CBA Florida (CBAI) – Liquidation – 23% + 35% Upside

Current price: $0.007

Net Cash: $0.0086 + $0.0024

Upside: 23% + 35%

Expiration Date: TBD

Asset Sale Proxy

 

This is an illiquid nano-cap with average daily volume of only $4k.

CBA Florida is a shell company that trades at 40% discount to net cash and is expected to distribute portion of that cash to shareholders shortly.

Company sold all assets (stem cell bank) in May 2018 and has $12.5m of cash, additional $3m cash locked in escrow and $1.3m of net liabilities. Summing these up results in $0.0086/share in net cash and another $0.0024 in escrow. Cash burn is minimal at c. $0.1m per quarter and there are only two employees left at the company.

$3m is held in escrow to cover any potential indemnification obligations related to the asset sale. Any amounts left will be released in May 2020. So far almost a year after closing nothing seems to be claimed against escrow funds - I take it as a positive sign. Before escrow is released company is also restricted from fully liquidating.

The biggest risk here is that only small part of funds gets distributed to shareholders and the rest remains on the balance sheets or gets wasted one way or another. Company is already sitting on all that cash for almost a year and continues to postpone distributions. Also in full liquidation scenario one needs to deduct cash burn till then as well as final liquidation expenses - in total probably <$1m or <0.0008/share.

On a positive note, CBA Florida is controlled by Red Oak hedge fund - 30% stock ownership and 3 out of 4 directors. There is limited information available on Red Oak Partners, but judging by these sources (here and here) company only has $109m of AUM (or had this amount at the time of launching the funds). Thus, CBAI investment is quite meaningful - potentially 4% of AUM. This should be sufficient incentive to maximize outcome in potential CBAI liquidation. Some more info on Red Oak Partners can be found from their previous activist campaigns.

All in all, buying CBAI at $0.007 seems like a safe bet with minimal risk of loosing capital and potential upside of 20%+.

 

Distribution Amount and Timeline

This was the wording on expected distributions in the proxy statement:

The Company intends, although there can be no assurance, to provide for an initial distribution of between $3.2 million and $4.5 million in the aggregate, or approximately $0.0025 to $0.0035 per share of Common Stock. <...> the Company intends to pay one or more future distributions but such distribution(s) and amount(s) will depend on the Company’s available cash, after reflecting any reserve for future contingent liabilities, operating costs and any other uses of cash.

The Company currently anticipates that the initial distribution to the Shareholders will occur within 90 days after the Closing, assuming the Shareholders approve the Sale and that the Sale is consummated.

Then with Q2 earnings release distributions have been postponed till beginning 2019:

After consultation with external accounting and legal advisors, the Board has determined to wait until 2019 to make an initial cash distribution to shareholders. Doing so may allow CBAI to issue distributions in the form of tax-efficient returns of capital as opposed to a taxable dividend if issued in 2018.

CBAI presently anticipates it will distribute a portion of the sale proceeds to its shareholders beginning in 2019

And finally in the annual report the timing has been pushed again:

CBAI presently anticipates it will distribute a portion of the sale proceeds to its shareholders in 2019

It's hard to understand this delay as $12.5m in cash is simply sitting idle on the balance sheet. Tax explanation is strange as well - there are no accumulated earnings and all of the funds could be distributed to shareholders tax free as return of capital (however, I am not tax expert, so maybe I am missing something here). On the other hand, there might have had some unfavorable tax implications for Red Oak funds if distributions had taken place in 2018.

The initial distribution was expected to be only $0.0025-$0.0035/share, but that was supposed to happen 90 days after closing and to be followed by further distributions. Now almost a year has passed and likely all expenses/liabilities have already been paid or are recorded on the balance sheet. With that said, there is a chance that the initial distribution will be larger than the range indicated in the proxy.

41 COMMENTS

  1. work 22

    Thanks for posting. Is the real estate lease listed below in that cash burn number of $100k/month? Seems like they had to adjust/reduce the lease for obvious reasons. I did buy some, as the money probably gets slowly, inexorably paid out over the next couple years. These liquidations always seem to take way longer than makes sense (Winthrop Realty FUR liquidation STILL going with a lot of money left to be paid out and lawsuits to be settled for example).

    From the 2018 10-K:

    “ITEM 2. PROPERTIES. On October 25, 2018, the Company entered into a sublease agreement (“Sublease”) for its offices at 1857 Helm Drive, Las Vegas, Nevada. The Sublease was approved by the landlord on October 26, 2018 and includes essentially the same terms as the lease payment obligations included in the Company’s First Amendment to Lease between the Company and the landlord. Lease payments for the period from mid-October 2018 through September 30, 2019, the end of the remaining term under the First Amendment to Lease amount to $194,447.”

    1. dt

      I simply looked book value change over the last couple of quarters and excluded non-cash and one-off items (such as $0.5m of deferred tax). So at least previous lease payments are probably included in my figure. Thanks for spotting this.

      If the company eventually liquidates, I assume expenses will definitely jump up above the $100k per quarter.

  2. Hodor

    1.27 B shares outstanding, correct? Doing the math… shouldn’t it be $0.0098/share in net cash, not $0.0086/share?

    1. dt

      I am using net cash figure and deduct all the liabilities from the cash on the balance sheet.

  3. hodor123

    Do you have a link to the company’s website? I have been unable to find a working one. I am mainly just interested in finding contact information for their investor relations. Thanks in advance!

  4. dt

    CBAI issued Q1’19 report:

    – Quarterly expenses again at $100k which was partially offset by $50k of other income (most likely interest in the cash balance).

    – Nothing has been claimed against escrow funds and amount outstanding remains at $3m

    – Same comment on distributions; “CBAI presently anticipates it will distribute a portion of the sale proceeds to its shareholders in 2019”

    https://www.sec.gov/Archives/edgar/data/1289496/000165495419006115/cbai_10q.htm

  5. Austin

    Any theories on why, 5.5 months into 2019, no distribution has been declared? What does Red Oak gain by waiting?

      1. dt

        No further updates on this, besides what is already covered. Q2 report should be out in mid August and might shed some further light on this (albeit all previous reports only indicated postponements of liquidation).

        This limbo continues already for 1.5 years and I have no idea what Red Oak gains by waiting.

        I am still long.

  6. Vinn

    Besides the time risk, do you guys think there is also a risk of significant capital loss? For example, a scenario where the company decides to change course and reverse merge into some illiquid company, like what just happened with Realm? I mean they do have significant accumulated deficit on the BS ($39 million) and they are protecting that as well.

  7. DendriteResearch

    Okay, here’s what Red Oak gains: it gets to siphon off $500k per year from CBAI. They pay their 3 directors $50-$100k per year for doing nothing, which goes straight into their pockets instead of Red Oak’s investors. And presumably the 2 employees who are also doing nothing are also affiliated with Red Oak.

    So from Red Oak’s managements’ perspective, they could liquidate, net a one-time profit of $500k?, of which they get to keep $100k, or they could milk it for $500k per year for themselves and their friends. And they even get a tax incentive to do the former, because CBAI has some deferred tax liabilities that get offset by their ongoing net losses.

    It’d be great if everyone did the right thing, but in this case I don’t think you can ignore the skewed incentives for management.

    1. Writser

      Well said. On the other hand, presumably they also manage money for outsiders – it’d be pretty stupid / brazen to steal from your own clients. And owning a perennial cash box at a discount doesn’t generate any performance fees either nor is it good for your track record.

      I guess the truth is somewhere in between.

    2. dt

      I agree on points made by DendriteResearch – lack of distributions so far seem to indicate that Red Oak is indeed intentionally benefiting themselves at the expense of shareholders. I can see them postponing the distributions till escrow funds are released (May 2020), but it will be very hard to justify any further delay.

      I tempted to give them benefit of doubt at least till the end of 2019 – if distribution timeline is pushed out again without any further clarification or stricter timeline, I will consider exiting the position.

  8. Writser

    CBAI filed an amended 10Q today, changing the text of footnote 1 regarding a distribution in 2019. New text:

    “CBAI previously disclosed that it anticipated distributing a portion of the sale proceeds to shareholders in 2019. With the goal of maximizing shareholder value, CBAI and its board of directors are also evaluating other alternatives including potentially pursuing a plan of liquidation and dissolution and/or a sale of the Company. In order to enable any such alternatives to be fully explored, the Company may not distribute a portion of the sale proceeds to its shareholders in 2019. The Company has no commitments, agreements or understandings with respect to any such alternatives and there can be no assurance that any such alternatives will be consummated or the terms thereof. CBAI and its Board of Directors continue to contemplate a distribution, but based on discussions, evaluations, and business judgement, have not yet determined if this will occur, or when.”

  9. dt

    Well, at least they managed to change the text on distributions. Now I am not expecting any distributions or strategic actions before the release of Escrow funds (May 2020). So the nearest catalyst is probably Q2’20 results to be released next August.

    This is taking much longer than initially expected. However, on the positive side the stock is already up 15% from the write-up prices and the amount of funds in escrow remains unchanged. With every passing quarter the likelihood of full recovery on escrow funds becomes more likely.

    BV of equity declined by $126k or $0.0001 per share – so c. 1% value erosion per quarter.
    In liquidation scenario, assuming this takes another year ($0.5m cash burn in total), liquidation costs $1m additionally and there is full recovery on escrow, distributions should amount to $0.0098/share vs current price of $0.008 – a 22% upside.

    The biggest risk is that nothing changes mid-next year and this idle cash balance simply gets pushed down the road indefinitely. But I am tempted to wait another year.

  10. fishwithwings

    Now that they are winding up, any thoughts on the est. liquidation value?

    1. dt

      My estimates on liquidation proceeds have not changed from November:

      “In liquidation scenario, assuming this takes another year ($0.5m cash burn in total), liquidation costs $1m additionally and there is full recovery on escrow, distributions should amount to $0.0098/share vs current price of $0.008 – a 22% upside.”

      This assumes a further $1.5m gets siphoned from the company, so I think it should be conservative enough. However, a big question remains if a full escrow amount is indeed recovered. There should be more information on expected liquidation proceeds in the proxy statement for the annual meeting.

      I also find this statement quite worrying: “The Board engaged one of the top global economic consulting firms, which recently completed an estimate of certain liabilities of the Company, in order to confirm the Company is in a position to make a cash distribution.” There seems to be plenty of cash and seemingly no liabilities on the balance sheet for the intended $0.0048/share initial distribution – so really not sure why the liability valuator was necessary. Maybe that is just a legal requirement that management is presenting as something extraordinary, or maybe I am really missing something.

  11. Ilja

    Annual report is out. BV of equity has declined by was just $37k YoY as in Q4 CBAI has received $280k tax benefit (due to the incorrectly treated asset sale income in 2014). Current BV/share stands at $0.011/share (42% upside). Assuming the liquidation date in Q3/early Q4, full recovery of escrow funds, $0.5m annual cash burn rate and $1m of further liquidation costs, the total distribution should eventually amount to ~$0.01/share (31% upside).
    Shareholder meeting date is set at the 28th of May.
    https://www.sec.gov/Archives/edgar/data/1289496/000165495420003226/cbai_10k.htm#n

  12. dt

    I have closed CBAI position after going through the proxy. I think these two paragraphs say it all.

    The Company’s $2.2 million reserve for unknown, contingent and/or conditional liabilities is based on the high-end estimate provided by NERA relating to potential liabilities which do not currently exist but could arise in connection with the Company’s former operating business.

    The Company’s $3.0 to $3.5 million reserve for known, ongoing expenses provides for approximately $120,000 of unpaid state and corporate taxes, non-executive personnel bonus and estimated severance costs, current accounts payable of $45,000, and approximately $3.0 million dollars for ongoing operating expenses (including insurance, employee expenses, Board fees, management fees, audit and tax fees, legal fees, public company expenses, rent and other ordinary course business expenses) during the Dissolution process, which is anticipated to last approximately 4.5 years.

    Instead of my initial estimate of $1.5m cash burn, this will now be $3m-$3.5m with further $2.2m reserved for potential liabilities. And the liquidation will last 4.5 years. Shareholders might still get something out of the $2.2m reserve, but I am not putting too much hope in that.

    This prolonged liquidation was/is clearly built to benefit insiders only. DendriteResearch message last August was spot on.

    The numbers we have now are:

    BV as of Dec’19 = $14.1m
    Initial distribution = $6.1m ($0.0048/share)
    Reserved for liquidation expenses = $3m – $3.5m
    Reserved for potential liabilities = $2.2m
    Further cash remaining = $2.3m – $2.8m

    So altogether this suggest further potential distributions of only $0.0018 – $0.0022 per share. And then shareholders will have to wait and hope to recover something from the $2.2m reserved for potential liabilities.

    I was quite wrong on this case in terms of interest alignment and timing, however margin of safety was sufficiently large allowing me to close the position with 10% gain.

    1. EB

      Agreed, there will likely be nothing left over once the 4 years are up. Price is above liquidation value here.

  13. blades

    I had large commissions to pay in exiting this at IB.Did anyone else experience this?

    1. Writser

      Why do you not expect further distributions? I think that that is way too negative. Back of the envelope: $11.5m cash, $3m escrow. Liquidation expenses: $3m – $3.5m (those should include current liabilities). The reserve for potential liabilities is a worst case estimate and I think there’s a large chance that that money will end up in our pockets. That gets me to ~$0.008 / share easily.

      Yes, the estimated liquidation expenses are very high and that was a big disappointment. There might be a chance you get screwed. But still, with a distribution of $.0061 coming soon I think you are buying the stub at an attractive price around $.007.

  14. Gosupress

    I think Writser has a point, it seems a bit excessive to expect the liquidation reserve to be gone. If there’s a clear reason to expect a hit that should be reflected in liabilities right?

  15. dt

    My point was, that I have no idea what has changed in two months since the proxy and why the distribution was larger than initially offered.

    As management has not communicated any more details, I stand by my calculations back in April. At that time, after deducting expenses indicated by management (even if these are excessive) total distributions were estimated at $0.007/share, which would leave another potential $0.0008/share to be distributed later. Market values the stub at $0.0016 already, which already assumes that liquidation expenses will be smaller than suggested by management or liability reserve will be left unused.

    Everything has gone wrong with CBAI liquidation so far (except for the latest bump in distribution) – the planned initial distribution after sale closing never happened, final liquidation might take another 4.5 years, planned liquidation expenses far higher than expected, additional reserves for unknown liabilities. Although not fully clear what is happening behind the scenes, this liquidation seems to work for the benefit of Red Oak (see Dendrites comment from Aug’19).

    Maybe it is as you say and management is just staying conservative and there are legitimate reasons for all the delays and prolonged timeline. But I just have no idea and the figures shared by management suggest that market overvalues future distributions.

    1. Zulu Investor

      I think for DT’s perspective, and correct me if I’m wrong – it comes also from the fact that management hasn’t proven themselves to be the most shareholder-friendliest group. While financially there are grounds to believe that there is still a small stub left to be paid out, conflict of interest (Red Oak) and a prolonged-time period might make this a difficult thesis to make a good investment case out of.

    2. EB

      What changed is that the escrow was probably released, which at the time of the proxy, wasn’t certain. The first number they estimated was without the escrow.

      All of the delays were because they were exploring options for what they could do with a public company cash box shell with net operating losses that they could potentially monetize. Once they saw that no option was better than liquidating, they moved forward with the liquidation.

      1. Writser

        As far as I know the escrow has not been released. I contacted the counterparty and they told me the account would be terminated in August.

  16. Brian

    I don’t see how it can take 4.5 years. I think they’re sandbagging….their known expense reserve implies 5 years at last year’s opex ~ $600k. As I’m sure you all are aware, liquidation is typically a 3 year window. And this one is very simple and straightforward. They can’t from a fiduciary perspective justify $500k a year, and they’re getting rid of 1) public company expenses 2) much of audit fees and…

    3) The Company’s executive officers and directors who own shares of Common Stock will be entitled to receive, on the same terms and conditions as the Company’s other Shareholders, the same distributions and other benefits that the Shareholders would receive when the Company makes liquidating distributions to the Company’s Shareholders of record. The Company’s officers and directors will not receive additional compensation in connection with the Dissolution. Red Oak Partners, LLC (“Red Oak”) currently provides ongoing management, administrative and operational services and assistance to the Company for $100,000 per year. To the extent the Dissolution requires more than 80 hours of additional work (outside of hours in the ordinary course of business) to be provided by Red Oak to the Company with respect to wind down activities and the administration of any claims which may arise, Red Oak will be paid $250 per hour for such additional work beyond 80 hours. The Company estimates that 160 to 200 hours of work over the course of the Dissolution, in addition to Red Oak’s ordinary course work for the Company, will be required from Red Oak. After the 80 hour allowance by Red Oak, this would result in fees of $20,000 to $30,000, which amounts have been included in the $3.0 to $3.5 million reserve for known, ongoing expenses; however, the foregoing amounts are estimates only and the Company cannot give any assurance that the actual amounts will not vary depending on the extent and nature of services actually performed by Red Oak during the Dissolution period.

    1. EB

      All Florida liquidations take four years, that’s the time period claimants can sue a corp being dissolved.

      I agree that $500-600k/year is high, but I believe it could be $400k/year. They still have their Red Oak fees, board fees, comp for the other employee (accountant), etc. Plus they have >300 shareholders, so they will have to stay registered and continue to file with the SEC the whole time.

    2. Brian

      I’d like to emphasize “The Company’s officers and directors will not receive additional compensation in connection with the Dissolution.” Above the point was made that the directors get paid $50-100k/yr. They cut their lease expense and as of last disclosure had a $600 month to month office in Vegas.

      At any rate, today is the last day I’m buying since I want to make sure I’m settled on Friday, the day they close their transfer books.

    3. Writser

      Interesting that opinions diverge so much on this name.

      What has happened so far doesn’t really speak well for Red Oak. Still, I’m willing to give them the benefit of the doubt with respect to the unexpected costs. I’m also willing to assume that all current liabilities as of the latest balance sheet are included in the expected costs. I’m even willing to assume that the escrow will be nearly completely recovered.

      However, when management reserves $3m – $3.5m for known, ongoing expenses it goes a bit too far for me to assume, on top of all other assumptions, well, they’re sandbagging, real costs will be lower. At that point I think you are making so many optimistic assumptions that disappointment is likely.

      Assuming $3m in total costs and a 90% escrow recovery gets me to ~$0.09 / share and I think that’s quite optimistic already. I personally don’t think it is very attractive above $.008.

  17. dt

    I am bringing this back among active ideas. Today is ex-dividend day is 25th of June (today)

  18. Brian

    Transfer books were supposed to close Friday but stock still trading around same bid/ask. Possible that new holders are still eligible to receive dividend but I wouldn’t count on it. If anyone was in Bind Therapeutics, many people were able to sell their shares after the record date for close to full value and still receive all subsequent distributions, and some folks bought after the record date and got totally hosed. Caveat Emptor.

    1. Writser

      Very interesting situation. I’m pretty sure that you will receive the first distribution, given that the ex-date is July, 1, according to the daily list. But what about subsequent distributions? FINRA is not saying anything about that and the press release given by the company explicitly states June, 26 is the record date for those too. This is going to get messy, I think.

  19. Terence

    Ex date 7-1, payment date 6-30 (tonight). Down yesterday and today, from .008 (Friday 6-26 close) to .007 now, on heavier volume.

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