Wednesday, February 11, 2009

Penny Ante Arbitrage


Asure Software, Inc. (Nasdaq: ASUR) is a money-losing micro cap stock I bought in 2007 when it appeared on the Magic Formula list. I sold it for a large loss last year, but for some reason I looked up the stock again last week. When I did, a comment on the stock's Yahoo! Finance message board alerted me to an opportunity to possibly squeeze a drop of lemonade from this lemon.

Last month, Asure Software announced that it plans to take the company private, in order to save about $1 million in annual compliance costs associated with being a public company. The company currently has about 10,000 shareholders, and, according to the press release, needs to have fewer than 300 shareholders in order to voluntarily terminate the registration of its common stock under the Securities Exchange Act of 1934. The company intends to reduce its shareholder count by means of a 750-1 reverse split, followed immediately by a 1-750 forward split, while cashing out any fractional shares at 36 cents per share, on a pre-split basis. The stock closed today at 17 cents, and the company has a market cap as of today's close of $5.29 million with an enterprise value of -$7.93 million.

Since the company isn't profitable, one question that came to mind was whether it would have the cash to pay 36 cents for each fractional share, assuming the shareholders approve the reverse merger. The company has burned through an average of about $1.34 million in cash per quarter over the last four quarters, while revenues have held fairly steady at about $2.7 million per quarter. Assuming those trends continue, and the reverse split takes place within a couple of quarters, the company ought to have enough cash to payout 36 cents per fractional share. Here's how I figure that:

Using the company's most recent balance sheet data, as of its last 10-k, the company had $10,554,000 in cash + $3,289,000 in short-term investments + $1,333,000 in net receivables = $15,166,000. Subtracting from that the company's total liabilities of $7,499,000 = $7,667,000. Subtracting $2,680,000 in cash burn ($1.34 million per quarter x 2 quarters) = $4,987,000. According to the company's 10-k, there were 10,054 shareholders as of October. Assuming that each shareholder will have the maximum number of fractional shares (749), the company will have to cash out 7,530,446 shares. At 36 cents per share, that would cost $2,710,960.

Based on that, I piggybacked on that commenter's idea and bought 749 shares of ASUR at an average price of 18 cents per share in each of a few different brokerage accounts.

The banner image above is from Asure Software's website.

7 comments:

Paul Price said...

Micro cap again.
Dave, Don't you and Daniel ever get fed up of the idea that you can beat the market by picking up these obscure stocks for which there is no ValueLine coverage!

Even Christine, who I don't consider very smart, knows better that that.

- Paul

Sivaram Velauthapillai said...

Thanks for the idea Dave. I've been looking for very-close-to-risk-free investments like these. Unfortunately, this is way too small. Seven hundread and fourty nine shares at eighteen cents works out to $134.82 :( Upside is around $134 but it will be lower after commissions. A $100 is a $100 but only if it was a bit larger. In any case, I'll consider taking a position.

One may also want to wait until shareholder approval before taking a position.

stockdoc said...

The comment attributed to me wasn't mine although the author did a good job of mimicing my style.

DaveinHackensack said...

Siv,

No problem. It's not a lot of money on 749 shares, but I'm doing this in several different accounts. I wonder how many other penny ante arbitrage ideas are out there like this: deals that are too tiny to interest institutional investors. It could be a profitable area for us to share ideas.

Sivaram Velauthapillai said...

Yep... these are the ideal deals for small investors. I participated in a similar one (Jaclyn)early last year but the share price, and hence the upsisde in dollar terms was larger. Similar to what you are doing here, I also used two accounts for the Jaclyn deal last year.

Although not true arbitrage like here, a somewhat related strategy that I'm getting interested in, is to buy Graham net-nets with a potential catalyst. The ones I'm most interested in are liquidations. You might want to check out the greenbackd blog, who goes over various deals. But do note that these liquidations and various others requiring catalysts don't have a fixed time frame and you may lose money (whereas the de-listing has low downside assuming approvals are there and the company has enough money to buy back.)

DaveinHackensack said...

Incidentally, Renaissance Technologies owns about 1.6 million shares of ASUR.

Anonymous said...

COSN is similar situation, see my seekingalpha article. free money!