Wednesday, 11 October 2017

DGLT M&A Transaction Imminent With 200%+ Upside

On Monday we recommended a buy on Digiliti Money Group, Inc. (DGLT) when the stock was trading at 30 cents. Not surprisingly for a grey market stock it has bounced around from 25 to 50 cents over the past couple of days but has closed up slightly from our call to 34 cents. If you like our picks make sure to follow our blog by clicking the follow button on the top of the left hand panel. We are up to 306 followers despite not giving out a lot of alerts, a fact that we think is indicative of a diligent and prudent stock picking history.  If you would like to share this blog, make sure to use the URL "" as certain spam filters on social media don't let you post addresses. The trading resources listed on the bottom of the article are paid, but they are good, and part of the reason why we can do what we do for free since we get commission on any sales. The other reason is that we participate in our picks and have made money more often than not. Over the last several months we have recommended AAOI, OCN, C.ISOL, FSNN and APVO while they were cheap and they all did very well in a short time frame (and a couple that so far didn't work out like STAF and DPW). Right now DGLT is in the same position as it is cheap and might be the best opportunity of the lot. We have also made a bit of money on shorts, though those tend to be very short term and only scalps of around 10%.

We don't usually cover OTC-listed stocks, but in the case of DGLT the time to buy is now with an opportunity to at least triple our money. It's not a typical OTC stock because there is a serious buyout offer on the table from Urban FT. If you do your research on Urban FT you will see it is a reliable company that has done two acquisitions before courting DGLT so this is very much a legitimate story. Urban  FT has made mention on more than one occasion that an offer of about $1.05 per share is reasonable for DGLT (look at the quotes posted and linked from articles seen below). The president of Urban FT Kasey Kaplan said on Twitter on October 10th: "Update: UFT & $DGLT are continuing to negotiate definitive terms to a proposed merger. No agreement reached yet." So this is very much an active story and the deal could be announced at any time.

In mid-August DGLT was dying a quick death. The stock tanked from over $2 at the start of August to 20 cents. On August 16, the stock rose 435% to $1.05 before being halted on news that Urban FT  offered to buy the company out:

"The Minneapolis-based company, which sells mobile financial services app technology, has an offer on the table from Urban FT, a New York-based digital banking platform provider that wants to buy the company in an all-cash offer.

“We are looking to grow organically by expanding our base of users on our existing platform, which we think is exceptional, but we also want to grow acquisitively,” says CEO Richard Steggall.

Digiliti Money, which made a name for itself in the remote deposit capture space, is an attractive acquisition target for Urban FT because of is its “exceptional” client and strategic relationships, Steggall adds.

The two companies have similar targets – financial institutions or programme managers that need better mobile apps to engage their customers. But Steggall believes that Urban FT would be able to reduce operating costs significantly and offer existing Digiliti Money clients additional services, such as Urban FT’s lifestyle app features.

“This is a tremendous opportunity for both companies,” he tells Paybefore. “They currently have a cost of revenues and cost of sales in the order of 65%, and we can bring that down to around 40% almost immediately by putting their clients on our platform.”

A big contributor to Digiliti Money’s expenses are data costs, according to Steggall, who says Urban FT can reduce them by authenticating checks on the mobile app as opposed to in a data centre.

“Our goal in approaching Digiliti Money with an attractive and timely offer is to keep the business operating and viable as we consolidate the entities to leverage the savings from operational synergies,” adds Urban FT chief operating officer Glen Fossella. “We believe that our cash offer – with the option for certain shareholders, at their discretion, to convert their Digiliti Money common stock to Urban FT common stock – represents the best benefit to all parties involved, most particularly the consumers who rely on the services of Digiliti Money’s clients.”

The deal, if accepted, will be financed through Urban FT’s largest investor. Although Steggall declined to name the investor for confidentiality reasons, he says the investor was one of the first employees of Oracle and financed Urban FT’s previous acquisitions of Wipit in 2015 and, more recently, iParse, which closed last month within 90 days of first entering a terms sheet.

Urban FT has 76 financial institution clients in addition to four nonbank clients, representing national brands in telecommunications, insurance and travel.

In April, the company announced a partnership with Sunrise Banks to offer clients a bank-issued prepaid card and accompanying mobile app.

Digiliti Money has until 21 August to respond to the bid, which is subject to a financial audit as well as other due diligence and regulatory approvals."

As you can see, Urban FT spoke very highly of the synergies it believes it can bring to DGLT's business. Why do we think DGLT is going to go back over a buck? DGLT management rejected Urban FT's first offer to buy the company out for $10.5 million on a net equity basis, equating to over $1.00 per share as there are around 10 million shares outstanding:

"Following Urban FTs initial offer to the Board of DGLT on August 15 and subsequent to initial due diligence revealing DGLTs actual financial position, Urban FT submitted a new offer which, if accepted by DGLT, would have been binding on Urban FT. The binding term sheet and the accompanying loan instruments delivered by Urban FT valued DGLT at $10,500,000 on a net equity basis. The offer provided that Urban FT would deliver DGLT and its subsidiary with an immediate line of credit that would enable DGLT to meet all current and ongoing working capital requirements, including its upcoming payroll obligations due at the end of the month. It would also have seen all customer services maintained without service interruption, all remaining employees retained and all creditors receiving 100 cents in the dollar.

For reasons not clear to Urban FT, DGLT, via its advisors at Lake Street Capital Markets, proposed alternate terms and stood firm on those terms, which Urban FT and its attorney considered unreasonable and unacceptable under the circumstances. The Board of DGLT said DGLT was not willing to negotiate its position and, in an email, noted that we are too far off at this point for a deal to be concluded in the time frame DGLT is working toward.

Kasey Kaplan, Urban FT president, said The Digiliti business is fundamentally good one, with good staff, good technology and good clients. He added: We will leave our offer on the table for acceptance by Digiliti until close of business on August 31. We ensured that our offer took into consideration all SEC and NASDAQ requirements for a transaction like this, and I hope the Digiliti Board concludes that our offer is the most fair, equitable and reasonable option for the various stakeholder groups, whom they as directors are meant to adequately and diligently represent as part of their fiduciary duty.

Placing Digiliti into bankruptcy, if that's what the Board is considering, continued Kaplan, would be a great loss to all of those stakeholders and would truly disrupt so many organizations that rely on Digilitis services every day."

Even though Urban FT came off as sad and desperate at the original rejection, happy endings eventually came because on September 1, DGLT announced that it entered into an agreement with Urban FT, formally starting the merger process. The company issued a secured promissionary note to UFT equities that allows DGLT to draw down money and keep operations steady while the two companies negotiate a deal. While Urban FT was the aggressor, DGLT has seemingly accepted an offer with open arms with the following being written on its website:

"We are pleased to announce that Digiliti Money has signed a Letter of Intent to merge with Urban FT, an industry leading fintech digital banking provider. The companies have agreed to preliminary terms and expect to close the transaction in short order, subject to respective required approvals."

Urban FT isn't being coy about this deal either, with the company's website littered with numerous articles about the pursuit of DGLT. The last one on September 13 re-confirms that $1.05 is a fair market value for the company according to Urban FT's CEO (even considering the value of the promissionary note). He also stated that he expected a transaction to close by September 29 and that DGLT should start trading once a new audit is complete:

"After Urban FT’s initial proposal to buy the company was rejected, DGLT’s latest SEC filing reveals a credit facility from UFT Equities—Urban FT’s associated investment arm—of up to $8 million for the mobile technology provider. The bulk of the funds ($6.5 million) would only be available upon a successful merger with Urban FT.

We anticipate closing a transaction involving Digiliti on or around the 29th of this month,” Urban FT CEO Richard Steggall tells Paybefore. “Concurrently the two businesses are working towards an integration plan that will allow for a seamless merger of the two, provided closing takes place.”

Although Steggall says he’s not at liberty to discuss the values being applied to DGLT or UFT for the proposed merger, he says DGLT’s last stock trading price prior to its Nasdaq suspension ($1.05) represents a fair market value for the company.

The Nasdaq suspended trading after DGLT postponed its Q2 earnings report following an internal investigation related to concerns raised by its former auditing firm.

The most recent 8K filing with the SEC says that DGLT issued a secured promissory note to UFT for a principal sum of up to $1.5 million. Steggall confirmed that $450,000 has been advanced to the company so far under the terms of the note. Subsequent draws may be made in equal portions of $350,000 each over a 90-day period subject to certain conditions. The proceeds will be used to pay mutually agreed upon expenses, according to the filing.

The promissory note also gives UFT Equities the ability to name an executive to the DGLT board. Steggall says the company has selected Urban FT’s own chairman Cliff Mason for the role.

Once DGLT appoints new auditors and they complete an audit review of 2016 and 2017 earnings to date, Steggall anticipates that the stock will resume trading. He expects a new firm will be appointed later this week."

It's been two weeks since the September 29th target date has passed and given the statements made by both companies that a deal will happen, a formal announcement could be made at any time. An audit which is currently in process will help DGLT move up from the grey market to the more reliable OTCQB which in itself should move the stock price back up close to $1.00 if a deal is not formally announced by then.

Urban FT originally offered an all-cash deal but there is speculation out there that it may also be interested in a reverse merger. Urban FT would take over the DGLT stock symbol and own most of the float and in exchange existing DGLT shareholders would become ownership in the new combined entity. Reverse merger stocks have done very well recently. One example, Stemcells (STEM), which is now Microbot Medical (MBOT), rose 600% in one day when those two companies announced a reverse merger.

So whether an all-cash deal around $1.00 or a reverse merger, we think DGLT is a very strong candidate to imminently run wild like it did on August 16th.

Disclosure: We are long DGLT

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