Soapstone Networks Inc (NASDAQ:SOAP) has filed its 10Q for the quarter ended March 31, 2009.
We been following SOAP (see our post archive here) because it is trading well below its net cash value with an activist investor, Mithras Capital, disclosing an 8.7% holding in October last year. The stock is up 48.0% from $2.50 when we initiated our position to close yesterday at $3.70, giving SOAP a market capitalization of $52.0M. We last estimated the company’s net cash value to be $86.1M or $5.59 per share. Following our review of the Q1 10Q, we’ve adjusted our valuation down 6% to $80.3M or $5.21 per share as a result of $6.7M of cash burned.
The value proposition updated
The company’s balance sheet value is almost wholly cash, which it continues to burn (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):
Balance sheet adjustments
We need to make the following adjustments to the balance sheet estimates above:
- Cash burn: The company used $6.7M in cash in the first quarter. They expect cash burn to continue to be between $6M and $6.5M per quarter.
- Off-balance sheet arrangements and contractual obligations: SOAP does not have any off-balance-sheet arrangements and its contractual obligations, which consist entirely of operating leases, are $3.9M. These operating lease payments are the minimum rent expense for SOAP’s facilities, including its head office.
Conclusion
We continue to believe that SOAP is a very good opportunity. The company’s ongoing business is small in comparison to its net cash position, so it shouldn’t dissipate its cash any time soon. It has no off-balance sheet arrangements, little in the way of ongoing contractual obligations and no material litigation, so the cash position seems reasonably certain. The company’s engagement of an investment bank to explore strategic alternatives is a promising step in the right direction. We continue to be concerned by the continued issuance of options at a huge discount to liquidation value. The sooner Mithras Capital gets control of this situation the better.
[Full Disclosure: We have a holding in SOAP. 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.]
Greenbackd 
i didnt take a look at this name until recently. I hope I am wrong (being a well wisher and since you do have a position) but if history is a guide, this management will work its way through all the cash (the company burned a cool $400 mm in the past and has nothing to show for it).
I think the hiring of Ibanker is nothing more than a ploy to placate investors (most of who I suspect are vulture investors like your’s truly).
If we are in a prolonged bull run, then this stock should underperform significantly because it has zero financial leverage and zero products/revenues.
Mithras is the only potential catalyst but been quiet, no?
Cheers.
FF
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Thanks, FF. We agree that Mithras has been very quiet. We’re going to keep an eye on it, and if the cash keeps disappearing down the drain, we might get out.
G
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