KDUS writeup

8/8/2019 KDUS writeup

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Shaun Noll, CFA

Phone: (707) [email protected]

This is a very simple idea, a very small company and is perhaps the most pure dollar for

.50 Ive seen in awhile. You will be able to know if you like it or not in about 15

minutes.

KDUS Cadus Corp

Company Background:

Cadus developed several proprietary technologies that exploit the similarities between

yeast and human genes to elucidate gene function and cell signaling pathways. In 1999

Cadus sold its business to OSI. The company retained ownership of some of its core

technology and maintains a portfolio of patents based on its yeast technology (valued at

$500k on balance sheet but I valued them at $0 to be conservative).

The royalty stream and interest income on cash has been more than expenses while the

company has no debt. As a result, the company has been barely free cash flow positive.

KDUS has no employees other than one consultant who acts as the CEO and is paid $25k a

year (essentially for accounting services), directors are paid $3k a year (why does Carl

Icahn waste his time?!) and KDUS also leases some storage space for ~$12k a year. So

this is a shell of a company that is publicly traded looking to do an acquisition.

Analysis and Valuation:

Current market cap is ~$19M while it has $23.2M in cash and another $1.1M in a Bank of

America sub prime mortgage fund that should be redeemed and liquid as of 12/31/09.

Previous redemptions of shares in this fund have occurred at 5% discount to NAV so KDUS

is using ~5% discount to NAV for the most recent balance sheet. While discounting this

from their fair value may be prudent, given the fact that the shares were redeemed during

far more volatile times for that discount Im not going to discount these any more than

KDUS is already, most likely they got their cash back at 100% of NAV..

KDUS also has ~$33M in R&D tax credits and NOLs from its previous years of losing money,

and these expire in various amounts over the 2009-2027 time frame.

I estimate the liquidation value of the company at $24.3M by assigning $0 value to the

$33M of tax assets, $0 in value to the publicly traded company shell and $0 to their

patent portfolio. This gives the stock 25.08% upside in a liquidation scenario.

Discounting the tax assets by 75% and giving 50% discount on the patent portfolio while

giving $0 value to the publicly traded shell creates a fair value of $33.3M, or ~81%

upside.

KDUS Valuation Analysiscurrent price $ 1.4000

shares outstanding

13,140,0

00current market cap $ 18,396,000

US net cash $ 23,123,222

market cap discount to US net cash 20.44%

liquidation value $ 24,555,373

market cap discount to liquidation value 25.08%

total net cash PLUS fair value of NOLs and patents $ 33,276,123

market cap discount to net cash, st inv and fair value of NOLs 80.89%


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Shaun Noll, CFA


The Catalyst:

I know these are pretty weak catalysts but with a company with no operations trading at

25% discount to liquid cash I feel that this is acceptable.

Icahn owns ~40% while Moab Capital Partners own ~13%. I estimate Moabs cost basis to be

~$1.75. Icahn bought in long ago (has been director at KDUS since 1993) and is likely

deep under water. Note that both were increasing their position as recently as 2009 and

while neither appears to be aggressively looking for deals, there have been a few deals

proposed. These investors starting this year will now have more motivation/pressure than

previous years due to two factors. Rumor is that Icahn indicated he would be willing to

exit at cash value and give up the tax and patent assets.

1. KDUS royalty revenue will expire 2010 while interest income on cash is extremelylow right now, this will be the first year that the company will likely burn some

cash (very small amount).

2. At the same time the NOLs started expiring in 2009 so that value is evaporating asthe company sits.

As long as the company was paying its own expenses there was little reason to be

aggressive looking for deals but now that the company will be burning some cash and NOLs

will start going away, this will create pressure to make a deal.

Also note that previously the company had cash locked up in the BAC fund and was having

trouble redeeming that, creating incentive for the controlling shareholders to sit and

wait. As of 12/31/09 shares in the fund have been redeemed giving them full liquidity.

The Risks:

Note the OSI license revenue ends as of 2010 and the purpose of the company is to make an

acquisition. The 10k states that this acquisition could be in any industry so they arenot limited to biotech. There is the risk that they could make a terrible acquisition.

Note that this works both ways, should they make a smart acquisition and apply some

modest leverage, the company would likely began being valued based on earnings and the

upside could be tremendous.

The most important risks in my view though are opportunity cost and liquidity.

Primary concern is this company simply sits for years. If I see no progress made over

the next year I will simply cut the position.

The other risk is due to the laughable volume/liquidity of this stock, although this is

also likely the reason for the valuation discrepancy. Simply keeping position size small

will be an effective way to deal with this and this is obviously not for an institution.

Conclusion:

The two largest risks are manageable and with no operations and 25% discount to cash

value the downside risk is limited. With 2 large and smart activist shareholders who

have majority control involved Im betting they wont let the company sit forever and

that something intelligent gets done with the $24M given the distressed environment for

small companies and the fact that this will be the first year company value will decrease

if shareholders do nothing.

If Im wrong though they could always liquidate and payout the companys cash creating a

25% return


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Shaun Noll, CFA


Documents

KDUS writeup