Looking at the Cadence Innovation November 30, 2008 balance sheet, you would see total assets of $88 million. The December 31, 2008 balance sheet shows total assets of only $6.5 million. What happened?

This post discusses the rapid and dramatic financial deterioration of Cadence Innovation during the short period of its bankruptcy and the significance of bankruptcy preference claims to the wind up.  This post focuses on a two month period, December 2008 and January 2009, as reflected in Cadence Innovation’s monthly operating reports. The decision to liquidate was announced in December, 2008, and the impact of that announcement was revealed in the monthly operating report for the period ending December 31, 2008 that was filed in mid January. The operating report for the period ending January 31, 2009, was filed on February 20, 2009.

In December, 2008, there was a charge to the P&L of $57 million for “Impairment of Long-Lived Assets” and the balance of the November asset value was moved to the heading “Assets held for Sale”.  (Independently of the impairment of asset charge, in December, 2008 Cadence lost $13 million on revenues of $27 million.)

The decision to liquidate has a severe impact on the balance sheet treatment of long-lived assets (equipment, fixtures, leasehold improvement, etc) under FASB Statement 144. While a business is a going concern, those assets are valued at cost less depreciation. Once a decision to liquidate is announced, those assets must be revalued to “fair market value” and re-categorized as “assets held for sale”.

So with the announcement of liquidation, 2/3rds of the fixed asset value disappeared. Unfortunately, even the 1/3rd of value that remains under the “assets held for sale” is subject to question.

Once the liquidation was announced the fixed assets were to be valued at the “fair market value” less cost of sale. But as we have already learned, in this market, “fair market value” may not be realizable. If the Hilco appraisal is any indication, the $23 million identified as “assets held for sale” might convert into only $2.3 million in cash. (It is interesting to note that prior to 2002 the FASB standards would have required valuation at “net realizable value” not “fair market value”.)

Okay – so much for December. What happened in January? Could it get any worse?

Let’s look first at the P&L. There were only $4 million in net revenues. There was a net loss of $4.6 million. Enough said about the P&L.

Well there are still assets, right? In January, finished goods inventory is down to $1 million; AR went from $16.7 million to 8.4 million. And those “assets held for sale”, are valued at $23 million at “fair market value”. For the reasons discussed above, only count on $3 to $5 million.  There was $1.5 million in cash left at the end of January.

So lets say there is only $16 million in realizable value left at the end of January. How long will that last? Most of it is already spent. There were $9 million in total post petition liabilities outstanding at the end of January.

So $7 million left out of what can be counted on. Professional fees were $1.6 million in January. Salaries and operating expenses $3 million in January. That January burn rate will drop dramatically. But even with a 50% reduction in 4 months $9.2 million in expenses.

Wait, a second, GM owes Cadence $4.9 million. First, we think that is already in the AR included in the calculations above. Second, GM is disputing that amount. We do not think that Cadence Innovation was exaggerating when it told the Bankruptcy Court that “GM’s refusal to perform its obligations … threatens the Debtors’ ability to complete the administration of Debtors’ estates and the realization of the value of property of the estates.”

Oh, but we forgot one more asset. Recoveries on claims for Bankruptcy preferences, also know as avoidance actions. As is to frequently the case, the preference claims are going to fund the liquidation of the debtor and pay the administrative expenses. And distributions to unsecured creditors for pre-petition outstanding dues – don’t put that in your budget.  At January end, $99.7 million in prepetition liabilities was outstanding.