LECG CORP XPRT S
April 01, 2011 - 2:59pm EST by
chewy
2011 2012
Price: 0.22 EPS $0.00 $0.00
Shares Out. (in M): 38 P/E 0.0x 0.0x
Market Cap (in $M): 8 P/FCF 0.0x 0.0x
Net Debt (in $M): 36 EBIT 0 0
TEV ($): 44 TEV/EBIT 0.0x 0.0x
Borrow Cost: NA

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Description

LECG Corporation (ticker: XRPT) announced this morning that its sale of assets and subsequent liquidation of the company will NOT result in any proceeds to the company's common stockholders.  The company further stated that it will be de-listed from the NASDAQ by September 26, 2011 and may request that its shares be delisted sooner.  So the common stock, currently trading at $0.22/sh, has zero value and the delisting from the NASDAQ should act as a catalyst pushing the stock towards zero (I'd imagine that it will trade at a couple cents) in less than six months.  We have received borrow on hundreds of thousands of shares from JPM and GS at a cost to borrow of -5%.  

This is not an April's Fool's joke.  In fact, I emailed Bill Penczak, XRPT's Global Chief Communications Officer (bpenczak@lecg.com), this morning and asked if this were an April's Fool's joke and he responded with one sentence: "I wish it were a joke."

The key paragraphs from this morning's release:
"Professional services firm LECG Corporation (NASDAQ: XPRT) announced today a number of events related to its previously-announced transition of its practice groups to other firms.  These transitions will not result in any proceeds to the Company's common stockholders and it is not anticipated that future operations will result in any proceeds to the Company's common stockholders."

"The outcome of these transactions will not result in any proceeds for the common stockholders.  We currently anticipate using any remaining proceeds to satisfy the Company's remaining liabilities and to fund the Company's operations during the wind-down of its business.  Contractually, if there is any remaining value available to equity holders, it would be first allocated to the Company's outstanding preferred stock to the extent of its liquidation preference."

Today's full press release can be found at: http://lecg.client.shareholder.com/releasedetail.cfm?ReleaseID=561319

In the interest of posting this to VIC in a timely manner, I'm not providing a detailed background on XPRT.  However, Whitney Tilson did a fine job of this in his February 2011 letter to investors where, according to Marketfolley.com, he states: "Much to our surprise and dismay, however, LECG instead announced what is effectively a plan of liquidation. We don't know why the company pursued this path, though it is possible that this route preserved compensation agreements for employees at the expense of existing shareholders.  Given the rapid execution of the liquidation, we believe the equity will end up being worthless so we sold our entire position."

The letter can be found at:
http://www.marketfolly.com/2011/03/whitney-tilson-explains-lecg-position.html

While the delisting from NASDAQ and moving to another exchange, such as OTC, won't take the stock to zero, it's unclear if LECG can even trade on the OTC.  While there are few rules for being traded on the OTC, one is that OTC listing is limited to "securities of issuers that make current filings pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ("Act")" as noted at:
http://www.otcbb.com/faqs/otcbb_faq.stm

XPRT made these filings for year-end 2010, but it's unclear if they'll make these filings going forward as there is an expense to preparing the filings and the company has stated the common equity has zero value.  If I held preferred in XPRT (which seems to be taking a loss per today's press release), I would not want the company incurring the expense of these filings (see appendix of this write-up for additional information on these filings).

In summary, the common equity is worth zero, it's possible to get a lot of borrow, and the delisting (or inability to be listed on any exchange) should act as a catalyst. 

 

Appendix:

Filings required to be listed on the OTC per http://taft.law.uc.edu/CCL/34Act/sec13.html#a:

Every issuer of a security registered pursuant to section 12 shall file with the Commission, in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate for the proper protection of investors and to insure fair dealing in the security--

  1. such information and documents (and such copies thereof) as the Commission shall require to keep reasonably current the information and documents required to be included in or filed with an application or registration statement filed pursuant to section 12, except that the Commission may not require the filing of any material contract wholly executed before July 1, 1962.
  2. such annual reports (and such copies thereof), certified if required by the rules and regulations of the Commission by independent public accountants, and such quarterly reports (and such copies thereof), as the Commission may prescribe.

Every issuer of a security registered on a national securities exchange shall also file a duplicate original of such information, documents, and reports with the exchange.

 

Every issuer which has a class of securities registered pursuant to section 12 and every issuer which is required to file reports pursuant to section 15(d) shall--

  1. make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
  2. devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that--
    1. transactions are executed in accordance with management's general or specific authorization;
    2. transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;
    3. access to assets is permitted only in accordance with management's general or specific authorization; and
    4. the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences; and

 

  1. notwithstanding any other provision of law, pay the allocable share of such issuer of a reasonable annual accounting support fee or fees, determined in accordance with section 109 of the Sarbanes-Oxley Act of 2002.

Each issuer reporting under section 13(a) or 15(d) shall disclose to the public on a rapid and current basis such additional information concerning material changes in the financial condition or operations of the issuer, in plain English, which may include trend and qualitative information and graphic presentations, as the Commission determines, by rule, is necessary or useful for the protection of investors and in the public interest.



 

Catalyst

In summary, the common equity is worth zero, it's possible to get a lot of borrow, and the delisting (or inability to be listed on any exchange) should act as a catalyst. 
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