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I guess I am. Are you suggesting they get to vote if selling to a 3rd party?
Under the terms of their agreement when they acquired their shares, they have to vote their shares in accordance with the majority of other voting shares.
Tony--Unless it's a broken auction with no resulting transaction, I think you're going to make money on those shares. One would have to assume that CCEL believes the company will be sold for a higher share price than they've most recently paid whether they are the buyer or sell their shares.
It's possible no buyer is willing/able to pay as much as Red Oak will accept although I think this is highly unlikely given Red Oak's low pps. The second risk is that a proposed transaction won't be approved by SHs. Red Oak essentially can't vote and CCEL owns less than 10%. I'm not aware that there are other large SHs, so it's difficult to predict how that vote might go. As a SH I would be very reluctant to vote down a transaction on the theory I will get more later unless I were prepared to continue to hold for years and almost certainly have the share price collapse from the offer price.
Myth--I'm assuming any buyer would delist CBAI to avoid the ongoing expense. However, there's going to be an upfront cost going through the delisting process which will be weighed by a buyer and be reflected in the sales process.
I think terminating the CEO and outsourcing the lab work makes the expense numbers look better to a potential buyer and will increase the ultimate sales price.
I have no idea how many interested buyers will surface or the extent to which they'll value the company as an ongoing concern or just for the recurring revenue in place. My guess is between .006 and .008 per share which is a 3-4x to Red Oak and still a significant premium to current share price. Could be higher if multiple buyers get into bidding war.
I was suggesting your implied $22 million valuation is way too high
Junebug--Your analysis assumes a value of $900 per sample which I think is way too high. CBAI has $2.6 million in annual recurring revenue from their 25,000 samples. Any buyer would have at least $300,000 in annual expenses associated with that revenue including rent for freezer space, staffing to oversee freezers, utilities, billing etc. so recurring net revenue isn't more than 2.3 million or $92 per unit based on 25,000 units. A value of $900 per unit is almost 10x the net revenue per unit which is declining (assuming no new units added) at about 5% per year as a small percentage of people stop paying each year. Somebody paying 10x net revenue wouldn't even get their money back for 12-13 years, so I don't think your valuation of the units which implies a company valuation of over $22 million is realistic or achievable in a sale.
It's possible (although difficult to predict) that a buyer may attach additional value to the expected revenue from (i) new customers which was down only slightly YOY and (ii) their placenta business despite apparently losing their biggest customer. Hard to know how much these two might improve the ultimate sales price.
Myth--Re timing of transaction, remember it will require shareholder vote with notice period etc. Those steps can drag out the process.
Holter--
I think anybody could reasonably infer that, whether they end up being the buyer or a seller, CCEL thinks the ultimate sale price per share will be higher than what they've paid in their most recent filing. Otherwise, they would be overpaying for shares now that they'll have to sell for less at closing or could buy for less at closing. Seems logical that the ultimate sale price will be higher than where it's currently trading.
The company's history notwithstanding, the current situation seems very straightforward to me. Red Oak came in as White Knight and got cheap shares which they always intended to sell. They've hired a banker to canvas the market to get the highest price for everybody's shares including their's. They will sell and not try to buy as thy have no history of taking companies private. If they were interested in buying, they would have accumulated shares along the way which they haven't. We know of at least one potentially interested buyer, but Red Oak has no incentive to give them special consideration. They will sell to the highest bidder who can credibly come up with cash at closing. Any bid that Red Oak gets is going to be multiples of their .0019 share price, so it's highly unlikely Red Oak will reject all offers and decide to continue to hold its shares--particularly because they would have to hire a CEO and other staff and pursue an operational turnaround which would take at least a few years and present execution risk. I think there's a 95% chance of a transaction where all shareholders will be bought out within the next 3-4 months. The only remaining question is price --which will be driven by how many interested bidders there are and how they value the company's assets and trajectory.
I think some of you are making way too much of the outsourcing decision which was a cost-based decision unrelated to either the timing of the sales process or to the future prospects of the company. That decision can be reversed if warranted at any time either by Red Oak or a future owner. I don't think it's a big deal.
Myth--I think of the lab as where specimens are processed by a lab technician before they're put in the freezer. That lab technician is expensive where as monitoring a freezer isn't. The freezer is still in place with all the specimens. It's not clear whether Xytex (if it is Xytex) is storing new specimens after processing or whether they send them back to the freezer in Las Vegas.
I think shutting down the lab was a pure outsourcing decision to save money which is the type of decision you would hope Red Oak would help influence. I don't think it signals they're shutting the company down at all--just processing samples in a cheaper way. I don't think most new customers will focus on or care where specimens are being processed, and if they do Xytex seems to be a very longstanding, legitimate, accredited lab so not a bad story. If Red Oak can show lower expenses to a potential buyer, it makes the company more valuable and shareholders get better price.
I thought the below paragraph was the most interesting part of the 10-K because you can calculate that revenues from new business/processing fees was only very slightly down YOY from some combination of discounted pricing and/or fewer units processed. Given recent company history I'm somewhat surprised new business held up as well as it did which is probably because of their strategic relationship with at least one health insurance provider which is a steady source of new business and also because when existing customers have another baby they're very likely to use them again.
Their $930,000 increase in revenues YOY is exactly the same as the increase YOY of their birth tissue procurement business, so their mainline stem cell storage business generated exactly the same revenue YOY (with recurring slightly up and processing slightly down). Although they re-signed a birth tissue contract, it's not clear how viable that business is going forward or how it might be valued by a potential buyer. Seems pretty evident that this business line will be down this year and won't be a growth driver going forward as it was in 2015. Nonetheless, the company is stable and doesn't appear at risk of running short of cash.
Since Red Oak has hired an investment bank, I would expect to see a transaction announced in the coming weeks unless no one bids a price Red Oak finds acceptable. Since their cost is so low I think the possibility of a broken auction is low as even a modest valuation of the recurring revenues will generate a multiple of Red Oak's share cost in a little over a year.
There has been some suggestion on this board that Red Oak might try to tender for the rest of the shares. I think this is highly unlikely as it isn't their history and would invite litigation, valuation rights etc. I think the buyer will be a legit 3rd party sourced via the auction who at a minimum sees the value of the recurring revenue stream. I think the buyer will want 100% of the shares and will take the company private. Red Oak has every incentive to get the best price and the SHs must in any case vote to approve the transaction (and Red Oak's shares must vote along with the majority of the other shares). So no SH will get "screwed" and there's no lurking conflict for the company to be sold for less than 3rd party buyers actually think it's worth. Nonetheless, the longer someone has been a shareholder the more likely they'll still lose money on the sale as the share price has dropped so dramatically in recent years.
For the year ended December 31, 2015, the Company's total revenue increased to $5.26 million from $4.33 million over the same period of 2014, an increase of 21%. Revenues are generated primarily from three sources: new enrollment/processing fees; recurring storage fees (both from cord blood and cord tissue); and services related to the procurement of birth tissue for organizations utilized in the transplantation and/or research of therapeutic products. The increase in revenue is due to growth in recurring storage fees and fees from procurement of birth tissue related services. Recurring storage revenues increased approximately 4% to $2.61 million for the year ended December 31, 2015, versus $2.52 million for the prior comparative year ended December 31, 2014. Revenues from the procurement of birth tissue increased to $1.73 million for the year ended December 31, 2015 from $0.80 million from the year ended December 31, 2014, an increase of 116%. This growth is attributable to an increase in the demand of birth tissue from existing relationships for 2015 as compared to 2014.
I think Red Oak has been clear about its intentions to sell the company and has hired an IB to run a sales process. What they can't be explicit about is their intention not to close a deal prior to mid May so as to get long term capital gains treatment on their investment. Even assuming significant expense to a buyer to pay off debt, honor golden parachutes etc, $2.6 million in recurring revenue is worth multiples of current market cap. The only risk I see is the possibility of a broken auction where Red Oak doesn't get a minimum offer it considers sufficient to trigger a deal. As their cost is only .19 per share and there's risk in continuing to hold a company with no management or operating momentum, I think it's very likely they will choose to accept the best offer that comes out of this process.
Wade--Regarding CUBI, I think the Fed decreasing interest rate hikes this year to two didn't help as banks were considered to be beneficiaries of rate increases.
Junebug--That article says nothing other than the industry growth rate isn't 33% which is utterly obvious to anyone even barely acquainted with the industry. In fact, in the US overall growth has been in the low single digits in the last few years--and the proliferation of small startups has reduced profit margins and market share for the larger, more established players. This is reflected in some of the marketing presentations filed by AMAG which acquired CBR, the market leader. Look at CCEL's revenue growth in recent years which has been very modest. Viacord owned by Perkin Elmer is not reported on separately in PE's 10-K, but they have been laying off sales reps which won't indicate a thriving business. So in the US the business has matured, competition has proliferated and growth has slowed. Nonetheless, the adoption rate by pregnant women in the US is still only about 2-3% compared to over 10% in South Korea which provides potential for explosive growth as the adoption rate rises. I think what's been missing for the last 5-10 years has been more major research studies confirming the effectiveness of these stem cell treatments for other significant newborn/childhood diseases in addition to the few (like blood cancer) already established. A major study on Cerebral Palsy should be completed this year at Duke University which, if successful, should provide additional impetus for the adoption rate to grow.
Myth--While no management may be more favorably viewed than bad management, my point was that a well managed, growing company will be valued at a higher multiple than a stalled company with bad/no management. With the prospect for future growth clouded, the valuation will be primarily based on the existing recurring revenue. The value of the recurring revenue will be materially affected by the "drop off" rate assumed by a buyer as a percentage of customers stop paying their storage fees each year. I think the annual drop off rate for most companies is less than 5%, but the difference in valuation assuming a 2% vs a 5% drop off rate is very material. Don't know what CBAI's drop off rate history is or what a buyer would assume.
Myth--Don't forget the outstanding debt. Their cash position probably won't be enough it pay it off much less other one time transition expenses like the executive contracts so a buyer would have to factor that in. Nonetheless, I agree that the ultimate pps paid to shareholders will be significantly higher than it is currently. As you're the most active bullish poster on this board, what's your best guess as to what the buyout pps will be?
China Cord Blood is in the middle of a going private transaction from it founder/CEO so I doubt they would add a CBAI transaction into the mix. In any case, I don't think CBAI will be valued by potential buyer as a vibrant ongoing concern given its declining operating results and lack of leadership/management. I'm guessing (just a guess) that Q4 results due at the end of March aren't going to impress. Bottom line is that the company's sale price will be driven by the value its $2.5 million in recurring revenues net of its debt, golden parachutes and other expenses associated with its legacy operations. If a buyer wants to maintain the office/freezer in LV then the annual lease and staffing cost of doing that will be factored into the valuation (netted from recurring revenues). The big question is what multiple a buyer will pay for the net recurring revenue.
Per my prior post, Red Oak will get long term capital gains tax treatment if they hold their stock at least one year from last May so we should expect a transaction in the May-June time frame. They've hired an IB to undertake a sales process, so there should be a transaction unless they don't get an acceptable offer. As their share cost is only .19, it seems likely they'll get an offer that will make the investment very profitable for them--so I think a deal is likely.
The main function of the lab is to process the tissue before it's frozen. That requires a pretty senior lab technician who's costly. Just monitoring the freezer is a low pay position. Maybe they aren't getting enough new orders to staff the lab so they outsource the processing to Xytex.
UVE--Approaching its recent low after short attack even though it initially bounced back from that. Getting dragged down by financial sector sell off?
Unless his investors are not for profits the longer holding period will lower their tax rate. I'm guessing a good chunk of the money is his, so he may well be sensitive to it.
Long term capital gain tax treatment on their profit
Re timing of any possible strategic transaction, Red Oak acquired its shares in May so they may want to hold at least one year.
Mortgage REITs and BDC's--
When the Fed recently raised rates, someone opined that the move seemed late as U.S. GDP growth had already "crested" albeit from a modest peak compared to prior expansions. Whereas early in the expansion businesses were driving GDP growth and consumer spending lagged, that now seems to be reversing with contraction in manufacturing (except for auto)and industries tied to commodities and exports. By contrast strong employment, recovered financial markets, increasing home values and low gas prices and interest rates are prodding the consumer finally to start spending again. Nonetheless, in the coming quarters even 2% GDP growth may be hard to achieve, and struggling economies around the world could even drive the beginning of our next recession after six years of expansion. While I'm not doom and gloom, I see GDP essentially flat-lining for the next 2-3 years. In that scenario I don't see the Fed raising rates more than twice more and Treasury rates increasing only modestly as "de-risking" into Treasuries by investors will offset much of the impact of rate increases.
This all strikes me as a very good time to invest in selected mortgage REITs and BDC's that have been sold off in anticipation of higher interest rates and the fear they can't maintain their dividends. During this week's market carnage, the mortgage REIT sector has actually bounced, but many still pay dividend yields of 12%-17% including NLY which pays 12.5%. NRZ, a recent favorite on this board, pays 15%.
PNNT, a BDC, is paying a whopping 17.4% because some of its loans are to small oil and gas companies. As the price of oil declined PNNT understandably plummeted as those credits deteriorated. Interestingly, even though oil has continued to decline this week, PNNT's share price has bounced (should be interesting to watch tomorrow).
The key for all of these is whether they can hold their dividends, and it looks like the market is starting to believe some of them can. Also, they're all trading at significant discounts to the net asset values of their underlying portfolios. Of course, those net asset values can deteriorate, but that current discount along with the high dividend still should help support the share price.
Admittedly, the often complex underlying assets and leveraged balance sheets make it impossible for anyone (with the possible exception of major analysts) to really understand all the moving parts and their impact on earnings and the ability to sustain dividends. If the dividend is cut, you will lose big. But if there is an increasing perception that dividends will be sustained, there should be significant share price appreciation along with the hefty dividend. I think a diversified portfolio of small bets is likely to significantly outperform major market indices this year.
You can't just value the cords in a vacuum. They wouldn't even be able to sell the cords as a standalone asset unless the loan was paid off first. If they were to do that the remaining company wouldn't be profitable as other revenues are declining. Realistically, any buyer will have to buy the whole company, assume (or pay off) the debt and then deal with the company's cost structure. In the case of CBR/AMAG there is significant revenue from upfront processing fees that boosted that valuation. They generate significant EBITDA because their SG&A as a percentage of revenue is much smaller than for CBAI, so CBR has real operating leverage. Also, AMAG saw great synergy in taking on CBR's salesforce to cross sell their drug to OBGYN's and pregnant moms. Finally, CBR is the market leader so that drove premium pricing. You can't just look at the number of cords because any buyer will have to assess all the costs/challenges of the company it's assuming. Even if a buyer decided to shut down the company except for the recurring revenues, the two top execs have golden parachutes and their would be an ongoing expense operating the freezers and billing the customers. You can't just import a CBR cord valuation and plug in here.
Junebug--Don't think dividing purchase price by cords is an accurate valuation method. Primary valuation methodology for the entire company will be a multiple of EBITDA of which the company has little. The trajectory of EBITDA growth is also important and the company has guided for a decline which would imply a low multiple.
The recurring revenue stream is its most valuable asset, but any buyer will have to pay off debt and slash overhead.
Possible we hear nothing until the 10-K at the end of March
When I referred to Red Oak flipping their shares I meant in a negotiated block sale to a single buyer. Agree they can't dribble out their shares.
Red Oak will do fine because they got in at such a cheap price. They've solidified the balance sheet and aligned Board decision-making with SH interests. That's a good start, but the big question is whether they'll be able to help turnaround and grow the mainline cord blood/tissue storage business. Although not their fault and probably not foreseeable during their due diligence, they had an early set back with the loss of most of the tissue business. They can either proactively try to support management or elect to replace management. In either case if they see operations gaining momentum, they'll probably hold longer and maybe even buy more. If operations sputter and they can't think how to turn it around, they might decide to flip their interest for a quick gain. We know who at least one of the suspected buyers might be.
Myth: They don't break out each of their three revenue sources, but this sentence in their most recent PR makes clear YOY Q3 revenue growth is from tissue and recurring revenues--not new enrollments and associated processing fees:
"Revenues are generated primarily from three sources; new enrollment/processing fees, recurring storage fees (both from cord blood and cord tissue) and fees associated with other tissue related products. The increase in revenue is due to growth in recurring storage fees and fees from other tissue related products."
The same sentence was in their Q2 PR so it's been going on for a while. Sequential revenue Q3 from Q2 was essentially flat, and sequentially recurring revenue only increased $10,000 reflecting the net addition of only a modest number of new customers. The growth of the tissue business and their dependable recurring revenue has been masking the their declining number of new enrollments. Now their tissue revenue seems likely to go away in Q4 as per their own PR their primary customer stopped placing orders:
"However, at the end of the third quarter a large tissue customer informed the Company that they expect a significant reduction in orders such that orders from this customer will be minimal in the foreseeable future. This reduction commenced in October."
While recurring revenue will continue to be steady going forward, their other two revenue sources are in decline. Overall Q4 revenue and earnings should be down significantly over Q3 but we won't find that out until the end of March.Their own guidance implies they won't have positive earnings in Q4:
"The Company should continue to generate positive EBITDA and cash flow in the fourth quarter and in 2016 inclusive of diligently managing expenses."
The real question is how much is $2.5 million of sticky annual recurring revenue worth? It's intrinsically valuable, but their current SGA is also running at about $2.5 million annually so it's all absorbed by their current cost structure. There will also be continuing (but apparently declining) new enrollment revenue but that will be absorbed for debt service. It appears the company will be at best barely profitable for the foreseeable future with no evident growth catalyst but has a current market cap of $6 million. It seems very fully valued based on its capacity to generate earnings going forward.
TonyM--Agree their current cash position is healthy so won't need cash infusion near term. I just don't see them paying off note from operating cash flow unless they can grow cord blood enrollments which have been in decline.
All the posts here and no real discussion of the recent quarterly filing. From my perspective it wasn't an encouraging report because their tissue business which has been their recent growth engine has been gutted by the loss of their primary customer. If you extract the tissue business from recent reports it's evident that new cord blood enrollments are declining YOY so not evident at all how the company will show improving operating results going forward. Neither is it evident how the company can continue to pay off debt from cash flow as operating results decline so they'll probably need another equity infusion.
Their crown jewel is their sticky recurring revenue which they brag as being an increasing percentage of overall revenue. The reason it's an increasingly higher percentage is because other revenue from cord blood processing fees and the tissue business is declining. Even with declining cord blood enrollments they can probably continue to grow recurring revenues so long as the rate of new enrollments exceeds the number of customers who stop paying their storage fees. Nonetheless, this won't be enough to provide sufficient cash flow after debt service.
Some on this board think that Red Oak will engineer an operating turnaround, but there's no evidence of that so far and they have no experience in the cord blood business. They did shore up and stabilize the balance sheet for now but may not be enthusiastic about injecting more cash. If they do it will cause significant additional dilution.
That accounting reversal is required by auditors if there have been enough successive Qs of profitability and continued profitability is expected--just as the last reversal was required after too many Qs of losses. Not a management decision so you're reading too much into it.
They're otcbb listed. They do file financials with the SEC quarterly so aren't a pink sheet company that doesn't file.
That NASDAQ delisting PR is from 2003! You need to catch up on your reading...
CCEL--Tender offer at $3.25 compared to $3.08 ask. A good place for a 5% gain in a few weeks in this volatile market?
GV lawsuit--I'm joining the class action! I have GV in P3L!