Current Price –$0.55
Offer Price - $0.8
Upside – 50% ($250 for holders of less than 1000 shares)
Expiration Date - TBD
Paybox Board of Directors decided that the costs of being an SEC reporting company outweigh the benefits and, thus, it is no longer in company's best interests or the best interests of stockholders, for PBOX to remain an SEC reporting company. To deregister the company needs to have less than 300 shareholders. To achieve that the company is proposing 1-for-1000 reverse stock split and cashing out stockholders (at $0.8 per share) who own less than 1000 shares. Expected annual savings for the company are in the range of $346k-$425k compared to $6.5m market cap and $8m in annual revenues.
Stock is illiquid, but at the moment of writing there is a seller at $0.55/share.
Source and Amount of Funds
Management anticipates that the total cash requirement for the reverse stock split will be approximately $420,000. This amount includes approximately $180,000 (equivalent to 1.7% of the shares outstanding) needed to cash out fractional shares, approximately $210,00 of legal, accounting and financial advisory fees, approximately $5,000 for transfer agent costs and approximately $25,000 of other costs, including costs of printing and mailing, to effect the reverse stock split.
The cash requirements will probably turn out to be much higher eventually, especially with regards to amount required to cash out fractional shares - company currently estimates only 225 fractional share accounts. This is likely to change after smaller shareholders start acquiring odd-lots specifically to benefit from this offer. However, due to low liquidity the number of fractional shareholders is likely to remain limited.
Company had $2.6m in cash as of Sep 2016 and could potentially buy out 25% of the shares outstanding if necessary.
Risks and Mitigants
The biggest risk with these types of reverse stock splits for nano-caps is that transaction gets cancelled after to many fractional accounts buy into it, and it no longer pays-off for the company to cash out all newly minted odd lot accounts at a premium. Hancock Fabrics (HKFI) is a perfect example of such cancellation. Shares dropped subsequently after all odd-lot holders started selling following the cancellation. HKFI filed for bankruptcy this year.
However, I believe PBOX deal is likely to go through as described:
- Firstly, majority (60%) of stock is owned by insiders and they seem to like the idea of cashing out smaller shareholders and in turn increasing their own stake in the company.
- Secondly, company is operating profitably and generates cash. 2015 has been especially good year for the company, when it generated $1.5m in cash vs $6.5m market cap currently. The company lost couple of clients recently and therefore 2016 performance has not been as great, but PBOX still operates above break-even If performance ever returns to 2015 levels, then at current prices PBOX is a real bargain. So it is not hard to see why insiders might want it all for themselves.
- Thirdly, even if the amount to cash out fractional shares increases 10x compared to management's estimate (unlikely due to low liquidity), this reverse stock split would still be a great deal financially - $2m expense vs $0.4m annual savings + increased ownership % for insiders.
- And lastly, the company seems to have a viable business model (software for working capital management). Despite being nanocap PBOX largest clients are HP, IBM, Siemens and etc. Over the last couple of quarters PBOX launched new product and started on-boarding new banking clients. Latest conference calls provide decent updates on the recent business developments - not many nano-caps with $6m have regular and informative calls with investors.