If Ominto Was A Private Company, It Would Be Worth A Fraction Of Its Current Price

The following article comes from White Diamond Research. The author was not paid for this article specifically, but does have clients who are short Ominto Inc. The information in this article represents the views of White Diamond Research, and not Benzinga.

Summary

• Ominto, an online cash back provider, has risen over 150 percent solely on the hype and exposure of being uplisted to the NASDAQ from the OTC exchange on February 14.
• It has tiny sales, stagnant growth and has consistently lost $1-$3 million per quarter over the past four years.
• A CEO of a top cash back website we interviewed hasn't even heard of Ominto or its cash back website Dubli.com.
• Ominto Inc OMNT has made a strange, financially unwise merger with an animation company that appears to have no synergies to the cash back business.
• We estimate Ominto's value to be $1-2 per share, for an eventual 90 percent decline.

Imagine Ominto was a private company looking to raise money on the TV series Shark Tank. Now imagine the CEO going into the room and saying:

"Hi Sharks, our business is in the online cash back industry. For the past four years, we have miniscule to no growth, average about $20 million per year in revenues, and lose about $10 million per year. We also acquired 40 percent of an animation company that has produced some holiday greetings animation clips you can watch on Youtube. We'd like $10 million for a 5 percent stake in our company."

Upon hearing this, any Shark would immediately fall back in his or her chair and say "Are you crazy? I'm out! I'm so out!"

If Ominto was a private company, we believe it would at best be worth $10-$20 million, or below $2 per share.

Ominto is an online cash back company. It provides online cash back shopping deals through ominto.com and dubli.com, which have the same content. Cash back companies are a dime a dozen and it's a tough business due to high competition and need for constant marketing to entice more customers. Ominto has had low revenues and continual losses every quarter for the past four years. We've found that Ominto isn't even among the top 20 cash back companies. The company hasn't said it publicly, but it appears from a recent strange merger with no synergies, that it's transitioning into the animated film business.

Ominto is a former OTC exchange traded stock that just recently got uplisted to the NASDAQ on March 20th. The stock is up over 150 percent within the last three months due to the excitement and new investor exposure from being on the NASDAQ. The company has liberally distributed its stock to insiders and partners, and some are just now able to sell their shares. 

In December, Ominto engaged in a non-arm's length merger with Lani Pixels that has no apparent synergies, and the company didn't report it to be non-arm's length. Although unlikely, this could be a case of fraud. Most of Ominto's executives are based in Europe, with the CEO and COO living in Dubai, and Lani Pixels is based in Denmark.

We tried to contact Ominto's investor relations with questions and they replied: "In accordance with Regulation FD, we are unable to provide you with any more details than what is in our filings with the SEC."

We asked them why do they have an investor relations department? They didn't reply to that question. In our experience, companies that don't talk to inquiring investors are often bearish about their future. They don't want to give anything negative away.

If Ominto Was A Private Company - What Would It Be Worth?

Ominto is a struggling company that's flailing in the wind, with a history of paying employees in stock because they keep running out of cash. The cash back industry requires constant marketing expense to keep up revenues, which is why Ominto has had a $1 million+ loss every quarter since 2013. The proof is in the pudding. The following are Ominto's quarterly revenues, losses and marketing spend since 2013:

Source: Ominto SEC filings

As shown above, the revenues are very small, and the losses are over $1 million per quarter except for a couple of quarters in 2013. For its fiscal year ending on September 30, total revenues were $17.7 million and the loss was $10.6 million. At a market cap of $200 million, this puts its price/sales multiple (P/S) at about 11, and it loses money hand over fist. Why would anyone pay that much for this company?

Some hot internet stocks have a P/S of 10 or more because they have a unique, disruptive technology and their sales are growing dramatically. It's clear that Ominto doesn't have a disruptive technology and is not growing. Maybe it could grow revenues if it poured more money into marketing and took a bigger quarterly loss, like it did in quarter ending September 30, 2015. It's an online cash back company that can't seem to book a positive quarter no matter how much it spends on marketing.

A Strange, Financially Unwise Merger

On December 13, 2016 Ominto announced that it had acquired 40 percent of Danish animation firm Lani Pixels A/S for $500,000 in cash and $8.5 million in stock valued at $3.50 per share, which equals 2.43 million shares. At a $10 per share value, the dollar amount of stock given equals $24.3 million.

This merger is financially unwise in our opinion. Animation companies are among the riskiest companies to invest in. It's very hard to make money from short animated films, maybe tougher than feature length films. Investors should ask how an animation company would benefit a cash back company. What are the synergies between the two? We don't believe there are any synergies. As stated earlier, we tried to contact investor relations but they won't discuss the merger, or anything else, with investors.

In the announcement, Ominto says "Ominto plans to continue to develop Lani Pixels as a marketing service company…"

It also says on the Ominto announcement "The expertise we gain from Lani Pixels animation content will advance our marketing acumen to a new level of sophistication"

So what Ominto is telling investors is that in order to increase its marketing to a new level, it's acquiring half of an animation company in order to have more animation in its marketing? This isn't a wise way to invest in marketing because Lani Pixels isn't a marketing services company, it's an animation company. Look at the Lani Pixels website. Under the "what we do" tab, it says absolutely nothing about marketing:

If you go around the website, you can tell the company is about animation, not marketing. Lani Pixels doesn't appear to have produced much animation at that. Here, it produced a film about the history of LEGO. Here is a short Happy Holidays video from Lani Pixels. Furthermore, our research found that it appears to be a non-arm's length transaction. The executives of both companies used to work together at LEGO Group.

In the merger announcement, it states: "Lani Pixels was founded by Kim Pagel and his son, Thomas Pagel, in 2000. Mr. Pagel has a long history in the creation and production of animated film content, including many years with the LEGO Group."

The key words here are "LEGO Group". That's also shown in Mr. Pagel's Linkedin profile:

Above, it shows that Mr. Pagel worked for 18 years for LEGO Group through the 80s and 90s. Looking at Ominto's CEO, Michael Hansen, LinkedIn profile, it shows that he also worked at LEGO in the 1990s:

From Ominto's latest 10-K, it says of the COO Betina Dupont Sorensen: Ms. Sorenson was employed in a Danish marketing firm and spent two years with Modulex, a division of LEGO where she worked in the accounting and logistics department. Former coworkers making deals together isn't illegal. But we have to question it because Ominto should have made it clear that executives had worked in the past with Kim Pagel at LEGO, given that this merger doesn't seem to be financially wise.

How was the animation company, Lani Pixels, appraised? How did Ominto come to value the company at $22.5 million? The company doesn't make this clear. It's valued at more than double that now because Ominto's stock price has tripled in the past four months. Also of note is Mr. Pagel doesn't seem to have any restrictions on when he can sell his stock.

The Cashback Industry Is Very Competitive

Ominto has many competitors in the cash back industry. To learn more about the industry, we spoke with Frank DeBlasi, CEO of top cash back website Hoopladoopla.com.

Note that in our interview, he stated he hasn't even heard of Ominto or Dubli.

WDR: Have you heard of Ominto or Dubli? Are they top competition in the cash back space?

Frank: I have never heard of those companies until you just mentioned.

WDR: How big is cash back shopping?

Frank: Cash back shopping is one of many types of deal type websites out there, along with regular coupon sites and daily deal sites such as Groupon. Cash back sites generally generate the most traffic of the three groups because they offer incentives to shop, and feature popular stores where people shop every day. There are lots of coupon sites out there which are very easy to set up. We have many shoppers on our sites that we know use competitors because they see us on cash back comparison sites.

The best rate gets the sale. The overhead running the business is very low, being there is no brick and mortar, and we are the middle man in the transaction. The top cash back sites we compete with are Ebates, Fat Wallet, and Mr. Rebates. The top earnings for some of my competitors exceed $100 million annually. With middle of the road competitors, it all depends on traffic. Anywhere between $10 and $50 million is respectable.

As shown earlier in this report, Ominto needs to spend a lot of marketing dollars to get revenues. Their marketing expense for the quarter is often higher than the revenue. We are not surprised that Mr. Blasi has never heard of Ominto or Dubli. They were not shown on websites that listed the top cash back sites.

Ominto Is Not Listed As One Of The Top Cashback Websites

If you do a Google search for "cash back companies" you'll have a hard time finding Ominto or Dubli. We've found that Ominto isn't even among the top 20 cash back/rebate companies. Moneyjojo.com published an article on January 15 listing the top 20 cash back and rebate sites for 2017. Ominto.com and dubli.com are not listed.

Rather-be-shopping.com published an article, updated on March 22, listing what they believe to be the top 11 cash back sites. Again, Ominto and Dubli are not listed.

To see a third cash back website ranking site to confirm which ones are the top, gobankingrates.com published an article on December 18 titled: Top 10 Best Cash-Back Websites. Again, no Ominto or Dubli. This site lists some of the same sites but a couple new ones.

Ominto's Large Stock Issuances And Upcoming Insider Sales

Ominto has issued a lot of shares to employees when it was low on cash. As well as to a merger, did a PIPE on 10/5/16, and issued the CEO 500K shares upon the uplisting. Eventually, these shares will be sold. Date Awarded Party # shares awarded Exercise Price Filing link 10/5/2016 Non-US Persons 1 million $4 link

11/17/2016 Michael Hansen 500k $0 

11/30/2016 Michael Hanson 17k $0 

11/30/2016 Mitch Hill 13k $0 

11/30/2016 Betina Sorensen 13.5k $0 

11/30/2016 David Pollei 4k $0 

11/30/2016 Peter Harris 2.5K $0 

11/30/2016 Gregory Newell 2.5k $0 

11/30/2016 Gary Baughman 2.5k $0 

12/1/2016 Jaye LaBelle 50k $2.80 

12/8/2016 Gregory Newell 30k $2.80 

12/8/2016 Peter Harris 30k $2.80 

12/8/2016 Gary Baughman 30k $2.80 

12/13/2016 Lani Pixels 2.5 million $0 

Above are the many stock issuances that Ominto awarded last year. Starting from the top, Ominto did a private placement on October 6, 2016 with "non-US persons", for 1 million shares at $4 per share. Those shares don't appear to have been registered per the SEC filings, so weren't able to be sold legally.

However, per SEC rule 144, the securities can be sold after six months, in which case that would be April 5, 2017. So we may see some selling from that investor in the near future. The second stock award on the above list, was to the CEO, Michael Hansen, who was awarded 500K shares upon the uplisting to the Nasdaq which was on March 20th. The shares issued on 11/30 to employees were salary payments to employees at share prices between $3-$5, much lower than where the stock is today.

The shares issued to employees in December are stock options with an exercise price of $2.80 per share. They vest monthly in equal installments for 36 months. So those employees have fresh new options every month. Finally the Lani Pixels deal is explained earlier in this article. In addition to the above shareholders that will sell at some point.

The company itself plans on selling shares. Mr. Hansen stated in its Q117 earnings report: "In addition, we believe trading on Nasdaq provides greater access to capital to support our future growth initiatives." That makes it clear that the company will engage in at least one equity raise going forward.

Conclusion

In conclusion, we actually find Ominto's market cap unethically high to retail investors who don't know how to value internet companies. For it to hop on the NASDAQ with a $150 million+ market cap, after years of failure, low revenues and consistent quarterly losses, it isn't right to sell stock to the market at this price. A market cap of somewhere around $10-20M would be the right price for retail investors wanting to make a gamble on a struggling company looking to make a profit in the cash back and animation business.

This article was produced by White Diamond Resaerch, and expresses the author's opinions. He is not receiving compensation for it (other than from Seeking Alpha), and has no business relationship with any company whose stock is mentioned in this article.