Feeds:
Posts
Comments

Archive for February, 2009

OrthoLogic Corporation (NASDAQ:CAPS) is a little unusual for us. While it trades below its net cash value and Biotechnology Value Fund (BVF) has disclosed a 13.42% holding, BVF’s holding is passive. At CAPS’s $0.60 close yesterday it has a market capitalization of $24.4M. We estimate the net cash value to be 80% higher at $1.08 per share. CAPS’s cash burn rate is quite high relative to its net cash position, so rapid steps need to be taken for this to be a profitable investment. We think that BVF is a good bet, so we’re adding CAPS to the Greenbackd Portfolio.

About CAPS

CAPS is a development stage biotechnology company focused on the development and commercialization of the synthetic peptides Chrysalin (TP508) and AZX100. Effective October 1, 2008, OrthoLogic Corp. is known and doing business as Capstone Therapeutics. The company’s investor relations website is here.

The value proposition

The summary of our estimate for the company’s liquidation value is set out below (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

caps-summary

Note that we have used the September 10Q. CAPS’s most recent filings indicate that cash is actually $48M (see slide 13), but we don’t know what the rest of the balance sheet looks like. The presentation also gives cash burn guidance this year of $14M to $16M.

The company also included the following in its 10Q, which seems to indicate a shift to cash preservation:

We announced that we have no immediate plans to re-enter clinical trials for Chrysalin-based product candidates and a strategic shift in our development approach to our Chrysalin Product Platform. We currently intend to pursue development partnering or licensing opportunities for our Chrysalin-based product candidates, a change from our previous development history of independently conducting human clinical trials necessary to advance our Chrysalin-based product candidates to market. We will continue to explore Chrysalin’s therapeutic value in tissues and diseases exhibiting endothelial dysfunction as well as the science behind and potential of Chrysalin. We will also continue research and development expenditures for further pre-clinical studies supporting multiple indications for AZX100 and plan to continue AZX100 dermal scarring human clinical trials.

Off-balance sheet arrangements and Contractual obligations

There is no discussion in the September 10Q about CAPS’s off-balance sheet arrangements or contractual obligations.

The catalyst

Given that BVF has filed a 13G notice, which indicates a passive investment, we’re not entirely sure what BVF has planned for CAPS. It’s possible that it is simply a passive holding. We’re reasonably comfortable following BVF into CAPS because of their efforts with Avigen Inc (NASDAQ:AVGN) and Neurobiological Technologies Inc (NASDAQ:NTII).

CAPS has been undertaking a stock repurchase program since March 5, 2008. At September 30, 2008, the company had repurchased 1.1.M shares of its common stock, at a total cost of $1.0M, and had allocated approximately a further $1.1M to fund possible future stock repurchases. We don’t know the status of the buy-back at this time.

Conclusion

At its $0.60 close yesterday, CAPS is trading at 55% of our estimate of its $1.08 per share net cash value. The risk for this investment – as it is for all of these types of investment – is that CAPS dissipates its cash before it or BVF can salvage that value. Management is taking steps to reduce its cash burn and repurchase undervalued stock, which is encouraging. Perhaps this is what BVF has seen, and the reason BVF hasn’t filed a 13D notice. We think that BVF is a good bet, so we’re adding CAPS to the Greenbackd Portfolio.

CAPS closed yesterday at $0.60.

The S&P500 Index closed yesterday at 752.83.

Hat tip to ef.

[Full Disclosure:  We do not have a holding in CAPS. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

About these ads

Read Full Post »

Axcelis Technologies Inc (NASDAQ:ACLS) has announced that it has agreed to sell its 50% interest in SEN Corporation, its joint venture with Sumitomo Heavy Industries, Ltd. (SHI) to SHI for Y13 billion, or approximately $133 million, in cash. This is an outstanding achievement by ACLS management under difficult conditions. The sale will provide the liquidity necessary to meet the $85M due to the holders of the company’s 4.25% Convertible Senior Subordinated Notes, upon which ACLS defaulted in January.

We started following ACLS on January 8 this year because it is an undervalued asset play with an activist investor, Sterling Capital Management, holding 10.7% of its outstanding stock. In our initial post we estimated ACLS’s liquidating value at $134.9M, or $1.31 per share. Assuming the sale is completed, we estimate ACLS’s liquidating value to be slightly higher at $147M or $1.43 per share, which is more than 300% higher than its close yesterday of $0.35.

The value proposition updated

ACLS is generating substantial and increasing operating losses, reaching a $22.8M nadir for the September quarter (see the September 10Q here). We have adjusted the September 10Q balance sheet to account for the sale of the SEN JV and to back out several other payments and projected it forward to March (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

acls-summary-sen-sale1This summary balance sheet assumes that the $133M to be received in March 2009 from the sale of SEN is used to pay off the notes first (approximately $85M) with the remainder added to cash. We have backed out a further $15M in termination payments from cash. This summary balance sheet also assumes that ACLS burns an additional $22M in cash in the current quarter. The company is still making substantial operating losses that have widened over the last five quarters, so these amounts are likely to be substantial on an ongoing basis.

The press release

ACLS has not yet filed an 8K but the press release is as follows (via Tradingmarkets.com):

Axcelis Technologies, Inc. (Nasdaq:ACLS) today announced that it has entered into a Share Purchase Agreement in which Sumitomo Heavy Industries, Ltd. (“SHI”) will purchase Axcelis’ 50% interest in their joint venture, SEN Corporation, an SHI and Axcelis Company, (“SEN”), for Y13 billion, or approximately $133 million, in cash at current conversion rates. Axcelis and SHI each currently own 50% of SEN, a Japanese company that is licensed by Axcelis to manufacture and sell certain implant products in Japan.

It is anticipated that the transaction between Axcelis and SHI will be completed on March 31, 2009. Axcelis will use a portion of the proceeds from the sale of its SEN interests to meet its obligations under its 4.25% Convertible Senior Secured Subordinated Notes, which were due in January. Pending the closing, the trustee for the notes has agreed to stand down on litigation filed in connection with Axcelis’ default on the notes.

Mary Puma, Chairman and CEO of Axcelis, said: “This transaction serves the best interests of Axcelis shareholders as it enables us to fulfill our senior debt obligations and gives us greater financial flexibility during this difficult economic climate and semiconductor industry downturn. Axcelis will continue to fully focus its efforts on tight cash and cost controls and on developing and selling innovative products like our Optima implanters and Integra dry strip tools, both of which have received strong customer reviews. With these products, Axcelis believes that we can compete and gain market share once demand for semiconductor equipment returns.”

As part of the transaction, at the closing Axcelis and SEN will enter into cross licenses that will allow the two companies to continue to use certain patents and technical information owned by the other to make and sell ion implant systems on a worldwide, royalty-free, perpetual basis. Axcelis’ license to SEN would not include patents, licenses, or technical information developed by Axcelis for the Optima HD, Optima XE, or any non-implant products. The transaction will terminate all existing agreements among Axcelis, SHI and SEN relating to the SEN joint venture.

More information can be found in the Form 8-K that Axcelis will file with the Securities and Exchange Commission at http://www.sec.gov.

Hat tip to manny.

[Full Disclosure:  We have a holding in ACLS. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

Read Full Post »

Trident Microsystems Inc (NASDAQ:TRID) has filed its results for the quarter ended December 31, 2008. While its earnings and operating cash flow have now turned negative, its liquidation value remains almost unchanged. In our original post we wrote that TRID is an undervalued net cash stock looking for a catalyst. We continue to think it’s a good candidate for an activist campaign for the following reasons:

  1. It’s large for a net cash stock: As its $1.32 close yesterday, the company has a market capitalization of $83M. That puts it into the strike zone for funds with around $100M under management.
  2. It’s deeply undervalued: We estimate its liquidation value is around $167M or $2.66 per share, which is more than 100% higher than its close yesterday.
  3. Its value is predominantly cash: TRID is trading at half net cash value of approximately $155M or $2.48 per share.
  4. Its stock is liquid enough: According to TRID’s Google Finance page, the average volume for the stock is more than 530,000 shares per day. It traded more than 427,000 yesterday. With 63M shares on issue, an investor seeking ~5% of TRID needs a few more than 3M shares, which should be readily achievable in a reasonably short period of time.
  5. Management holds a vanishingly small number of shares and are net sellers.

We confess that – aside from the litigation and regulatory investigations into TRID’s granting of stock options – we can’t see the problem with TRID. Please leave a comment if you can see what we are missing.

The value proposition updated

TRID continues to boast an embarrassment of riches on its balance sheet (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

trid-summary-2009-12-31While TRID has burned through $18M of cash since our last post, it has reduced its liabilities by around the same amount, so its liquidation value remains unchanged. The slight reduction in liquidation value is a direct result of the additional stock on issue, which is the really TRID’s whole story: management takes the value that should belong to the shareholders.

Off-balance sheet arrangements and Contractual obligations

According to the 10Q, TRID has no off-balance sheet arrangements and its contractual obligations are relatively modest $11.6M, which includes total operating lease payments of $2.5M and total purchase obligations of $9.1M. There is also a long-term income tax payable of $20.1M but TRID is “unable to make a reasonably reliable estimate of the timing of payments in individual years beyond twelve months due to uncertainties in the timing of tax audit outcomes.”

Contingencies

The only real area of concern for us is the litigation and regulatory investigations into TRID’s granting of stock options. The following is extracted from the 10Q:

Shareholder Derivative Litigation

Trident has been named as a nominal defendant in several purported shareholder derivative lawsuits concerning the granting of stock options. The federal court cases have been consolidated as In re Trident Microsystems Inc. Derivative Litigation, Master File No. C-06-3440-JF. A case also has been filed in State court, Limke v. Lin et al., No. 1:07-CV-080390. Plaintiffs in all cases allege that certain of our current or former officers and directors caused it to grant options at less than fair market value, contrary to our public statements (including our financial statements); and that as a result those officers and directors are liable to us. No particular amount of damages has been alleged, and by the nature of the lawsuit no damages will be alleged against us. The Board of Directors has appointed a Special Litigation Committee, or SLC, composed solely of independent directors, to review and manage any claims that we may have relating to the stock option grant practices investigated by the SLC. The scope of the SLC’s authority includes the claims asserted in the derivative actions. In federal court, Trident has moved to stay the case pending the assessment by the SLC that was formed to consider nominal plaintiffs’ claims. In State court, Trident moved to stay the case in deference to the federal lawsuit, and the parties have agreed, with the Court’s approval, to take that motion off of the Court’s calendar to await the assessment of the SLC. We cannot predict whether these actions are likely to result in any material recovery by or expense to, Trident. We expect to continue to incur legal fees in responding to these lawsuits, including expenses for the reimbursement of legal fees of present and former officers and directors under indemnification obligations.

Regulatory Actions

The DOJ is currently conducting an investigation of us in connection with our investigation into our stock option grant practices and related issues, and we are subject to a subpoena from the DOJ. We are also subject to a formal investigation by the SEC on the same issues. We have been cooperating with, and continue to cooperate with, inquiries from the SEC and DOJ investigations. In addition, we have received an inquiry from the Internal Revenue Service to which we have responded. We are unable to predict what consequences, if any, that an investigation by any regulatory agency may have on it. Any regulatory investigation could result in our business being adversely impacted. If a regulatory agency were to commence civil or criminal action against us, it is possible that we could be required to pay significant penalties and/or fines and could become subject to administrative or court orders, and could result in civil or criminal sanctions against certain of our former officers, directors and/or employees and might result in such sanctions against us and/or our current officers, directors and/or employees. Any regulatory action could result in the filing of additional restatements of our prior financial statements or require that we take other actions. If we are subject to an adverse finding resulting from the SEC and DOJ investigations, we could be required to pay damages or penalties or have other remedies imposed upon us. The period of time necessary to resolve the investigation by the DOJ and the investigation from the SEC is uncertain, and these matters could require significant management and financial resources which could otherwise be devoted to the operation of our business. In addition, our 401(k) plan and its administration were audited by the Department of Labor but no further action was noted.

Indemnification Obligations

We indemnify, as permitted under Delaware law and in accordance with our Bylaws, our officers, directors and members of our senior management for certain events or occurrences, subject to certain limits, while they were serving at our request in such capacity. In this regard, we have received, or expect to receive, requests for indemnification by certain current and former officers, directors and employees in connection with our investigation of our historical stock option grant practices and related issues, and the related governmental inquiries and shareholder derivative litigation. The maximum amount of potential future indemnification is unknown and potentially unlimited; therefore, it cannot be estimated. We have directors’ and officers’ liability insurance policies that may enable us to recover a portion of such future indemnification claims paid, subject to coverage limitations of the policies, and plan to make claim for reimbursement from our insurers of any potentially covered future indemnification payments.

The catalyst?

Still none. No investors have disclosed an activist position in this stock and management still seem intent on helping themselves to big portions of options and restricted stock. Rather than pay dividends to long-suffering stockholders, they’ll retain the earnings to pump up the stock price, which helps with their options. The company could comfortably pay a special dividend of around $2.75 per share and still leave $40M of cash in the bank.

Conclusion

TRID’s board and senior management should be embarrassed that TRID is a perennial net net stock and now trades consistently below its net cash value. The market is sending a clear message when it values stock at less than net cash value. That they have the effrontery to gift themselves such huge helpings of stock and options in the face of such a message is astonishing. Even though it’s deeply undervalued, without some external pressure to allign management’s interests with its stockholders, TRID will remain that way. For the reasons we outlined above, TRID seems to us to be a prime candidate for an activist campaign. We can’t figure out why no activists are interested in this stock. What are we missing? Are we underestimating the impact of the litigation and regulatory investigations into TRID’s granting of stock options?

TRID closed yesterday at $1.32.

The S&P500 Index closed yesterday at 764.90.

[Full Disclosure:  We do not have a holding in TRID. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

Read Full Post »

The Zanett Group has increased its stake in MATH to 6.58% according to its most recent Schedule 13D amendment.

We’ve been following MATH since December last year when it was trading at $0.68. We initiated the position because MATH is a net cash stock with two substantial stockholders lobbying management to liquidate. The stock is up 19% to $0.87 yesterday, giving it a market capitalization of $8.0M. We estimate MATH’s liquidation value still to be more than 80% higher at $14.4M or $1.57 per share. That value is predominantly cash and short term investments and doesn’t take into account any further value that the sale of the FPOA technology and intellectual property may yield. The two activist investors, Mr. Zachary McAdoo of The Zanett Group and Mr. Salvatore Muoio of S. Muoio & Co., have been urging MATH’s board to consider liquidation rather than a merger. MATH’s board seems to agree, twice rejecting unsolicited merger proposals, suspending the company’s operations and exploring “strategic alternatives, which could include merger, acquisition, increasing operations in another structure or liquidation.”

The Zanett Group’s most recent share purchases were undertaken between January 22 and February 19 this year at prices between $0.81 and $0.90.

[Full Disclosure: We do not have a holding in MATH. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]

Read Full Post »

Zale Corporation (NYSE:ZLC) has released its results for the quarter to January 31, 2009. After reviewing the results, we have significantly reduced our original estimate for the company’s liquidating value since we initiated the position at $4.82 on December 3, 2008. Our initial analysis of ZLC’s balance sheet was overly optimistic. We’ve now applied more dour assumptions to ZLC’s results and, as a result, we’ve decided to close the position.

We started following ZLC believing it to be an undervalued asset situation. With former Chairman of the SEC turned activist investor, Richard Breeden of Breeden Capital Management LLC, holding two seats on the board, we thought it looked like a reasonable opportunity. At its $4.82 closing price on December 3, 2008 the company had a market capitalization of $154M. We estimated ZLC’s liquidation value at that time to be around $243M or $7.63 per share. After reviewing ZLC’s Q2 financial results and applying more dour assumptions for the value of the assets in liquidation, we now believe there is a risk that ZLC has no value in liquidation.

The value proposition updated

Set out below is our summary analysis of the balance sheet (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

zlc-summary-2009-q2Conclusion

At its $1.35 close yesterday, ZLC has a market capitalization of just $43M. When we started coverage in December last year, ZLC traded at $4.82 and had a market capitalization of $154M. Our ZLC position is down a punishing 72% on an absolute basis. The S&P 500 Index closed at 848.81 on December 3, 2008 and closed yesterday at 764.90. That’s a return of -9.9% for the index and means we’re off 62.1% on a relative basis, which is still very disappointing. The simple fact is that this was an unforced error. Our original analysis of ZLC was overly optimistic. We’ve been applying more dour assumptions about the recovery values of assets in liquidation to our most recent analyses. If we had been applying the more dour assumptions at the time we made our original assessment of ZLC, we would not have initiated the position.

[Full Disclosure:  We do not have a holding in ZLC. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

Read Full Post »

Biotechnology Value Fund (BVF) has extended its tender offer for the outstanding shares of Avigen Inc (Nasdaq: AVGN).

We’ve been following AVGN (see archived posts here) because it’s a net cash stock (i.e. it’s trading at less than the value of its cash after deducting all liabilities) and specialist biotechnology activist fund BVF has been pushing it to liquidate and return its cash to shareholders. MediciNova Inc (NASDAQ:MNOV) has made an offer for AVGN that we think represents a clever way for AVGN’s stockholders to receive cash equivalent to that which they would receive in a liquidation (less $7M to be paid to MNOV) with the possibility for “an extraordinary, uncapped return” if MNOV is successful post-merger. We estimate AVGN’s cash at around $1.22 per share (BVF estimates $1.20 per share), which is around 20% higher than AVGN’s $1.01 close yesterday.

The full text of BVF’s press release is reproduced below:

BVF Acquisition LLC (the “Purchaser”), an affiliate of Biotechnology Value Fund L.P. (“BVF”), which has commenced a cash tender offer to purchase all of the outstanding shares of Avigen, Inc. (Nasdaq: AVGN) (“Avigen”) for $1.00 per share, announced today that it has extended the expiration date for the tender offer to 6:00 p.m., New York City time, on Friday, March 6, 2009. The tender offer was previously set to expire at 12:00 midnight, New York City time, on Monday, February 23, 2009. As of the close of business on February 20, 2009, a total of 1,132,192 shares had been tendered in and not withdrawn from the offer, which together with the shares owned by BVF and affiliates, represents approximately 33% of the total shares outstanding of Avigen.

[Full Disclosure: We have a holding in AVGN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]

Read Full Post »

CuraGen Corporation (NASDAQ:CRGN) has announced that it is considering strategic alternatives to enhance shareholder value including selling or licensing CR011, acquiring additional assets or business lines, or selling the company.

We started following CRGN on January 20 this year because it is a net cash stock with an investor, DellaCamera Capital Management, disclosing a 5.6% holding in January. We estimate CRGN’s net cash value to be around $62M or $1.07 per share. The company is not generating any operating cash flow as it is a “biopharmaceutical development company,” so the challenge for DellaCamera Capital Management is to persuade the company to pay a special dividend or liquidate before it dissipates its remaining cash.

The company’s press release (via Earth Times) is as follows:

CuraGen Corporation (Nasdaq: CRGN) announced today that it is undertaking a review of a broad range of strategic alternatives to enhance shareholder value.

Robert E. Patricelli, Chairman of the Board of CuraGen commented that “The Board believes that management is making exciting progress as CR011 moves through the current Phase II clinical trials and that it has taken the necessary actions over the past two years to ensure that CuraGen is a well capitalized organization in a difficult external financing environment. The Board further believes we should consider strategic alternatives that could enhance shareholder value. These alternatives range from selling or licensing CR011, to acquiring additional assets or business lines, to selling the company. The company will retain an investment bank to assist the Board with its strategic review. During our evaluation process, management will remain focused on executing our current business plan.”

Dr. Timothy M. Shannon, President and Chief Executive Officer, also announced that CuraGen has retained JSB-Partners to identify potential acquirers of CR011-vcMMAE. “In an ongoing multi-center study in heavily pretreated patients with breast cancer, CR011 is well tolerated and there is early evidence of activity. Our Phase II program in melanoma also continues to show promising activity”, commented Dr. Shannon. “The potential to move CR011-vcMMAE into more advanced development in both patients with breast cancer and patients with melanoma makes this a good time to seek strategic interest in the marketplace.”

There is no assurance that this process will result in any changes to the Company’s current business plans or lead to any specific action or transaction. While the process is underway, the Company does not intend or expect to disclose any developments regarding the process until, if ever, a definitive agreement is entered into or the board determines to terminate the process.

“We ended 2008 with $88 million of cash and investments on hand, have a clinically active attractive Phase II development asset, and over $500 million in net operating loss carryforwards (NOLs). Yet, our stock price does not reflect the intrinsic value of our assets and we continue to trade at a deep discount to our cash.” commented Dr. Shannon. “We seek to address these value disconnects through the strategic review process.”

The Company also recently completed a privately negotiated transaction with a holder of the Company’s 4% Convertible Subordinated Notes due February 2011 (the “2011 Notes”) in which the Company retired a total of $4.8 million of the 2011 Notes for an aggregate purchase price of $3.8 million or a 21% discount off of face value. This transaction added $1.0 million of net cash to the Company’s balance sheet. The Company now has $14.1 million of the 2011 Notes outstanding. The Company’s burn guidance for the first half of 2009 remains unchanged at $7.0 to $8.0 million and the Company now expects to end the second quarter of 2009 with between $76 and $77 million of cash and investments.

[Full Disclosure:  We do not have a holding in CRGN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

Read Full Post »

Older Posts »

Follow

Get every new post delivered to your Inbox.

Join 5,388 other followers

%d bloggers like this: