Walker Innovation (WLKR) – Liquidation – 11%+ Upside

Current Price – $0.485

Liquidation Value – $0.54

Upside – 11%+

Expiration Date – Q3 2018

Liquidation Announcement

This idea was shared by AV.

 

Walker Innovation Inc. (WLKR) announced last week that the board would call a meeting of stockholders to approve the liquidation of the company. The press release gives us a starting point to figure out how much cash will be available for distribution. As of June 30, 2018 the company had cash of approximately $22.8 million and 39,526,311 fully diluted shares outstanding. Of that amount, between $1.5 and 2.5 million will be held in a contingency reserve for “known and potential liabilities”. Given that Walker Innovation is basically a box of cash it’s hard to see what could drain this contingency reserve, besides severance benefits to employees, and I think eventually a large part could be paid to current shareholders. The company has 4 full-time employees, and at least their management, is entitled to 12 months of salary when their contract is terminated. The CEO and CFO earn a combined $700 thousand a year, so because of that I have gone for the low-end of this range in my calculations, and with a bit of luck even that will end up being conservative. Their office lease will terminate on it’s own in September.

The company is expected to make the initial liquidation distribution in September, so we will have to model one additional quarter of cash burn. In the first quarter of this year $656 thousand went down the drain, so probably a similar amount will disappear between June 30 and September. Besides that, the liquidation itself will probably also not be cheap. I never understood why these things cost so much money, but to model an additional $1 million disappearing in liquidation expenses is not an unreasonable bet.

Luckily there is also some good news. The press release talks about fully diluted shares, and a large part of those shares are 4,432,997 options. What the weighted average strike price of those options is can’t be determined exactly, but we do know that at the end of the year 4,928,832 options were outstanding with a weighted average strike price of $0.64/share. This average is skewed upwards by a couple of worthless options with a high strike, since 4,516,333 options had a exercise price between $0.00 and $0.50 with a weighted average strike price of $0.39. I think we can conservatively assume that all the worthless options were forfeited and that all the remaining options have a strike roughly at the $0.39/share level. If we add this all up we get the following picture:

WLKR

As an added bonus, Chairman owns almost half of the company, which should help to minimize any liquidation expenses and Q3 Opex waste.

Another way to look at this situation is that liquidation costs + Q3 OpEx need to reach $5.3m before liquidation distributions would be lower than the current share price. This is equivalent to 25% of the remaining cash balance and its hard to see how Chairman would allow this kind of waste.

10 COMMENTS

  1. Michaelx

    I own this, and quite like it. I think there is probably some value to the patent portfolio here given they have had semi-regular six figure settlements coming in. Even on a fire sale basis you’d think that should be worth a few hundred thousand in option value to someone. Not going to move the needle dramatically, but provides a bit of potential “good news” optionality, as opposed to the general rule in liquidations that anything that happens eats away at the margin of safety.

  2. Thinley w

    Hi AV. Thanks for the idea. Do you have the calcuation behind how you came up with the 4.4mm option? Also, regarding the contingency reserve, any idea why they state a very high $2.5mm?

  3. AV

    Mchaelx: I agree. Don’t expect it too be worth much, but perhaps it can be a pleasant surprise.

    Thinley: In the press release they give the number of fully diluted shares, and we know the number of ordinary shares and preferred shares from the latest 10-Q/K. And I’m not sure why they have the big contingency reserve. I think it’s mainly a legal requirement, and secondly, they might have to pay their 4 employees for 12-months after dissolution (if they don’t just pay a lump sum to settle it before dissolution).

  4. greg lia

    I read this as shareholder meeting Sept 5 to stockholders of record Aug 1

  5. Vincent

    Your estimate is almost equal to the higher end of the estimation range ($0.50-$0.53) mentioned in the Plan of Dissolution. It seems that the key here is estimating the amount of contingency reserve needed for liabilities/future claims.
    I’m not sure if we have any special insight here. Nonetheless it seems like a free option since the shares are trading around the lower end of the estimation range. Although I am a bit surprised by this part of the Plan of Dissolution, which could in theory not make it a free option anymore:

    “Under the DGCL, if the amount of the contingency reserve and other measures calculated to provide for the satisfaction of liabilities and claims are insufficient to satisfy the aggregate amount ultimately found payable in respect of our liabilities and claims against us, each stockholder could be held liable for amounts due to creditors up to the amounts distributed to such stockholder under the Plan of Dissolution”.

    1. dt

      I think this statement re further shareholder liabilities is just a required formality, I would not expect this to actually happen. The reserve at $1.5m is worth $0.04/share so if any portion of it is unused, there might be further upside to shareholders.

  6. Martin Hernon

    Note the contingency reserve has been increased, and the initial distribution will be slightly lower and in the range of $0.47 to $0.50 per share:

    Subsequent to the date of mailing of the Proxy Statement, we received notice that the Internal Revenue Service (the “IRS”) had opened an audit regarding our tax year ended December 31, 2016. While we believe our tax return for that year is correct and reflects all amounts owed to the IRS – which we paid on a timely basis – there is a risk that the IRS will disagree in this regard and may raise issues in respect of other tax years. We are in the process of initial engagement with the IRS and are consulting with our advisors regarding the issues that could arise in the course of the audit, but due to the usual manner in which these reviews proceed, do not expect to have any substantive discussions or any visibility regarding potential liabilities that may result from this matter prior to the date of the Special Meeting. As a result, on August 16, 2018 our Board of Directors approved an amendment to our Plan of Complete Liquidation and Dissolution increasing the maximum amount of the Contingency Reserve contemplated by Section 7(b) to satisfy (among other things) potential tax liabilities and related professional expenses from $2.5 million to $3.5 million. As a result of this modification, all references in the Proxy Statement to an estimate of the aggregate amount of cash distributions to stockholders being in the range of $0.50 to $0.53 per share are unchanged (as we expect that no such tax obligations will result from the IRS audit), but we are noting for the benefit of all stockholders that we currently expect that the initial distribution will be slightly lower and in the range of $0.47 to $0.50 per share to fund this increase in the Contingency Reserve.

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