Current price: $0.007
Net Cash: $0.0086 + $0.0024
Upside: 23% + 35%
Expiration Date: TBD
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.