In August last year Wes Gray and Andy Kern supplied the first Greenbackd guest post on CombiMatrix Corporation (NASDAQ:CBMX). The thesis was as follows:
There are a number of undervalued micro cap companies in this market, but not all values are created equal. Combimatrix (Symbol: CBMX) is a small biotech company that is tremendously undervalued by the market and has catalyst in place to realize its intrinsic value in the near term (~6months or less). Management is smart, downside is limited, and upside is huge( 100-200%+). There’s a lot to like at the current stock price.
Valuation
a. Cash
The company doesn’t appear to even remotely be a net-net by glancing at the balance sheet, however, closer inspection of the company’s contingent claims suggest otherwise. In 2005 the company won a lawsuit against National Union Fire Insurance relating to its director’s and officers’ insurance policy and was awarded a $32.1 million judgment by the US District Court. It was later awarded an additional $3.6 million by the court for attorneys’ fees and has continued to earn interest since this time.
National Union appealed, at which point the court required it to post an appellate bond of $39.2 million with the court. This means that the creditworthiness of National Union is not an issue and the only thing standing between CombiMatrix and the current value of the judgment is the Circuit Court. It appears very unlikely that the ruling will be overturned based on our legal due diligence: the decision was a bench verdict by a federal judge, and there were $0 dollars in punitive damages so the appeal theory is very weak. All briefs have been submitted to the court by both parties and only the oral hearing remains, meaning that a disbursement of the funds could happen soon. A decision is expected to be finalized by Q4 2009.
The $36mm lawsuit money and $10mm supplement represent $46mm. After the 20% lawyer fee we are left with ~30mm plus the $10mm supplemental (which we would likely do a settlement for 7mm to expediate process). Add back the $11mm cash balance on June 30, 2009 and the company is sitting on nearly $6.4 in cash per share (based on 7.5mm outstanding).
If we assume $3mm in cash burn and $12mm in liabilities (convert debt+misc liabilities+liquidation costs) at December 31, 2009, we are still left with a cash balance of [~$4.4] per share ($33mm/7.5mm s/o).
CBMX has lodged the following notice:
On January 27, 2010, National Union Fire Ins. Co. of Pittsburgh, PA (“National Union”), Acacia Research Corporation and we entered into a settlement agreement (the “Settlement Agreement”), pursuant to which National Union has agreed to pay us $25.0 million by February 12, 2010 to settle the dispute. Consistent with the Settlement Agreement, we have not issued a press release with respect to this event as is our normal custom upon entry into material agreements.
The settlement seems to be at a reasonably substantial discount to the award, but this is a positive development. It will be interesting to see where the stock trades today.
[Full Disclosure: I have a holding in CBMX. 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.]
Just curious. Why is settling for a lot less a positive development?
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