Hello again! I am back with another deep dive in the ILUS sphere, this time with the parent company itself!
If you haven’t seen my two releases on QIND, you should check those out first as I won’t be rehashing too much of the QIND pieces again. See here:
Introduction
I’m going to try and rapid fire through this as best I can. I could probably write 50 pages on this 10k in a full deep dive. But nobody has the time for that.
So what I’m going to do is get my points down with less commentary in written form, and then I’ll be releasing a longer YouTube video with more detailed commentary on all of this. Some of this will also be discussed in subsequent articles and videos in more detail. This is just an intro post as I haven’t written anything about ILUS yet.
Also, I will have to skip over some things. Again, for brevity.
The format will be:
- The Good – My general overview of how I see the company’s upside looking and where the “play” is here.
- The Risks – Here I will detail all of the risk areas of the company and which I think are the biggest. Every company has them, despite what some people like to pretend.
- The Issues – I’ll close off with the problems I’m seeing in the 10k and how serious I think they are as a prospective investor.
Read First!
The purpose of this article is purely educational, and it is my opinion. I don’t have a financial position in ILUS or any of its subsidiaries, long or short, at the time of writing this. I’m doing this for the benefit of potential and current shareholders so that you can gain some perspective.
Let’s try to keep it civil. I’ve had to block a lot of people over the last week or two who’ve failed to do so. I don’t care if you disagree with me, but the personal insults, rude comments/language, and doxing attempts are particularly disappointing.
However, I appreciate the constructive conversation and dialogue. Many of you clearly know your stuff on ILUS and its subsidiaries, and it has been very insightful hearing what long time investors have to say. The nuggets of knowledge I learn from long term investors in all of the companies I cover are invaluable.
With all of that said…
The Good
Business Profile
At the core of it, ILUS is a mergers and acquisitions company that creates value by acquiring business at fair or below fair values, enhancing them, and then spinning them off, selling, or maintaining them in the portfolio.
With a company like this, you are really investing in management’s ability to identify undervalued targets, finance the deals with shareholder friendly terms, and enhance the businesses through their particular expertise. Once a company has reached the right stage, they then successfully exit these businesses through a spinoff or private sale, or they remain under the ILUS umbrella for shareholders to reap the rewards from.
So what’s the “play” here then? The play as an investor is that management will uncover diamonds in the rough or turn around undervalued companies to create value for you. They aren’t inventing the cure for cancer or finding a way to earn an extra 2% of margin on manufacturing rubber duckies.
What Are They Doing?
Well, they’re executing on the business plan! We have four divisions: Emergency Response (ERT), Manufacturing, Renewables, and Defense.
In terms of the current portfolio, this is limited to ERT and Manufacturing. ERT contains several businesses that I won’t rehash here for the sake of brevity, but just know that this is a more well-established business for them.
Manufacturing is rather new and is limited to QIND (which ILUS owns about 75% of) and its subsidiary, Quality Industrial (QI) and Petro Line, which QIND owns 52% and 51% of, respectively. See my old article for more on this.
To get to the meat of this, ILUS is clearly not putzing around and is getting right to doing what they said they would. They have already started building out their portfolio of current businesses and have a very large pipeline of companies. Most notably, identifying targets for the new Defense division, more ERT targets, and a deal with the Serbian government to build out their EV manufacturing and Renewables businesses.
In addition to the above, there’s also a NYSE (I kept saying NASDAQ for QIND erroneously) up list in the works for QIND and would serve as a pilot project for any future subsidiaries.
I could keep going, there’s a lot going on… it’s a big company!
The Good – My Opinion
Most importantly, the first place to look in a company like this is the track record of management executing this strategy. For ILUS specifically, we haven’t had enough time to see a company come through the full process. The first company to make it through the process, start to finish, will likely be QIND.
I’m not here to write a personal profile on Nicolas Link, but he self-proclaims to have accomplished this multiple times in the past. I have no reason to not believe him, so he is likely qualified to actually do this. For example, he wasn’t digging ditches or writing mediocre penny stock blog posts before he became the CEO of ILUS (not that there’s anything wrong with ditch digging).
So I don’t think there’s much else to say here other than “he could do it”. So I think management is capable… what else?
To keep this brief, I am going to rapid fire what I’m seeing that I like:
- A successful NYSE up list for QIND is probably THE most important thing for ILUS right now in my opinion. And all signs point to it going according to plan, but we’ll need more updates. More on this below.
- QIND is currently profitable and growing while it is going through a tricky time in terms of integration into ILUS. These usually don’t go well, but operationally it appears to be weathering the storm. So I see mostly upside.
- ERT is challenging in terms of losses and low growth, but I don’t see why it can’t turn around.
- Dilution has been rather minimal, but it remains to be seen how QIND finances QI and further companies.
- I LOVE them entering the defense sector, just turn on the news…
- Renewables recycling is also exciting, but I personally think this will remain a smaller chunk of ILUS. Curious to see where this goes.
- A 142m run rate as of Q4 2022 and 200m in forecast organic revenue for 2023 sounds very promising if it is coupled with healthy margins and positive operational cash flow. When broken down by segment, they look very realistic and grounded. Always a good sign.
- Legal issues seem minor.
- As a person in finance in my day job, the single ERP system made me weirdly excited. I’m sure it’s sucking big time right now to do this, but it will be wonderful once they have it.
So all in all, there’s some cool stuff going on here.
The Risks
Literally every company has these, though a surprisingly high number of investors in the OTC seem to gloss over these, or pretend penny stocks = money market account in terms of risk.
So what are ILUS’ risks?
As a start, they wrote like 10 pages of the company’s risks in the 10k… I won’t rehash those, but here are the main ones I see (rapid fire):
- ILUS and QIND need to find a way to finance the QI acquisition. See my prior article, they have a minimum 80m+ in payments coming due this year. I personally think this will be achieved via an offering after the up list. So the risk here is… what if they don’t up list? How will they finance QI then?
- Along the lines of financing QI, they are still cash flow negative in that business and have a ton of inventory and AR to clear. It’s not impossible, but they are making some serious working capital investments that need to be converted to cash, and soon.
- Complexity – this company is COMPLEX and it’s only going to get more complex. We have tons of subsidiaries, a global operation, spinoffs, up lists, acquisitions, and current and future subsidiaries may not be 100% owned. So they have to deal with all of that, plus minority partners. Complexity can lead to inefficiencies, so they will have quite the challenge in store for them!
- Acquisitions may not pan out. In my career life, I have experienced many failed acquisitions and the monetary and time drains are immense. It’s probably worse than you’d think…
- Market conditions – self-explanatory. However, they’re diversifying to mitigate this.
- Ability to raise shareholder friendly capital. This is always a risk, but the bigger they get, the easier it will become. So this may only be a more temporary issue.
There are probably a million other things that can go wrong. But if they can effectively tackle these above risks, their probability of success really shoots up.
The Issues
I’ll break these into two categories, bigger issues I’m seeing and then more minor things that can be cleaned up later.
I’ll start with the bigger issues to rip the band aid off, and then we’ll get to the more minor things.
Bigger Issues
Lack of Debt Detail
This is actually a few things:
From my QIND article, we have minimal detail on debt and terms. For ILUS’ 10k, we have some good detail on some notes, but some debt is not discussed. For example, 18m of short term “Borrowings”, and 12.3m of long-term debt called “Borrowings from Financial Institution”. Those are material enough that we should have more detail, and I think they’re likely from QI.
We do, however, get some detail on convertible notes which is helpful, but does not cover all of their debt.
**NOTE – QIND HAS CORRECTED THIS ERROR BELOW AS OF QIND’S AMENDED 10K RELEASED ON MAY 8, 2023. LEAVING THE DISCUSSION FOR REFERENCE. THEY MISLABELED A LONG-TERM LEASE LIABILITY AS A NOTE PAYABLE.**
Another issue I’ve spotted is that the debt figures from QIND (as of the amended 10k issued on April 10, 2023, the latest available as of writing this) don’t appear consolidate up into ILUS correctly. Recall from my prior article that 100% of all line items consolidate up and then are only reduced via the equity / net income lines. So 100% of QIND’s debt should be accounted for in ILUS.
The 18m of short-term borrowings ties perfectly, but long-term debt gets murky. Per the QIND 10k, they have around 29m in long-term debt. But somehow ILUS only has the following listed as long-term debt:
- 12.3m of “Borrowing from Financial Institution”
- ~1.5m of convertible notes and accrued interest
- 10.5m of notes payable
- Total long-term debt liabilities = ~24m.
So somehow their subsidiary has more debt than the parent, which is supposed to consolidate up all of that debt. Something isn’t adding up here. The way this is written it appears to understate debt in ILUS.
I hope I’m wrong here, but some more clarity will be critical here as this is a substantial amount of debt. Most of the issue seems to stem from debt in QI, so I’m hoping this is temporary.
Consolidation and Noncontrolling Interest
This is covered much more in my QIND article, but basically ILUS should be reducing its net income for the amounts of its subsidiaries it does not own. For example, it only owns ~75% of QIND. So it does not have a right to 25% of QIND’s income. So 100% of everything down to net income, and then a reduction of 25% for noncontrolling interest.
The same thing happens for the balance sheet – 100% consolidates up and you reduce equity by the noncontrolling interest. This they do for the balance sheet, but not for the income statement.
ILUS’s net income attributable to shareholders is therefore being overstated without this reduction of net income.
Also, they are taking 100% of QIND’s net income as well, which also needs to be adjusted down by 48% as QIND only owns 52% of QI. So it needs to be reduced twice!
As it’s near impossible to estimate the exact reduction in net income, it is impossible for me to understand the earnings attributable to an ILUS share. And it doesn’t appear to be immaterial.
Minor Issues
While the above are pretty serious in my opinion and absolutely can’t be ignored, here are some more minor issues that stuck out to me. These are problems that should be addressed but aren’t critical to valuing the business. Pettiness warning for some of these!
Rapid fire!
- They don’t do a consolidated audit with all subsidiaries. This is more of a 2023 thing I’d like to see, though.
- They accidentally left a placeholder in (Ctrl+f for “XXX” 😊)
- Cash flow statement – this is one of the strangest presentations I’ve ever seen for a cash flow statement. Some examples:
- Why don’t they adjust out the premium on investment in 2022 but they do in 2021? I think they do it via another line item, but it’s not clear and poor presentation.
- They break out the cash raised via common and preferred stock issuances between par value (the small amounts like 111,700k) and additional paid in capital (the big amounts). I’ve literally never seen that before in a cash flow statement.
- They start putting together increases in assets and liabilities into big groupings but have nice breakouts in the balance sheet. Why not both?
- Note 13 – they call it “Marketing and Sales Expenses” but it’s really revenue, not an expense. Very confused.
There were some more smaller ones, but you get the picture. Kind of a sloppy report.
A Side Note on Ownership Structure
I’m sure the seasoned ILUS investors know about this, but ILUS has convertible preferred shares over multiple series that need be considered. They convert as follows:
- # of Common Shares as of December 31, 2022: 1,355,230,699
- Common Equivalent from Preferred Shares if Converted:
- Series A: 30,000,000
- Series B: 65,589,041
- Series D: 30,370,500,000
- Series F: 158,602,740
- Total Diluted Common Shares: 31,979,922,480
Based on a fully diluted share count, total common outstanding shares as of today of 1.35bn account for about 5% ownership in ILUS. So purely based on their financial statements, as a common stock investor, your pool of ownership into the company is only around 5%. The rest is owned by management.
So when you calculate market cap, it’s only based on the 1.35bn shares. So, in theory, the posted market capitalization only represents about a 5% ownership stake in the company.
Furthermore, while these are very difficult to convert because you’d have to raise the AS, dump them on the market somehow, etc. they still represent some value in the company. For example, if ILUS was acquired, the Series D owner (Nicolas Link) would be compensated according to the equivalent common share count.
I’m not saying this is good or bad, I’m just telling you these exist. And I think management should have equity in their company. But if this is jarring or rustles some jimmies, let me give some additional points.
Many people have discussed this before and seem to think that management is using these just as voting control and they do not give a “real” equity stake. While this does give voting control to Nicolas Link, it also gives him a massive conversion option. So he may not actually consider these as part of his ownership value, but he is using a slightly incorrect security to just give management control.
So if you trust the CEO to not convert or amend these one day, I guess you could ignore these? I’m a financial statement purist, so if they say he can convert and have value, then I have to factor them in. But if you don’t think they do, then ignore them. Just know that it gives you a WILDLY different answer in terms of the “real” market cap of the company.
As an open letter to management – If these are truly voting control, I sincerely hope that you amend these shares to not convert into common and just give super voting control. Plenty of other companies do this via super voting common or preferred shares and it works just fine. It paints a very wrong picture if these are truly only for voting protection.
As a final point – if ILUS ever up lists, which seems very likely if they continue on their current trajectory, all of the preferred share classes will be cleared out and settled. Typically, they are all converted to common or paid out from the company via buybacks.
So one way or another, we’ll find out soon enough if the Series D really does convert into 30bn shares! If they don’t, these will likely be cancelled and replaced with some other form of super voting common shares.
Wrap Up
So I’ve given you the thousand-foot view of my thoughts on the company, the main risks involved, and the primary issues I’m seeing in their financial reports.
To summarize – I think ILUS is a very intriguing company with a very high upside and a lot of good things going for them. However, their financial reporting is relatively poor and needs to be cleaned up in 2023. I don’t see why it couldn’t be cleaned up, but a good indication will be how the Q’s look.
But given the lack of detail on some very key open items, I personally won’t invest as I can’t properly value the company. Total debt and their terms, along with a proper net income figure, are pretty critical values that I cannot ignore.
HOWEVER – if they had higher quality financial reports today, I would be seriously considering investing. So take that as you will!
Perhaps by Q1 they will start to look better? Either way, I’ll be watching very closely and will be releasing more posts in the future on ILUS and its subsidiaries.
Thanks for reading!
Links below:
Website: https://samakerfinance.com/
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IMER – AT THE TIME OF WRITING THIS ARTICLE I DO NOT HAVE A POSITION, LONG OR SHORT, IN QIND or ILUS. THIS ARTICLE IS NOT FINANCIAL ADVICE AND IS INTENDED ONLY FOR EDUCATIONAL PURPOSES. I AM NOT A FINANCIAL ADVISOR. DO YOUR OWN RESEARCH.
