IMPLANT SCIENCES CORP IMSCQ
December 06, 2016 - 1:49pm EST by
bdad
2016 2017
Price: 0.14 EPS 0 0
Shares Out. (in M): 79 P/E 0 0
Market Cap (in $M): 11 P/FCF 0 0
Net Debt (in $M): 73 EBIT 0 0
TEV ($): 84 TEV/EBIT 0 0

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  • Liquidation
  • Personal Account Idea
  • Beer Money
  • Bankrupt Equity

Description

Implant Sciences is a time sensitive and asymmetrical small cap in Bankruptcy that should offer limited downside and material upside over a short timeframe.

Background:

Implant Sciences makes systems and sensors for detection of explosives, drugs and harmful chemicals and sells products primarily to military, Homeland Security, customs and airports. The Company filed Chp 11 in October and agreed to sell their assets to in a 363 auction occurring next week but L-3 (NYSE: LLL) has submitted a stalking horse bid $117.5MM and there’s a good likelihood LLL ends up the winner.

Management of the debtor proposed using the proceeds from this sale to buy a hoverboard company called Zapata which would have been an exquisitely wasteful use of cash since Zapata is a high R&D and unprofitable Company which would have been totally unable to utilize IMSCQ’s $116MM NOL balance (not to mention the fact that the mgmt. going to Zapata have no experience running what is essentially a tech co). This was a major risk to the equity value but last week the Company announced that the deal was cancelled in November which I believe has substantially de-risked the equity here.

The failure of this deal has made a liquidation increasingly likely (and a near-term event since it is hard for management to justify to the Court keeping expenses ticking while they look around for ways to spend the estate’s money). I can’t recall ever seeing a debtor being able to propose a totally different Plan get approved in a restructuring eventhough mgmt. may want to (which may not even be the case).

In a liquidation, value looks like this:

 

Base

High

Low

Purchase Price

 $       117.5

 $                 125.0

 $           117.5

Value for NOLs

0

7.5

0

Value for Claimants

117.5

132.5

117.5

Pre-peition principal

 $         73.4

 $                   73.4

 $             73.4

Accrued

10.7

10.7

10.7

Post-petition debt

5

5

8

Fees during BK

6

4

10

Priority Trade Claims

2

1

3

Value to Equity

 $         20.4

 $                   38.4

 $             12.4

Common Shares

79.87

79.87

79.87

Value to Common

 $       0.255

 $                 0.481

 $           0.155

Change

82%

243%

11%

 

 

Liquidation value of the Company based on L3 bid is ~$0.25/share (+80% upside) in what I expect to be a few months. There are also upside scenarios where the equity is worth multiples of that including:

·        $0.25/share value gives no credit for NOLs which could be worth an incremental $0.10/share

·        Possibility for overbid. The assets were shopped by a small time bank (Chardan) and there has been a lot of activity in the threat monitoring space. It is worth noting that OSI Systems (a $1.5bn Company that makes security monitoring equipment) appears to be monitoring the BK proceedings telephonically. Every $10MM overbid increases equity value by $0.12.

·        An official equity committee has been appointed to look into several sources of value including actions against Platinum Partners (the now defunct hedge fund that is facing a federal fraud investigation) and is the lender on most of the Company’s pre-petition loans.

o   Many of these loans have egregious/usurious terms and the equity committee could pursue equitable disallowance remedies against Platinum based on these terms. While the bar for equitable disallowance in Chp 11 is high, bringning a colorable claim could compel Platinum to either reduce their claim amount (especially since they would prefer to focus on the fire in their own home)  

 

  Principal Pre-petition Accrued Total Pre-petition claim
RC Note  $         17.7  $                     4.8  $             22.5
2008 note  $            5.3  $                     0.2  $                5.5
2009 note  $            1.0  $                     1.2  $                2.2
2012 note  $         12.0  $                     0.6  $             12.6
2013 Note  $         17.5  $                     0.7  $             18.2
2014 Note  $         20.0  $                     3.2  $             23.2
Total  $         73.4  $                   10.7  $             84.1

 

Risks:

·        L-3 walks or is able to identify some MAC giving them an out. This seems unlikely and I’d note that shortly before filing, IMSCQ received a $71MM order from the TSA which has yet to flow through in financials.

·        Management persuades the court to allow them to use L-3 proceeds to buy a time machine company since their bid for hoverboards failed. I have never seen a situation where mgmt. is able to propose a totally different Plan which the court looks favorably on but this is a risk since it would extend timeline and result in incremental fees. This is worth watching though.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Overbid at auction and/or confirmation of restructuring plan

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