Mongolia Growth: Letter to shareholders for the 4th quarter of 2021 – Annual report ›
Q4 2021 Leer to shareholders – Annual report
By all accounts, 2021 has been a transformative year for our business. We transformed the business into that of a merchant bank, significantly increased our cash and marketable securities balance, and started a business from the ground up that has now raised over $2 million in underwriting proceeds. More importantly, we have substantial momentum as we continue to pivot the business and seek acquisition opportunities.
At the end of December, our company had over $28.6 million in cash and net marketable securities with negligible debt (excluding margin borrowings and short-term call opons linked to fully hedged call spreads ). Based on current subscriber trends at KEDM and a reasonable expectation of renewal rates, we believe our company will be cash flow positive in the future (excluding one-time expenses). This means that we now have a stable base on which to build and reinvest, without having to worry about funding operating losses, which is quite different from the first decade of our company’s existence. Now is the time to stop, think, and act intelligently to create value on our terms. Although the road to today has been difficult, we now have the capital resources to take this company in many exciting directions. The past decade has been painful and frustrating, I am hopeful the next decade will be exciting and prosperous.
Our future direction:
In conjunction with Geneviève and our Board of Directors, we looked at various operating models for the future. I see myself primarily as an allocator of capital and believe that transforming our business into a merchant bank makes the most sense in terms of the future business model. Becoming a merchant bank will give us the flexibility to incubate diverse businesses, while simultaneously financing growing businesses in which we hold majority or minority stakes. Although my background is in public securities, there are regulatory and tax reasons why we cannot be a publicly traded vehicle comprised primarily of noncontrolling minority interests in public securities. We expect our balance sheet composion to migrate to minority and majority posions in various companies, public and private, where we can influence the outcome of events.
I think we have many advantages as a merchant bank, particularly because I frequently encounter companies that need both a capital and capital markets perspective. There are many gaps in the trade-off between public and private valuations, which lower capital costs for companies along the way, and I’m excited to put this theory into practice.
Finally, I believe that a permanent capital vehicle such as our company, where our board and management control approximately 30% of the voting shares, gives us a unique advantage in capital allocation because we we can take a long-term view. of our investments. Hopefully, this long-term view will aract unique investment opportunities, ones that Private Equity, with its frequent resale of equity posions, misses. KEDM is our first internally funded commercial venture. We hope to acquire and grow from here.
We now separate our business segments into three categories (Investment Properties, Commercial Subscription Products and Business Division (which includes our Investment Portfolio).
The fourth quarter of 2021 connued to be diﬃcult for our real estate operations in Mongolia due to recurring periods of confinement related to COVID-19 and the inability of many of our tenants to manage their businesses. As a real estate company, we are only successful because of our tenants and when our tenants’ businesses cannot operate, we are unable to collect the rent contractually owed to us. During the year, we reported $679,091 (2020 – $756,283) of rental income and $190,850 (2020 – $68,170) of other income (primarily from third parties), offset by $759,100 (2020 – $860,936) expenditures in Mongolia. Unfortunately, we have no visibility on the future trajectory of the economic crisis in Mongolia. Until businesses are allowed to operate without interference, we will likely continue to report depressing returns from our Mongolian operaons.
During the year we purchased a mixed-use property in Puerto Rico for approximately $820,000 which we are in the process of renovating. We intend to use this property primarily for internal purposes, although we believe we may be able to rent out portions of the property to earn rental income.
Business Subscription Products:
KEDM, our subscription business, which follows various event-driven strategies, was successfully transformed into a revenue-generating product on July 1. During the year, we booked $944,411 in revenue with a very healthy margin. Throughout the year, recognized revenue and the number of subscribers connued to increase each month sequentially and have connued to increase since the end of the year. As of the date of this leer, we have received over C$2 million in underwriting proceeds. We intend to aggressively invest resources to improve KEDM and increase the overall value proposition for subscribers. Additionally, given the reception of KEDM among readers, we intend to increase our marketing spend to grow the subscriber base. We believe that these two iniaves will reduce the short-term profitability of the subscription business; however, we intend to moderate expenses so that the business remains profitable.
Given the reception to KEDM to date, we believe there are ancillary services that we can launch and monetize, providing additional value to KEDM subscribers. It is likely that these services will be a cost center as they are designed and developed before mon-ezaon. To learn more about KEDM, visit www.KEDM.COM. Additionally, the company is considering acquiring other financial publications that would complement KEDM.
During the year, our general expenses increased primarily due to an increase in legal fees, corporate structuring and tax planning. We expect this increased level of spending to continue into 2022. When we weren’t expecting our business to achieve profitability, we didn’t think much about the eﬃciency of our corporate and tax structure. Now that we have taxable income, we are reviewing our structure for opmization. Additionally, we expect business expenses to increase over the coming quarters as we add staff to help grow our business, particularly with respect to business development acvies and product marketing. KEDM.
Our public securities portfolio produced an unrealized gain of $7,946,088 (2020 – unrealized gain of $4,265,403) and a realized gain of $10,306,006 (2020 – realized gain of $3,288,803). I want to strongly warn you that it is very unlikely that returns like the ones we have experienced recently will be repeated in the coming quarters. Our porolio is currently focused on investments in the energy, uranium and housing sectors. Additionally, we initiated a small position in a cryptocurrency called Monero. We view these investments as highly liquid alternatives to holding cash and intend to liquidate various investments if we find other businesses to launch or acquire stakes.
Conclusion 2021 has been transformative for our business. We have now incubated and launched KEDM to great success and expect it to become a fast-growing revenue stream that we can build on. Our investments in public securities are bearing fruit and we are now in a position to pivot the business model towards a merchant banking model. We intend to grow our workforce, target unique opportunities and continue to diversify our business profitably.
Although we remain opmisc about Mongolia’s long-term future, it remains mired in economic crisis. Accordingly, we remain focused on selling non-strategic real estate assets (particularly office and redevelopment) to diversify the business, while retaining our core portfolio and management team, so that we can pivot to the back. in Mongolia when the economy returns to arave growth rates.
Finally, I remain of the view that our stocks are undervalued. During the year, the company used its increased cash to accelerate the pace of share purchases and repurchased 3,311,500 shares under our normal course issuer bid at an average price of 0 $.65/share. At the end of the year, our number of shares was 27,778,499, down 22% from our share peak in 2016. To date, the company has repurchased a total of 7,754,100 shares .
Although we didn’t always have a lot of cash, we never stopped believing in ourselves and remained aggressive with our NCIB. We knew we would eventually find our place.
We are excited for the future.
Harris Kupperman CEO