Sonics & Materials, Inc. Tender Offer ($SIMA)

We received this recently regarding Sonics & Materials, Inc. (OTC: SIMA). Some highlights from the tender offer document:

  • Sonics & Materials, Inc. (“Sonics” or the “Company”) is offering to purchase up to 837,580 of its
    common stock (the “Common Stock”) in a tender offer at a price per share of $10.00 in cash.
  • We will purchase up to a maximum of 837,580 shares of Common Stock, which number of shares represents all of the outstanding shares of Common Stock held by stockholders other than Robert Soloff, Lauren Soloff and their respective affiliates, including JBH Sonics, LLC (collectively, the “Soloff family”), and shares held by Sonics. The Soloff family is our largest stockholder, controls our Board of Directors and will not participate in this offer as a selling stockholder. As of the date hereof, the Soloff family beneficially owns 2,563,490 shares of our Common Stock (representing 73.2% of the outstanding shares of our Common Stock).
  • In recent years, the Company has received inquiries from stockholders regarding how the Company plans to use the cash on its balance sheet. While the Board has explored various options, including having engaged an investment banker to present possible acquisition targets (none of which is contemplated at this time), the Company has received several requests from stockholders that the Company use its available cash to repurchase its issued and outstanding shares not held by the Soloff family. In connection with this offer, the Company recently retained Access Value, LLC (“Access Value”), an independent third-party valuation firm to determine the fair market value of the our Common Stock. Access Value has determined that the fair market value per share of Common Stock as of March 31, 2021 was $6.11 on a minority, non-marketable basis and $9.60 on a minority, marketable basis.
  • Sonics designs, manufactures and sells (i) ultrasonic bonding equipment for the welding, joining
    and fastening of thermoplastic components, textiles and other synthetic materials, and (ii) ultrasonic liquid processors for dispersing, blending, cleaning, degassing, atomizing and reducing particles as well as expediting chemical reactions. To further address the needs of its customers, the Company also manufactures a spin welder and the vibration welder, both of which are used for the bonding of thermoplastic components. The Company was incorporated in New Jersey in April 1969, and was reincorporated in Delaware in October 1978. Robert S. Soloff, its chief executive officer and founder, invented the ultrasonic plastic welding process early in his career. He has been granted numerous patents in the field of power ultrasonics and is considered to be a pioneer in the application of ultrasonic technology to industrial processes. The certain patents granted to Mr. Soloff in the field of power ultrasonics have expired and the technology related to them is now in the public domain and is used in part in the development and manufacture of the Company's products. Lauren Soloff, Robert Soloff’s daughter, has worked in the business since 1994. In 2019, she became president of the Company.

The tender offer document shows unaudited financials for the nine months ended March 31, 2021. The company made $2 million (net) on $18.5 million of sales in just nine months. Book value at the end of March was $35 million and current assets net of all liabilities were $31.7 million.

At $10 per share (the tender offer price), the market cap is $34 million. However, the enterprise value is much less, because of all the cash on the balance sheet. 

You might wonder how a company with $9.32 in net current assets could have a fair market value of $6.11. Here is the reasoning applied by the Access Value appraisal report:

Based on the LOCD [lack of control] market indications and the analysis of key factors of control noted above, a 19.0 percent LOCD was selected to convert the control basis of value to a minority basis of value in the market approach and the asset approach to valuing the Subject Interest. [...]

An LOMD [lack of marketability] of 38.0 percent was selected for the income approach, which reflected public market liquidity; and a 30.0 percent LOMD was selected for market approach and asset approach, which reflected control liquidity in the private markets.

If I owned Sonics & Materials shares, I'd be on guard on the future for the controlling shareholders to try to squeeze me out at a ridiculously low "appraised" valuation.

SEC Rule 15c2-11 Restricted Securities

Last September, we wrote about a proposed SEC rule change that threatened to make it more difficult to trade in opaque micro cap companies. 

Over a hundred people wrote in to comment, almost all in opposition, including well-known investors, firms, and funds like: Mitchell Partners, the OTC Markets Group, and the Oddball land company Aztec Land and Cattle Company, Ltd..

TD Ameritrade just sent an email to clients with a 162 page list of OTC stocks (embedded below) that they are going to restrict from trading because of the new SEC Rule 15c2-11. Here is how they are describing their new policy:

On September 28, 2021, new amendments to Rule 15c-211 under the Securities Exchange Act of 1934
go into effect to enhance investor protection and improve issuer transparency. These amendments
restrict the ability of market makers to publish quotations for those companies that have not made
required current financial and company information available to regulators and investors.

Ahead of the regulatory enforcement date, TD Ameritrade will only accept orders to liquidate positions - (i.e. no new buy orders) starting in mid-August 2021. Please note: After the amendment officially goes into effect on September 28, 2021, it may be more difficult to liquidate these securities. Quoting and market liquidity may also be very limited.

The list is below as of June 30, 2021 and is subject to change at any time.

The TD Ameritrade list includes such Oddball companies as Hanover Foods (both HNSFA/HNFSB), Pardee Resources, PD-RX Pharmaceuticals, Queen City Investments, Pinelawn Cemetery, ACMAT Corp, Advant-e Corp, Aztec Land & Cattle, Avoca, and Boston Sand & Gravel. 

It includes some banks, but not very many.

We will be continuing to cover this regulatory change in the Oddball Stocks Newsletter. If you haven't yet, give us a try.

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