Greenbackd

Ditech Networks Inc (NASDAQ:DITC) has filed its 10Q for the period ended April 30, 2009.

We’ve been following DITC (see our archive here) because it is trading below its net cash value with an investor, Lamassu Holdings LLC, disclosing a 9.4% holding in November last year. Lamassu has previously 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.” Lamassu has now nominated two candidates for election to the board “who are committed to enhancing shareholder value through a review of the Company’s business and strategic direction.” The stock is up 49.4% from $0.89 to close yesterday at $1.33, giving the company a market capitalization of $35M. We last estimated the net cash value to be $34.3M or $1.31 per share and the liquidation value to be around $47.5M or $1.81 per share. We’ve now reduced our estimate of the net cash value to around $32.2M or $1.23 per share and the liquidation value to around $43.4M or $1.65 per share.

The value proposition updated

DITC has continued to consume cash in its operations through the last quarter, bringing the cash burn over the last year to $22.6M. At April 30, 2009, all of DITC’s short-term and long-term investments were held in corporate notes and asset backed auction rate securities. According to the 10Q, the long-term investments are tied to auction rate securities that failed to settle at auction beginning in fiscal 2008, and for which there appears to be no near-term market. Although these securities would normally be classified as short-term, as they typically settle every 28 days, DITC has reclassified them long-term pending them settling at auction. At June 30, 2009, DITC continued to hold auction rate securities with a par value of $13.7 million. 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):

In the last 10Q, DITC wrote that it believed its “legacy business to be at or near cash flow break even” which would “begin to be more evident in our financial results in the coming quarters.” That rosy prognosis has not manifest itself this quarter. Maybe DITC management meant the next quarter.

Off-balance sheet arrangements and Contractual obligations

According to the 10Q, DITC has around $4.0M in contractual commitments (including $247M in operating leases and $2.7M in purchase commitments), around $2.6 of which falls due this year and the remainder falling due within the next 3 years. DITC has no other material commitments or off-balance sheet liabilities.

Conclusion

The deterioration in DITC’s value is a concern, but, for reasons we’ll discuss in the next post, we propose to continue to hold DITC in the Greenbackd Portfolio for the time being.

[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.]