Description

This is a liquidation case for an illiquid nano-cap ($9m market cap and only $5k average daily trading volume) and the idea is suitable for small PAs only.

CBA Florida previously operated in cord blood storage business. Earlier this all operating assets were sold to California Cryobank Stem Cell Services and management is planning to liquidate the company by distributing the proceeds to shareholders.

Currently CBA trades at $0.007 and their net distributable cash stands at c. $0.0090/share. Additional $3m have been locked in escrow for two years for any potential indemnification liabilities relating to the sale of the operating business. This adds another $0.0023/share in value, however it will be held back until 2020 and not clear how much of it will be recovered back by CBA Florida.

The first distribution is expected in early 2019 and the company is restricted from fully liquidating till mid 2020 (as per asset sale agreement). The initial distribution was postponed till early 2019 to make it more tax efficient - return of capital treatment vs. dividends.

30% ownership and BoD control by Red Oak Partners (hedge fund) gives quite a bit of confidence that any future expenses and liquidation costs will be kept in check.

I am estimating that the first distribution (early 2019) will be at approximately current share price levels ($8.9m distribution in total), and this will still leave $3m of net cash on the balance sheet + additional $3m in escrow. Any further distributions of remaining funds will be like free option. 

Thoughts on further expenses

The biggest questions here are what are going to be the liquidation costs and how much of the escrow amount will be recovered. The fact that the whole process is going to take 2 years and company’s statement that the “proceeds paid out to shareholders are expected to be significantly less than the gross purchase price” are not encouraging at all.

For escrow recovery even management themselves would probably not be able to give an estimate as it will be mostly driven by yet unknown indemnification liabilities. Latest 10Q (6 months after the sale closed) does not have any updates regarding it and escrow amount still stands at $3m. I take it as a positive sign, as the biggest issues would have likely surfaced already. Another positive is that the buyer cannot ask for more than $3m for any indemnification liabilities.

When it comes to liquidation costs and ongoing expenses over the next two years, during Q3 (first full quarter without the operating business) BV has declined by c. $90k. Extrapolating this for another 8 quarters till mid 2020, results in ongoing costs of $720k or $0.00057 per share. I expect additional liquidation costs to be within $1m or $0.00079 per share  (seemingly conservative guess for a shell company with a market cap of only $9m). Assuming there is zero recovery from the escrow, these expenses would reduce NAV to $0.0078 - still a spread of 11%.

To start loosing money on this case, there must be zero recovery on escrow and liquidation + ongoing expenses must be larger than $3m. So using my estimates above there is still a safety margin of $1.3m. 

Controlled by hedge fund 

CBA is 30% owned by hedge fund / investment advisory firm Red Oak Partners. Founder of the firm (David Sandberg) now acts as chairman of CBA and BoD is controlled by the hedge fund (3 out of 5 directors). This gives quite a bit of confidence that any future expenses and liquidation costs will be kept in check.

Red Oak Partners acquired its stake as 724k preferred shares in 2015 when CBAI had to raise funds to repay part of debt. Total price was $724k and later the preferred stock was converted into 381m common share, resulting in price per share of $0.0019 - c. 50% discount to the market price at the time. Moreover, Red Oak has put 3 of their top managers - D. Sandberg (founder and CIO), A. Snow (managing director), A. Pertierra (CFO) on CBA’s board. I do not know if this was a coincidence or Red Oak has planned to push for the sale from the start, but shortly after that company faced operational challenges and revenues declined by 40%. Later the company started a strategic review and it took them 3 years to finally sell the operating business.

There is not much information on Red Oak’s track record, except for a few snippets below:

• Red Oak has successfully invested into EDUC and currently own 7.8%.  The stake was acquired during H12017 and the share price has increased more than 5x since then;

• Sandberg is also chairman at ASUR (since 2009) - the stock was performing very well (15x) until the recent Q3 results after which the price has already dropped by more than 40%.

• The fund unsuccessfully fought Amazon acquisition of Audible.com;

• D. Sandberg is also a on the board of SMTX (since 2009) - stocks performance has been mixed since then, but back in 2012 Sandberg successfully fought for shareholder friendly policies;

• Further PR on Red Oak's activism can be found here.

Another large owner, Cryo Cell International (holds over 10%) has accumulated the stake over several years (since 2015) at an average price of c. $0.004.

Catalyst

- 1st distribution in Q1 2019