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Saturday, July 09, 2016 6:33:06 PM
Uhhh....I dunno! Maybe it's detailed in the 'context' of the post. This will shed add'l insight....
550M+ A COUPLE OF ADDITIONAL THOUGHTS …
VALUATION FACTORS & METRICS
I appreciate the desire of folks to conduct analyses on potential valuation using standard value methodologies and analytic metrics. However, as others have mentioned, and as I have previously noted, an appropriate valuation of a growth rocket like this is not limited to such analyses. The “bad news” is that shareholders and potential investors cannot do homework that elicits an accurate estimation of value. The “GOOD NEWS” is that without such ability, there is no tight collar on the share price in advance of a potential transaction, leaving significant latitude on share appreciation.
Theoretically, one might ordinarily assume that variability could lead to share depreciation, but, in this case, I don’t believe that it is reasonable to think that this transaction will be consummated at a value at or below recent share prices (see below).
Presumably the ibankers engaged by Implant have long since met with management and have distilled all of the current and potential projections into a package of materials that supports a maximum range of value of the Company. We’re not privy to those projections, but with non-disclosure agreements in place, potential acquirers/partners not only receive them, but are given an opportunity to conduct due diligence underlying them. An example of a component of those projections would be the current CATSA Tender – projections presumably reference and include an amount that embodies the value of that contract multiplied by a defensible probability of Implant landing it.
Serious parties are also likely given non-public information and insight into new products and R&D programs. The valuation of that component is similar to the valuation of small biotechs – even without any revenue from such “products”, acquirers consistently pay significant prices for promising candidates/R&D substantially before final relevant regulatory approvals.
So, without the ability to peek into the tent, what are we left with? In addition to the motivations referenced below, I’d suggest that McGann’s $800M potential value mentioned in a recent conference call might be a data point. Likewise, as I previously noted, Safran’s original 2009 basis in Morpho of $716M may also be indicative of a value target. Obviously, there’s no guarantee that an acquirer will be willing to acknowledge and pay that – and closing a deal will depend on a variety of other factors.
DMRJ MOTIVATION & ALIGNMENT
Apparently the Company’s lawyers woke up and caused it to clarify and highlight information regarding conversion rights and specifically the ownership percentage of creditors on April 12th. Once I saw that, I considered whether DMRJ, with its controlling interest, could or would steer this into a “dark place” for other shareholders. My conclusion is that theoretically they could, but that practically and realistically they wouldn’t. As a result I think their interests still align relatively nicely with ours, although I now believe that they’ll “influence” a sale rather than a partnership since my guess is that they’d prefer to get their bonanza out today rather than several years down the road.
DMRJ and affiliates are not beyond playing hardball with their investments, as others have noted, and as we’ve gotten a clear glimpse of with Implant. They historically stepped in to float the Company, but have nurtured this “golden goose” in a manner that has exponentially increased their stake in its fattened potential. Now, when the opportunity of selling the gilded fowl presents itself, they should want to maximize that price without killing or wounding said goose. This bodes against some machiavellian attempt to steal the Company or otherwise fleece shareholders (they appear to have already extracted an additional pound of goose flesh in exchange for the current extension).
In addition to the problematic liability that would likely accrue to management*, the board and their advisors, I think the likely ramifications to DMRJ would be substantial and overwhelming. As we know, the homeland security business is substantially driven by the TSA domestically and other government agencies around the world. Consequently, any underhanded attempt to mess with the ownership and disposition of this Company I believe would cause the TSA and other agencies to step away from Implant, thereby killing or severely harming the golden goose. Another fore-check is the strong likelihood that the SEC would take notice in a manner that certainly would not bode well for DMRJ.
So I’m left with the fervent belief that DMRJ will proactively push for a sale at a maximum share price, well north of their highest priced $1.18 options. They’re smart folks, have a big stake already, and understand that the market for flipping this Company is non-existent. They’ve also disclosed in their recent 13D filing that they’re likely communicating with those inside the tent in a manner that a major shareholder or activist might do to enhance and/or maximize shareholder value.
[*Additionally, presumably Bill McGann’s professional reputation and net worth are both substantial enough for him to give significant priority to his continued legacy in the industry, such that giving this Company away or allowing it to be stolen would be completely unacceptable.]
SELLING PRESSURE
Although I’ve been modestly surprised at the apparent number of sellers that has allowed the initial share price appreciation to stall, my guess is that it’s due to the following:
• Flippers that previously purchased shares in the .20s and .30s over the past few months. Given the low share price, it doesn’t take much of a differential to represent a worthwhile return. That traunch of traders appears to have begun to dissipate, and hopefully may disappear soon enough.
• Market makers looking to keep trading volume churning by capping share price movement and by otherwise controlling/manipulating this “under the radar” stock. I’m not that familiar with the OTC Market, but a colleague who is advises that the ability to do so is quite significant, particularly with stocks that have nervous shareholders that are susceptible to the feints, swings, naked shorting and bear-raids that apparently are the standard tools of manipulators. He also commented that in this situation where the expectation that this money machine may now have a short half-life, the manipulation may be exacerbated, at least until that market maker believes it is in their interest to let it run higher.
• Lastly, an interested private equity fund or other potential acquirer might attempt to keep the lid on the share price for negotiation purposes. I’ve only seen this on occasion, but once again, I understand that such activity can be accomplished much more readily without attribution with a pink sheet stock.
IN CONCLUSION, THIS APPEARS TO BE A SAFE SHARE PURCHASE UP TO $1.50. MOREOVER, I CONTINUE TO BELIEVE A VALUATION IN EXCESS OF $550M IS ACHIEVABLE AND A SHARE PRICE OF AT LEAST $3.00 IS HIGHLY LIKELY.
Courtesy Percy14
550M+ A COUPLE OF ADDITIONAL THOUGHTS …
VALUATION FACTORS & METRICS
I appreciate the desire of folks to conduct analyses on potential valuation using standard value methodologies and analytic metrics. However, as others have mentioned, and as I have previously noted, an appropriate valuation of a growth rocket like this is not limited to such analyses. The “bad news” is that shareholders and potential investors cannot do homework that elicits an accurate estimation of value. The “GOOD NEWS” is that without such ability, there is no tight collar on the share price in advance of a potential transaction, leaving significant latitude on share appreciation.
Theoretically, one might ordinarily assume that variability could lead to share depreciation, but, in this case, I don’t believe that it is reasonable to think that this transaction will be consummated at a value at or below recent share prices (see below).
Presumably the ibankers engaged by Implant have long since met with management and have distilled all of the current and potential projections into a package of materials that supports a maximum range of value of the Company. We’re not privy to those projections, but with non-disclosure agreements in place, potential acquirers/partners not only receive them, but are given an opportunity to conduct due diligence underlying them. An example of a component of those projections would be the current CATSA Tender – projections presumably reference and include an amount that embodies the value of that contract multiplied by a defensible probability of Implant landing it.
Serious parties are also likely given non-public information and insight into new products and R&D programs. The valuation of that component is similar to the valuation of small biotechs – even without any revenue from such “products”, acquirers consistently pay significant prices for promising candidates/R&D substantially before final relevant regulatory approvals.
So, without the ability to peek into the tent, what are we left with? In addition to the motivations referenced below, I’d suggest that McGann’s $800M potential value mentioned in a recent conference call might be a data point. Likewise, as I previously noted, Safran’s original 2009 basis in Morpho of $716M may also be indicative of a value target. Obviously, there’s no guarantee that an acquirer will be willing to acknowledge and pay that – and closing a deal will depend on a variety of other factors.
DMRJ MOTIVATION & ALIGNMENT
Apparently the Company’s lawyers woke up and caused it to clarify and highlight information regarding conversion rights and specifically the ownership percentage of creditors on April 12th. Once I saw that, I considered whether DMRJ, with its controlling interest, could or would steer this into a “dark place” for other shareholders. My conclusion is that theoretically they could, but that practically and realistically they wouldn’t. As a result I think their interests still align relatively nicely with ours, although I now believe that they’ll “influence” a sale rather than a partnership since my guess is that they’d prefer to get their bonanza out today rather than several years down the road.
DMRJ and affiliates are not beyond playing hardball with their investments, as others have noted, and as we’ve gotten a clear glimpse of with Implant. They historically stepped in to float the Company, but have nurtured this “golden goose” in a manner that has exponentially increased their stake in its fattened potential. Now, when the opportunity of selling the gilded fowl presents itself, they should want to maximize that price without killing or wounding said goose. This bodes against some machiavellian attempt to steal the Company or otherwise fleece shareholders (they appear to have already extracted an additional pound of goose flesh in exchange for the current extension).
In addition to the problematic liability that would likely accrue to management*, the board and their advisors, I think the likely ramifications to DMRJ would be substantial and overwhelming. As we know, the homeland security business is substantially driven by the TSA domestically and other government agencies around the world. Consequently, any underhanded attempt to mess with the ownership and disposition of this Company I believe would cause the TSA and other agencies to step away from Implant, thereby killing or severely harming the golden goose. Another fore-check is the strong likelihood that the SEC would take notice in a manner that certainly would not bode well for DMRJ.
So I’m left with the fervent belief that DMRJ will proactively push for a sale at a maximum share price, well north of their highest priced $1.18 options. They’re smart folks, have a big stake already, and understand that the market for flipping this Company is non-existent. They’ve also disclosed in their recent 13D filing that they’re likely communicating with those inside the tent in a manner that a major shareholder or activist might do to enhance and/or maximize shareholder value.
[*Additionally, presumably Bill McGann’s professional reputation and net worth are both substantial enough for him to give significant priority to his continued legacy in the industry, such that giving this Company away or allowing it to be stolen would be completely unacceptable.]
SELLING PRESSURE
Although I’ve been modestly surprised at the apparent number of sellers that has allowed the initial share price appreciation to stall, my guess is that it’s due to the following:
• Flippers that previously purchased shares in the .20s and .30s over the past few months. Given the low share price, it doesn’t take much of a differential to represent a worthwhile return. That traunch of traders appears to have begun to dissipate, and hopefully may disappear soon enough.
• Market makers looking to keep trading volume churning by capping share price movement and by otherwise controlling/manipulating this “under the radar” stock. I’m not that familiar with the OTC Market, but a colleague who is advises that the ability to do so is quite significant, particularly with stocks that have nervous shareholders that are susceptible to the feints, swings, naked shorting and bear-raids that apparently are the standard tools of manipulators. He also commented that in this situation where the expectation that this money machine may now have a short half-life, the manipulation may be exacerbated, at least until that market maker believes it is in their interest to let it run higher.
• Lastly, an interested private equity fund or other potential acquirer might attempt to keep the lid on the share price for negotiation purposes. I’ve only seen this on occasion, but once again, I understand that such activity can be accomplished much more readily without attribution with a pink sheet stock.
IN CONCLUSION, THIS APPEARS TO BE A SAFE SHARE PURCHASE UP TO $1.50. MOREOVER, I CONTINUE TO BELIEVE A VALUATION IN EXCESS OF $550M IS ACHIEVABLE AND A SHARE PRICE OF AT LEAST $3.00 IS HIGHLY LIKELY.
Courtesy Percy14
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