VaxGen Inc (OTC:VXGN) has released its quarterly report for the period ended March 31, 2009.
We started following VXGN (see our post archive here) because it was trading at a substantial discount to its net cash position, had ended its cash-burning product development activities and is “seeking to maximize the value of its remaining assets through a strategic transaction or series of strategic transactions.” If the company is unable to identify and complete an alternate strategic transaction, it proposes to liquidate. At its $0.44 close yesterday, VXGN has a market capitalization of $14.6M. We initially estimated the company’s net cash value to be around $27.7M or $0.84 per share. We’ve now reduced that slightly to $26.5M or $0.80 per share. VXGN has other potentially valuable assets, including a “a state-of-the-art biopharmaceutical manufacturing facility with a 1,000-liter bioreactor that can be used to make cell culture or microbial biologic products” and rights to specified percentages of future net sales relating to its anthrax vaccine product candidate and related technology.
The value proposition updated
VXGN has taken steps to minimize its cash burn, reducing its workforce to three employees, terminating its anthrax and smallpox development activities and selling the assets related to its anthrax product candidate. The company’s value rests on its vestigial holding of cash and equivalents (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):
Balance sheet adjustments
We make the following adjustments to the balance sheet estimates above:
- Cash burn: The company used $2.1M in cash in the first quarter. We have included cash burn of $5M in our estimate for the remainder of the year. We have also assumed termination payments of $0.2M.
- Off-balance sheet arrangements and contractual obligations: According to VXGN’s 10Q, it has no off-balance sheet arrangements.
One concern is the lawsuit against VXGN by its landlords, in which they seek $22.4M:
In February 2009, a lawsuit was filed against the Company by plaintiffs, Oyster Point Tech Center, LLC. The plaintiffs generally allege that the Company defaulted on the lease on the 349 Oyster Point, South San Francisco facility. The complaint seeks possession of the premises and the balance of lease plus unpaid rent and expenses totaling $22.4 million, as well as an award of plaintiffs’ attorneys’ fees and costs. The Company’s biopharmaceutical manufacturing facility is located in the leased premises that are the subject of the dispute. At a February hearing, the court denied the writ and the temporary protective order sought by landlord. The parties are currently in discussions to achieve an amicable resolution to the matters alleged in the complaint and a negotiated termination of the lease. However, if necessary, the Company intends to vigorously defend against such allegations.
The Company may incur substantial expenses in defending against such claim, and it is not presently possible to accurately forecast the outcome. The Company does not believe, based on current knowledge, that the foregoing legal proceeding is likely to have a material adverse effect on its financial position, results of operations or cash flows. In the event of a determination adverse to the Company, the Company may incur substantial monetary liability and could have a material adverse effect on the Company’s financial position, results of operations or cash flows.
If the lawsuit is succesful, then VXGN has next to no value. We’re taking our guidance from the company, which “does not believe, based on current knowledge, that the foregoing legal proceeding is likely to have a material adverse effect on its financial position, results of operations or cash flows.”
Conclusion
At its $0.44 close yesterday, VSGN has a market capitalization of $14.6M. We estimate the net cash value to be around 82% higher at $26.5M or $0.80 per share. VXGN has other potentially valuable assets, including rights to portion of future net sales on its anthrax technology and a state-of-the-art biopharmaceutical manufacturing facility. One concern is lawsuit by the landlord against the company, but that company states that it does not believe the lawsuit will have a material adverse effect on its financial position.With its stock at a substantial discount to its net cash position, its cash-burning product development activities at an end and a proposal to identify and complete an alternate strategic transaction or liquidate, we think VXGN is a good prospect, and we’re going to maintain our position.
[Full Disclosure: We have a holding in VXGN. 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.]
I spoke with management recently. The landlord never served them and was planning on using the case as leverage in negotiations. So nothing has been settled, they are back to square one.
Moreover, you cant use bankruptcy as a “sword, only as a shield” – – a lesson I learned following the Liberate Tech’s vain attempt to limit its lease liab while being completely solvent – that case was thrown out by the judge and he used the sword/shield quotation in his final ruling. I beleive that Chapter 11, prepack or not, is not an option.
Yes they are current on thier rent payments and could sublease but I would imagine it is tough to find takers as (rumor has it that) California has too much vacant real estate….
FF
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Thanks, Double F. That’s a shame.
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FF,
Thanks for the information, I readily admit I don’t understand the specific requirements. I have one bankruptcy in my portfolio where it appears the company primarily filed to eliminate lease obligations, but also had another large suit pending so maybe that changes things.
The question isn’t whether they can sublease, it’s at what price, and what discount. My guess is this dance is still close to completion, given the landlord isn’t aggressively pursuing legal options, it’s more likely than not that some sort of settlement is approaching.
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Good news, the suit with Oyster Point(the landlord) has been settled, but no word on the terms. In their 10-q they said they didn’t think the litigation would be material and they had reserved $5mm for it. So if they only had to pay $5mm then we’re at a $1 liquidation value. Even if they paid $10mm it’s still worth $0.88. A lot of volume yesterday but not so much today.
http://openaccess1.sanmateocourt.org/openaccess/CIVIL/casereport.asp?casenumber=480977&courtcode=A&casetype=CIV&dsn=
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Thanks, Mike. Great news and great work!
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Hello Mike – Which Court Doc indicates that there has been a settlement?
Double F
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You can reach the documents at
http://openaccess1.sanmateocourt.org/openaccess/CIVIL/
case #480977
the last actions are mutual requests for dismissal, and if you click on the “parties” option it lists both as dismissed on that day. Note the dismissal was without prejuiduice, so if I remember Perry Mason, that means it can be refiled if the settlement falls apart.
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there is nothing in bankruptcy law which prohibits co’s from filing to avoid or get out of lese obligations – matter of fact, getting out of contracts is a key reason for filings. The issue is of solvency. VXGN is undeniably solvent even after the entire lease obligation so doesnt have the option or excuse for filing. I would be careful on your sublease solution because they have been dancing this dance for a while without any luck so far. This tells me that the bids, if any, have been less than satisfactory. having said all that, I agree that this is an interesting situation and worthy of keeping on radar.
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Okay, here is a reference to the bankruptcy code, essentially they could reduce their entire lease obligation to about $2.5M (about half of what they have reserved for it) if they filed a prepack bankruptcy.
http://www.sheehan.com/publications/good-company-newsletter/The-Amended-Bankruptcy-Code-Bringing-Balance-to-the-Commercial-Landlord-and-Debtor-Tenant-Relationship-.aspx
The Landlord’s Rejection Claim
If a debtor-tenant rejects its unexpired lease with its landlord, and assuming there has been no previous assumption, a landlord’s claim consists of three components: 1) an uncapped administrative claim for rent for the period between the bankruptcy filing date and the date of rejection; 2) an uncapped unsecured claim for the rent due as of the date of the bankruptcy filing (the past due rent as of the filing date); and, 3) an unsecured claim for damages resulting from the termination of the lease (typically, future rent). It is this third, future rent component of the landlord’s claim (often the largest portion of the landlord’s claim) that is subject to a cap.
A landlord’s damages resulting from the termination of a lease (again, typically future rent) are capped at one year’s worth of rent or 15% of the rent over a three year period. It is important to note however that claims for damages arising out of physical damage to the leased property are not subject to the “cap”.
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Great work, Arb. Thanks for your comments.
G
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Oops, I guess they did stop making payments. Not sure why…
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I think the lawsuit was a shot across the bow to prevent the company from making any liquidation distribution before the landlord was taken care of. It’s interesting that as far as I know, they were still current on their rent payments.
Of course the company isn’t going to end up paying off the lease in full, clearly they could sub-lease and recover at least half the value. Another option would be a quick prepackaged bankruptcy, where a bankruptcy judge might just give the landlord 6 months rent and the keys back.
My guess is they pay the landlord about 25% of the remaining lease to get out.
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