Implant Sciences (IMSCQ) – Liquidation – 45%+ upside

74 Comments

Current Price –$0.105

Expected pay-off – $0.15+ (potentially $0.25+ or more)

Upside – at least 45%+

Expiration Date – TBD

 

This is just a quick note as I have not had a chance to look at this more in depth and should be able to do that next week. This special situation concerns nano-cap company (market cap only $10m), thus stock can be really volatile, so do your own due diligence before investing. I have a small long position in IMSCQ.

The thesis is quite simple. Implant Sciences is a tiny equipment manufacturer for defense industry and recently received few large orders from transport security administration. Subsequently, L-3 Communication agreed to purchase IMSCQ assets for $117.5m and assume certain liabilities. In connection with the sale a voluntary bankruptcy process was started and an auction is being launched to see if there are any higher bidders for the assets. If higher bidders emerge, the share price will shoot through the roof!

Using L-3 offer equity should be worth at least $0.15 per share or 45% upside. This is still a moving target as final equity value depends in working capital adjustments and final creditor list. But L-3 offer at least gives a good downside protection. Equity committee was established and seems to be quite actively defending shareholder interests.

At the moment it is still not certain if company will liquidate after the asset sale . Another option on the table is merger with Zapata Industries and uplisting to NASDAQ. Zapata Industries is famous for their flying hoverboard prototypes. Shareholder vote will decide the way forward for the company, liquidation is likely to be a better choice from valuation perspective.

Share price is currently depressed as majority of shareholders pre-bankruptcy were retail investors, who might misunderstand the voluntary bankruptcy process and are simply selling out of the position completely disregarding L-3 offer, which values equity 45% higher.

There is Seeking Alpha article by hedge fund on the subject, but for the moment it is behind paywall – should be available to everyone tomorrow.

74 Comments

74 thoughts on “Implant Sciences (IMSCQ) – Liquidation – 45%+ upside”

  1. My position got closed out at $0.17 (had a limit sell on it) – did not expect these levels to be reached today.
    It seems that SA article by Green Knight really got investors attention and stock price simply shot upwards. At least I have not seen any further news with regards to this.
    I still plan to dig deeper into this, but for now it is 60% over the weekend. Not bad at all.
    Hope that some subscribers had a chance to use this opportunity as well.

  2. Platinum Partners suit is going forward. Why do feel the stock has tanked?

  3. Getting hit hard this afternoon. Any news? Back down to $0.115.

  5. Given the recent plethora of news would it be possible to get your thoughts on the likely impact including the Sec filing re the LOI with Zappata?
    Thanks in advance.

  6. Jerry, Chris, jfc – thanks for questions.
    My opinion only, but I also believe termination of LOI with Zapata is a positive. Merger with Zapata was one the biggest risks that liquidation would not happen. So now the chances of liquidation going through have increased substantially. Unless management finds another ‘promising’ merger in the near future.

    The Zapata merger itself was of a very questionable value – current shareholders of IMSCQ would have paid $15m in cash (majority of the current balance) and diluted themselves by at least 60%. Zapata business still has no (or minimal) revenues and further development and commercialization of flying hover boards would have required substantial cash outlays likely resulting in further equity dilution. And all of that would still not guarantee any success. So Zapata transaction was close to throwing $15m out of the window and hoping for a Hail Mary. Break-up fee is only $350k and IMSCQ seems to be disputing it, so does not look material at all.

    Yesterday’s trading was indeed fun and seems that some shareholders took the news quite negatively. Either true believers in flying hoverboards were selling out or (much more likely) some IMSCQ holders saw the headline, did not care about the implications and simply pressed sell sell sell. Would have loved to buy this at $0.11, but noticed it after the close only.

    I do not have any further updates with regards to Platinum Partners investigation, so can not comment on that.

  8. Wondering if you or anyone has an idea of when we might know about competitive bids for the biz. As I understand it any interest in making a bid needed to be expressed by the 8th and on the 12th I assume they will make a decision, if needed and the sales hearing is on the 16th. Can we expect to hear on the 8th, 12th or 16th?

    Anybody?

      • The only thing that changed is that noone offered more than L3 – previously there was a small chance that L3 will be outbid. Downside protection remained unchanged.

        There are still many unknown and moving parts (working capital, exec compensation and etc) but L3 offer seems to result in at least $0.15 share. There is also still a question if the company will liquidate – shareholders will need to vote on it in Q1 2017.

        current decline might be just a short term market reaction – the same as when Zapata deal was cancelled. Or maybe someone knows more than I do.

  10. Thx for the update. So, if they liquidate, where does that put us? (In your opinion)

  11. My thinking on potential payout is below:

    L-3 Offer = $117.5m + working capital adjustments
    Secured debts + interest outstanding = $84.1m
    Cash = $1.7m
    Preferred equity = $7m

    This leaves net cash before fees and excluded liabilities at $28.1m

    Now to the unknowns:
    – excluded liabilities – L-3 will assume only trade liabilities related to the sold business and purchase price will be adjusted if the net working capital differs from $9m. As of June 2016 net working capital excluding interest payments (which are counted in debt above) was approximately 0. So likely around $9m of liabilities will need to be covered by the company (there is a timing difference so amount might be much smaller – pre-petition claims amount to less than $6m).
    – IMSCQ has taken DIP loan in the amount of $8m which will be used to pay above mentioned liabilities plus any additional fees. DIP loan will also have interest payment and other fees which will amount close to $1m.
    – Ongoing bankruptcy expenses – it is not clear to how much these might add it, but in the schedule for DIP loan, management indicated that professional fees will be c. $0.5m per month. With the sale to L-3 now imminent (as the auction ended), I count these fees for 4 months (Nov-Jan) for a total of $2m.
    – Any other fees for management due to termination agreements and etc. Based on info in 10-K upon change of control top execs would be entitles to 12.5% of net proceeds (after re-payments of indebtedness and any other expenses related to change of control). This amounts to c. $2.5m, out of which L-3 agreed to cover $1.3m of such expenses for employees it wants to hire.

    So we had $28m before expenses and excluded liabilities. Now we deduct:
    – $9m for DIP loan + fees + interest
    – $2m for any other excluded liabilities
    – $2m for professional fees
    – $1.2m for employee change of control

    This leaves us with $13.8m or $0.17/share. I believe the above calculation is already conservative, but I could potentially add further $4.5m of expenses and would still break-even at $0.115/share.

    The case might still surprise on the upside as Equity Committee (which so far seems to be doing the job pretty well and already a number of things pushed through the bankruptcy court) is investigating the whole $84m of debt that was given by troubled Platinum Partners. http://www.wsj.com/articles/implant-sciences-shareholders-call-for-platinum-partners-investigation-1479328676 (google for the title to access it for free).

    However, uncertainty is very high. Expenses might turn out far higher than I am projecting. Also if the case drags on in legal limbo, shareholders will have to pay dearly.

    • Keep i mind that all the ‘unknowns’ listed above are almost literally unknown. Reconciliation between the latest balance sheet on SEC fillings and info in the bankruptcy docs seems close to impossible (at least for my bankruptcy untrained eye) and all analysis I have seen indicates different deductibles and different eventual pay-offs for equity. E.g. Green Knight analysis on SA does not deduct $7m of preferred equity.

      So the bottom line as always – do your own due diligence before investing.

  13. dt…is there a date or likely time when this might all be resolved or is it just open ended?

    Thx

    • I think the whole situation is likely to be resolved (or at least approach far more clarity with regards to the unknowns indicated above) during Q1 or Q2 2017.
      The first step will be transfer of assets to L-3, at which point there should be more clarity on what assets and liabilities remain – currently there is a lot of confusion on the liability side.
      Then would come debt pay down and any renegotiation of it with Platinum Partners and related parties.
      After this there should be shareholder vote whether to liquidate or pursue other opportunities.

      I do not know the exact dates for any of the above.

  14. Thx. Appreciate your input.
    Was thinking we were past the shareholder vote re liquidation but guess not.

  15. Im new here and just bought a 1 year membership. I am a BRK buffet follower and love the idea of special situations and Arbs but dont have the time to research so I am hoping to just diversify among your research with even amounts and play this out. This is my first one so I bought 10000 shares at 0.105 this AM. Thanks for spending the time and sharing your research.

    • Joe, thanks for your subscription. I encourage all readers to do their own research before investing. I post write-ups for idea generation purposes only and everyone should make their own decision based on their own research whether to invest or not. I do my best effort to provide unbiased view for each situation, but I can obviously be wrong, especially with such cases as IMSCQ were there are many moving parts and no transparent information.

      • understood. Thats why such a tiny investment on my part. Mainly to watch and learn.

  16. Why do you think it is currently trading at $0.09 (down from previous highs), and do you still think it isn’t too late to buy?

    • It seems shareholders are selling out following the publication of the latest 10-Q and there also might be tax loss covering at the end of the year.

      I think the key takeaways from the latest filling are:
      – Preferred shares of $7m now are fully visible to everyone. In previous financials these were hidden in details and some might have missed it.
      – As of Dec 9th, pre-petition debt with accrued interest stands at $86.2m, so additional $2.1m. Equity committee is disputing these high interest payments post-petition: https://www.kccllc.net/imxacquisition/document/1612238161227000000000011
      – Most importantly – cash collections are lower than expected, which will affect the cash remaining in the company after the asset transfer.
      “On December 8, 2016, we notified the Tannor Partners Credit Fund that our cash collections for the month ended November 30, 2016 were lower than the amounts contained in the DIP Budget. As such we were not in compliance with the New DIP Loan Covenants, which constitutes an event of default under the New DIP Loan. We expect to submit an order of stipulation with the Bankruptcy Court and have agreed to pay an additional $96,000 of interest in full and final satisfaction of any entitlement of Tannor under the New DIP Loan Agreement through January 5, 2017. This additional interest shall not be credited against the exit fee.”

      Overall this is slightly negative for the equity holders, but it is hard to put a number on it. Uncertainty is really high for this case.
      In the bankruptcy filling by equity committee there is a statement that after repaying all debts (including DIP loan) cash proceeds from the sale would be at least $10m (vs current market cap of $7m), however it is not clear what other expenses and liabilities will need to be covered by this.

      Volume is high around $0.09/share, so there seem

  18. Could you comment on the recent PR re Platinum lawsuit. It would seem to be somewhat positive to me. Also when is the vote as to whether to liquidate or not?

    Thx

    • I do not think there is a set date for liquidation vote yet. But would expect updates with regards to that after the asset sale closing happens (5th of Jan 2017).

      With regards to Platinum Partners lawsuit – equity committee is actively pursuing it, and I believe in January the court will establish whether there is any merit with regards to equity committee claims. But you also have to consider that on the other side of Platinum Partners there are also investors who have been defrauded and they also want to get their money back. So if IMSCQ does not pay their debts back, those defrauded investors will receive less. I really have no clue how will the court look at this situation, as both sides are victims of Platinum Partners. This is obviously an option that could surprise on the upside, however I think the chances of that are slim.

  21. Have you reopened a position? Currently trading at $0.08. I missed the initial opportunity, but am considering entering now. Finding it hard to reconcile company filings (recent 10Q) with BK court filings…

    • Andrew, yes I have a positioning currently. Like you i am having trouble reconciling SEC fillings with BK fillings.
      The problem with this position is that, is that the it is still not clear how much of the expenses and liabilities will be need to be deducted before calculating equity gains – it might be that numbers are far higher than my initial estimates from SEC fillings.

  22. On the 6th of Jan the transfer of assets to L3 was completed. I would assume an updated status of BS (excluding any transferred assets/liabilities) should be issued shortly. This would make evaluation far easier.

    • I have not seen any info on the hearing yet – nothing filed under the court documents yet.

  26. Any idea of when a revised BS will be issued?
    The market is suggesting that it is worse than anticipated.
    If not, this would be a great buying opportunity to double down.

    • New BS will probably be issued only in February (in line with timing for previous reports).
      Market is skeptical as expenses are higher than expected and bankruptcy case still drags on.

      Also it turned out that services of equity committee are quite expensive and eating heavily into the final pay-off. See here:
      https://www.kccllc.net/imxacquisition/document/1612238170117000000000013

      Advisers for equity committee get compensated $1m for 2 months of work (compared to current market cap of $6m). These expenses are likely continuing currently and if the process drags on for another few months, equity investors might be left with nothing. Work of equity committee is clearly to expensive especially if the chances on any recovery from Platinum Partners are low (or zero) – so I am starting to think that equity committee is doing disservice for shareholders – probably one of the reasons why market is skeptical as well.

      • Wow, looks like they have the entire Law Practice working on one file around the clock.

  27. Looking at your math above from December 13 and December 30, it would seem we need to account for another $3mm of equity committee expenses ($1mm for the work performed for the last ~2 months and assuming another $2mm for work to be performed for the next ~4 months, but just guessing here).

    So $13.8mm less $2.1mm in additional accrued interest expenses (from your Dec. 13 note) less the $3mm of additional equity committee expenses gets to $8.7mm left for shareholders or ~$0.109/share.

    Another view of it: there was a mention in the equity committee filing of there being at least $10mm of cash left after the sale to L-3 and after paying all debt. So less $3mm of equity committee expenses (which the committee may have already backed out when spitting out this $10mm figure) leaves $7mm of cash or $0.0875/share.

    I say all this to imply that maybe $0.07 to $0.08 range seems about right given what we know and all the uncertainty around expenses (and the upside of any positive developments from the equity committee). I’m now down about 10% on my position with a fully baked cost basis of ~$0.085. I plan on holding until we at least see the 10-Q, but the upside math keeps going down the longer this drags out.

    • Sorry, last item, also from the link posted above (https://www.kccllc.net/imxacquisition/document/1612238170118000000000003), there is this in the Consent Order:

      “WHEREAS, after (i) application of the working capital adjustment, (ii) payment
      of DIP Facility Obligations and all amounts owed to BAM in connection with the Pre-Petition
      First Lien Agreement, (iii) payment of cure claims required to be paid by the Debtors pursuant to
      the APA, and (iv) the establishment of the escrow pursuant to the APA, the net cash proceeds
      received by the Debtors from the Sale is approximately $80.8 million (not including other
      payments made in connection with the Closing)”

      Does $80.8mm come in about where you were thinking, dt?

  29. Sorry for all the posts, but wanted to walk through the downside one last time. My attempt below. Let me know what you guys think.

    Net proceeds from sale after paying BAM and DIP per latest court docs: $80.8mm
    DMRJ Debt as of Dec.9 per 10-Q: $(48.2)mm
    Accrued interest to DMRJ as of Dec.9 per 10-Q: $(8.7)mm
    Montsant Debt as of Dec.9 per 10-Q: $(5.3)mm
    Accrued interest to Montsant as of Dec.9 per 10-Q: $(0.3)mm
    Payoff to Preferred Stock: $(7.0)mm
    Wild guess for Excluded Liabilities not transferring to L-3: $(2.0)mm
    Cash burn for operating the company thru 1H 2017: $(0.7)mm
    Wild guess for cash to be spent on Equity Committee for Nov. 2016 thru April 2017: $(3.0)mm
    Wild guess on other bankruptcy / CoC/ other professional fees and expenses: $(3.0)mm

    CASH LEFT: $2.6mm
    # of shares outstanding: 79.9mm
    RECOVERY TO COMMON PER SHARE: $0.033

    So still a ways to go before meeting the downside. However, I feel like these are very bearish assumptions.
    I see a not-unreasonable-base-case as being the above but assume the equity committee earns its paycheck and IMSC doesn’t have to pay the accrued interest to DMRJ or Montsant, saving $9.0mm and new recovery is now $0.146/share. That’s a double from today’s close. Further upside could be getting any of the $50mm that the Equity committee is going after in damages from Platinum.

    • Joe, I generally agree with your bearish scenario analysis, especially that there are many ‘wild guesses’.
      Couple things you might be missing:
      – your bearish estimate assumes that there is no cash in the company in addition to the receipts of $80.8 from the asset sale. Company took DIP of $8m at the end of Nov, so I would assume at least part of it is still on the balance sheet.
      – you do not include any recovery from the escrow account established pursuant to Asset Purchase Agreement (not sure about the amount that was transferred there).
      – your assumption of $8m of incremental liabilities and expenses is on top of any other claims/expenses that have already been paid-off using DIP financing, so you are in a way estimating $16m of claims/expenses in total.

      So there are quite a few positive cashflow items that are excluded from your bearish scenario.

      With regards to accrued interest, my understanding is that equity committee is disputing only the amount that has accrued post bankruptcy petition (in the range of $2m) rather than the whole accrued interest. And I would not expect much from going after in damages from Platinum.

      • Wow thanks dt that is really helpful. I had actually assumed that the $80.8mm in proceeds already netted out cash on the Company’s balance sheet, which would have included the ~$8mm of DIP financing. But if I am reading what you are saying correctly then I should be adding it back, which makes sense. It is easy for me to foot to $80.8mm if the equation is $117.5mm – $23mm (BAM plus interest) – $9mm (DIP plus interest) – $3mm (transaction fees to bankers) – $1.7mm (other expenses/fees). But I feel you are right, it does not seem right that the entire $8mm of cash from DIP just disappeared since October. So my bearish scenario should at least gross up the cash by say ~$5mm to be conservative. That alone gets me back to $0.096/share in recovery to common.

        I am afraid I am a little lost on your third bullet.

        But I feel much better about owning it here. Agree with you on the upside, very minimal.

      • Regarding $80.8m this is just my understanding, so do not take my word for granted. But in the document it is called proceeds from sale, so would assume that any cash on hand would need to be added to it.

        On the third bullet, I just wanted to say, that if you assume that no cash is left from the DIP (meaning it was spent for covering claims or professional expenses) then this DIP amounts needs to be added to total liabilities/fees covered during bankruptcy process.

        The bottom line – still too many unknowns.

  30. Well team, if I am reading this correctly, then it appears the Equity Committee will now be paid only if they are successful, however that is defined (#9 of this link): https://www.kccllc.net/imxacquisition/document/1612238170119000000000002

    I feel like this news raises the worst-case recovery scenario that I tried to pencil out above by at least $2mm of the $3mm that I budgeted. So now my worst case math is showing $0.12/share

    • Joe, the filling is indeed positive, but my take-aways from it are different than yours:
      – post petition interest accrual from DMRJ is cancelled. This is worth at least $3m or 4ct/share for equity holders, thus materially positive news.
      – Equity Committee managed to reach an agreement with DMRJ Group with regards to interest accruals – this increases the likelihood of settlement on other claims.
      – Law firm will not charge anything (unless the case is won or settlement reached) only with regards to Equity Committee’s litigation against Platinum Partners. Expenses incurred so far will still need to be paid and also Equity Committee might incur other expenses going forward. Still a positive, but does not mean equity committee will work for free and no other consultants will be hired.
      – Brown Rudnick, the same company that charged $1m for two months work, agreed to work on contingency basis with regards to litigation against Platinum Partners. This shows that Brown Rudnick sees potential in winning/settling the case. My understanding is that court still needs to approve Equity Committee’s motion before litigation can proceed. Hearing is today (20th of Jan), but not sure when the info will be published.

      • Haha thanks for pointing that out, dt. This is the first bankruptcy that I have followed and having a heck of a time understanding. Really appreciate your thoughts.

        I guess I understood that they had an agreement regarding the interest accrual with DMRJ but that we don’t know the details yet (could be cancelled, could be reduced to a larger or smaller degree).

        As always, thanks again for clarifying!

    • Joe, I think you are mixing it up. $19.9m is book value of assets and the balance sheet is pre-sale, as the actual sale happened on the 5th of JAN. So all of these assets need to be replaced by $80.8m of net proceeds from the sale.

      To arrive at estimated BV of equity at the end of Dec I do the following:
      – Proceeds from asset sale after deducting BAM debt, DIP and some expenses – $80.8m
      – Less PP debt + accrued pre-petition interest – $61m
      – Less preferred equity – $7m
      – Less other current liabilities listed in MOR (excluding warrant liability and accrued interest) – $1m

      This leaves $11.8m (roughly in line with what EC referred to on figure after the sale)

      From this we would need to deduct also expenses that have not been booked yet as of Dec 31st – which likely includes some other professional services expenses related to asset sale as well as equity committee work – some expenses for Nov/Dec were booked only in January. And also any expenses going forward. Some of employee termination / change of control expenses might also be still excluded from the listed liabilities (if termination only happens upon asset sale). By my count of bankruptcy fillings since Jan 1st professional fees for services rendered till Dec 31 but not yet on the balance sheet sum up to $2m (if Chardan fees of $1.9m are excluded as I understand these were already deducted when calculating $80.8m net proceeds from asset sale).

      Thus the BV of the equity stands at c. $10m after known expenses are deducted as of 31st of Dec. Any further professional expenses will need to be deducted from this. However, the figure might be pushed upwards due to some cash not being transferred with the asset sale (balance of $3.3m on MOR) or releases from Escrow account.

      January MOR is likely to be far more informative.

      Additionally, on MOR there is an entry for unsecured debt of $18m. Majority of this ($12m) likely relates to interest accruals, but the remainder $6m is still unclear. This might be some meaningless accounting entry as this unsecured debt already dropped from $36m pre-petition to $18m currently. I did not manage to find any explanation what else this might relate to, as it is not included in IMSCQ balance sheets.

  32. A small positive:
    Yesterday the court allowed equity committee to proceed with their motion to sue PP. I still believe any recoveries are unlikely.
    http://www.kccllc.net/imxacquisition/document/1612238170130000000000003

    And a slight negative:
    In one the documents referenced in the comments above, equity committee explained that their lawyers will work on contingency basis going forward. However, article from Law360.com seems to indicate that cap rate of $2m was agreed instead (whcih is inline with their current rate for 6 months period). Not sure what exactly to make of this, but probably lawyers will not be as generous as initially expected. And if there is no recovery from PP, then these $2m is a pure waiste of shareholder assets.
    https://www.law360.com/articles/883105/imx-equity-panel-offers-fee-cap-for-ch-11-lender-suit

  33. Well, someone pushed some kind of a button… quite a move over the last couple of days!

    • Three possible explanations:
      1) somebody knows something;
      2) market is pushing the share price higher due to upside potential from PP investigation case;
      3) this is pure speculation scenario and someone is pressing the buttons to profit from retail crowd (i.e. pump and dump)

      For the moment being I consider no. 3 to be the most likely.

      Company is clearly overvalued here if there is no further cash from to be reclaimed from PP (either through debt or interest reduction).

  34. It looks like you were pretty spot on with your math: https://www.sec.gov/Archives/edgar/data/1068874/000106887417000005/imsc161231_10q.htm

    To the downside, it looks like $1.77mm of A/P is staying on the balance sheet. And further to the downside I assume all $3.3mm of cash on the B/S was transferred to L-3.

    Look forward to the MOR in a week or so but definitely need to bank on equity committee earning their paycheck in order to see more than the $0.115/share that it is trading at right now.

  35. Here is the January MOR: https://www.kccllc.net/imxacquisition/document/1612238170301000000000001

    If I am reading this right (and man is that a big “if”; I’ve gotten it wrong every step of the way so far), then here is my crack at the math:

    $78.576mm of cash
    Plus: $0.149mm of prepaid expenses
    Less: $3.772mm of accrued Professional Fees
    Less: $1.747mm A/P and other current liabilities
    Less: $53.439mm of Secured Debt (NOTE: This foots to the latest 10-Q as debt at Montsant Partners and DMRJ. Looking at the 10-Q it adds up like: $5.284mm + 11.97mm + 17.523mm + 1mm + 17.662mm = $53.439mm)
    Less: $6mm of Unsecured Debt (NOTE: this is listed as $18.643mm in the MOR but I don’t know what is making it this high, as dt mentioned in the comments above; I am just using $6mm of pre-petition accrued interest here. Let me know what you guys think.)
    Less: $7mm of Preferred Equity
    EQUALS: $6.767mm to common or $0.085/share using the share count from the latest 10-Q.

    Doesn’t look great to be owning it here unless you think equity committee can pull through. Let me know if you guys think I am missing something (as always, I suspect I am).

    • Joe, I agree with your calculations, just pre-petition accrued interest on PP debt is $7.5m instead of $6m you are using
      Total assets $78.7m
      – less $5.5m post petition liabilities;
      – less $61m pre petition PP debt and accrued interest;
      – less $7m of preferred equity;

      This leaves $5.2m for common or $0.065/share. And from this amount one needs to deduct any further expenses related to ongoing litigation or any admin expenses for final wind-up of the company. Clearly any remaining investors are banking on some sort of claw-back from PP.

      On Dec 13th I posted my initial estimate on final equity recovery, where I said that common holders are likely to get $13.8m. Now that amount is $5.2m. So what caused such a huge difference? Three main items:
      1) Final proceeds from sale were $113.5m instead of $117.5m – difference of $4m most likely to due working capital adjustments on the date of asset transfer.
      2) $1.7m pre-petition cash balance was also transferred to L-3 or burned by operations (same WC adjustments as above).
      3) The remaining $2.8m difference is due to significantly higher expenses for professional fees.

      My closing of the position at $0.17/share (with 60% return over the weekend) looks pretty good retrospectively.

  36. The unexpected happened and Equity Committee reached settlement with Platinum Partners:

    “The DMRJ Claims and Interests shall be reduced and allowed in the total amount of $55,000,000”
    “In sum, the DMRJ Parties and PPVA are essentially waiving more than $17,000,000 of the DMRJ Claims and Interests in full and final satisfaction of the Permitted Actions.”
    https://www.kccllc.net/imxacquisition/document/1612238170410000000000003

    This is huge for equity holders keeping in mind that current market cap is only $7m.

    My estimates of the eventual pay-off:
    – Cash on the balance sheet – $74.8m (from Feb MOR);
    – Post petition liabilities till Feb 2017 – $2.8m (from Feb MOR);
    – Payment to Platinum Partners – $55m (from settlement doc);

    This leaves $17m for equity holders. But there will be some further expenses and there are also some not fully clear details (see comments below for clarification). My conservative estimates for these are:

    – Professional expenses still to be accrued and wind-down costs – $3m (1);
    – Other liabilities outside settlement agreement – $1.63m (2);
    – Preferred equity excluded from settlement agreement – $2.8m (3).

    Remaining for equity holders $9.6m or $0.12/share.

    Clarification on my estimates:
    (1) Remaining professional fees and wind down expenses – I have added $3m (guess estimate) and this might prove to low. But keeping in mind that equity committee pushed for expedited hearing on the settlement and court approved hearing on 27th o April, future expenses might also be lower. I am mostly concerned about any success fees for the lawyers of the equity committee.
    (2) Liabilities outside settlement agreement. Feb MOR still has $4.2m under title ‘Unsecured debt, pre petition AP’. This amount has been decreasing with every subsequent MOR and it is not fully clear what if refers to. I think that warrant liability of $2.17m might be under it and it is just an accounting entry as warrant exercise price is $0.19. Also $0.4m of accrued dividend payable (likely means dividends on preferred held by Platinum) is likely to be part of the settlement and therefore can also be excluded. This leaves $1.63m of other liabilities that might potentially be with parties unrelated to Platinum.
    (3) Settlement doc mentions that $2.6m of preferred shares have been transferred from Platinum and are excluded from liabilities covered by the settlement (if I am reading section 13 correctly). This would mean some $2.6m of preferreds will have to be paid separately together with any accrued dividends, so I call it $2.8m. (interestingly the par value in the scanned agreement is only $100 per share where as in the typed text it says $1000 – was this just a typo? The scanned doc was fully signed by the parties).

    The eventual pay-off might be lower or higher, but with shares trading at $0.09 vs $0.12 base case scenario and the end of the road seemingly close I find the risk/return worth taking and have initiated the position again. Margin of error is quite small, as the additional expenses need to increase by just $2m for the trade to breakeven. However, if any of my indicated questionable liabilities will not have to be paid or are part of the settlement then the case might surprise on the upside.

    One hint that I might be overestimating the liabilities excluded from the settlement is that agreement indicates a relief of $17m meaning that Platinum was owed $72m in total. Summing up debt (53.4m), accrued interest till today (c. $12m), included preferred equity ($4.4m) and dividends on preferreds ($0.3) I arrive at only $70m, so there might be $2m of other liabilities that were listed on MOR and were also included in the settlement. This would easily provide 2.5c per share boost to the upside.

    Quarterly report (10-Q due shortly) might shed some further light on this.

    • I have closed the IMSCQ position as share price approached my target of $0.12. This resulted in 30% return in one week. It seems I am really lucky with short term trades on IMSCQ

      • will you consider opening new trade if the price down to 0.1

      • I am tempted at least to wait for March MOR before re-entering. Also worth tracking bankruptcy docket for any new developments.

  37. Nice call! Already back to $0.12. Are you selling here, dt?

    • Yes Joe, I have closed the position already as the price approached my target. Do not think equity holders are likely to get much more than $0.12/share in eventual liquidation.

  38. It looks like our boys posted the March MOR: https://www.kccllc.net/imxacquisition/document/1612238170426000000000005

    My calc (using your format above)
    Cash at end of March 2017: $72.752mm
    Post petition liabilities till March 2017: $1.397mm
    Payment to Platinum Partners: $55mm
    Future Professional expenses and wind down costs: $2.0mm (my guess; I would hope this is at the high end given the legal heavy lifting is out of the way and it looks like they paid over $1mm of this since end of Feb. 2017)
    Other liabilities outside settlement agreement: $1.63mm (stole your number above)
    Preferred equity excluded from settlement agreement: $2.8mm (stole your number above)

    That leaves ~$9.925mm or ~$0.124/share

    As always, feel free to correct me

    • Do you think I am in the right ball park, dt? I have a good history of mis-reading the MOR so want to make sure I am not missing anything. It looks like there is a chance to buy it today at $0.09.

      Thanks!

      • My estimates so far remain unchanged and quite in line with your figures.. eventual professional fees, can easily eat the whole upside. That is the biggest unknown currently.

  39. Professional services accounted for c. $1.8m, which is a huge amount and margin of safety can be eated pretty quickly.

  40. It looks like IMSCQ posted amended MORs for Feb. 2017 and March 2017 but I can’t tell much of a difference vs. the original MORs.

    Dt, do you have any bad vibes about trying to buy more below $0.09 here?

    Thanks!

    • Joe, finally had a chance to look at IMSCQ again. I believe the key document now is Docket #707 where management present plan of reorganization and indicate only $0.07-$0.08 value per share for equity holders.

      https://www.kccllc.net/imxacquisition/document/1612238170508000000000003 (see page 13)

      At the same time Debtors (i.e. management) recommend that shareholders vote for reorganization instead of liquidation. In this case of reorganization management could continue receiving salaries, so they are kind of incentivised to understate the value of liquidation by inflating potential claims (eg. unsecured claims, for which the exact amount is still to be determined).

      Equity committee has not issued the opinion on this reorganization plan. However, the possibility of reorganization instead of liquidations significantly limits the attractiveness of IMSCQ.

      Also worth noting that equity committee seems to be on relatively bad terms with management. Right after settlement (when I entered the trade for the second time) it seemed that all parties are in agreement and situation will be sorted out in short period of time. That no longer seems the case, which means further expenses to cover laywer fees and etc. This was an interesting fight between management and equity committee:

      http://www.kccllc.net/imxacquisition/document/1612238170424000000000006
      http://www.kccllc.net/imxacquisition/document/1612238170426000000000001

      Interestingly, equity committee notes that management is seeking further $5.6m in bonuses, which might be one of the reasons why shareholders’ recovery is estimated at only $0.07/share.

      The bottom line is that at current prices I no longer find IMSCQ attractive – situation has changed considerably since the settlement was filed.

      • Thank you for the update. Looking to exit my position around here. The prospect of a reorganization vs getting cashed out is enough to scare me out as well!

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