Arbor Realty Trust Inc (ABR)

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CBAI: brief analysis of reverse split options, and resultant impact
by ablindrat
on Today at 08:59 PM (211 Views)

I have no position in CBAI, but I know many here do, or are interested in CBAI. I thought I’d share a little math I did, as well as some thoughts.

Before I do that, I suggest you go read the 10-K they released on March 31, 2011. Go ahead, I’ll wait.

Back so soon? You did read it, didn’t you?

Regardless.. as of April 11, 2011:

pps: $0.0021
market cap: $14,310,000

cur AS: 6,945,000,000.00
cur OS: 6,815,696,764.00
cur OS/AS: 98.14%
AS x to 1 reverse: 100
OS x to 1 reverse: 100
post split AS: 69,450,000
post split OS: 68,156,967
post split OS/AS: 98.14%
post split AS increase : 250,000,000
post AS increase OS/AS: 27.26% [3.7 to 1 dilution]

original reverse x to 1: 500
post split AS: 13,890,000
post split OS: 13,631,393
AS increase to: 95,000,000
original post changes OS/AS 14.35% [6.8 to 1 dilution]

The first big block of text describes the numbers as they are under the current (100 to 1) reverse split plan. The second block describes them as they were under the initial (500 to 1) reverse split plan. Let’s walk through this.

We’ll assume you initially purchased 1m shares at $0.004 (the average price from October until the split announcement), prior to the reverse split announcement, investing a total of $4k. Unfortunately your initial $4k investment is currently worth $2.1k. Sorry about that.

Under the first plan (500 to 1 O/S reverse), the AS and OS would both undergo a 500-1 reverse split, taking the AS from 6.945b to 13.89m, and the OS from 6.82b to 13.63m. As the numbers change in the same proportion, the OS/AS ratio stays the same – 98.14%. But then Matt wanted to increase the AS after the split occurred, from 13.89m to 95m. That’s an 81.11m share increase, or more importantly, a 584% increase. Suddenly the OS/AS ratio drops from 98.14% to 14.35%.

After an immediate shareholder outcry, Matt backpedaled and changed the plan from a 500-1 split to a 100-1 split, taking the AS from 6.945b to 69.45m, and the OS from 6.82b to 68.2m. The OS/AS ratio was still the same – 98.14%. But then Matt threw the shareholders a bone and only suggested increasing the AS after the split from 69.45m to 250m. That’s a 180.55m share increase, or more importantly, a 260% increase. Suddenly the OS/AS ratio drops from 98.14% to 27.26%.

So, why do you care about the OS/AS ratio? Why is 27% better for you as a shareholder than 14%?

If you assume that Matt plans to spend the shares he prints up in his AS printing press (and looking at the history of the company and the OS/AS growth rate over the last few years, that’s a fairly safe bet: the OS went from 41m in 2006 to 6.8b today [almost all of which is used up] – that’s an increase of 1658% – $1 invested at the start of that would be worth $0.006 today, or you would have lost 99.994% of your investment) by increasing the OS after the split with more purchases and more $150k/year consulting agreements for his wife, you can start to estimate how the dilution will impact you.

If you are like me, and assume Matt is going to spend every share he can convince the shareholders to let him print (again, look at past history), you’ll see that in the 500-1 plan, every share you have would have been diluted to 14.62% of its current value. Under the 100-1 plan, every share you have would have been diluted to 27.77% of its current value. The new plan leaves you about twice as well off as the first plan would have. You still take an enormous dilutive hit, of course.



In the original 500-1 plan, your initial $4k (currently worth $2.1k after the announcement) becomes worth about $570.40 after Matt burns his way through the rest of the shares he prints up (not taking into account the value of what the company gets for the shares). In the 100-1 plan, you end up with $1110.80.

Another way to look at this is to consider that you are effectively having Matt spend $2889.20 of your original $4k on whatever he ends up spending it on. Do you believe you will get at least that much in value from his wife’s “services in relation to strategic corporate planning and other business related matters.” for which the company also paid her $12,500/month in 2010? How about from the 10% interest rate they paid themselves on the money they loaned to the company in 2007? Are you aware that of the $8.5m net loss for 2010, 26% of that, or $2.2m was in stock compensation?

Where can I sign up for this deal where I get a 10% return via interest on a loan for which I am both the lender and the borrower, except I get to spend someone else’s money to pay the interest on the loan, and prioritize the loan repayments ahead of other obligations the lender may have? Sign me up!

You have to decide if you think Matt & Stephanie are going to use your money wisely, and whether or not they will generate a net positive return for you.

I believe that the reverse split will eventually result in a share down the road (after Matt fully taps the piggy bank yet again) being worth about 25% of what it was worth pre-split announcement. The market currently thinks it will be worth about 50% of what it was worth pre-split announcement. The market is taking into account a return of some kind on the future share expenditures, which I (quite unfairly) am not.

After the 100-1 split, the price of a share, assuming it is then what it is today, will be $0.21 (which neuters the argument that this reverse has anything to do with moving to a big board exchange – $0.21 is still too low). After the auth bump, Matt will have 181.84m shares at his disposal (250m auth, minus the post split 68m existing O/S), or about $38.18m in the piggy bank. Right now he has 129.3m shares at $0.0021/share available, or about $271k.

He’s basically going to try to create $38m in spending money out of thin air.

Let that sink in for a second.

This reverse (assuming pps stays constant until it happens) is going to put about $38m worth of A/S shares in his hands to start spending again. That money comes from somewhere, it’s not free. It comes from the constant dilution of the value of the current outstanding shares. It comes from the value of your investment. It also provides whatever return is generated from what it is spent on, but your initial $4k investment, which is currently worth $2.1k in CBAI shares, is where much of this value comes from. That’s why the share price plummeted when this was announced.

Please note that the above is not a reflection on the science, or the business strategy. It’s meant to help understand the impact of the initial and subsequent reverse split announcements on the valuation of the company, and on individual investments. Matt’s acquisition strategy may work out quite well in the long run, and CBAI could become a profitable investment despite the reverse split.

For current shareholders, I think there will be more pain before things get better, though.

Hopefully this was helpful for a few folks.

I welcome any corrections to my numbers, math, or logic.

- a blind rat

Disclosure: No position in CBAI, no intention of having one any time soon.

http://investorstemcell.com/featured/cbai-brief-analysis-of-reverse-split-options-and-resultant-impact/