Caraco came out w/ earnings today. Although the quarterly performance was reported, we are not too interested in looking at the numbers. The main concern for us is any update on the FDA compliance, moving production to other facilities, and cash burn.
As for cash burn the company had 72M in cash and 10M in short-term investments a quarter ago. For the quarter ended 12/31/09, the company had 67M in cash and 10M in short-term investment. They burned through 5M in the quarter, given that the company had no manufacturing in the quarter this is not bad. Also, the other action by the management will further reduce this cash burn.
From the 8K:
As previously disclosed, on June 25, 2009, U.S. Marshals, at the request of the FDA, arrived and seized drug products manufactured in our Michigan facilities. The seizure also included ingredients and in-process materials held at these same facilities. The estimated value of such seized inventory as of December 31, 2009 was $24.0 million. Products sold and distributed by Caraco that are manufactured by third parties and outside of these facilities are not impacted and distribution and marketing of these products continues. The Company has also transferred certain Caraco-owned products to additional alternate manufacturing sites that would allow the Company to regain revenues from those products while Caraco completes the necessary remedial actions that would lead to resumption of its manufacturing operations.
This is great news and a major move towards cutting the cash burn, more likely increasing the cash flow. Although they didn’t mention the ‘alternate manufacturing sites,’ it is certainly a Sun Pharma manufacturing site. This will drastically improve cash flow and reduce negative impact on relationship w/ distributors.
The biggest news from the 8K was:
The Consent Decree provides a series of measures that, when satisfied, will permit the Company to resume manufacturing and distributing those products which are manufactured in its Michigan facilities. In accordance with the Consent Decree, the Company has engaged a consulting firm which is comprised of current good manufacturing practice (“cGMP”) experts and has submitted a work plan to the FDA in October 2009 for remedial actions leading to resumption of its manufacturing operations. Some additional details and clarifications to the work plan were submitted to the FDA for its approval on January 14, 2010. As a result of the FDA action, Caraco voluntarily ceased manufacturing operations and instituted, in two phases, indefinite layoffs of approximately 430 of our employees. The Company has subsequently started recalling some of these employees in conjunction with its efforts to restart its manufacturing activities. Further details on the results of operations are provided below.
The recalling of employees is huge news. This means that management believes that resumption of manufacturing is likely to happen shortly. The mention of a ‘work plan’ sounds like Caraco is expecting to receive a manufacturing approval in phases. Any restart of manufacturing, however limited it may be, will dramatically move the share price of Caraco.
GGP today announced the engagement of UBS for “evaluating potential financial transactions for emergence from Chapter 11, raising exit capital and with such other matters.” This is the first clear indication from management that they are likely to receive an offer or are working with potential suitors.
The recent activity by BAM (here, here, here, here) are strong indication that BAM wants a piece of GGP. From reports it appears that BAM is interested in a JV w/ GGP. The JV route will by-pass any legal concerns with consolidation in REIT. BAM also has a stronger capital structure, less debt, than Simon.
The next couple of weeks to months will be very interesting for this holding. Definitely by June the clouds will clear around GGP. It could happen much faster than that.
This is a small cap play, you are basically getting the company for cash on hand and getting for free a growth story for a strong set of products. The company has $33M of cash w/ a market cap of $35M and zero debt. In the past 6 months, the company has signed huge distribution deals that will have a major impact on sales and cash flow. The company has been break-even on cash flow basis, so there is little risk of cash being wiped out while we wait for the new distribution deals to increase cash flow.
iGo develops universal chargers for laptops/cell phones/mp3 players/digital cameras. They basically sell 1 charger with multiple ‘tips’ for different products. Instead of carrying chargers for each device, you carry one iGo charger and a separate tip for your cell phone, digital camera, mp3 player, netbook, generic usb charger …. Each ‘tip’ sells for about $7, so it is very affordable. They also have a new ‘green’ product that saves ‘vampire power’ (think of it as a smart surge protector that cuts off power when not being used). Also the power adapters work at home/car/plane, so you don’t need a different adapter for each location..
A video about their new product that saves on Vampire product.
The play here is that the downside is protected by cash and the upside is big based on new distribution deals. Here is a list of distribution deals signed in the last 6 months:
– Sell Netbook chargers in 2400 Verizon Wireless (Sept 2009)
– Sell all products in 1000 Office Max (Sept 09)
– 300 Staples Canada stores (Nov)
– 500 Walmart locations (this is a pilot program, i think it could
grow substantially in 2010)
– deal w/ Radio Shack (can’t remember the store count)
– new European distribution deal (store count increased from 500 -> 3000 stores)
Before these new distribution deal and press coverage, the company was doing 15M in sales per quarter and was profitable. They have a 30% gross margins, could improve w/ top line growth. It is hard to get numbers on what the future sales will look like but the odds are very good that sales jump substantially w/ the new distribution deals.
Also, the company has been divesting from the low margin products to the high margin products, the direct marketed products are high margin products (so the adapters and new products that are sold via the distribution deals). So this will also substantially improve the gross margins.
Also management has been buying shares, w/ the CEO purchasing since 2008 (buying in the $0.60 – $1.15 range). See recent insider buying.
Currently the shares trade at $1.10, w/ $1.03 in cash on hand. I think the upside could be big and in a short period (12-24 months). There is basically no analyst coverage, so the shares are trading at a huge discount. I can see this company being bought out if the new distribution deals results in strong growth. If the growth doesn’t come, you can easily get out w/ little or no loss (i don’t expect the shares to trade below cash and don’t expect management to drain cash).