Archive for February, 2009

Network Engines Inc (NASDAQ:NENG) has released its results for the quarter to December 31, 2008. We’ve adjusted our valuation down 7% from $25.5m or $0.59 per share to $23.8M or $0.55 per share. With the stock price at $0.51, we’re going to maintain our position for now, but we’re mindful that NENG is a perennial net net stock and so we might take the opportunity to exit if it gets to our target valuation of $0.55.

We started following NENG on January 13 when it was trading at $0.38, which gave it a market capitalization of just $16.5M. The stock is up 34.2% since our initial post to $0.51, which gives it a market capitalization of $22.0M. In November 2007, an activist investor, Trinad Management, pushed the company to “immediately [implement] a share buy-back program.” The company demurred and saw its stock sink to all-time lows.

The value proposition updated

NENG’s Q1 10Q shows an increase in cash, which seems to be largely as a result of reducing accounts receivable and inventories (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):



We are inclined to exit NENG if it gets to our $0.55 valuation. It’s a perennial net net stock, so we think there’s a good chance NENG will be back in net net land again. As we pointed out in our earlier post, Jonathan Heller of Cheap Stocks-fame mentioned it back in October 2005 in a list of the Top 20 Market Cap Companies Trading Below Net Current Asset Value. It was then trading around $1.30 against a net current asset value of around $1.31. Investors buying back in October 2005 had plenty of opportunity to unload the stock at a profit while it traded up to $3.17 in March 2006. We’re planning to do the same again, but at $0.55.

[Full Disclosure:  We do not have a holding in NENG. 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.]

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Audiovox Corporation (NASDAQ:VOXX) is a rarity in our universe: a profitable undervalued asset play. At its $3.73 close yesterday, VOXX has a market capitalization of $85.3M. We estimate the liquidation value to be 50% higher at around $128.4M or $5.60 per share. Howson Tattersal filed a 13D notice in September last year disclosing a 7.3% holding. While VOXX has been another perennial inclusion on lists of net-net stocks, we think it’s hard to ignore at this price.

About VOXX

VOXX is an “international distributor and value-added service provider in the accessory, mobile and consumer electronics industries.” The company markets its products under the Audiovox brand name and other brand names, including Acoustic Research, Advent, Ambico, Car Link, Chapman, Code-Alarm, Discwasher, Energizer, Heco, Incaar, Jensen, Mac Audio, Magnat, Movies2Go, Oehlbach, Phase Linear, Prestige, Pursuit, RCA, RCA Accessories, Recoton, Road Gear, Spikemaster and Terk, as well as private labels through a domestic and international distribution network. See the company’s website here. The company’s investor relations website is here.

The value proposition

VOXX’s sales, operating income and net income increased in the quarter ended November 30, 2008. Net sales for the third quarter were $195.6 million compared to net sales of $183.6 million reported in the comparable prior year period. Operating income was $10.7 million in the third quarter compared to $6.7 million in the preceding third quarter. Net income was $6.5 million compared to net income of $4.7 million in the comparable period. This doesn’t tell the full story however as operating activities used cash of $26.7M for the nine months ended November 30, 2008. The company used less cash for its operating activities compared to the prior year period ($92.9M), but it is still a concern for us. The balance sheet looks interesting (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):

voxx-summaryWe’ve written down VOXX’s receivables by 20% to $144.2M or $6.30 per share and VOXX’s investory by 50% to $74.7M or $3.26 per share to arrive at a total current asset value of $236.7M or $10.35 per share. Deducting total liabilities gives a net current asset value of $119.1M or $5.21. We’ve discounted $46M in non-current assets to $9.2M or $0.40 per share, which, added to the net current assets, gives a liquidation value of around $128.4M or $5.61 per share.

Off-balance sheet arrangements and Contractual obligations

According to its most recent 10Q, VOXX does not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon its financial condition or results of operations.

VOXX has around $42M in contractual cash obligations (including $11M in capital lease obligations and $31M in operating leases), around half of which falls due in the next 5 years and $23.7M falling due after 5 years. VOXX also has another $43M in unconditional purchase obligations falling due in the next 12 months.

The catalyst

Howson Tattersall Investment Counsel Limited filed its 13D notice on September 24, 2008 disclosing a 7.3% holding in VOXX. It seems from the filing that Howson Tattersall paid $18,825,883.44 for 1,508,075 shares in VOXX, giving them an  average purchase price around $12.50 per share. Given that Howson Tattersall has listed in the filing the “Date of Event Which Requires Filing of this Statement” as April 11, 2007, it’s possible that they are an example of the “reluctant activists” we referred to on Monday.


At $3.73, VOXX is trading at a discount to its net current asset value and around two-thirds of our estimate of its liquidation value of around $5.61 per share. We’ve got no particular insight into the business. The negative operating cash flow is an issue and its near term contractual obligations are significant. That aside, we think VOXX is a reasonable punt and we’re adding it to the Greenbackd Portfolio.

VOXX closed yesterday at $3.73.

The S&P500 Index closed yesterday at 789.17.

[Full Disclosure:  We do not have a holding in VOXX. 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.]

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S. Muoio & Co. has called on MathStar Inc (OTC:MATH) to include in the proxy statement for the 2009 Annual Meeting a vote by shareholders to approve a voluntary liquidation of MATH.

We’ve been following MATH since December last year when it was trading at $0.68 because it was a net cash stock with a substantial stockholder lobbying management to liquidate. The stock is up 19% to $0.81 Friday, giving it a market capitalization of $7.4M. We estimate MATH’s liquidation value still to be around 94% 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. Two activist investors, Mr. Salvatore Muoio of S. Muoio & Co. and Mr. Zachary McAdoo of The Zanett Group, 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.”

S. Muoio & Co. attached to its most recent schedule 13D notice amendment the following letter to the board of MATH:

February 10, 2009

Mr. Douglas M. Pihl
Chairman of the Board
MathStar, Inc.
19075 NW Tanabourne, Suite 200
Hillsboro, OR 97124

Dear Mr. Pihl,

It has come to our attention that MathStar has timely received a proposal from another shareholder to include in the proxy statement for the 2009 Annual Meeting a vote by shareholders to approve a voluntary liquidation of MathStar.

As we stated in our letter of December 12, 2008, we believe that a prompt liquidation of MathStar is in the best interest of the company and its stakeholders. We also continue to believe that pursuit of a merger or alternative transaction flies in the face of the wishes of many of the company’s owners.

As such, the board of directors must act in good faith and cause the proposal to be put on the ballot for the forthcoming annual meeting of shareholders.


Salvatore Muoio, C.F.A.
Managing Member

cc: MathStar, Inc. Board of Directors

[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.]

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Ken Squire argues in a feature article in this week’s Barron’s magazine, A Golden Age for Activist Investing (subscription required), that the “political climate, shareholder sentiment and opportunities available to activists” means that “the sun, the moon and the stars have moved into alignment for activist investing.” Squire believes that the knowledge that investors “can’t rely on the markets to create value, so they will have to create it themselves” will turn many formerly passive investors into “reluctant activists.”

Squire makes some interesting points:

1. We are witnessing “the largest spreads ever between price and value”

While we don’t accept that we are yet witnessing “the largest spreads ever between price and value,” we believe that we are getting close. On long-term measures of value (for example, Graham’s 10-year trailing P/E ratio and corporate profits as a proportion of GDP) market prices are well below average and approaching all time lows (See Future Blind‘s post Market Valuation Charts prepared in October last year when the S&P500 was around 1160). More on this at a later date. (Note that this is not a declaration that we are nearing the bottom. We think there’s a good chance the markets will over-correct to the downside and stocks will be undervalued for an extended period).

2. The “economic and political climate will make it much easier for activist investors to succeed”

Squire argues that the “economic crisis has eroded confidence in boards and corporate leadership” and “[shareholders] have less patience for laggard management, indecisiveness and missteps, and are more likely to support an activist.” We don’t disagree with these points, but we dispute that this necessarily translates into success. Incumbent directors have a huge advantage over alternate slates. See, for example, Carl Icahn’s argument that boards and managements are entrenched by state laws and court decisions that “insulate them from shareholder accountability and allow them to maintain their salary-and-perk-laden sinecures.”

3. The “impaired credit markets will make it difficult to implement financial-engineering solutions”

Squire believes the environment will force activists to “focus on operations, strategy and governance, rather than stock repurchases and special dividends”:

There are many companies whose operations or strategy fell short, and activists will identify them and implement plans to improve operations, cut costs and redirect investment.

This is a particularly interesting point. It’s clearly more difficult for an activist investor to articulate to stockholders the benefits of improvements in operations or a redirection of investment than it is to simply promise a dividend or a buy-back, which should in turn reduce their chance of getting on the board. This might suggest that impaired credit markets actually reduce an activist investor’s chance of success.

4. We will see a “significant increase in corporate/strategic acquisitions”

Squire argues that “corporate acquirers have a low cost of capital” which will “compensate in part for the void in private-equity buyouts”:

Activists not only will be open to discussing potential transactions with strategic acquirers, but often will seek them out. The activist-investor board member will want to be involved in negotiating the transaction to assure that stockholders receive the best value.

5. Companies with net cash will attract activist investors

Squire writes that activists will target exactly the type of investments Greenbackd favors:

Given today’s backdrop, many activists are expected to emphasize net cash as an inducement to invest. Large amounts of cash give a company the financial flexibility to withstand economic stress, and make it a more attractive takeover target. Abundant cash also may be an indication that the stock is mispriced. In many cases, price/earnings ratios have been gravitating toward 10, without regard to cash balances.

Based on the foregoing, it’s hard to disagree with Squire’s conclusion that 2009 will be “a busy and exciting year for shareholder activism.” It’s certainly very good news investors like us. Lest we get a reputation for being blind cheerleaders for activist investment as an end in and of itself, we’d like to emphasize that Greenbackd’s focus is undervalued asset situations with a catalyst and we’re almost agnostic as to the source of the catalyst. Our ideal situation is a management prepared to recognize the discount of price to value and undertake some step to unlock that value or remove the discount. We remain ever optimistic that all directors – including those of smaller companies outside the glare of the analyst coverage and the mainstream media – fully embrace their fiduciary duties to stockholders. Our experience is that this doesn’t often happen in the absence of an agitating stockholder. This is the real reason that formerly passive investors become “reluctant activists.” Not because they “can’t rely on the markets to create value” but because they can’t rely on some boards and managements not to destroy value.

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Avigen Inc (Nasdaq: AVGN) has filed the transcript of its earnings call held last Wednesday. In the call, AVGN’s management addresses their estimate of AVGN’s net cash value, their attitude to the MediciNova Inc (NASDAQ:MNOV) offer, and the possibility of a liquidation or a return of capital.

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. 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 a little less than 15% higher than AVGN’s $1.05 close yesterday.

Selected portions of the transcript follow:

On the possibility of liquidation

Ken Chahine [President and Chief Executive Officer]

Oh, okay. So yes, our — so was the question are we committed to liquidation at some point?

Juan Sanchez, [Ladenburg and Thalmann]

Yes. You don’t come out with a real — a proposal to the investors. And in the exercise you guys are going through, are you committing to returning the money back to investors? And is $42 million the money that is going to be available to investors by then, or is a different amount? You see?

Ken Chahine

Juan, our commitment is very, very simple. We’re going to maximize the value. If liquidation ends up being the best offer we have, then liquidation is the best offer we have. There’s no hidden agenda here. It’s simply a matter of maximizing the value.

Is MediciNova the best deal? I don’t really — at this point I honestly don’t know. Could it be? It could be. Is it? I don’t know.

And I think if — let me give you an example, Juan. If you were selling a house and you got an offer for your house and your realtor came by and said you have three more offers that are coming in today, and we have three more that we think are coming next week. I think it’s fair to say that you would probably not take that first offer unless you had at least an opportunity to look at the other three and wait for the other three to come in.

Now, even if you like that first offer, you might say, I think this one is going to be hard to beat. I think you would say that it would be negligent not to at least look at those other offers.

So I think what we’re asking here is not unreasonable. I think it’s absolutely logical, and I think it’s exactly what you and other shareholders on this call would expect — would do. And so that’s all we’re saying.

And so if at the end of the day, is it going to be MediciNova, is it going to be a liquidation, is it going to be sale to a larger company? I don’t know. But I think the commitment absolutely is that whatever it is, it’s going to maximize the value to the shareholders. And if it turns out to be, in our opinion, an M&A transaction, we will propose that transaction and the shareholders will have the right to either vote for it or not vote for it, right?

So at the end of the day, the fate of this Company is not in our hands. The fate of this Company is squarely in the hands of the shareholders. And we’ve protected the burden so that there’s no risk that we’re squandering the money in the meantime.

And again, going back to your — Andy can answer some of the specific questions on the finances, but again, the severance package may or may not be payable at all by the Avigen shareholders. If it turns out that a company comes in and buys us out and retains some of the employees, then the answer is, no, there would be none.

So I think, again, we’re not trying to avoid the question.

Juan Sanchez

So the $42 million doesn’t include the severance package?

Ken Chahine

I don’t know. I’m going to pass that on to Andy, and he can answer that specifically.

Andy Sauter [Chief Financial Officer]

All right, Juan. So the $42 million does not remove any severance payments. At the end of the year we will still have a year of obligations with regard to our lease billing. Again, that’s only one more year. We avoided any extensions that could’ve put further future monies that risk.

Obviously, the process of liquidation involves a number of things. There would most likely be significant monies put in escrow to cover potential unidentified obligations for a period of time. A custodian would have to wrap up any remaining corporate rights and obligations, and that could take a couple of years.

So how exactly liquidation would spill out is something that is very hard to project, exactly what the net payment to shareholders would be and that those delays in distribution further reduce the value. And right now we believe that the value of our current assets and the potential to enter into a successful M&A has significant value over liquidation.

On the MNOV offer

Juan Sanchez

Just one last question before I move on (inaudible). In a nutshell, what do you guys find fundamentally slow or wrong with the MediciNova offer? What’s — what don’t you like about this offer that you’re not willing to entertain it in a more active way, so that –(multiple speakers) See what I mean?

Ken Chahine

Juan, can you — yes. I’d like you to please clarify, though. What have we said that’s said it’s not attractive, and what have we done to not entertain it more aggressively? — so I can answer your question more directly.

Juan Sanchez

The — it’s more like the body language that you guys transmit seems to be that the MediciNova offer is the last option that you guys have and it’s not attractive for you at this point. So from the financial point of view, what’s not to like and what’s to like?

Ken Chahine

Well, I’m very curious at that statement because we have tried, as we stated clearly in our 14D9, to engage MediciNova. As of yesterday, I am very pleased that MediciNova and Avigen came to an agreement to initiate diligence. Up until now MediciNova has been unwilling to sign a confidentiality agreement that every other company has signed.

So we’re not — and this is not a special one for them at all. So again, I take a little bit of issue with that because I think that we have not put them in any special box or disadvantaged them in any way. They’d like to preserve their right to continue to file press releases and other documents, and that’s fine. We respect that. It’s their right, and we respect their right to do that.

However, we do have a common asset in AV411, and I think it’s important that we protect that asset for Avigen shareholders in the event that if a transaction is not consummated with MediciNova and a larger pharmaceutical company would like to come in here and purchase that asset, that we haven’t devalued the asset by sharing a bunch of confidential information with MediciNova.

So we are now just starting to assess MediciNova, and we’re going to look at it very carefully. If it is the winning bid, I guarantee that it will be up to the shareholders to decide whether they like that transaction or not.

I absolutely have no judgment on that right now because we haven’t had a chance to do diligence. So I’m pleased that we’re going to get started, and we’ll see how it stacks up to the rest of the offers.

On AVGN’s net cash value

Edgar Bordovski, [Burlingame Asset Management]

Can you guys put a bound on the time at which shareholders can decide on the state of the Company and whether all possible transactions that you consider attractive will be presented before Management decides to proceed with those transactions? I understand you can’t pinpoint when that will be, but can you put an upper bound on how long we have to wait before we have clarity on all the attractive transactions?

And then my second question is, what is the lower bound on the cash, net of liabilities including remaining liabilities like the leases that you will still have to pay and liabilities that you may not be sure you have to pay? What is the net number at the end of the year? Thank you.

Ken Chahine

Was that — I think I got it right. It’s Edgar? So, Edgar, yes. So thanks for your question.

So yes, we are moving actually pretty rapidly. And I think — I will be honest with you, I think a lot of the pressure is coming from more the capital markets than any other. There’s a lot of companies out there that are in need of cash. Some of them have very attractive assets. And I think that’s what’s really driving the process.

I firmly believe in the next month or two we’re going to have some really good clarity. This is not something that’s going to drag out at all. I just don’t think that, A, we have any desire to drag it out, and, I don’t see any need to drag it out.

So I think in the next month or two we’re going to have a lot of clarity. And again I want to reiterate, I don’t know that we will find something, but I think it’s our duty and I think it’s in all shareholders’ best interest for us to go out there and see if we can find something that’s better.

And at the end, you and other shareholders are going to vote as to whether you agree that that transaction is better.And we know that that’s a high hurdle, and we don’t intend to present anything to shareholders that we don’t think is going to meet that hurdle.

So if — okay again, in a month or two I think we’re going to have some clarity, we will present it. We’ll present what we have to shareholders, and then we’ll go from there. So — then Andy, if you can just address –?

Andy Sauter

Yes. I mean, I guess just to try to reiterate, your question about what’s the lower bound on our cash. At this point, if we go through the year with this limited burn and obligations and nothing else happens, at the end of the year we believe our cash will be between $40 million and $42 million.

At that point we will have one year left on our lease obligations. That’s probably a two-year obligation — or a two-year cost that would have to be paid no matter what. And in the meantime we have significant opportunity to bring in additional cash that exceed our expenses, both through the transaction related to AV411, both through keeping up with potential Genzyme milestone payments, and then basically giving us a free look at these M&A opportunities that could create significant value for the shareholder base and give them a chance to choose something that they might not otherwise have access to.

So that’s how we look at the cash. It’s been preserved. We’ve set our year-end estimates. We’ll have very little obligations left after that. And there’s a lot more potential upside in the meantime than that lower bound is that you’re asking about.

Edgar Bordovski

So just to clarify, when you say very little liabilities, can you put an upper bound on those liabilities at the end of the year?

Ken Chahine

So, Edgar, I guess what we’re trying to say — and I will say it since I’m not a CFO — that — maybe I will say it a different way that maybe you can relate to better.

What is the only expense that shareholders would have to incur let’s say in 2009 that you wouldn’t have to incur otherwise? The reality is that it’s about — it’s under $3 million worth of salaries going forward. So even a very modest, I would argue, almost unattractive transaction in 411 will more than make up for that expense.

Other than that, I think the public listing is something that’s worth keeping up because we think we can get the value, and I can tell you now some of the offers that we have, there’s definitely value in that public listing. I think the public listing could more than make up for all of that.

So what’s really variable here — it’s very little. It’s $2 million in the salaries. There’s some in the listing, which I would argue absolutely we should maintain. And that’s it, everything else has to be paid out whether we are here for the remainder of the year or not.

So does that help a little bit?

Edgar Bordovski

So just to conclude, number one, shareholders will be able to vote within say several months as to all the possible transactions that Avigen is considering, and Avigen will not pursue a transaction without that vote. And number two, the liability at the end of the year that remains, you’ll have $40 million in cash, but you will have some liabilities relating to leases and other things. That number is going to be $2 million, $3 million, $4 million. It’s not going to be more than that.

Ken Chahine

I think that’s right. It is very difficult to think that we can cut the expenses significantly, if at all, without starting to significantly impair the value of the assets that are here.

So I think, yes, you are absolutely right. The cash is safe. The one thing that is a little bit of a variable cost — and we hate to bring it up, but it’s the reality — is the legal costs. We’ve probably spent more on legal costs now than we have spent in any other year since I have been here. I’m an attorney. We handle our finances and our legal costs very modestly, like we do the rest of the company. That’s a variable cost that I can’t help you with because I don’t know what’s down the pipe.

But shareholders will absolutely have the opportunity to vote. There’s a special meeting that has been called. We absolutely plan to have that special meeting. By the bylaws, it’s 120 days from when it’s called. When are we going to have that meeting? We really have not set a date, but we just want to make sure that you had the opportunity to say, yes, I either like this transaction or don’t like this transaction — at the time that you make the vote. And we’re happy with the decision. Whatever it is that the shareholders want, we will abide by.

Edgar Bordovski

Okay. Can I just get an answer on the net liability at the end of the year in terms of putting an upper bound on it? You mentioned it’s going to be very little, but can I — is it possible to quantify that number?

Ken Chahine

I’ll try this — Andy, please feel free to jump in — because I think I have these memorized, right? It’s — we have the leases. Those are in the 10-K. Andy went through them. It’s $2 million on the leases. They would be more except that we’ve been very aggressive at subleasing.

There is some accrued liabilities that came in the fourth quarter. You can’t just stop a trial and decide that you’re not going to pay anything further. There has been work that has been accrued up until the time that we terminated the trial. Those have now been paid, so there’s really no further obligations or very little on the AV650 and other trials.

I’m trying to think. There’s some wind-down costs that would normally have to happen. If we were to — there’s a potential of a severance — partial payment or full payment, depending on, again, what the transaction is or isn’t.

And am I missing anything?

Andy Sauter

No. Again, the only last thing here is that to wind up a company there is some sort of cost of custodialship and execution. So if we are not able to deal with the AV411 asset during 2009, there would be some cost to dealing with it after 2009. It’s hard for us to project what that would be, but as far as you can tell — or as far as we can reassure you — the only obligations we’re committed to that are on the books that you can see is going to be the one last year of leases, which is $2 million net. So we’ve certainly tried to point that out a couple of times.

Ken Chahine

Yes. And we’re certainly not trying to avoid the question. It’s just that it’s not as simple of an answer. A judge in a dissolution proceeding, for example, is not going to just take the AV411 asset and leave it completely untouched, right? There’s going to be a duty for that dissolution judge to actually try to monetize that asset, right? Well who’s going to do it? Well, it could be the Management. It could be somebody else.

But what we’re trying to point out here is that it will be someone and there will be some cost. Okay? So exactly what that, we can’t tell you for sure.

The other thing is, the judge — dissolution judge — isn’t necessarily going to say, okay, that’s it; we’re not going to keep any reserves for liabilities.

We’ve run some clinical trials, and so there may be some liabilities on the D&O side. It could be liabilities for clinical trials. There may be a reservation there that is held out. What that’s going to be? Again, we’re not trying to avoid it. There’s just no really good way for us to do it. That’s typical in a dissolution proceeding.

So I really hope I’m — we’re answering your question as clearly as possible. And we’re not trying to complicate it any further.

On the chances for a return of capital

Joe Spiegel, [Chalet Capital]

Great. I’ve got just two other quick questions. The first is, you guys talk a lot about the value of the public listing, but you said yourself it’s costing you $1.5 million. Now, we can all go and look at the present value of negative $1.5 million going out till infinity.

It seems to me that the value of the public listing is far less than your advisers are telling you. It’s a great drain. So I don’t think you should put too much weight on that.

The number two — and then I guess that was a statement, not a question. But the question becomes, have you looked at NUCRYST and this situation there? The largest holder wanted a return of capital. NUCRYST was tremendously overcapitalized. And I believe they were going to have their special meeting, which they agreed to hold, and the vote’s tomorrow, and the chances are, I would say, 100% that NUCRYST shareholders will receive a return of capital. It will leave the company with plenty of cash to pursue their business objectives or have an acquirer acquire their programs.

What — why do you guys feel that returning capital is an either/or? Capital — a dollar in the bank is only worth a dollar. There’s no multiplier in acquisitions for money, for cash. Why not return capital to shareholders, give us $1.00 a share. BVF is happy. Your other shareholders are thrilled, and you still have more than enough money to run the business. Why is that not the top option?

Ken Chahine

It may very well be. We’re not saying that it’s not.

Joe Spiegel

If it’s the top option, do it. Just do it.

Ken Chahine

Well, but I mean (multiple speakers) I’m sorry. Did I get the — is it “Joe”?

Joe Spiegel


Ken Chahine

Joe, I mean, I don’t know this other company’s situation.

Joe Spiegel

Take a look, NCST.

Ken Chahine

That’s fine. I don’t know how long they were operating without sort of the business model. I want to just take a step back.

We are absolutely not dragging our feet. I think you can go back — and I think you even said that in many ways we’re handling this in a professional and admirable way, because we aren’t dragging our feet, and so — but this happened — the third week of October is when we announced the data. We’ve restructured. We’ve cut costs. We’ve sold one asset, and we have just engaged the process. So — and we said it’s going to take a month or two.

I’ve seen this play out many, many times. If we in the next month or two come to some decision as to where we are, we’re going to be at the very top of quick and efficient processes. So all we’re saying is, look, that may be very well the answer. And if that’s the answer, we will absolutely pursue it.

But I think — we’ve been in this thing for two months, and I think we’ve had the strategic process for three or four weeks. So I don’t think it’s even been four weeks. I think it’s been like three weeks. So all we’re saying is that. We’ve had very honest discussions in the Board, and I can tell you unequivocally, the Board is not at a position where it says, it’s an M&A or bust. We’re definitely not that way.

But we’re saying, look, we’re in a very interesting situation where capital markets are obviously shut. Where would a company that they had just launched a product — or was just about to launch a product — where would they normally get their working capital? Well, normally they would go to the credit market. That would be the most efficient way, and that’s the least dilutive way for shareholders. And then they would launch a product and then repay that debt.

Well, that whole market is shut down, right? So (multiple speakers) I guess — would you be completely opposed to the concept — if we could have a Company that would be cash flow positive in the very near term and have revenues by the end of let’s say the year — just throwing it out — would that be something that you would absolutely not consider?

Joe Spiegel

Well guys, you have to understand. You are not a bank. You’re a biotechnology Company that unfortunately is seeing hard times. You can still run your business and still bring value to the shareholders through the AV411 program while returning capital to your investors. It doesn’t have to be either/or. But remember, you’re not a bank.

Ken Chahine

Understood. And I think we do have very strong expertise in identifying opportunities that are good. And all we’re saying is, we can present it if we find one. And if we do, great. And if not, we do not intend to be a bank. But a bank is also not — doesn’t have the expertise we have.

So all we’re saying is, hey, if we can find an opportunity that makes sense — and we may not — then that’s fine. I mean, we’ll do that.

Again I want to continue to reiterate, we really — there is absolutely no hidden agenda here. The Board is completely open. And if that is the best option, we can guarantee that we’re going to pursue it.

Joe Spiegel

Well, great. I appreciate you guys taking the time to explain all of this on the conference call. And like I said, a lot of companies wouldn’t even go that far. So I do think you are doing a good job. Do see what happens at NUCRYST. And do consider the fact that these are not either/or proposals. You can satisfy all your constituents.

[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.]

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The Manual of Ideas has a copy of Empirical Finance Research’s paper “Fundamental Value Investors: Characteristics and Performance” (.pdf). The paper examines the investment methods of professional value investors (defined as the members of the valueinvestorsclub.com) and concludes that value investing is a broad church encompassing many different styles, but predominantly consists of “Warren Buffett-style growth investors:”

We find that investors are overwhelmingly concerned with assessing intrinsic value. Discounted cash flow models, earnings multiples, GARP, and other similar valuation techniques are overwhelmingly used (87.50% include this analysis in their recommendation). Based on these results, professional value investors tend to be Warren Buffett-style growth investors…

The paper seems to quantitatively confirm our qualitative (read, baseless) assertion in the About Greenbackd page that “assets are a contrarian measure of value.” Less than a quarter of professional value investors incorporate the value of tangible assets in their investment decisions:

[A]pproximately 24% of value investors do incorporate the classic value technique of focusing on tangible asset undervaluation. The other favorite tools of value investors are open market repurchases (12.12%), the presence of net operating loss assets (5.29%), restructuring and spin-off situations (5.12%), and insider trading activity (4.70%).

The paper also indirectly tackles the question oft posed by commenters on this site which, incidentally, questions the very raison d’etre of Greenbackd: why opportunities to invest below liquidation value and alongside activist investors persist even after the filing of the 13D notice:

According to efficient market logic (Fama (1970)), the rational arbitrager should act alone, drive the price to the fundamental level, and reap all the rewards of the arbitrage he has found. Unfortunately, arbitragers find this difficult in practice. Two primary reasons for this are capital constraints and the limits to arbitrage arising from the realities in the investment management business (Shleifer and Vishny (1997)).

The paper is typical of Empirical Finance Research’s rigorous approach and well worth the effort.

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InFocus Corporation (NASDAQ:INFS) has released its results for the fourth quarter and full year ended December 31 and they are, frankly, nothing short of horrific. As always, Greenbackd’s concern is primarily for the state of the balance sheet and the liquidation value of the company. Here, the news is bad:

Balance Sheet

Total cash and restricted cash as of December 31, 2008 were $33.4 million, a decrease of $36.9 million from the end of the third quarter. The reduction in cash was primarily driven by changes in working capital, the cash loss from operations and settlement on foreign exchange hedges. Inventories at the end of the fourth quarter were $38.5 million, an increase of $8.1 million compared to the third quarter of 2008.

We generally don’t pay too much mind to earnings. We welcome it when earnings fall off a cliff and drag stock along for the ride because it creates opportunities for investors like us who are focused on the balance sheet. We do, however, take issue with a management burning through more than half of a company’s cash in quarter, especially when that cash is set alight in the “settlement on foreign exchange hedges.” An investor cannot have any confidence in a management that, confronted with cash losses from operations, not only neglects to fix operating cash flow but finds a new way to lose money. Remember INFS’s adoption of a poison pill “to help ensure … our Board of Directors is able to conduct its review of strategic alternatives without the threat of coercive takeover or control tactics that do not offer shareholders a fair premium”? Surely that argument is at an end now. Management has failed. It’s time for Nery Capital Partners to bayonet the wounded and put INFS’s stockholders out of their misery.

When we started coverage in December last year, INFS had a market capitalization of $25.6M. We estimated its liquidating value to be more than 80% higher at $46.7M or $1.15 per share. With Nery Capital Partners and Miller pushing the company to enhance its stock price, we believed INFS to be an attractive opportunity. That seems to have been a mistake. We don’t have a full 10Q / 10K to review, so we’ve adjusted our earlier model based on the information in the press release attached to the 8K (described above). Based on that incomplete information, we estimate that INFS’s liquidation value could now be as low as $8M or $0.20 per share. Given that INFS closed yesterday at $0.37, our reason for holding the stock is gone. Accordingly, we have to close out the position. We opened it at $0.63, so our INFS position is down 41.3% on an absolute basis. The S&P 500 Index closed at 873.59 on December 12, 2008 and closed yesterday at 833.74. That’s a return of -4.6% for the index and means we’re off 36.7% on a relative basis. In all, a bitterly disappointing outcome.

If you have the stomach for it, you can read a summary of the whole sorry tale below. Looking back, it seems that there were a number of portentous steps taken by management that should have tipped us off:

After we opened our position on December 12 last year, INFS announced that it would “restructure.” We wrote that management “believes it will achieve profitable operations with an 18% gross margin target and operating expenses in the range of $10-11 million per quarter.” We noted that projections about future profitability often don’t turn out as projected, saying:

They are made by managements deaf to what the market is telling them about the company. As a result, we are much more interested in the company’s plans to unlock the value in the assets. On that front, the news is mixed.

INFS has previously announced that it had retained an investment banking firm to provide “advisory services.” The new announcement says that these advisory services include “advice concerning unsolicited offers from outside sources expressing interest in purchasing the Company.” This is a positive development. The bad news is that the company has suspended the stock repurchase plan, which is slightly disappointing. We say “slightly disappointing” because a buy back of 4 million shares over a three year period does not have a meaningful effect on the per share value, so cutting it makes almost no difference. It does show, however, that management is ignoring obvious value-enhancing opportunities for stockholders.

There was a brief glimpse of light when we read a report that a group of “high-powered executives,” including INFS’s co-founder Steve Hix, wanted to buy the company if they could get financing. The executives planned to save INFS from the “New York sharks” who wanted to liquidate the company for a quick profit. Said one of the group:

We’ve got some whispers that there’s a guy in New York looking at buying 50 percent of this company, and he’ll liquidate it. We are scared. We don’t want that to happen to this company. We’ve been working for nine months on a way to save it.

Nery Capital, presumably one of the “New York Sharks,” then upped its stake to 12.2% of INFS’s outstanding stock. It seemed we might be in a competitive bid situation, which would have been very good news for stockholders as it often presages a fully valued offer for the company.

Unfortunately, the news then took a decided turn for the worse when INFS’s management adopted a poison pill, which it euphemistically described as a “Shareholder Rights Plan.” We wrote that calling such an abomination a “Shareholder Rights Plan” was pretty galling when its effect was to take rights away from shareholders and deliver them to management. We were also unhappy with the suggestion that the board were the ones to determine what was “in the best interest of [INFS] and its shareholders” and how much of a premium was “fair” given the level at which the stock languished (when we wrote that, the stock “languished” at $0.78, more than 100% higher than the level at which it languishes today).

Tuesday’s results announcement is just the final nail in the coffin. We care little for the tumble in earnings. We do care that the company has burnt through more than half its cash in a single quarter in pursuit of “foreign exchange hedges.” We’ve lost what little confidence we had in management’s ability to put shareholders first. That wouldn’t ordinarily cause us to exit a position. The accelerating destruction of value is, however, too much, and we’ve closed out the position.

[Full Disclosure:  We have a holding in INFS. 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.]

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Biotechnology Value Fund (BVF) yesterday called for the management of Avigen Inc (Nasdaq: AVGN) to “address certain fundamental questions BVF believes need to be answered in order for stockholders to effectively evaluate [AVGN]’s future strategic direction.”

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 a little less than 20% higher than AVGN’s $1.04 close yesterday.

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

Biotechnology Value Fund, L.P. Requests Avigen Board to Provide Critical Information to Stockholders

Tuesday February 10, 2009, 1:04 pm EST

Raises Questions to be Addressed by Board and Management on Avigen’s February 11, 2009 Conference Call

SAN FRANCISCO, Feb. 10 /PRNewswire/ — Biotechnology Value Fund, L.P. (“BVF”), today called for the management of Avigen, Inc. (Nasdaq: AVGN – News) to address certain fundamental questions BVF believes need to be answered in order for stockholders to effectively evaluate Avigen’s future strategic direction. Avigen announced in its January 14, 2009 press release that it will hold a conference call on Wednesday, February 11, 2009 (time to be announced) to, among other things, “provide an update on the progress of the strategic review.” To make that update more effective, BVF raises the following questions and challenges the Board and management to finally address these fundamental issues:

1. Why has Avigen failed to call the special meeting of stockholders that would permit stockholders to have a say in Avigen’s future? BVF delivered its request for a special meeting to the Board over a month ago. To date, the Board has failed to call the requested special meeting. This meeting would provide stockholders with the ability to exercise their fundamental right to vote on Avigen’s strategic direction. If stockholders agree with BVF, they can vote to remove existing directors and elect BVF’s nominees. If the Board does not act prior to Wednesday, March 11, 2009 to set a meeting date, BVF can unilaterally set the date of the special meeting and would anticipate setting a meeting date for early April.

2. Why has Avigen not offered downside protection to stockholders? BVF has repeatedly called on Avigen to commit to protecting stockholder value by offering all stockholders a fixed amount of cash under any resulting scenario. Management has continually resisted this suggestion, leading us to believe that Avigen intends to gamble that money. MediciNova has proposed a transaction that offers critical downside protection to stockholders. So why hasn’t Avigen done so directly?

3. Why does Avigen not consider the MediciNova proposed merger to be a compelling outcome for stockholders? BVF does not understand why Avigen appears to be resisting the MediciNova transaction. Economically, based on publicly available information, we believe this proposed transaction to be in the best interest of all stockholders. In a worst case scenario, stockholders would receive approximately Avigen’s liquidation value. In a best-case scenario, stockholders would own 45% of the combined company.

4. Is management requiring downside protection for Avigen stockholders as a condition to all potential “strategic alternatives?” If this is the case, Avigen should state so explicitly so stockholders can stop worrying about losing the bulk of their investment. If not, please explain how any alternative without downside protection could be more attractive to stockholders. Most biotech companies in Avigen’s shoes have managed to destroy the majority of stockholder value through by pursuing their favorite merger. How can Avigen justify standing in the way of the downside protection being offered by MediciNova?

5. What is the estimated net liquidation value of Avigen? In response to our tender offer, management claimed that Avigen is currently worth more than our offer of $1 per share, without support of any kind. We call on management to publicly provide their estimate of Avigen’s liquidation value, together with a detailed analysis. Management should also disclose how much cash was burned by Avigen since its last public filing on September 30, 2008 and how much cash net of debt and obligations will be available on March 31, 2009.

6. What are Avigen’s total “golden parachute” obligations and how much time did Avigen’s CEO spend in Utah versus California during the critical months of December and January? In a shameless example of acting in their own self-interest, in October 2008 management increased its “golden parachute” payments in order to “to attract and retain key executive talent.” At the time, we estimated these payouts to total at least $3 million, an incredible 16.5% of Avigen’s entire market value at the time of adoption. BVF believes this is particularly egregious given the current economic environment. What is the current value of these obligations and how many employees stand to receive these payouts?

7. What is Avigen’s relationship with its financial advisers and how are they being compensated? In January 2009, the Board of Directors announced that it had retained not one but two financial advisers, RBC Capital Markets and Pacific Growth Equities LLC. Why did the Board find it necessary to engage two financial advisers? Will these advisors be paid in the same currency as stockholders or will they, like management, take cash and leave stockholders with paper?

Mark N. Lampert, the General Partner of BVF stated, “Since management announced the failure of AV650 in October of last year, we have found their reluctance to address certain issues, which we believe are integral for stockholders’ assessment of Avigen’s current prospects and future direction, to be incredibly frustrating. We are hopeful management will not hide behind vague generalities, and will provide specific answers to these important questions.

Mr. Lampert continued, “We hope the Board and management will address our questions and concerns and provide stockholders with the disclosure necessary to properly evaluate and determine the best strategic direction for Avigen. We call on each Board member, consistent with his fiduciary duties, to act in the best interests of all stockholders. If we determine this Board has acted inconsistently with its fiduciary duties, we will not hesitate to take any and all actions within our rights as stockholders, including commencing litigation and/or seeking an injunction, in order to protect our investment in Avigen. We look forward to the Board’s and management’s response.”

[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.]

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Biotechnology Value Fund (BVF) responded on Friday to Avigen, Inc.’s (NASDAQ:AVGN) announcement that its board is “considering ‘strategic alternatives,'” announcing that it is “gravely concerned” that AVGN’s announcement is “silent on downside protection for all stockholders.”

The full text of BVF’s announcement is reproduced below:




NEW YORK, February 6, 2009 – BVF Acquisition LLC (the “Purchaser”), an affiliate of Biotechnology Value Fund L.P. (“BVF”), announced today that it is gravely concerned that today’s announcement by the Board of Directors of Avigen, Inc. (NASDAQ:AVGN) that it is considering “strategic alternatives” is silent on downside protection for all stockholders.

Speaking on behalf of BVF, Mark Lampert, BVF’s General Partner, stated, “As the largest stockholder in Avigen, holding 8,819,600, or approximately 29.63% of Avigen’s outstanding shares, we are worried that this Board is embarking on a path that will use the companies cash and valuable assets in a misguided transaction which offers no downside protection to stockholders — a key feature of the proposed merger with MediciNova . The landscape is littered with numerous parallels in which cash shells like Avigen have entered into transactions promoted as value-creating, but which ultimately left investors holding nearly worthless stock. Our nominees are committed to closing the downside-protected merger with MediciNova. We are disappointed that the current Board seems to be more interested in entrenching itself by means of implementing golden parachutes and a poison pill, actions that we believe are detrimental to the creation of value at Avigen. We reiterate our call to the Avigen Board to institute downside protection for all stockholders.”

Separately, BVF is notifying the SEC of significant and blatant inaccuracies in Avigen’s 14D-9 filing. BVF will hold Avigen responsible for any harm caused to BVF by these inaccuracies.

“We believe Avigen’s board and management has a long history of failure and waste and do not believe this Board should be making any decisions about Avigen’s future. Any decision by this Board for the direction of Avigen should be subject to a vote of stockholders,” Mr. Lampert said. “We note that Avigen’s directors and officers own an aggregate of 48,233 shares of Avigen stock, as opposed to BVF’s over 8.8 million shares. BVF shares the interests of all stockholders in the direction of the Company, and has never requested any benefit in which all stockholders would not fully participate. Our tender offer provides other stockholders with a liquidity option. We welcome any stockholders who do not wish to tender to continue as holders alongside BVF.”

BVF continues to urge the Avigen Board to stop stalling and to promptly call a special meeting of stockholders to enable the true owners of the company, the stockholders, to determine the fate of their investment. BVF submitted a request on January 9, 2009 for Avigen to call special meeting. Today, nearly one month later, the Company has taken no action in this regard. At the special meeting, stockholders will be asked to replace the existing Board with directors who would be dedicated to maximizing value and minimizing risk and waste on behalf of all Avigen stockholders. BVF believes that stockholders who are concerned about the continuing destruction of value at Avigen – whether or not they intend to tender their shares – should urge the Board to call a meeting as soon as possible.

On January 23, 2009, BVF commenced a tender offer at $1.00 per share, which represented a premium of 35% over the closing stock price of $0.74 on January 8, 2009, the day before BVF announced its desire to replace Avigen’s incumbent Board of Directors. Subsequent to the commencement of BVF’s tender, Avigen’s stock price has increased to above the tender price. The offer, which is not subject to any financing condition, was and is intended to give certain stockholders, who desire near-term liquidity, an alternative to the proposed merger with MediciNova. Each stockholder should make their own decision on whether or not to tender.

The tender offer is conditioned upon, among other things, the BVF nominees being elected or appointed to the Avigen Board of Directors so that they would constitute a majority of the Board. If placed on the Board, the BVF nominees would, subject to their fiduciary duties, pursue merger negotiations with MediciNova, Inc. or other actions that would be designed to enhance value and minimize risk for all Avigen stockholders.

MacKenzie Partners, Inc. is the Information Agent for the tender offer and any questions or requests for the Offer to Purchase and related materials with respect to the tender offer or the special meeting may be directed to MacKenzie Partners, Inc.

[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.]

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The board of Avigen Inc (NASDAQ: AVGN) has responded to Biotechnology Value Fund’s (BVF) cash tender offer to purchase the outstanding common stock of AVGN, writing that the offer is “inadequate and not in the best interests of stockholders.”

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 a little less than 20% higher than AVGN’s $1.04 close yesterday.

The letter to AVGN stockholders is reproduced below:

Dear Avigen Stockholder:

Your Board of Directors has determined that the unsolicited conditional offer (“Offer”) by BVF Acquisition LLC (“BVF”) to acquire your shares is inadequate and not in the best interests of stockholders. The Board strongly urges you not to tender any shares into BVF’s Offer, and to withdraw any previously tendered shares. We believe we can create more value for your investment than the $1.00 per share that has been offered by BVF.

To that end, we are pleased to report good progress in our process of considering strategic alternatives to maximize stockholder value. In the last few weeks, Avigen has received multiple proposals that place significant value on its cash position, intellectual property portfolio, AV411 product development program, and public listing on the NASDAQ Global Market. We expect to receive additional proposals in the weeks ahead and are optimistic about achieving our objective of creating significant value for all stockholders.

Reasons for the Board’s Recommendation to Reject the BVF Offer

The Board cited the following reasons for recommending that stockholders reject BVF’s Offer:

* The Offer price is inadequate and substantially undervalues Avigen. The Board believes the Offer price substantially undervalues Avigen’s business, including its cash position, AV411 development program, intellectual property, license with Genzyme, experienced management team and public listing.

* We believe we can structure a transaction that will allow you to receive value for many or all of the company’s assets. The Board believes that the current global economic crisis provides significant strategic opportunities to companies such as Avigen that have a strong cash position and public listing. In addition to pursuing a potential strategic relationship with MediciNova, Inc., we have recently received other written proposals which appear competitive to the MediciNova proposal. These proposals place significant value on many or all of Avigen’s assets, and we believe we will receive additional proposals in the weeks ahead.

* The Avigen stock price has recently traded as high as $1.06 per share, and closed February 5, 2009 at a price of $1.00 per Share.

* The BVF Offer transfers to BVF any future increases in the price of your Avigen stock. Under the terms of BVF’s Offer, if you tender your shares, and the Offer is consummated, you would not receive more than $1.00 per share. The Board does not believe that BVF would make this Offer unless it expected the stock price to increase.

In fact, BVF states in its Offer that “[t]he Purchaser is making this Offer because BVF believes that the purchase of Shares at the purchase price pursuant to the Offer represents an attractive investment for the Purchaser.” If you tender your shares to BVF and the Offer is consummated, BVF will benefit from any gains in Avigen’s stock price, not you.

* The BVF Offer is not a firm commitment to you and is unlikely to close by the Expiration Time. The Offer has conditions that make it unlikely to close on February 23, 2009 as stated in the Offer, and carries significant uncertainty that the Offer will be consummated at all.

Avigen’s Board is committed to listening to its stockholders and working with them to achieve the maximum value of the company’s assets. The Board has met and interacted with BVF a number of times, received and evaluated its proposals, and tried to draw on its ideas in a collaborative manner. These efforts to work with BVF are described in detail in Avigen’s Schedule 14D-9, which accompanies this letter and has been filed with the Securities and Exchange Commission.

The Board also has worked diligently to engage in discussions with MediciNova, Inc., which in December 2008 proposed acquiring Avigen. Since making that unsolicited proposal, however, MediciNova has been slow to advance discussions, as more fully described in Avigen’s Schedule 14D-9 filing.

Our Pledge to Stockholders

Avigen’s Board and management took decisive action since the announcement of our AV650 trial results on October 21, 2008, and acted swiftly to preserve cash. We believe the value of Avigen’s remaining assets is significant and the potential for a strategic transaction is worthy of consideration. Whatever the outcome, we intend to apply the same financial judgment used in the past to decisions going forward.

In the meantime, Avigen intends to provide its stockholders with regular updates and to continue to work with all its stockholders in a thoughtful, collaborative and respectful manner.

Signed for the Board of Directors:

/s/ Zola Horovitz, Ph.D.
Zola Horovitz, Ph.D. as Chairman of the Board

/s/ Kenneth G. Chahine, Ph.D., J.D.
Kenneth G. Chahine, Ph.D., J.D. as Chief Executive Officer

The relevant portion of AVGN’s Schedule 14D-9 filing follows:

Although BVF had previously been a significant stockholder of Avigen, BVF’s filings with the SEC show that BVF had sold almost all of its Shares prior to October 21, 2008. Specifically, in the two months prior to October 21, BVF sold more than 640,000 Shares, at prices ranging from $3.95 to $4.60 per Share.

On October 21, 2008, Avigen announced that the top-line data from its AV650 trial for the treatment of spasticity in patients with multiple sclerosis did not meet its primary endpoint. As a result of this announcement, Avigen’s stock price dropped by more than 80% and, on the same day, BVF purchased more than 8,100,000 Shares in the open market at an average price of approximately $0.58 per Share.

Avigen held a conference call announcing the data from the AV650 trial. On the call, Avigen stated that the management and Board were pleased with the trial design and execution, but unfortunately the results were unequivocal. As a result, the AV650 program would be immediately terminated and no additional investment in the program was planned.

On October 22, 2008, Avigen’s representatives met with BVF’s representatives. At the meeting, BVF’s representatives expressed admiration for the team’s past performance in creating stockholder value. BVF proposed that Avigen, given its expertise and cash balance, look for attractive companies to merge with or acquire. BVF expressed its belief that such a strategy could lead to a significant return on its recent investment.

Avigen’s Chairman, Dr. Zola Horovitz, invited Mark Lampert, President of BVF, to present his views to the Board at the upcoming Board meeting on October 30, 2008. Mr. Lampert presented at the meeting and again expressed his admiration of the Board and management on taking swift and decisive action to terminate the AV650 program. However, instead of pursuing strategic alternatives, Mr. Lampert recommended to the Board that Avigen immediately liquidate. Following Mr. Lampert’s participation, the Board approved management’s recommendation to significantly reduce head count and to monetize both the AV513 and AV411 assets through either a partnership or sale transaction, and authorized management to initiate a process to identify potential strategic opportunities that could maximize stockholder value and result in returns that exceeded Avigen’s liquidation value.

On the next day, and without waiting for any response from the Board, BVF filed an amendment to its Schedule 13D expressing the same view Mr. Lampert had expressed at the Board meeting and threatening to bring a proposal for liquidation directly to a vote of the stockholders.

On November 3, 2008, Avigen announced a significant restructuring aimed at preserving cash and reassessing strategic opportunities, including staff reductions of over 70 percent of Avigen’s total workforce, as approved by the Board on October 30.

Dr. Kenneth Chahine, Avigen’s CEO, continued to have an open dialogue with Mr. Lampert through phone conversations and emails. Dr. Chahine tried to reassure BVF that Avigen was going to conduct an orderly and efficient process and that Avigen was being fiscally prudent. Mr. Lampert expressed his opinion that Avigen should grant BVF a “put option” (an option to sell its Shares back to Avigen at a set price in the future) to guarantee the minimum “worst case outcome” for BVF. Dr. Chahine expressed that such a put option could potentially weaken Avigen’s negotiating position in its efforts to monetize AV411 or a sale of Avigen. Dr. Chahine explained his concerns by using the analogy of someone trying to sell their house for full value when the buyers know the house is scheduled to go into foreclosure at a fraction of the price in the future.

On November 21, 2008, Avigen entered into the Rights Agreement described in more detail in Item 8 below, in order to discourage a hostile takeover by a third party at a price that would prevent stockholders from obtaining fair value for their Shares.

During the next two weeks Avigen continued discussions with strategic advisors and began negotiating engagement letters with Pacific Growth Equities (“Pacific Growth”) and RBC Capital Markets (“RBC”).

On December 4, 2008, Dr. Chahine, along with one of the strategic advisors, spoke with Mr. Lampert. Dr. Chahine stated that he had spoken with counsel, strategic advisors, and several Board members regarding BVF’s demand for a put option. Dr. Chahine conveyed that numerous legal and business concerns had been raised and cautioned that a put option might have unintended consequences that would disadvantage all stockholders, including BVF. Nevertheless, Dr. Chahine stated that he remained open-minded and invited Mr. Lampert to provide Avigen’s strategic advisors at Pacific Growth support and rationale for BVF’s proposal for presentation and consideration by the Board at a meeting to be held on December 9.

On December 8, 2008, Dr. Horovitz received a letter from MediciNova, Inc. (“MediciNova”), proposing an acquisition of Avigen by MediciNova and setting forth very general terms for the proposed acquisition. Dr. Horovitz promptly contacted MediciNova’s Chairman and expressed that Avigen was in the process of retaining strategic advisors to consider proposals such as this early in the new year. This timing was necessary to permit Avigen’s management to focus on the ongoing restructuring efforts and to complete the negotiation of the sale of AV513 to Baxter Healthcare, and to formally retain strategic advisors.

On December 9, 2008, the Board met. While not formally engaged, strategic advisors from Pacific Growth and RBC gave presentations outlining their expertise and the review process. The Board discussed the MediciNova proposal and Dr. Horovitz stated that he had contacted MediciNova’s Chairman and had proposed a timeline for discussion. BVF did not provide any supporting material to strategic advisors on the mechanism or rationale for a put option.

On December 11, 2008, BVF published an open letter to the Board. In the letter BVF accused management and the Board of general mismanagement and reiterated BVF’s demand that the Board “guaranty” an outcome for stockholders.

On December 18, 2008, Avigen announced the sale of its AV513 product candidate for $7,000,000 ($0.23 per Share) to Baxter Healthcare.

On December 22, 2008, Drs. Horovitz and Chahine issued a letter to stockholders underscoring the Board’s and management’s commitment to act in the best interests of Avigen’s stockholders and emphasizing the swift and decisive actions already taken to preserve cash since the AV650 announcement. The letter to stockholders also reminded stockholders of the significant value of Avigen’s remaining assets, and of the Board’s and management’s commitment to pursue possible strategic transactions that would be in the best interests of all of Avigen’s stockholders. The letter concluded with a pledge to stockholders that Avigen would continue to use the same fiscally prudent approach that had allowed it to preserve cash.

On that same day, Dr. Horovitz received a second (and modified) proposal from MediciNova. In the letter, MediciNova proposed terms substantially similar to those contained in MediciNova’s December 8 letter, modified to reflect the $7,000,000 received from the sale of AV513.

The Board subsequently reviewed the proposal from MediciNova and concluded that the MediciNova proposal, as revised, should be carefully considered and that due diligence should commence early in the new year following the engagement of strategic advisors. Dr. Horovitz again contacted MediciNova’s Chairman and communicated the Board’s conclusion.

On December 29, 2008, BVF filed an amended Schedule 13D advocating that Avigen should “consummate the Proposed Merger expeditiously.” It was the Board’s view that BVF’s publicly-stated support for the MediciNova proposal weakened Avigen’s negotiating position, making it more difficult for Avigen to negotiate a better transaction with MediciNova on behalf of all of Avigen’s stockholders.

On January 9, 2009, BVF delivered a notice to Avigen, demanding that Avigen call a special meeting of stockholders to, among other things, remove the current members of Avigen’s Board, without cause, and for the proposed election of BVF’s slate of director nominees (the “BVF Nominees”).

On January 14, 2009, Avigen announced that it had engaged RBC to oversee the review of merger and acquisition opportunities for Avigen and had engaged Pacific Growth primarily to assist in monetizing Avigen’s AV411 assets.

On the very next day, BVF publicly announced its intention to make a tender offer to purchase all of the outstanding Shares of Avigen. In its offering documents filed subsequently, BVF incorrectly stated that Avigen had rejected the MediciNova proposal and expressed BVF’s view that, if elected to the Board of Avigen, the BVF Nominees would pursue the MediciNova proposal.

On January 19, 2009, Avigen sent a confidentiality agreement to MediciNova’s Chairman of the Board, in order to initiate the due diligence process and negotiations regarding a possible transaction between Avigen and MediciNova. The Board proposed in the confidentiality agreement that both Avigen and MediciNova share information with each other in order to permit the Board and, if a transaction is agreed upon, Avigen stockholders, to understand key aspects of MediciNova’s business, including anticipated expenses, development plans, and commercialization strategy in order to properly evaluate the proposal and determine whether it is appropriate to recommend or, if recommended, approve.

In the days following, Avigen’s strategic advisors at RBC met with representatives of BVF to engage in further discussions.

On January 20, 2009, RBC presented various financial analyses and an overview and update of the process of evaluating Avigen’s strategic alternatives to the Board. On that date, Avigen received multiple proposals from companies to engage in strategic transactions that, on their face, appeared competitive with the MediciNova proposal. Avigen contacted these companies and initiated discussions to assess these potential strategic transactions.

Avigen’s strategic advisors at RBC sent an email to MediciNova’s Chairman on January 22, 2009, stating that efforts to reach MediciNova’s CEO and CFO were unsuccessful and urging him to review and return the confidentiality agreement so that due diligence could commence as soon as possible. The Chairman responded that he would remind the MediciNova management. RBC subsequently received a communication from MediciNova’s CFO promising that they would review the draft and return it with any comments.

In spite of Avigen’s continuing efforts to assess potential strategic transactions and the Board’s and management’s efforts to engage Mr. Lampert in productive discussions, on January 23, 2009, the Purchaser filed a Schedule TO with the SEC, formally initiating the Offer.

At Board meetings held on January 26 and 29, 2009, at each of which the Board assessed the Offer, RBC presented various financial analyses and an overview and update regarding the process of evaluating Avigen’s strategic alternatives.

One week after MediciNova’s prior communication, on January 29, 2009, strategic advisors at RBC once again contacted MediciNova’s Chairman reiterating that efforts to reach MediciNova’s CEO and CFO were unsuccessful and urging him to review and return the confidentiality agreement so that diligence could commence as soon as possible. The Chairman responded that he would remind the management again.

On January 30, 2009, RBC received a revised version of the confidentiality agreement from MediciNova with suggested changes. The draft was reviewed by Avigen’s counsel and on February 3, 2009, promptly returned to MediciNova. RBC proposed that MediciNova’s counsel call Avigen’s counsel to expedite the process and resolve any issues so that the due diligence process could be initiated as soon as possible.

As of the date of this statement, MediciNova’s counsel had not yet contacted Avigen’s counsel.

AVGN’s other proxy documents can be found here.

[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.]

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