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.