A reader sent us an email yesterday asking whether XTNT is a good investment at $0.30/share given that its Board of Directors approved a plan for liquidation and that the company stock dropped a whopping 70% after the announcement was made. Our personal opinion is that the short answer is “No“, but readers are encouraged to conduct their own research.
Some of you may recall that we opened added XTNT to our portfolio on March 17, 2009. In our article, we outlined our case for XTNT. At the time, the company was selling at $0.46/share with nearly $0.80/share in cash or cash equivalents on its balance sheet. The company had already engaged Piper Jaffray & Co. to explore strategic alternatives and had reduced its workforce by over 96% in the process. So, in a Graham-like fashion, we concluded that the margin of safety for this investment was high as long as the cash burn rate remained under control and liquidation expenses did not exceed $50M. Two weeks later, the company was trading at $0.76/share, and we exited our position for a 77% gain.
Five days after closing our position on XTNT, the company surged to $1.50/share, which inspired us to write our article “Selling is Harder Than Buying: A Comment on XTNT” on March 31, 2009. In the article we explained that although we would have loved to keep the company for an extra five days, keeping the company meant going beyond, if not disengaging, not only form our core discipline, but also from our original thesis.
Yesterday, the board announced that they have approved liquidating the company, but this was not the same company we had first encountered back in March. First, the company was trading at $1.00/share, which was above our March estimate for liquidation value. But most importantly, the latest 10-Q filing indicates that the company burned through nearly $7M of cash and cash equivalents between March and May, bringing the company’s net cash value down to nearly $0.50/share. Therefore, it is clear that the company is not worth the $1.00/share it was selling for just a couple of days ago.
Furthermore, the preliminary proxy filed on May 15, 2009 indicates that employee compensation, professional fees, insurance, and operating expenses would range between $0.20/share to $0.40/share, leaving only $0.10 to $0.30 per share to be distributed among stockholders.
The precipitous drop in cash and cash equivalents in XTNT highlights two key learning points:
a) The inclusion of “expected liabilities” is necessary in estimating a proper liquidating value. These can be hard to estimate.
b) “Expected liabilities” will depend on the timing of the transaction, making timing another difficult factor to evaluate in estimating liquidation value.
Both of these points emphasize the need for a wide margin of safety when engaging in this type of investment operation. This will unquestionably force us to take another look at Eden Bioscience Corp. (EDEN), a stock in our portfolio involved on this type of transaction which has a low margin of safety relative to our estimated liquidation value.