Brian Finn from Findell Capital on his letter to Oportun Financial $OPRT (podcast #162)
Brian Finn, CIO of Findell Capital Management, discusses the letter he sent to Oportun Financial's board (NASDAQ: OPRT). Since Oportun's September 2019 IPO, shares have fallen -85%, falling well behind competitor, OneMain Holdings (OMF). In addition, costs have exploded higher and acquisitions have proved disastrous.
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Transcript begins below
Andrew Walker: Hello and welcome to Yet Another Value Podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot, if you could follow rate, subscribe, and review it wherever you're watching or listening to it. With me today, I'm happy to have Brian Finn. Brian is the founder of Findell Capital. Brian, how's it going?
Brian Finn: Good, how are you doing?
Andrew: I'm doing good, back from the long weekend. Excited to start off the week with the podcast, but let me start the podcast with a quick disclaimer. Remind everyone that nothing on this podcast is investing advice. That's always true, but particularly true. Today we're going to be discussing a company that has rapidly become a Microcap company. If we were talking 18 months ago, this would've been a 2 billion-plus market cap company. Say it's just over a hundred million. Findell Capital sent a letter to the company, which we're going to be talking about. They disclosed that you own about 4% of the company so people should certainly keep all of those extra added risks and things in mind when they're thinking about this.
Remember, not financial advice. Anyway, the company we're going to talk about is Oportun Financial. The ticker is OPRT. You guys sent a letter to the company about two weeks ago now, which I'll be sure to include in the show notes if people want to review it and I'll just turn it over to you. What is Oportun Financial and why did you send a letter to them?
Brian: Cool. Just to step back here. Oportun was a company that was started back in 2005 by a Stanford Business School student and actually is a research project. The idea was to try to find a way to get unbanked folks and these are typically Latin immigrants access to lending and to credit. This is an alternative to call it payday lending. Payday lenders charged 400% interest rates and it's a practice that's under a lot of political and regulatory backlash.
Brian: But this is different than that. This is basically a personal loan and there's a cap to how much they can charge on the interest there. It's typically, in most states about 36%. Most of their loans are somewhere in the below 30s as far as the interest rate charged and their short duration so less than 5 years, typically like one to 2 years maybe 3 years and they pay these loans back like an installment scheme. What this is really is it's a way for underbanked people to get access to credit and to build a credit score. It's a really important service in that respect and Oportun is really the only game in town doing this. They've created this great specialty lending business where they've got all these retail locations to spread throughout the country in the neighborhoods where these people are.
They've got access to the most amount of data as far as the full performance of these different vintages because these aren't loans that remain outstanding forever. They typically get paid off within a couple of years. They're the only folks at scale targeting this customer base. They're made competitors, a company called OneMain Financial. These guys are doing similar personal loans, but their customer base is typically a little bit more assimilated and higher up on the credit spectrum so they don't really overlap with Oportun. The guys that are getting Oportun loans are really guys that don't really have a lot of other avenues for getting these loans. This is a service that's important from a financial inclusion perspective.
They're targeting a great market. They're the only game in town, obviously in the number of immigrants in this country has grown a lot. The folks that are doing these loans, they're doing these loans not just to get the money for whatever emergency it is or particular need, but they're doing this to build up a credit score. They typically will do about three loans and that gets you to a 660 FICO score, which is enough to go out and get a credit card. But the interesting thing is the renewal rate typically increases with each subsequent loan. The deeper these guys get into their relationship with an Oportun, the more loyal they are. They'll often later on as they build up their credit score, they'll still do loans with Oportun, even if that doesn't make as much economic sense. You have a great base business here. Now, what's happened here is management's come in and screwed it up, so take a step back. The founder left in I think 2012.
Brian: Somewhere in that timeframe. Raul Vasquez was the CEO who was brought in, and he comes from walmart.com where he led those efforts. He basically came in and he got a techy background and he's decided to run this business like it's a FinTech company rather than a specialty subprime lender. What he's done is he's going out and he's made a bunch of acquisitions and he's layered on all these operating expenditures. Gone on hired a bunch of middle management people, really expensive corporate officers in California which is obviously an expensive place to hire people so by doing all this he's essentially imploded the business here. One of the big mistakes he made was he bought this company digit for 200 million and that's been written down, basically.
They've added all these operating expenditures from there. If you go through each of these decisions to try to become a more all-encompassing consumer bank, there's really no evidence. We've talked to sell site analysts and confirmed this to show that any of these efforts have really borne any fruit, or have led to any new revenue streams or cost synergies and whatnot. All they've done is created this gigantic Frankenstein cost structure that is obscuring what is an amazing base business here of lending to underbanked folks who need to get access to credit. He's done everything possible to basically screw this up. The board hasn't been all that attentive to this and we wrote this letter to basically call the question his conduct as CEO. We've asked that he be removed and we wrote the letter knowing that the board slate, it's too late to nominate a board slate for this year.
We wrote the letter to bring, I guess, public awareness to his tenure here and his track record as a capital allocator and as a manager of this organization and to begin a public dialogue about how this company's being run. Since we put out the letter, we've had about 25% of the flow, which is a huge amount, reach out to us and essentially have voiced their strong support for what we've put out there. We have not yet begun a campaign of reaching out to other shareholders, although we imagine that most just hard to disagree with anything we pointed out because it's just such a blatant reality. This is a company that went IPO in 2019 is down almost 90% versus its main competitor OMF, which is up 50% if you include dividends since then.
There's been a stark difference in performance here as far as where things are right now. We will start reaching out to other shareholders. What we're going to do is we're waiting, so we were going to do a call with them and that call basically got delayed till this coming quarter gets released. Then we plan on seeing if they take any of our considerations into account and if they don't, then I think we begin a more aggressive campaign of talking to other shareholders. But we'll wait and see what the reaction is here in the near term.
Andrew: Perfect. Let's dive into some of those points. Because look, as you said, like I can't imagine anyone reading this letter and reading the letter you sent and looking at the results and everything and finding like, really anything to criticize in it or anything. But I guess you mentioned the board, what is the board doing here, right? Because I see a stock that's down, call it 85%, we can discuss the funding and everything, but I look at the Q4 call, I look at the results, I look at how long it took them to start cutting pause the results of that acquisition and what is the board doing that they're letting management go on this crazy spree. It seems crazy that they're taking so long to make changes here.
Brian: Yeah, no, it's not clear what the incentive structure is for these board members to just keep this going. That's why there needs to be some pressure applied here.
Brian: You've got two board members who've been there for a long time. Dave Strohm, who comes from Greylock Partners, and Carl Pascarella who's the lead director. I remember those guys are, Dave has clearly lost a lot of money on this investment. My guess if I had to guess is that this is part of some vintage within the ZC fund that has already done PR probably pretty well on other investments.
Brian: This is just some remaining piece that is floundering. But what does he care? Yeah, it's not clear where the board is sitting on all of this. We have yet to obviously have a dialogue with them. It's not clear how captured they are by Raul Vasquez. Raul from what we can gather, he's well-liked by certain people in the industry, but he is one of these guys who's great at getting public PR done. He appears to be good at the political games here because he is been able to last in the seat while delivering just completely disastrous results.
He's one of these guys who you search him, there's like 50 magazine articles talking about what a great executive leader he is, so he is really, really good at PR and he gets all these diversity, equity, and inclusion awards and kind of thing. He obviously, the track record speaks for itself, the hugely bloated cost structure, the disastrous acquisitions that he's done, and the stock price and you've got a lot of shareholders who are upset.
Andrew: Let's talk about the business and a little bit of upside and then we can come back to some of the comments you made in the remarks. I guess the first thing, you said was, "Hey, this is a pretty good business lending subprime to people without credit scores." It's not a huge niche, but I think a lot of people would look at that and say, Hey, you're lending to people without credit scores like lending is a commodity business. I do think that can be a decent business because there are some returns to scale. Again, there aren't going to be a lot of people there. You're competing against payday loans. But can you just break down the business a little further like what makes it such a good business to do this?
Brian: Yeah, look, this is a great business because they've got two things. They've got their tentacles into these different communities. They've got all this retail presence so they're spread throughout the right neighborhoods where these sorts of underbanked people live and work. They're in the community which is a barrier to entry, I guess, to establish that presence. But more importantly, it's data. They have all sorts of data that no one else has on this particular customer segment. Data is obviously, key to developing algorithms and the like, and so they've developed great algorithms, they have all the data and they've got a huge lead over anyone else in that respect. When you think about the structure of this business, you're doing these loans at call it low to mid-30s, and the cost of financing's Five-Six.
It's a pretty fat net interest margin. But what matters is obviously the cost of customer acquisition and driving that lower which is where they've failed. Now, with the needs that they have it would be hard for someone else to come in there quickly because they have the data to show how these loans do over time, which I think if OMF wanted to come in, it would just take them a while to develop how a vintage does over time and to know who the good repeat customers are and whatnot.
Brian: I think there's a lead there. The other great thing about this is that these loans, it's a book that they can turn over quickly so they're not stuck with a big loan portfolio of loans that are going to last for 30 years. These are loans that are short-duration loans, so they can change things quickly and which they did, they did do that last July when they noticed deterioration in the credit quality of their current portfolio. They tightened up the lending standards so that will obviously affect loss rates going forward. They can pivot on a dime here, which is great.
Andrew: I guess just looking at it, it does seem like lending to subprime people, you probably should be able to get a little bit of return above your cost of capital just because there should be some scale benefits. There should be some data benefits. But I guess maybe investors might be biased because just in the small-cap space, like over the past year or two years, we've seen OppFi go public through OppFi had a very similar business model and they went public through a SPAC and that's been a disaster through the group. There were lots of moving parts there and everything, but that's been really poor. Each of them, it's not just the base business that deteriorated away and resulted in poor returns there.
Both of them tried to do similar to what Oportun did, they tried to get more into a FinTech lending as a service, whatever you want to call it thing and catch a tech multiple and both them sunk tons of money into that and ended up blowing up. But I guess just like as an investor, you look at it just seems all of them blow up and it seems like how much of it was, hey, when interest rates were going down and the economy was good, and maybe like 2020, everyone was getting PPP and stuff these loans were paying off better than you expect versus in 2023 and 2024 interest rates rising. Maybe a little bit of a rocky economy. Like you start seeing that the write-offs are a little bit higher than maybe these guys have been modeling.
Obviously, they change that a little bit by changing the lending standards in July 2022. You just worry about that, the money out the door and it says, "Oh, as soon as the economy takes a zip down, you just see right offs left and right."
Brian: Yeah, there's a couple of ways to think about this, for one, when you think about who they're lending to, these are folks that are actually, their jobs are in demand, they're probably not getting laid off. If you look at what's happened with unemployment here, it's the white-collar workers that are seeing layoffs. Whereas, there's a great Wall Street Journal headline talking about how it's really hard to find a truck driver to pay $90,000 a year, but really hard, really easy to find an MBA that you could pay $60,000 a year. You're not going to see their unemployment rate, or at least right now isn't spiking. You're still seeing strong growth and in-demand for these types of jobs. Inflation obviously, caused some issues with their losses which went up from, call it like 70%-ish to 10%.
Their forecasting, at least right now, is to see those loss rates come back down as they've changed out the credit quality since July of last year. Most of the loan portfolio by the second half of this year will be the post-July of last year lending standards. They've tightened up the credit quality. I think the folks they lend to are in a better position from an employment perspective and inflation, the thing that throws all these variables out the window has at least come down a little bit. Inflation obviously, hits poorer people more than it hits wealthier people, but oil prices are in a more stable trading range than where they were last year around this time.
Some of the other metrics have come down as well. I definitely, the macro is something to consider and worry about here, but the reality is these guys have such a fat margin. What screwed them up is not the quality of the loan portfolio, it's how this guy has operated the business. To give you some stats here, Oportun back in 2016 if you look at their OpEx per number of loans, the roughly the cost of customer acquisition, it was in the $300 to $400 range like 350-ish. Today it's a thousand dollars. Now, where's all that OpEx going? It's not additive to their loss rates or it's not additive to their lending algorithm or anything like that. It's going to support this mass of corporate bloat.
They've raised the headcount of their corporate officers by 70% since 2019. These are all guys making $300, $400, or $500,000 a year who is just cost center. They're not adding the revenue, creating employees who are the folks in the retail centers creating the loans or in the call centers helping service these loans. That's not where this guy added employees. He's added employees at the corporate headquarters and you see it, you can just look at their website. They've got 27 vice presidents, essentially 27 executives listed on there. A lot of them have overlapping titles. They literally have like 3 or 4 people that are head of global HR and 4 risk officers. They have all these different people that are essentially doing the same job, and these are folks making mid to high six figures.
The issue with Oportun is really not in credit environment matters and could become a problem, but that it looks like they've managed that fine and the loan portfolio does turn over quickly so that's a risk that I think is more manageable here versus other specialty lenders. The issue really is just how this guy's operated the business, how many costs he's layered on and this is really like Teldar Paper 2.0 if you ever watched the movie Wall Street when Gordon Gekko gets up and talks about Teldar Paper, how they have all these vice presidents are all doing the same thing, that's what this is.
This is an organization that got massive bloated because you had a CEO who was pursuing all these imperialistic FinTech dreams, wasting a ton of money in acquisitions, wasting a ton of money on personnel, and it's caught up to them and they've got a market cap of 150 million now. The company and the stock's been destroyed, but he still has not gotten the message. He still hasn't pivoted. They've made these token pivots on the cost side, but nothing that really constitutes the gravity of the situation here. This letter's a wake-up call to him and he has to pivot and he has to change.
Brian: If you look at their competitor, OneMain's done fine over the last, since 2019, if you comp them on a stock performance basis, OneMain has not added a bunch of employees. They've actually, their employee's head counts going down from 10,000 to 9,000. Their cost per loan has stayed flat. They're getting operating leverage every year as they grow the business. OneMain, it's managed Apollos on the board, and it's managed soundly, these guys have been managed disastrously and that's why they are where they are.
At the end of the day, it falls on the CEO, it falls on Raul Vasquez, who is great at getting accolades and managing his PR and probably managing the internal politics of this company but has been a complete and utter disaster for shareholders. The shareholders are waking up to this and they're upset they need to see either he is removed or they need to see a massive cost initiative here to address these issues.
Andrew: If I could just add some things on there like, look, this is coming. I could not believe it when I was looking at just the 10K and everything flipping through it said, making sure this is prepped for this podcast. They capitalized 50 million in software last year. This is a 2050 million market cap company, they're a lender and they capitalize 50 million of the market, of software expense. It seems pretty clear to me and the other thing I'd add is, you mentioned OneMain as a competitor several times, go look at OneMain's earnings releases. They treat themselves like a finance company. They mention, "Hey, here's our tangible book value, here's our return on equity, and here's our charge ratios.
Tangible book value and book value is really the one I'm thinking of. Whereas, go look at how opportunity talks about themselves. They never talk about book value. They never talk, they do give some return metrics, but they never talk about book value. It's like, look, these guys, 50 million of software expenses, what they focused on what they're putting out in their earnings release? It's pretty clear that they see themselves as a growing tech company and the results are in, right? They wrote down the acquisition they're trading way, way below book value. They're writing everything off like they need to readjust and manage themselves, like what their core business is like, where their earnings are and that is as a subprime lender to put it bluntly. Anything you want to add to that?
Brian: No, I totally agree. I mean, they're trading at a fraction of their book value here, whereas their comps trade above book value so that says it all.
Andrew: Let's build off book value and let's just quickly talk, not pieing this guy upside, but how do you look at the value in the company? Because my first takes were, "Hey, let's look at tangible book value as we discuss the trading below that. I'll let you calculate that or I can throw some numbers out." Or the other way to look at this, and I don't look at tons of sell-side research, but this is a pretty well-covered company. You can go find it. Most sell-side says, "Hey, here's 2024 earnings slap, probably like a five times multiple on it, which makes sense for what should be a low growth subprime business in my opinion." But both of those would get to a number higher. You mentioned something similar in your letter, so I'll just toss it over to you. What do you think about valuing this company if they do what's right here?
Brian: Look, I think you can go through their 10Ks and see where they've added cost over the last couple of years. It's been an area, these cost centers that aren't increasing revenue, to any discernible degree that we can see. We think they could easily take out an additional 150 million in OpEx here, obviously, there are different ways to slice and dice their overhead here, you could look at an OpEx per loan originated, OpEx per total originations, and OpEx per total loan value. There are different ways to do it. It's every single metric. It's clearly gotten out of whack if they were to go back to their operating expenditures 3 or 4 years ago as a percentage of any one of those metrics that again is $150 to $200 million less OpEx in 2024 than what they're currently projected to do.
Look, this is a company with someone in the order of 35 million shares outstanding. You go, you cut one expensive middle management guy that's called a million dollars. That's 3 cents a share. Something to that effect. The simplest thing they can do here is to go out and cut overhead and stop these different FinTech initiatives. If they got back to any of the OpEx ratios from 20, even close to 20 what they were doing in 2019, we have them doing more than $3 per share in earnings, like $3 or $4 a share in earnings in 2024, even with an elevated off ratio and whatnot. Really, there's just tons of fat to cut here. He just hasn't been willing to cut it. Whatever, maybe he's just full of pride or hubris and the board isn't really forcing his hand.
In the meantime, he's paying his management team something on the order of almost 30% of the market cap if you look at their comp. Whereas, the competitors are at like 1%. His hand needs to be forced. I think that there are enough angry shareholders out there that agree with this. If you model it out, you can easily get to $3 or $4 a share in earnings next year. Sure. Five times that. It's probably reasonable in the long run though, if you got a management team in place here that really focused on the cost of acquisition per loan and really got down to the numbers that they were at five or six years ago, then I think you'd look at the sky's the limit here.
This should be a multi-billion dollar company because they're in a great market, it's an important service that they're providing and they have an amazing data advantage over everyone else has been in this sector for longer and serviced, way more loans to this particular customer segment than any other competitor. If they had the right specialty lending-focused folks in charge versus someone who thinks they're a FinTech CEO they could get there.
Andrew: I have no disagreement there. One other worry opportunity I have like anybody who's interested is go look at the Oportun website versus the OneMain financial website. Like Oportun is always pushing you towards the Oportun app and talking about this tech focus that we're talking about where if you go to the One main website, they don't talk about the app, it's just, "Hey, do you want a loan?" When you're dealing with subprime lenders, these are the general people who are unbanked. I keep saying subprime, but it's actually unbanked here is what you're really dealing with. An app might not make as much sense. Yeah, you get a recurring customer and it's on their phone and stuff, but if they're unbanked they don't have a way to really get anything going through an app. Right?
Andrew: You really do need to be dealing with them. It sounds silly, but I remember when I was talking to OppFi, they're like "Yeah, it's silly, but our best way of getting customers is actually in the mail." It's not going to be digital, it's not going to be over Instagram. It's in the mail, it's people going into branches and it just seems to me pretty clear that oppFi is focused on something that if they were dealing with high net worth individuals who they were looking to sell IRA products to or get trading commissions from, yeah, it would be great for that, but they're not, they're dealing with the much lower-income people. They need to just focus on mail-cutting costs like the apps really not, yeah, it might be nice and longer, but it's not what you want to be leaning off with, it's just another example of corporate strategy going wrong to me.
Brian: No, that's a great point. If you look at the opportunity, a lot of people do pay back their loans in retail stores. They literally line up and are giving cash. If that's your customer base some 35-year-old immigrant with two kids who worked 60 hours a week in some blue-collar type of job and they're coming into the retail branch and paying back the loan with cash.
Brian: The fact that you're going to turn this person into some millennial app person doing, these people are very, very far away from becoming Robinhood day traders. They're folks that are trying to...
Andrew: Robin was exactly what I was thinking when I mentioned the app and yeah, exactly. Let me just quickly, so book value, right? Book value is, if you look at December 31, 2022, about 550 million of that, about 140 million in capitalized software, which I think both of us would probably just write off so call it 400 million of 400 to 410 million of tangible book. There are 33 million shares outstanding. They'll be going up a little bit after the warrants and stuff and we might talk about finance a second, but that's over $10 per share of tangible book. It's trading today for less than $4 per share.
I think people can see the hard asset value. I guess the one thing to think about there would be, hey, we already wrote off all the intangibles, so there's nothing to worry about there. What about the fair value of the loans here? Right? This is not a held-to-maturity Silicon Valley Bank situation, but they do have to fair value their loans. I think people might look at the recent financing that we might discuss in a second. Everything says, "Hey economy slowing down, they've had some issues with the loan portfolio." or "Hey, can I really trust that there's a solid $10 per year intangible book here?"
Brian: Yeah, that's fair to have concerns around the loan performance going forward, especially if the macro environment changes more from here. I guess I would think that like the losses that you saw last year, they went up from 6% to 7% to over 10%. Were in an environment where inflation was spiking, and that inflation comes down here. While it's still maybe at elevated levels, I guess the question's, how do these long cohorts do? In speaking to some of the sell-side analysts, they had questions about that.
It's all the more reason for them to focus on cutting costs and controlling the expenses they can control here because if the credit environment takes a much more dramatically worse turn than perhaps the loan performance that they thought they were going to have as far as the loss ratios just get worse. But for now, they're forecasting a decline in losses and more normalization of their loss ratios.
Andrew: The other thing I worry about, so you don't have to follow along, but page 51 of their 10K has how they fair value their loans. They've got, hey, they've got the discount rate at 11.5% of their loans, and this will bleed nicely into the refinancing and everything they just said, but they just refined their credit agreement to LIBOR plus 9%. They had to issue about 10% of the company in penny warrants to get this thing done. I look at that refinance and say, "Hey, their cost of capital seems a heck of a lot higher than 11.5% right now." That seems like pretty distressed financing. I where, hey, it's either signaling distress financing or cost. I'm not sure, but 11.5%, it's actually 11.48%, but it seems a little too low versus what I'm seeing in their financing if that makes sense.
Brian: Yeah, no, that's a fair point. Their cost of financing is going to, essentially the bottom line, you're going to get more dilution here as a shareholder unless they get religion on cost here...
Andrew: Which is all the more reason to cut the cost aggressively right now and so that you don't have to do this refinances that the cashflow pours in and you can finance yourself.
Brian: Yeah, that's the cheapest form of capital is to just cut your cost.
Andrew: Let's talk about [crosstalk], the recent refining system is, I just want to harp on the Q4 call because I thought for somebody sending a letter, if you're a shareholder who's interested or you're just interested in this situation, I'd go listen to the Q4 call and if you listen to it, this is my words, not yours, but I'd be like, "Hey, if somebody didn't send a letter to the company, I would wonder what the heck is going on." They talk about the banking acquisition they did in late 2021 where they're saying, "Hey, we're just starting to see this synergy coming in here after we basically wrote off all the goodwill." I don't believe they'll ever be synergies. They talk about the refinancing they did, which they did alongside earnings.
They buried it in the 8K and they have analysts coming on and be like, "Hey, I need you to explain this recent refinancing. It comes with some warrants. I need to get some details on the warrants." Basically, get management gets asked enough questions and they finally say, "Hey guys, these are penny warrants. They're free to exercise. We just gave away 10% of the company to get this done." If I was listening to this, I would've been just terribly concerned as shareholders. I won't let you comment on it, I kind of rambled on that a little bit, but I wanted to let you comment on anything in the Q4 results. They talk about the July restructuring where they said, "Hey, we tightened the credit box there. Guess what? They probably should have done it a lot earlier." They did say they're cutting some costs, but I don't think it's enough so just anything that happened there, I wanted to give you a chance to address.
Brian: Yeah, no, I think the point is you need to see a big pivot here. I give them some credit for tightening the credits, the credit box in July, but to your point, they should have done that earlier. If you look at OMF, OMF wasn't as aggressive with its lending growth during the last 2 years. They haven't had to pivot as strongly as much as opportunities. The opportunities over and over again are trying to grow unnecessarily in ways that aren't accretive for shareholders and it was just constantly getting whacked for doing so. But yeah, on the cost side, they've made these token gestures to decrease cost by, I'm trying to remember the amount, but I had it in my letter, but not nearly what they could do and what they should do.
Andrew: They did 50 million and I think in your letter, if I remember from it, I think you called for over 150 million, but it could be more than that.
Brian: Yeah. Let me just pull up the letter.
Andrew: Yeah. Because they're at 550 and you said to bring it back to 381, so about 150.
Brian: Yeah. This is a management team that still thinks that they've got all these avenues for growth in the FinTech space. It's still saying, "Hey, wait and see." They talk about digital acquisition in generalities. They don't point out anything specific about what's happened there, any revenue synergies or cost synergies. They're talking about these things in generalities and saying, "Hey, you should just wait and we're going to grow a ton in the future via these different initiatives." But to your point, none of these seem synergistic to their base business here and the type of customers that they have.
These are I guess Silicon Valley people thinking that they understand a community that they apparently don't seem to understand because they're providing them with products that this community doesn't want or need, rather than focusing on the product that they're good at and have grown a real base business around. If they go back to focusing on that product and cutting out some of these costs here, they've got a huge, huge advantage there from a retail location perspective, from loan data, and just a lot of customers that are already recurring. You could just cut all those costs and have a great pace business here that spits off a lot of earnings, even in a more distressed credit environment. Where loss rates go up to stay at an elevated level.
Andrew: On the products, I just had their 10K, it was open behind this, and I just saw underneath it, they mentioned the digit deal and they talk about, "Hey, we're selling our customers low-cost ETFs and tax advantage IRAs." "Hey, your core business is lending to the unbanked." It's the alternative to them getting payday loans to cover short-term needs. These guys do not want tax advantage. Everybody wants tax-advantage IRAs and low-cost ETS, but that is not what they're looking for. They're coming to you to cover a life emergency to cover something for shorts and a cap. It's just crazy that you would think there are synergies between those two products. It's just absolutely. Wow. Let's talk about the next steps. You sent the letter a couple of weeks ago.
You mentioned that the company and you are probably going to talk on the heels of their Q1 earnings, which will be out in the next few weeks. Its two nomination windows closed. There's not going to be a proxy fight here. The company is only 120 million so proxy fights at that level are a little crazy. But I need to stop mentioning Proxy fights actually, but what are the next steps here, right? You'll talk to them in a few weeks. What are you looking for? What are the tangible next steps that people who might be interested in this or following along should be looking for here?
Brian: Yeah, look, was it Bessemer Capital wrote meta letters saying, "Hey, look, you guys got to stop pivoting to this metaverse thing and cut costs." Zuckerberg who's obviously a great entrepreneur who actually built a multi-billion dollar business to his credit. He got the letter and he pivoted, they started cutting costs and doing some of the things that Bessemer asked. Raul is not Mark Zuckerberg. I hope that he has the humility to do what Zuckerberg did and to recognize here that if he doesn't do it, shareholders in the end will have their voices heard, and he won't have a job. He either won't have a job because he'll get fired or he won't have a job because the company won't be a going concern.
He will lose his job no matter what. If he continues to do what he's doing hopefully, he has the humility to realize he's got a pivot here and announce some strategic cost review and go out there and say, "Hey, look, we can take out 150 million or pick your number in operating expenditures and go out and make those cuts. I think that's the only thing that he can do in the next two months without the pressure for myself and from other shareholders just ratcheting up. The pressure isn't going to stop after the letter now to your point, the board nomination deadline has passed, so there's nothing to do for now in that respect. But that doesn't mean that down the line there won't be other moves in that respect that can be made.
I imagine that other shareholders could write letters. This will just turn into more of a public relations nightmare for him and for his board because it's like the first shot was fired and not more people are going to look to shoot their shot at him and at his managing style and at his approach to capital allocation. He's got to do something here. I think if he just has another quarter and talks about his different FinTech initiatives, it's just going to be a much broader mutiny. I'm not original or brilliant for pointing any of this out. I was just the first one to do it. There are a lot of other people who feel exactly the same way, who will I think come forward and write letters and start a campaign here to pressure these guys to pivot.
Andrew: Well, I think people a lot of times get hung up on, "Hey, is he always going activist on something? Is he a first-time activist that I think you can speak to your history with your history or lack thereof with activism?" But to me, it's just like, "Hey, what the person's saying in this letter makes sense?" It's like, "Here's a guy who owns 4% of the company. Everything he's saying makes sense. The management team, they've again, share price down 85% to 90% over the past 18 months. They just had to issue penny warrants for 10% of the company to get the financing done at 10% plus all-in interest rates, excluding the penny warrants.
They've run this company to the ground and to me, it seems like, as you said, the 50 million cost cuts are a nice first step, but it's so clear to me, you cannot invest 50 million into capitalizing software anymore. It's been tried, it blew up. The company is on the brink. They need to get back to basics. That involves cutting all of these finance costs, focusing on the core business, which can be a good one, and running this thing for cash. Proudly, the end game here is to do all that. This is not a company, I think this is one of the reasons some of these unbanked companies get in trouble. It's not really a company that should be public, right? It should be run for cash without tons of growth because the scariest thing in finance is a FastCo financial. You're not going to take over the world. They should probably just be run for cash by a small private equity shop. They shouldn't be public. They shouldn't have the added cost burden of a public company seems pretty clear to me.
Brian: Yeah, no, this is a company that should be on my private equity. That's probably the bottom line.
Brian: Maybe that's where all this ends up going. But yeah, in private hands, this company could be run, way more effectively on all sorts of levels.
Andrew: Again, 125 million, 150 million market cap companies probably cost 3 billion to be public these days. Take that out. That's a pretty nice synergy from the get-go. Anything else you wanted to talk about on opt...? I think we covered just about everything in your letter. I think we covered everything in my question notes. Anything else we should be talking about or people should be thinking about?
Brian: No, I think the synopsis here is that this is a great business and it would be a shame if it was run into the ground by this corporate, by this leadership team, and by Raul Vasquez. I hope, I think he'll pivot if he's got a head on his shoulders and isn't totally full of pride and ego. If he does, that really will change things from our perspective. But that remains to be seen over the next month or so. We'll probably know a lot more after this quarter, and that's where we'll probably make our next decision about how to engage.
Andrew: Perfect. Well, look, I'm going to include a link to the letter that you guys sent. Again, anybody who's interested in the situation can go read that letter, and get a little bit more familiar with the company. Brian's contact info is also at the bottom of that letter, so anybody who's interested in reaching out, if you're a shareholder and you want to swap thoughts or potential shareholder and you want to swap thoughts, find his contact info there and reach out to him from that. But Brian, thanks so much for coming on, and I know that we've got one other portfolio company in common that we didn't talk about today, Liquidia, but because of that, I'll say thanks for coming on, and I'm looking forward to having you on again in the future.
Brian: All right. Take care, man. Bye.
Andrew: Later, Brian.