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Archive for the ‘Net Net Stocks’ Category

Forward Industries Inc (NASDAQ:FORD) has filed its quarterly report for the period ended June 30, 2009.

We started following FORD (see our post archive here) because it was trading at a discount to its net cash and liquidation values, although there was no obvious catalyst. Management appeared to be considering a “strategic transaction” of some kind, which might have included an “acquisition or some other combination.” Trinad Management had an activist position in the stock, but had been selling at the time we opened the position and only one stockholder owned more than 5% of the stock. The stock is up 17.4% since we opened the position to close yesterday at $1.69, giving the company a market capitalization of $13.4M. Following our review of the most recent 10Q, we’ve slightly reduced our estimate of the liquidation value to $19.5M or $2.47 per share.

The value proposition updated

FORD continues to face difficult trading conditions, writing in the most recent 10Q:

Trends and Economic Environment: We believe that the deteriorating economic conditions, rising unemployment, tight credit markets, and heightened uncertainty in financial markets during the past 18 months have adversely impacted discretionary consumer spending, including spending on the types of electronic devices that are accessorized by our products. We expect this challenging business environment to continue in the foreseeable future.

The company had a slightly better quarter than the preceding one, but still burned through nearly $0.3M of cash (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):

FORD Summary 2009 06 30

Summary balance sheet adjustments

We’ve made the following adjustments to the balance sheet estimates (included in the valuation above):

  • Cash burn: We’ve got no real idea about FORD’s prospects. Its cash burn over the last quarter was around $0.3M. That was made up of $0.2M of cash used in operations and $0.1M cash used in investment activities. If we assume, as management has, that the company will face a similarly tough operating environment over the next 12 months, we estimate cash burn of around $0.7M.
  • Off-balance sheet arrangements: According to FORD’s most recent 10Q, it has no off-balance sheet arrangements.
  • Contractual obligations: FORD’s contractual obligations are minimal, totalling $0.9M.

Possible catalysts

FORD’s President and Acting Chairman, Mr. Doug Sabra, said in the letter to FORD shareholders accompanying the notice of annual shareholders’ meeting, that in 2008 “management began to implement operational and strategic initiatives in order to put [FORD]’s business on a stronger, more sustainable footing. …  This past August we retained an outside consultant to assist us in vetting possible partners for a strategic transaction.” It seems that the “strategic transaction” might include a “possible acquisition or other combination that makes sense in the context of [FORD’s] existing business, without jeopardizing the strong financial position that we have worked so hard to build.” FORD’s focus on a “strategic transaction” is a positive, in our view, although our vast preference is for a sale of the company, buyback, special dividend or return of capital over an acquisition.

Any transaction will require the consent of FORD’s board. While it has a free float of around 92%, the company’s so-called “Anti-takeover Provisions” authorize the board to issue up to 4M shares of “blank check” preferred stock. From the 10Q:

The Board of Directors has the authority and discretion, without shareholder approval, to issue preferred stock in one or more series for any consideration it deems appropriate, and to fix the relative rights and preferences thereof including their redemption, dividend and conversion rights.

Conclusion

At its $1.69 close Friday, FORD is trading at a substantial 46% discount to its $2.47 per share liquidation value and $2.07 per share net cash value. While there’s no obvious catalyst in the stock at this stage, management’s consideration of a “strategic transaction” is a positive. The risk to this position is management spending the cash on an acquisition. We think a far better use of the company’s cash is a buyback, special dividend or return of capital. Another concern is Trinad Management exiting its activist position in the stock. Those concerns aside, we’re going to maintain our position because still looks cheap at a discount to net cash.

[Full Disclosure:  We have a holding in FORD. 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.]

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VaxGen Inc (OTC:VXGN) has released its quarterly report for the period ended June 30, 2009.

We’ve been following VXGN (see our post archive here) because it is trading at a substantial discount to its net cash position, has ended its cash-burning product development activities and is “seeking to maximize the value of its remaining assets through a strategic transaction or series of strategic transactions.” If the company is unable to identify and complete an alternate strategic transaction, it proposes to liquidate. One concern of ours has been a lawsuit against VXGN by its landlords, in which they sought $22.4M. That lawsuit was dismissed in May, so the path for VXGN to liquidate has now hopefully cleared.

VXGN has now also attracted the attention of BA Value Investors, which has disclosed an activist holding and called on VXGN to “act promptly to reduce the size of the board to three directors; reduce director compensation; change to a smaller audit firm; terminate the lease of its facilities; otherwise cut costs; make an immediate $10 million distribution to shareholders; make a subsequent distribution of substantially all the remaining cash after settling the lease termination; distribute any royalty income to shareholders; and explore ways to monetize the public company value of the Issuer and use of its net operating losses.”

At its $0.50 close yesterday, VXGN has a market capitalization of $16.6M. We last estimated the company’s liquidation value to be around $26.5M or $0.80 per share. Following our review of the most recent quarterly report, we’ve slightly reduced our estimate to $25.4M or $0.77 per share. VXGN has other potentially valuable assets, including a “state-of-the-art biopharmaceutical manufacturing facility with a 1,000-liter bioreactor that can be used to make cell culture or microbial biologic products” and rights to specified percentages of future net sales relating to its anthrax vaccine product candidate and related technology.

The value proposition updated

VXGN has taken steps to minimize its cash burn, reducing its workforce to three employees, terminating its anthrax and smallpox development activities and selling the assets related to its anthrax product candidate. The company’s value rests on its vestigial holding of cash and equivalents (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):

VXGN Summary 2009 6 30 v2Balance sheet adjustments

We’ve made the following adjustments to the balance sheet estimates above:

  • Cash burn: The company used $1.1M in cash in the second quarter, down from $2.1M in the first quarter. We have included cash burn of $4M in our estimate for the year. We have also assumed professional fees and termination payments of $1.1M.
  • Off-balance sheet arrangements and contractual obligations: According to VXGN’s 10Q, it has no off-balance sheet arrangements.

The lawsuit against VXGN by its landlords, in which they sought $22.4M, has been dismissed:

In February 2009, a lawsuit was filed against us in the Superior Court of California for the County of San Mateo by plaintiffs, Oyster Point Tech Center, LLC. The plaintiffs generally allege that we defaulted on our lease for our facility located at 349 Oyster Point, South San Francisco, California. The complaint seeks possession of the premises and the balance of the lease plus unpaid rent and expenses totaling $22.4 million, as well as an award of plaintiffs’ attorneys’ fees and costs. Our biopharmaceutical manufacturing facility is located in the leased premises that are the subject of the dispute. At a February hearing, the court denied the writ and the temporary protective order sought by landlord. In May 2009, the lawsuit was dismissed.

Conclusion

At its $0.50 close yesterday, VSGN has a market capitalization of $16.6M. We estimate the net current asset / liquidation value to be around 74% higher at $25.4M or $0.77 per share. VXGN has other potentially valuable assets, including rights to a portion of future net sales on its anthrax technology and a state-of-the-art biopharmaceutical manufacturing facility. One concern has been a lawsuit brought by the landlord against the company, so it is encouraging that the lawsuit has been dismissed. With its stock at a substantial discount to its net current asset / liquidation value, its cash-burning product development activities at an end and a proposal to identify and complete an alternate strategic transaction or liquidate, we think VXGN is still a good prospect, and we’re going to maintain our position.

[Full Disclosure: We have a holding in VXGN. 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.]

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Soapstone Networks Inc (NASDAQ:SOAP) closed Friday at $0.495 following the payment last week of a $57.5M or $3.75 per share special dividend. The company estimates the final distribution at between $0.25 and $0.75 per share. The higher end of the distribution range represents a ~50% upside from Friday’s close, so we’re going to do some work now to determine whether we hold on to the stub, buy some more or close out the position.

We opened the position in SOAP on February 2nd (see our post archive here) because it was trading well below our estimate of its net cash value. An activist investor, Mithras Capital, had disclosed an 8.7% holding and called on the company to liquidate. After some urging on Mithras Capital’s part, management acceded to the request and announced a liquidation. SOAP stockholders approved the liquidation of the company last week and were paid a special dividend of $3.75 per share. Based on our $2.50 purchase price, the $3.75 per share special dividend returns our initial capital plus 50%. At the Friday close, the $0.495 stub represents an additional 20% on our initial purchase price for a total return to date of 70%. Management estimates the final distribution will be between $0.25 and $0.75 per share, which means the stub is trading at a fraction under the midpoint of the distribution range.

The value proposition for the SOAP stub

Following the payment of the special dividend, SOAP has cash of around $17.5M or a little over $1.00 per share. The basis for SOAP management’s calculation of the $0.25 and $0.75 per share distribution is set out below (extracted from the Preliminary Proxy Statement):

SOAP Estimated Liquidating Distributions

(The table above has been modified from the original to fit this space)

(1) Estimated balance is net of cash used for the period April 1, 2009 through June 30, 2009 for estimated operating expenses ($4.2 million), severance costs ($1.7 million) and accounts payable and accrued liabilities ($1.5 million), partially offset by interest income ($0.1 million).

(2) Estimated Extraordinary Dividend payments of $55.8 million are associated with 14,886,107 shares of our common stock outstanding as of June 16, 2009 and Extraordinary Dividend payments of $1.7 million are associated with 460,828 shares of our common stock subject to currently vested options that are in-the-money at $4.13, the per share closing price of our stock on the Nasdaq Global Market on June 16, 2009, which options are assumed to be exercised prior to the dividend payment.

(3) Estimated proceeds from the exercise of currently vested options for 460,828 shares of our common stock that are in-the-money at $4.13, the per share closing price of our stock on the Nasdaq Global Market on June 16, 2009, which options are assumed to be exercised prior to the dividend payment.

(4) Estimated range of cash proceeds from sale of assets, including technology, intellectual property, furniture, fixtures and equipment.

(5) Estimated operating expenses for the period of July 1, 2009 through June 30, 2010 for personnel, facilities and other expenses to conduct our wind up operations but exclusive of all other line items specifically allocated in the table above.

(6) Estimated severance costs for remaining employees involved in the wind up operations.

(7) Estimated accounts payable and accrued liabilities as of June 30, 2009.

(8) Estimated range of cash payments associated primarily with lease and lease related commitments for our headquarters facility.

(9) Estimated range of cash use for the purchase of insurance, including Directors and Officers liability insurance covering the six years from the date of stockholder approval of the plan of dissolution.

(10) Estimated range of cash use for professional fees related to our liquidation and dissolution, as well as ongoing SEC reporting requirements.

(11) Estimated range of cash use for unanticipated claims and contingencies, including potential deductibles and retentions associated with potential insurance claims.

Set out below is an analysis of SOAP management’s estimates, showing the differences between the upper and lower estimates:

SOAP Estimated Liquidating Distributions 2

It becomes clear from the preceding table that two categories account for the majority (80%) of the difference between the upper and lower estimates of the final distribution:

  1. Real Estate and Equipment Lease termination costs: Around $3.8M or $0.25 per share.
  2. Proceeds from the sale of Assets: Around $2.2M or $0.14 per share.

We’ve got no real idea about the likely final figures in either of these categories, which means we won’t be buying any more at this stage. Given that the stock is trading at a fraction under the midpoint of management’s estimate of the final distribution, we’re going to hold on to our remaining stock for the time being and see how it plays out.

[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.]

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Autobytel Inc (NASDAQ:ABTL) has filed its 10Q for the quarter ended June 30, 2009.

We last estimated ABTL’s liquidation value at $24.3M or $0.54 per share. Following our review of the 10Q, we’ve reduced our estimate to$21.8M or $0.48 per share. The stock closed yesterday at $0.48, which means it’s trading at our estimate of the liquidation value. On that basis, we’re exiting. We opened our position at $0.43, so we’re up 11.6% on an absolute basis. The S&P500 closed yesterday at 979.62, and was at 899.24 when we started following ABTL in December, which means we’re up 2.7% on a relative basis.

Post mortem

We started following ABTL (see our post archive here) because it was trading at a substantial discount to its liquidation and net cash values and Trilogy had filed a 13D notice disclosing a 7.4% holding. Trilogy had also launched a tender offer for ABTL at $0.35 per share. When Trilogy launched its offer, we wrote that we believed that $0.35 per share was only the opening salvo and a higher price was possible if the board terminated the rights plan poison pill. The board rejected the offer out of hand and Trilogy did not make a further offer before the initial offer expired. On expiry of the offer, Trilogy sent a letter to the board saying that it would “continue to evaluate [ABTL’s] business, its cash position, and its operating performance” and called on the board to communicate to its shareholders the break-up value of Autobytel, such that shareholders can determine if that is the best course to maximize value.” That did not eventuate.

ABTL has consumed a great deal of cash over the last years. Its principal sources of liquidity are from proceeds from dispositions of non-core businesses and the patent litigation settlement payments. Our estimate for ABTL’s liquidation value is set out below (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):

ABTL Summary 2008 6 30

Conclusion

Our position in ABTL has been a disappointing one, and has dragged down the performance of the portfolio. That aside, we can’t be too unhappy with a slightly positive result in a declining company.

[Full Disclosure:  We do not have a holding in ABTL. 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.]

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Digirad Corporation (NASDAQ:DRAD) has filed its 10Q for the quarter ended June 30, 2009.

We started following DRAD (see our post archive here) because it was an undervalued asset play with a plan to sell assets and buy back its stock. The stock is up more than 118% since we started following it to close yesterday at $1.92, giving the company a market capitalization of $36.1M. We last estimated the liquidation value to be around $29.5M or $1.56 per share. We’ve now increased our valuation to $32.5M or $1.73 per share following a very good quarter for DRAD, in which it generated over $2.2M in cash. DRAD has also now started to buy back stock under its previously announced $2M stock repurchase plan.

The value proposition updated

DRAD had a very good second quarter, generating $3M in operating cash flow and ending the quarter up more than $2.2M in cash. Our updated estimate for the company’s liquidation value is set out below (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):

DRAD Summary 2009 6 30

Off-balance sheet arrangements and contractual obligations: The company hasn’t disclosed any off-balance sheet arrangements in its most recent 10Q. The contractual obligations as at December 31 were around $3.0M, around $1.4M of which falls due in the next 12 months to December 31, 2009.

The catalyst

DRAD’s board has announced a stock buyback program:

The Company also announced that its board of directors has authorized a stock buyback program to repurchase up to an aggregate of $2 million of its issued and outstanding common shares. Digirad had approximately 19 million shares outstanding as of December 31, 2008. At current valuations, this repurchase plan would authorize the buyback of approximately 2.1 million shares, or approximately 11 percent of the company’s outstanding shares.

Chairman of the Digirad Board of Directors R. King Nelson said, “The board believes the Company’s direction and goals towards generating positive cash flow and earnings coupled with an undervalued stock price present a unique investment opportunity. We are confident this will provide a solid return to our shareholders.”

According to the most recent 10Q, the company has now started to buy its own stock, albeit a relatively small amount:

On February 4, 2009, our board of directors authorized a stock buyback program to repurchase up to an aggregate of $2.0 million of our issued and outstanding common shares. The timing of stock repurchases and the number of shares of common stock to be repurchased are in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. The timing and extent of the repurchase depends upon market conditions, applicable legal requirements, and other factors. During the three and six months ended June 30, 2009, we repurchased 198,000 and 209,000 shares, respectively, of our common stock at a cost totaling $0.3 million at a weighted average price of $1.28 per share.

Conclusion

At its $1.92 close yesterday, DRAD is trading at a small premium to its $32.5M or $1.73 per share in liquidation value. We’re generally sellers of secondary securities trading at a premium to liquidation value, but DRAD seems to have the potential to transition to a cash generator. We’d like to see where it can go. We can see no other reason to cease holding DRAD in the Greenbackd Portfolio and so we’re going to maintain the position for now.

[Full Disclosure:  We do not have a holding in DRAD. 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.]

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MathStar Inc’s (OTC:MATH) board has announced a “possible merger” with a company called Sajan, Inc, presumably the private company discussed in the presentation at the annual meeting. Douglas M. Pihl, MATH’s CEO, has resigned in protest, saying in his resignation letter that he was resigning because of the board’s “rejection of the plan I have presented to restart MathStar based on Video Encoding technology.” Pihl goes on to say:

I do not believe the proposed Sajan acquisition is in the best interest of MathStar shareholders. I do not believe that Sajan, or the advisors hired to do the due diligence, have presented a business plan that warrants committing over $13 million of cash, nearly half of which will not remain in the combined company but will be distributed to the current Sajan shareholders. In addition the newly issued shares will result in nearly a 50% dilution of the equity currently held by MathStar shareholders.

The full text of Pihl’s letter is set out below. We tend to agree with Pihl’s assessment that the Sajan acquisition is a loser for MATH shareholders. On that basis, we’re out at yesterday’s close of $1.20. We initiated the position on December 17 last year at $0.68, which means we’re up 76.5% on an absolute basis. The S&P500 closed at 913.18 when we intiated the position, and closed yesterday at to close yesterday at 932.68, which means we’re up 74.3% on a relative basis.

Post mortem

We started following MATH in December last year (see our post archive here) because it was trading below its net cash value and had two substantial stockholders lobbying management to liquidate. MATH’s board had suspended the company’s operations and had been exploring “strategic alternatives, which could include merger, acquisition, increasing operations in another structure or liquidation.” Two activist investors, Mr. Zachary McAdoo of The Zanett Group and Mr. Salvatore Muoio of S. Muoio & Co., urged MATH’s board to consider liquidation rather than merger, but MATH’s management seem intent on a merger. The liquidation was presented to stockholders on Friday last week, and rejected. Tiberius Capital has a tender offer for MATH at $1.25 per share in cash expiring on July 20. We’ve elected to sell our stock on market rather than tender to Tiberius Capital because there’s no certainty that Tiberius Capital will be successful, and it’s time to get as far away from MATH’s management as humanly possible. While the position didn’t play out as we had hoped, we’re still satisfied with the result.

The company’s press release announcing the merger is set out below:

MathStar Announces Letter of Intent for Possible Merger;

Board Announces Special Committee

HILLSBORO, Ore., July 15, 2009 — MathStar, Inc. (MATH.PK) today announced that it has entered into a non-binding Letter of Intent with Sajan, Inc. regarding a potential merger. Sajan is a leading provider of language translation management solutions. Sajan’s language translation services use advanced process and quality management through their next generation SaaS technology. Sajan’s patent-pending data management and on-demand collaboration and workflow platform create a unique blend of technology and service, resulting in the most advanced and measurable solution available today. Among their clients are several Fortune 500 companies.

MathStar also announced that on July 14, 2009, the Board of Directors appointed a special committee consisting of MathStar’s independent directors, Richard C. Perkins and Benno G. Sand, to negotiate the completion of a definitive merger and ancillary agreements with Sajan. Craig-Hallum Capital Group, LLC is representing MathStar as its investment banker in connection with the proposed transaction.

The Mathstar Board, in conjunction with Craig-Hallum and several independent technology and financial consultants, has conducted extensive due diligence of Sajan; however, entry into definitive merger and ancillary agreements with Sajan is subject to the completion of due diligence, among other customary conditions. Final terms and conditions of the proposed transaction will be disclosed upon any signing of the definitive merger agreement.

Statements in this press release, other than historical information, may be “forward-looking” in nature within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to various risks, uncertainties and assumptions. These statements are based on management’s current expectations, estimates and projections about MathStar and include, but are not limited to, those set forth in the section of MathStar’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission on March 31, 2009 under the heading “Item 1A. Risk Factors” and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009. Except as may be required by law, MathStar undertakes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this release.

The CEO’s resignation letter is set out below:

July 14, 2009

Gentlemen;

In response to your decision today to pursue the Sajan acquisition I hereby tender my resignation as President, CEO and CFO of MathStar and also my position on the Board of Directors, effective immediately. I am disappointed by the actions you took regarding Sajan and by your rejection of the plan I have presented to restart MathStar based on Video Encoding technology.

Further, I do not believe the proposed Sajan acquisition is in the best interest of MathStar shareholders. I do not believe that Sajan, or the advisors hired to do the due diligence, have presented a business plan that warrants committing over $13 million of cash, nearly half of which will not remain in the combined company but will be distributed to the current Sajan shareholders. In addition the newly issued shares will result in nearly a 50% dilution of the equity currently held by MathStar shareholders.

Douglas M. Pihl

[Full Disclosure:  We do not have a holding in MATH. 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.]

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Lloyd I Miller III has disclosed a 5.9% holding in Ditech Networks Inc (NASDAQ:DITC). According to the 13D filing, Mr. Miller supports Mr. Leehealey and Mr. Sansone – the director candidates nominated by Lamassu Holdings for election to the board of directors at the DITC annual meeting – as “candidates who are independent of management and he seeks to encourage greater attention to corporate governance by all members of the Board of Directors.”

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 at around $32.2M or $1.23 per share and the liquidation value at around $43.4M or $1.65 per share. While the deterioration in value is a concern, Mr. Miller’s support of Lamassu Holding’s director candidates introduces a new element to the position. We’re inclined to hold on to see how the annual meeting plays out.

[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.]

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Audiovox Corporation (NASDAQ:VOXX) has filed its 10K for the fiscal year ended February 28, 2009.

The stock has risen strongly over recent weeks to close yesterday at $5.93, which gives VOXX a market capitalization of $135.6M. We’ve had an opportunity to review the 10K, and we’ve now slightly reduced our estimate of VOXX’s liquidation value to $117.3M or $5.13 per share. With the stock trading at a premium to our estimate of liquidation value, we’ve decided to exit. We opened the position at $3.73, and the stock closed yesterday at $5.93, which means we’re up 59.0% on an absolute basis. The S&P500 Index closed at 789.17 on the day we opened the position in VOXX and closed yesterday at 909.71, which means we’re up 43.7% on a relative basis.

Post mortem

We started following VOXX (see the post archive here) because it was a profitable, undervalued asset play. When we opened the position, we estimated VOXX’s liquidation value to be around $128.4M or $5.60 per share against a share price of $3.73 and a market capitalization of $85.3M. Howson Tattersal had filed a 13D notice in September last year disclosing a 7.3% holding. We noted that, while VOXX was a perennial inclusion on lists of net-net stocks, we thought it hard to ignore at $3.73. Fast forward to today. The stock is up 59% to $5.93 and the liquidation value is down slightly to $5.13 per share. The updated balance sheet is set out below (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):

VOXX Summary 2009 2 28Balance sheet adjustments

  • Cash generation: The company generated $30.0M in operating cash flow in the last year.
  • Off-balance sheet arrangements and contractual obligations: According to its most recent 10K, VOXX does not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon its financial condition or results of operations.VOXX has around $43.4M in contractual cash obligations (including $11M in capital lease obligations and $32M in operating leases), around half of which falls due in the next 5 years and $24.0M falling due after 5 years. VOXX also has another $62M in unconditional purchase obligations falling due in the next 12 months.

Conclusion

We are again reasonably happy with the outcome in VOXX. While Howson Tattersall’s campaign has not been run to its conclusion, we feel that with the stock trading at a premium to VOXX’s liquidation value, and with VOXX’s liquidation value reducing over the last quarter, it is an opportune time to exit.

[Full Disclosure:  We do not have a holding in VOXX. 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.]

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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):

soap-summary-2009-3-311

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.]

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We’ve decided to exit our position in Network Engines Inc (NASDAQ:NENG) at its $0.56 close yesterday. We opened the position on January 13, 2009 when it was trading at $0.38, so we’re up 47.4% in about two-and-a-half months on an absolute basis, which is a pleasing outcome. The S&P500 Index was trading at 870.26 when we opened the position in NENG, and closed yesterday at 832.86, which means we’re up 51.7% on an relative basis, which is also a good outcome.

We’ve started following NENG (see post archive here) when it was trading at $0.38, which gave it a market capitalization of $16.5M. We initially estimated the company’s liquidation valuation to be around $25.5M or $0.59 per share, but we reduced that estimate to $23.8M or $0.55 per share after reviewing the December 10Q. At its $0.56 close yesterday, the company has a market capitalization of $24.2M, which exceeds our estimate of its liquidation value. We were attracted to the stock because Trinad Management had been pushing the company to “immediately [implement] a share buy-back program.” The company initially demurred and saw its stock sink to all-time lows, but has recently reinstated that stock repurchase program.

Although the company has indicated it will undertake a $5M stock buyback, which will likely push the stock price up further, the stock has reached our estimate of its liquidation value, so the buyback will not increase the per share liquidation value at this level. We’re also mindful that NENG is a perennial net net, and at higher prices than presently prevail, so we think there’s a good chance NENG could be back in net net territory again in the not-too-distant future.

[Full Disclosure:  We do not have a holding in NENG. 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.]

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