Please let me save you $0.295/sh

Hi to all Quintis bagholders/short sellers/onlookers,

I felt implored to post on here given the many factual misrepresentations evident in the Quintis forum and having been a keen observer of the company as a holder of a short in their stock for nearly 3 years.  

I am as surprised at the speed in which this has unravelled as I was in the resilience of Quintis' share price for many years.  The problems in this business were not always displayed in broad daylight and whilst I have some sympathy for the bagholders, I would suggest they seek empathy here https://twitter.com/bagholderquotes and then suggest learning some harsh lessons and getting out while there is still $0.295/sh of equity value in Quintis.  

What about the takeover? Yes, there are some logical buyers of this business, in particular KKR, whose plantation business is far inferior to that of Quintis - simply comparing the quality of the trees reveals this.  However, KKR are smart investors and will have long ago realised there is likely zero value in the equity of Quintis.  Any takeover will almost certainly occur via a restructuring in true vulture fashion; given the indebtedness of Quintis and lack of access to the equity capital markets Quintis has historically relied heavily on (as well as retail and institutional capital via MIS and Beyond Carbon respectively - now that bankruptcy is a realistic probability, few if any will be unsophisticated enough to hand capital over to Quintis), smart buyers of their hard assets will be certain to do so via the notes.  Missing a coupon payment on these notes once cashflows have dried up will catalyse the business moving to the full control of noteholders.  The history of poor cash flow conversion provides confidence in this view.  

Furthermore, with the share price plummeting and short seller reports making headlines, I would expect a very large portion of the $51.321m in MIS contingent liabilities, outlined in the FY17 semi-annual in Note 18 (ii), to become cash outflows in November 2018 and 2019, hence requiring more Quintis equity given how stretched the balance sheet already is.  

The possibility of a class action could pose further threats to liquidity.  Then of course there is the likelihood of the institutional put option being exercised.  This is seemingly a very high chance outcome given the terms are growing increasingly generous to the put option holder.  Quintis revealed in the FY17 half yearly presentation that they were pursuing $35m loan facility with a major bank.  The size of this loan may coincidentally be around the same amount as the put option, or perhaps the CFO was readying the finances for the possibility of the put being exercised.  

Overall, it is very clear that the business has lost access to the capital markets it has relied upon throughout its lifespan to remain a going concern (equity, institutional hard asset investors via BC and retail hard asset investors via MIS).  Sophisticated investors will be very mindful of this and simply allow the equity value to erode along with Quintis' balance sheet liquidity, rather than paying up for the $115m of equity value that remains.  

So what about Frank - could he get the financing together to mount a bid? My first question here would be to ask whether Frank has his stock lodged as collateral for his significant personal assets (including a very nice boat apparently), given the company's securities trading policy does not explicitly state this practice is precluded for Quintis Directors.  It also wouldn't make much sense to prevent Frank from borrowing money against his Quintis holding, given the inherent hypocrisy owing to the precedent of related party loans.  Recall Frank was allowed to borrow from Quintis' treasury at a rate lower than their cost of capital (works out to be ~6.5% per annum on my numbers versus the 8.75% QIN pays on their Senior Secured Notes), for the purpose of investing in trees which came with a guaranteed return.  I refer to Related Party Transactions from Note 39 (iii) of the FY14 annual report to explain this.  Frank Wilson bought $14.19m of trees, was paid back $922.35k in commissions and in September 2018 can exercise a put option to be paid $15.8m for these trees, giving a gain of $2,532,350 over 4 years, or 19% (note this is before his finance costs).  To be clear, this is just speculation, but if it were true then Frank would have some serious margining issues post the share price fall.  

However, for the purpose of exploring the Frank buyout scenario, let us assume this isn't the case and that Frank is both willing and able to take the company private.  The logical thing here would be to ask why has he been trying to defend the share price so vigorously? The day before Frank resigned as a Director to supposedly pursue a takeover (when he seemingly could have recused himself instead), Frank signed off on a response to an ASX share price query which defended the company's operations, despite also revealing that their crucial Chinese customer had not requested any shipments in 2017.  Given that announcement came on March 27th, the standing of the relationship with Shanghai Richter should have been known to the Company for some time, yet was not disclosed.  We then found out Galderma had terminated their agreement with Santalis but again the information was not disclosed to the market.  Not having Galderma nor a Chinese party buying wood or oil from Quintis are both negative pieces of news that would have resulted in share price falls if disclosed to the market during Frank's tenure at the helm.  A buyer naturally wants to buy as cheap as possible and so if he was actually going to buy the business, releasing this news would have worked in his favour.  The same could be said about the Chinese customs raids.  

Then there was the suspiciously timed revelation that founding Director and former number 2 Quintis shareholder Graeme Scott had "formed a joint venture with Shenzhen-listed Layn Natural Ingredients to buy 150 tonnes a year of sandalwood for the Chinese market", per this article in The Australian http://www.theaustralian.com.au/bus...s/news-story/056e2b0ecf9ff68d6a991474f143089b.  This was published on the morning of May 1, when Quintis was known to be updating the market on the institutional put option that expired at the end of April.  As we now know, the news was negative, as the option holder had renegotiated on terms that were once again less friendly to Quintis. The conveniently timed news of this new JV helped distract the market from the negative outcome on the put option.  Given Graeme Scott was a foundation Director, is it not possible that he is an associate of Frank and was acting in cohort with Frank? Again, this is just speculation and cannot be relied upon, but going through the company's prospectus reveals Frank and Graeme have many common directorships and investment interests.  Graeme also provided office space for Quintis in the past: "A Director, Graeme Scott, is a principal of Graeme Scott & Co Pty Limited. This company provided accounting consulting services along with the rental of premises to the TFS Group during the period to 3 November 2004 for an amount of $9,152 (2003 - $194,964) (2004 - $13,756.60)." Again, if Frank and former Quintis insiders really wanted to privatise this business, they would not be trying to help the company with sales contracts, which is share price supportive (on the assumption they would be transacting on Santalum Album at Quintis' stated market rates, which is a further unknown).  

As a side note, I assume the institutional option holder has been deliberately renegotiating the put option exercise value higher so as to close the gap between where he/she marks the value of the investment in his/her portfolio, and the value of the put.  The investor is rumoured to use the elevated Quintis inputs for investment valuation purposes (which come from highly debatable assumptions using level 3 fair value accounting methodology; this valuation is further justified by Sandalwood transactions in the secondary market, which are often Quintis buying the wood themselves, a topic well covered in the Glaucus report) and would therefore take a PnL hit if putting the trees back to Quintis on the current agreement.  The option holder will be very mindful of the tight position Quintis' balance sheet is in, cognisant that exercising the put would place Quintis under serious financial duress, and can therefore negotiate the put exercise value higher from a position of strength. With the valuation discrepancy closing with each renegotiation, the likelihood of exercise is growing stronger.  10 July 2017 is the first key date under the new agreement and potential buyers of Quintis equity will be mindful of dilution risk that could result around this date from either a) the required equity financing for buying the trees back from the institutional investor; or b) the lower equity valuation that comes from taking on an additional $35m of debt via drawing down from loan facility.  

In summary, Quintis is facing serious solvency issues and it is my belief that sophisticated PE firms such as KKR will be well and truly across this.  Any change of control will most likely occur via the notes.  I have serious doubts about Frank's ability to form a successful buyout syndicate based on behavioural evidence at hand.  Yes, I have a vested interest in the equity value of Quintis falling, but I hope this post helps you make an informed investment decision.  Bagholders, aka "Baggies", can still extract some scrap value here and my opinion is to take what's left and be thankful for the chance!

Pete