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dharma_bear
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Former engineer and engineering manager at the VP Engineering level, now a full time investor and systems trader.
  • COIN warrants grossly undervalued

     

    First, the background on COIN, from a recent press release:

     Converted Organics (NASDAQ:COIN - News), (convertedorganics.com), based in Boston, MA, is dedicated to producing high-quality, all-natural, organic soil amendment and fertilizer products through food waste recycling. The Company uses its proprietary High Temperature Liquid Composting (HTLC) system, a proven, state-of-the-art microbial digestion technology, to process various biodegradable food wastes into dry pellet and liquid concentrate organic fertilizers that help grow healthier food and improve environmental quality. Converted Organics sells and distributes its environmentally-friendly fertilizer products in the retail, professional turf management, and agribusiness markets.

    COIN has been in start-up mode. Their sales over the last 7 quarters, in thousands:$260 $493 $428 $367 $492 $992 $1,484. As of the last quarter they were still incurring negative gross margins, but this is changing, as of October 27, 2009:

    Converted Organics Inc. (NASDAQ:COIN) announced today that third quarter 2009 sales of organic fertilizer products from the Company’s Gonzales, California manufacturing facility increased approximately 64 percent over sales from the quarter ending September 30, 2008. The Company also reported a positive operating margin from its Gonzales plant of approximately 11 percent of sales for the quarter ended September 30, 2009, as compared to a negative operating margin of 45 percent of sales for the same quarter in 2008.

    The other manufacturing facility in New Jersey was not mentioned in this PR, so whether overall operating margins will turn positive next quarter remains to be seen. 

    They recently raised $15 million via a combination offering of stock and warrants. This is 1 year's worth of cash at the current burn rate. The warrants are exercisable at $1.30 until October 2014 and trade as COINW.  The historical volatility of COIN is 1.26 using a calculator available here.  Using the current stock price of .83, an interest rate of 3%, 5 years to expiration and strike price of $1.30, and applying these parameters to the Black-Scholes calculator available here, we get a price of $.68 for the warrant.  The warrants are actually trading at $.17, which implies a stock volatility of .35, which is too low. So for a very modest fee one can buy an option on a very volatile stock with a bright, albeit speculative, future.

    Disclosure: long COINW

     

    Nov 23 3:03 PM | Link | 2 Comments
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