In mid November I ran a post on Convera Corporation (NASDAQ:CNVR) (see the CNVR post archive here), which was in the process of liquidating and planning to pay distributions valued in the range of $0.26 to $0.45 per share. The stock was then trading at $0.221. The distributions consisted of three cash payments with a value of $0.26 per share ($10M on liquidation, and a $2M payment on each of the 6 and 12 month anniversaries of liquidation) and a share in a newly created company, VSW, worth between nothing and $0.14 on pretty heroic assumptions. The most recent 10Q is a little troubling because it doesn’t mention the two $2M distributions, which account for about $0.07 of value in the liquidation. They are still included in the original plan of liquidation and therefore by reference in latest 10Q. We have not, however, been able to contact the CFO to confirm that the distributions are still payable. I believe that some distribution is still payable, but not in the quantum originally estimated by the company. My rough estimate, based on the accounts as at October 31, places the total cash distributions slightly lower than the company’s last estimate at ~$13.0M or $0.24 per share.
The original information statement
Here’s the description from the 14(c) information statement:
We plan to distribute $10,000,000 shortly after the closing of the Merger, with the remaining $4,000,000 to be distributed in $2,000,000 increments at six months and 12 months after the closing of the Merger, subject to possible holdbacks for potential liabilities and on-going expenses deemed necessary by our board of directors in its sole discretion.
The present value of this cash distribution, assuming a discount rate of 10%, is estimated at $0.26 per share.
Hempstead assessed the value indication associated with a one-third equity interest in VSW based upon the discounted cash flows methodology. Specifically, under a discounted cash flows methodology, the value of a company’s stock is determined by discounting to present value the expected returns that accrue to holders of such equity. Projected cash flows for VSW were based upon projected financial data prepared by our management. Estimated cash flows to equity holders were discounted to present value based upon a range of discount rates, from 25% to 35%. This range of discount rates is reflective of the required rates of return on later-stage venture capital investments. The resultant value indications for the VSW component of the transaction, on a per-Convera share basis, are as follows:
Based upon the above analyses, the value indications for the cash and VSW stock to be received by our stockholders in exchange for their current Convera shares are within a range of $0.37 to $0.45 per Convera share.
The most recent 10Q
This is the position according to the most recent 10Q:
On June 1, 2009, we announced our plans to merge our search business with Vertical Search Works, Inc. and our expectation to adopt a plan of dissolution with orderly wind down and liquidation of Convera before the closing of the merger. The merger with VSW contemplates the transfer of all the business assets and obligations of the search business, including $3.0 million in cash and a $1.0 million line of credit to VSW, subject to certain adjustments. The plan of dissolution contemplates a $10.0 million dividend to shareholders of record at the close of the transaction and an orderly wind up of Convera’s remaining obligations over the twelve months after closing. We believe that we have sufficient cash resources on hand to complete the merger and the plan of dissolution. We expect the conditions for the closing of the VSW transaction will be met early in 2010. However, we make no assurances that either the merger or the plan of dissolution will be completed.
Here’s my rough estimate of the state of the balance sheet here after a further 12 months of cash burn and professional fees:
According to my back-of-the-envelope calculations, the distributions estimated by management seem slightly high, but my estimate is sensitive to the quantum of the cash burn and professional fees. At the present stock price, there’s no upside in the cash distributions. The share in VSW may present some value, but no sensible estimate can be made as to that value. The range is likely nil to $0.14 per share, and I believe nil is the more likely end of the range. I’m going to maintain Greenbackd’s position in CNVR because I think the worst case scenario – which is probably the most likely scenario – is that the position is a wash, but there is some small chance that there is value in VSW.
Hat tip Rodrigo.
[Full Disclosure: I do not hold CNVR. 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.]
http://yahoo.brand.edgar-online.com/DisplayFiling.aspx?TabIndex=2&FilingID=6957287&companyid=81001&ppu=%252fdefault.aspx%253fcik%253d1125536
I guess it has begun?
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Well, it’s interesting. Looking at Greenbackd’s nifty table, the critical difference is whether that annualized cash burn should be closer to $8m. “At the time that Hempstead rendered its fairness opinion, and assuming a mid-2009 closing, our management estimated that our residual cash, after transfer of all of the operating assets and $3,000,000 in cash at closing of the Merger, drawn-down portion of the $1,000,000 line of credit, and various wind-down activities, would be approximately $14,000,000.” You know CNVR lost $2.3m in the quarter ended Oct09, of which IIRC $0.2m was attributed to more legal fees while noncash expenses ran around $0.2m quarterly too. In other words, 6 months after “mid-2009” that $14m may be closer to $10m: about 18 cents/share to be distributed. Of course that’d be a horrendous IRR on 23 cents/share. One more quarter of those losses before closing and we’re down to $8m or 15 cents/share. And if the deal falls through, we might envision close to zip after wind down. Granting just a 20% probability to the adverse falls-thru scenario would knock that 15-18 cents/share range to 12-15 cents/share future cash distribution expected value supposing a reasonably smooth closing. Discounted to present value: 10-14 cents/share. But margin of safety is the name of the game. Requiring minimally 70% price to fair value estimate: buyable 7-11 cents/share. Of course that assumes no value in ongoing business, if the value of it doesn’t look reasonably ascertainable nor nearly certainly materially positive. And in other respects those back-of-envelope figures look not overly conservative. Comparing that 10-14 cents/share fair value estimate to 23 cents/share price: worst case is no loss? merry xmas :) Maybe Santa will bring me a Ronart Lightning … next year, after I’ve been a good boy.
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Perhaps I was too optimstic. 18 cents sounds like a more reasonable assumption. However, they do say in the proxy that they may distribute VSW shares in place of the additional cash distributions – as in, on top of the 33% – after the initial $10m.
On the other hand, I disagree with Hempstead’s discount rate. It should be directly related to the risk-free rate, not just 10% because it’s a round number and everyone else uses it. This is an extremely high assumption in a zero interest rate environment. 5%-7% might be more appropriate.
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The cash burn does appear to be abating somewhat. Cash was down primarily because of the agreement to slowly distribute $3m in cash to VSW. Also, expenses are down significantly.
I agree with Greenbackd that it is a little odd they didn’t mention the other two distributions and they refuse to respond to calls (I tried as well). Worst case though, you get your investment back plus some – even if the VSW shares are worth a penny.
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Hm. Your estimate might be spot on. One of the things we like to look at in these kind of situations is expected return/loss if the deal falls through. What’s your estimate of CNVR value in that eventuality? And ballpark what probability would you assign that eventuality? Cash burn appears to be over $8m/year ($7.265m first nine months and not abating, apparently). How does that become $0.4m — assuming deal got done right after 31-Oct? Kudos on some great ideas. Cool blog!
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