VaxGen Inc (OTC:VXGN) has released its quarterly report for the period ended June 30, 2009.
We’ve been following VXGN (see our post archive here) because it is trading at a substantial discount to its net cash position, has 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. One concern of ours has been a lawsuit against VXGN by its landlords, in which they sought $22.4M. That lawsuit was dismissed in May, so the path for VXGN to liquidate has now hopefully cleared.
VXGN has now also attracted the attention of BA Value Investors, which has disclosed an activist holding and called on VXGN to “act promptly to reduce the size of the board to three directors; reduce director compensation; change to a smaller audit firm; terminate the lease of its facilities; otherwise cut costs; make an immediate $10 million distribution to shareholders; make a subsequent distribution of substantially all the remaining cash after settling the lease termination; distribute any royalty income to shareholders; and explore ways to monetize the public company value of the Issuer and use of its net operating losses.”
At its $0.50 close yesterday, VXGN has a market capitalization of $16.6M. We last estimated the company’s liquidation value to be around $26.5M or $0.80 per share. Following our review of the most recent quarterly report, we’ve slightly reduced our estimate to $25.4M or $0.77 per share. VXGN has other potentially valuable assets, including 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’ve made the following adjustments to the balance sheet estimates above:
- Cash burn: The company used $1.1M in cash in the second quarter, down from $2.1M in the first quarter. We have included cash burn of $4M in our estimate for the year. We have also assumed professional fees and termination payments of $1.1M.
- Off-balance sheet arrangements and contractual obligations: According to VXGN’s 10Q, it has no off-balance sheet arrangements.
The lawsuit against VXGN by its landlords, in which they sought $22.4M, has been dismissed:
In February 2009, a lawsuit was filed against us in the Superior Court of California for the County of San Mateo by plaintiffs, Oyster Point Tech Center, LLC. The plaintiffs generally allege that we defaulted on our lease for our facility located at 349 Oyster Point, South San Francisco, California. The complaint seeks possession of the premises and the balance of the lease plus unpaid rent and expenses totaling $22.4 million, as well as an award of plaintiffs’ attorneys’ fees and costs. Our 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. In May 2009, the lawsuit was dismissed.
Conclusion
At its $0.50 close yesterday, VSGN has a market capitalization of $16.6M. We estimate the net current asset / liquidation value to be around 74% higher at $25.4M or $0.77 per share. VXGN has other potentially valuable assets, including rights to a portion of future net sales on its anthrax technology and a state-of-the-art biopharmaceutical manufacturing facility. One concern has been a lawsuit brought by the landlord against the company, so it is encouraging that the lawsuit has been dismissed. With its stock at a substantial discount to its net current asset / liquidation value, 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 still 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.]
Greenbackd 
Letter sent to the board from major shareholders, including BA Value. Looks like it was sent in July, but not released publicly until yesterday.
http://www.centredaily.com/business/technology/story/1448591.html
They demand a $.50 dividend be announced within 10 days. It would seem that the board has ignored them so far, since that deadline passed several weeks ago.
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Great pick up.
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Thanks for the post. I had been following this stock a few months ago, but had not followed up to see that the lawsuit had settled. The lawsuit was enough of a reason for me not to invest then. I am in now.
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great info Mike, thanks
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So conservatively one should add 5.1mm to total liabilities to account for cash burn and such, taking liquidating value down to 20.3mm?
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James,
Ah, no. We’ve already accounted for the $5.1M. We estimate the liquidation value at $25.4M or $0.77 per share after deducting the $5.1M. It wasn’t clear from the first summary, but we deducted it from cash. We’ll update the summary now so that it’s clearer.
G
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Updated now.
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I agree this is a pretty fat pitch.
I saw in the other thread someone was saying the landlord stuff was still maybe an issue, imo it never really was that big an issue anyways. If you read the complaint what happened was basically along the lines of “you guys were a week late with rent, therefore you are in default according to our contract so you have to vacate the premises and pay all the rent you would have paid through the year 2016.”
Just silly, but the landlord surely knows the score and wants to get as much as it can. I’m sure they’ll settle for much, much less (if they haven’t already.)
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Martin Weiss recently disclosed a 5% position in VXGN as well.
Mike, I noticed that passage in the Q. As always, I worry about the NOLs being the barrier to liquidation.
From the 10-K… “At December 31, 2008, VaxGen had U.S. federal and California net operating loss carryforwards of $168.5 million and $166.5 million, respectively.”
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widemoat,
why is NOL a barrier to liquidation. Also, does anyone know about the performance of Weiss asset management; it might indicate their success in these activist type situations. I looked on their website, but couldn’t find anything.
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garp,
NOLs have a value that is lost if the company liquidates, hence companies with NOLs are sometimes reluctant to liquidate.
G
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There is also this new passage from the 10-q:
“In July 2009, our board of directors disbanded its Strategic Transactions Committee, effective September 1, 2009. The board of directors as a whole will assume the remaining responsibilities formerly delegated to the Strategic Transactions Committee, and, following its disbandment, the members of that committee will cease to receive additional compensation for service on it.”
Hopefully this means they’ve given up on trying to make any sort of acquisition and that they are one step closer to liquidating.
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It must be nice to see one of them give up on the cash burn.
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