A net-net that's liquidating...how unusual

I want to thank Theodor Tonca a principal at Graham Theodor & Co for sending me this idea.  Graham Theodor & Co is a value based Canadian money manager.  For any value investors in Vancouver Theodor runs a value investing interest group, if you're in the area it's worth checking out their next meeting.

With most articles I do on net-net's I include my liquidation analysis spreadsheet.  I include this not because I think the company in question will liquidate, but to show the maximum possible downside.  In some cases the biggest downside (outside of fraud, or massive asset squandering) is actually an upside.  Of the net-net's I've written about and researched I don't think I remember any actually liquidating.

While I haven't had a net-net liquidate, although some should, I have been involved in one liquidation situation.  I purchased EDCI stock a few years back once the decision to liquidate was made and I realized the liquidation value was in excess of the trading price.  I ended up selling out way too early but I know people who held on made 2-3x or their initial investment, I ended up with a 50% gain in about four months or so which I thought was spectacular.  I blew the gains on a trip to Florida, and while stocks are nice they don't compare to a sunny sandy beach but I digress...

Maxco (MAXC)

So what's the deal with Maxco you ask?  Well management realized a few years back the best way they could realize maximum shareholder value was to liquidate the company and distribute the proceeds.  The company has liquidated substantially all of their assets at this point and made four distributions to date.

At this point all that's left of Maxco is the CEO, an empty office and the receptionist.  At the bottom of the annual report filed at the end of March 2011 management indicated they expect a final liquidating distribution of $.60.  The final distribution is a result of a large IRS refund they received last year.

The situation seems pretty straight forward, and you're probably wondering at this point if there are no assets left to liquidate why hasn't the company paid out the final distribution?  The reason is a bit unique, due to the size of the tax refund a special committee needs to review it before the company is allowed to release the funds to shareholders.  The IRS guidelines state that a review of this type can take up to 18 months depending on the complexity of the return.  The company mentioned they would update their website when the audit process began.  It's been a year since the last posting on Maxco's website so I decided to call and see if there were any updates, unfortunately there aren't.  The audit still hasn't started, although the woman I talked to said she doubts it will take the full 18 months given the simplicity of Maxco.

A shareholders return in this liquidation depends on two factors, the price they pay, and the amount of time between the purchase date and the liquidation date.  I've included a graphic I put together showing how the longer the process drags on, or the higher the price paid the return drops.  I know this is intuitive for most readers, but often a graphic makes it much easier to understand both the potential and liability.


Maxco looks like the perfect investment, put in a bid $.02 above the last quote, hope things wrap up in a year and you're looking at a 200% return.  I agree, this looks excellent on paper, the problem is it's very difficult to actually purchase shares, trust me I've been trying.

Here is a screenshot I grabbed of ALL the trades going back to September 2011:
Most trades are less than 1,000 shares ($180!?!?!) and my guess is they're partial fills.  If you decide you want Maxco shares I would strongly encourage a limit order with an all or nothing specification.

Why cheap?

No post would be complete without me asking this question, for Maxco this is very easy to answer:
-The current market cap is $621,730, yup, smallest stock I've ever written about.
-The stock is very illiquid as mentioned above.
-Uncertainty regarding the timing of the final distribution.

Talk to Nate about Maxco

Disclosure: I have an order outstanding for Maxco shares at $.18, yup I'm optimistic.

28 comments:

  1. Hi Nate,

    Great blog, would you consider making your blog available for RSS feed via Google Reader?

    Best,
    Gary

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    1. Gary,

      The blog should be available by RSS already, I know there are a number of RSS subscribers. Input this URL into Google Reader: feed://www.oddballstocks.com/feeds/posts/default?alt=rss

      Hopefully that works for you.

      Nate

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  2. Wow there went that idea. Trade 10k at $0.41. Great idea. But looks like will have to wait for the net one.

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    1. Saw that.. If you're interested I'd just set a good til cancelled order at whatever price you want and sit on it. In a week or two I'm guessing this will probably trade down again. If you look at the trade history there have been a few $.40 trades.

      Nate

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    2. called up the company, she goes, "you do realize there will be very little left over for the shareholders, right?". wouldnt elaborate. that is a bit scary.

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    3. Anon,

      Strange comment, although without the context I'm not sure what it means. If she means that shareholders who have been long since before the liquidation are getting scraps then that might be true.

      Do you think she meant that what the company has put in their filings is incorrect?

      Nate

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  3. does anyone know if you have to file a 13D on a company like this after 5% given reporting and otc status?

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    1. I am not a lawyer, but I believe the answer is no, because MAXC is not an SEC filer.

      SEC rule 13d-1(i) says you have to file a 13D only on securities subject to Section 12 of the Act of 1934. MAXC deregistered with SEC, and delisted from a national exchange, in 2007, so appears not to be subject to Section 12.

      If you confirm that with a real lawyer, please let us know what he says.

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  4. I'm skeptical. As small as this stub is, certainly there are still enough investors following it to no allow any easy triple to get away. The 8:51am comment hints that the story is not so simple as "buy and wait for 60 cents".

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    1. I'm wondering what that comment meant. In the last year's annual report is says they expect a final $.60 distribution. Since that date there have been zero communications or changes according to that presumably same woman.

      Now maybe they're expecting to squander the cash in the mean time. They already have $300k set aside for salary expense which is a bit rich. And if you just do the net liquidating value minus accrued liabilities (the salaries, rent, lawyers etc) I'm getting a share value of $.74. So somewhere in there they're expecting to burn an additional $.14 before the final liquidation.

      My biggest concern with this one is the time frame. It's been a year already, why hasn't the IRS scheduled anything. I know of a company who the IRS asked to audit five years after their filing date. The company had since gone out of business (I knew the CEO), he had a massive hassle because they still wanted to audit even though there was nothing to audit. That's the scary thing for me, the buy and wait could be buy, tie up capital for four years to get the $.60.

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    2. So I asked her a couple other questions (which I guess I should have shared earlier), and she said "let me get back to you, ill ask the others in the office". Now i'm saying to myself, who else could there be, right? Clearly not as simple as one guy in an office. Also - she did not know of any maturity date on the receivable, so theoretically one is exposed to the risk that gets pulled out a bit.

      In regards to time, she said "we cant get them (IRS) to come in (to audit)". So yes, Nate, I think you are right, this could take much longer. Granted, if it was at 18c thats still fine by me, im in a lot of situations like that, but today at 42c different ball game.

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    3. I'm surprised someone even answered the phone. Do they have someone there full time even though there is nothing left to do? That might explain where some of the money is going!

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  5. How do you go about searching for liquidations? I've always been interested in them but find the amount of time it takes to find them isn't always worth it.
    thanks!

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    1. This one was mentioned to me by Theodor. I've done different things to find them in the past:

      1) Do a text search on EDGAR for liquidation or words close to it
      2) Sometimes one will appear on a SEC 13E3 filing search
      3) Google for "liquidation distribution" - Actually noticed ACE Aviation a net-net I wrote about last year is liquidating for $300m, less than the current market cap.

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  6. Good one Nate!
    This remembers me of my investment in Comdisco(don't give me credit for this one, I stole the idea from Buffett).
    Here I just wonder about what the final result of the its review would be...and why there have been a delay if it's the case.

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  7. The main problem with MAXC is that two thirds of net assets (about $1.6m) are receivables from entities controlled by the president. See notes 3 and 4 to the March 2011 financial statement, posted at the company's website.

    This is clearly a personal vehicle ("MaxCo" run by "Max Coon"). The repayment timetable has already been extended once (again, see posts at the company website). So there is a risk that Mr. Coon's other vehicles never repay MaxCo, in which case the net assets in liquidation would be something south of 30 cents a share, minus burn rate.

    One could litigate, but that's expensive. This one may make most sense for a lawyer who enjoys investing on the side -- with a few threatening letters, he could assert shareholder rights and cause MaxCo to collect on the notes.

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    1. Yeah, I saw that. I believe the receivables will be paid back by the proceeds from the liquidation. I believe that's why the date was extended, the CEO doesn't have the cash and needs the company to pay out first.

      If you think about it this really seems like the CEO is using the liquidation to tie up some loose ends financially for himself. He took out a loan from the company for something (a house maybe?) but doesn't have the money to pay it back. Liquidating the company will give him control of the asset free and clear. This is just a guess on my part.

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  8. Has anyone google'd max coon? I'm a hour away from Grand Ledge, I'm really contemplating going up there and try to do get answers in person.

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  9. As little as this stub is, certainly there are still enough traders following it to no allow any simple multiple to get away. The 8:51am thoughts suggestions that the tale is not so simple as "buy and delay for 60 cents.

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    1. Agreed, a reader called and talked to the company and it seems they have a pretty significant payroll as well currently. So they seem intent on spending down the cash before the liquidation is complete.

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  10. I called up the company last week (their number and address have changed, by the way, and no longer match what's on the web site; I got the new info by Googling) and asked what the status was. The very nice woman with whom I spoke said the IRS hasn't scheduled its review yet, and she didn't know whether the real estate receivables had been paid off. She said they were managing the liquidation and that to save money "everyone had gone part time." I didn't ask who everyone was. She also said that they're "annoyed" their IT guy hasn't posted new financials yet on their web site. She promised to pass along my questions to a Mister Fields, who does the accounting, and he'd get back to me.

    As I said, she was very nice, but I didn't have high hopes for a reply. To date, I haven't received one. The problem here is that the estate is so small that it could well be exhausted before there's any shareholder distribution.

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    1. Aharon,

      Thanks for the update, the information is both intriguing and disappointing. I'm not sure why there's a staff left, at this point it should be a CEO taking a bare minimum salary. I think the most likely outcome is as you say, the estate will be exhausted before shareholders receive anything.

      Nate

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    2. I stand corrected; they did get back to me this afternoon with March 2012 financials. I just spent a few minutes looking at them; will probably have a better look later (happy to forward if you'd like). On the plus side, it seems like most RE receivables have been collected, so one of the main concerns has been eliminated (and the remaining receivables are effectively collateralized by Max Coon's holdings in the co). On the minus side, their estimation of the final distribution is now 35-45 cents and, as of my conversation of a few weeks ago, the IRS audit still hasn't been scheduled. The audit itself is likely not a one-day or even one-month event, so I can well imagine the final distribution being below their current estimate or even zero. Even at the current bid of .23 (let alone the .40 ask), there's unfortunately not enough safety here for me.

      Speaking of liquidation stocks, have you looked at WSCC? They're a failed BDC in run-off; they defaulted on their SBA debentures and so are now subject to external discipline (which isn't that harsh) in terms of salary and overhead. They estimate their liquidation could take until 2015 or (ominously) beyond, and they're subject to an SBA demand for full repayment at any point, which would certainly push them into bankruptcy, though they've had plenty of forbearance. They're trading at about 1/10th of book, though that's very likely a declining number.

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  11. Ah! I see they've published updated information on their site now.

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    1. Thanks for updating this. I took a look, your earlier comments seem right. I'm going to continue to pass as well.

      I haven't heard of WSCC, I'll take a look

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  12. Ahron - ive looked at WSCC - they can (and may) be forced into a fire sale liquidation by the SBA at any point in time which would very likely cause a hit to the asset value (ESP the options, which would wipe out equity), and the equity is levered to that. there is also not clarity on the holdings and markings. so priced where it is for that reason.

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  13. Update for anyone interested in Maxco.. .40 distribution with ex date today. Nate, I've never saw this post, but have been buying Maxco since Dec 2012. Both you and Whopper are always scooping me!.. haha.

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    1. Thomas,

      Where did you get the information that the ex date was may 31? I haven't received any information on it yet.

      Thanks!

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