Greenbackd

Ditech Networks Inc (NASDAQ:DITC) has filed its 10Q for the period ended January 31, 2009.

We’ve been following DITC (see our archive here) because it is trading well below its net cash value with an investor, Lamassu Holdings LLC, disclosing a 9.4% holding in November last year. Lamassu has offered to acquire DITC for $1.25 per share in cash. Lamassu says that it “anticipates its due diligence requirement will take no more than two weeks and there is no financing contingency.” The stock is up 19.1% from $0.89 to close Friday at $1.09, giving the company a market capitalization of $27.8M. We initially estimated the net cash value to be $37.9M or $1.44 per share. We’ve now adjusted our valuation down slightly to $34.3M or $1.31 per share.

The value proposition updated

DITC has continued to consume cash in its operations through the last quarter, bringing the cash burn in the last three quarters to $15.1M. As of January 31, 2009, DITC also had long-term investments of $8.2 million as compared to $15.1 million at April 30, 2008. These long-term investments are tied to auction rate securities that failed to settle at auction. Although these securities would normally be classified as short-term, as they typically settle every 7, 28 or 35 days, because they failed to settle at auction DITC has reclassified them to long-term pending them settling at auction. As of February 28, 2009, DITC continued to hold auction rate securities with a par value of $13.7M. Our updated valuation follows (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

The company believes its “legacy business to be at or near cash flow break even” and this “will begin to be more evident in our financial results in the coming quarters:”

However, we do expect to continue to invest in our newer product offerings, which we believe will help diversify our customer base and hopefully add more predictability to our revenue streams. We expect that the investments in our new products will result in continued negative cash flows from operations until such time that we experience a resurgence of demand for our legacy products closer to their historical levels or our new products gain traction in the market and begin to generate meaningful revenue streams.

This is unfortunate. We think the best use of the company’s cash is its own undervalued stock.

Off-balance sheet arrangements and Contractual obligations

According to the 10Q, DITC has around $5.4M in contractual commitments (including $2.7M in operating leases and $2.7M in purchase commitments), around $2.9 of which falls due this year and the remainder falling due within the next 3 years. DITC has no other material commitments.

Conclusion

We propose to maintain our position in DITC and will continue to hold it in the Greenbackd Portfolio.

[Full Disclosure:  We do not have a holding in DITC. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]