Investment memos

Internet America (GEEK US) Initiation

Recommendation: BUY, target price upto $0.025 per share

Share Price: $0.024

Market Cap: $0.402m

Free Float: 17.3%

Ave. Daily Trade Volume: $1,286

The simplest stories are the best and this one is very simple. Almost all the assets of Internet America were sold to JAB broad band in a sale that completed in late May / early June 2015. As part of the sale the shareholders received a liquidating dividend of $0.68 per share. What remains of Internet America is: (i) cash escrow from the sale, (ii) inventory and IP address assets that were not part of the sale to JAB, (iii) cash retained for wind down, and; (iv) small amount of debt.

Taking these assets in turn:

  • Cash Escrow – this is $700k of the purchase price for Internet America that has been held back against any purchase price reductions that may occur. The deadline for making a claim is the 80th day after the closing date (we am assuming this is the 25th June). The proxy statement does not detail what the purchase price reductions could be but we would imagine they relate to “locked box” style working capital which hopefully should be known and small
  • Inventory & IP Address Assets – these include receivables older than 60 days, c. 50k of IP addresses, name and trademarks as well as NOLs and inventories. Management have valued these at $300k
  • Cash for Wind Down – $350k
  • Estimated Debt – $(193k)

As always with liquidations another factor is the cost to realise the assets of the estate. Management have estimated this to be $250k and have also included $100k of contingency. What is comforting here is the meaningful equity stakes held by management and the acquirer who should be incentivised to (a) be conservative on outlook, and (b) minimise costs in order to maximise their returns from the business.

We have laid out the company’s plan of liquidation here and would recommend you read the proxy statement which you can find here which contains all the relevant details of the liquidation plan.

The simple facts are that at $0.025 per share you are creating the business to a 2.17x MoM with an expected distribution of 93% of the remaining assets within c. 3 months time based on managements plan. To this forecast you have upside from better realisations on the assets sales as well as lower post-closing costs. In terms of margin of safety if you assume all costs, including the management $100k contingency, and no value from the sale of the assets you could afford for 17.4% of the escrow to be called before you start to loose money.

We are looking to add this security as a 7.5% position in the HIPS portfolio at $0.025 and would grow it to a 15% position at $0.020. Unfortunately we only stumbled across this opportunity in early August as a result of a post by Schwab711 on the Corner of Berkshire and Fairfax message board and missed the only window of good trading so far which occurred from the 24th July until the 3rd August 2015. Given our flat trading fee structure from our broker and a view that we cannot really spend more than 10% of our acquisition cost in trading fees we need to acquire at least 8,000 – 10,000 shares per trade depending on whether the price is at $0.020 or 0.025. Time will tell if we are right to set this limit and chance our hand by waiting.

Would be great to hear from anyone that knows a good broker for these very small illiquid situations that has a more reasonable charging structure that would allow us acquire small share lots.

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