BA Value Investors has disclosed a 5.1% holding in VaxGen Inc (OTC:VXGN) and, in a letter to the board of directors, 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.”
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. At its $0.46 close yesterday, VXGN has a market capitalization of $15.2M. We estimate the company’s net cash value to be around $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.
VXGN’s main problem is a lease dispute with its landlord, in which the landlord seeks $22.4M. From the last 10Q:
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.”
The letter from BA Value Investors to VXGN is set out below:
BA Value Investors, LLC
1 North Federal Hwy., Suite 201
Boca Raton, FL. 33432June 12, 2009
The Board of Directors
VaxGen, Inc.
379 Oyster Pointe Boulevard, Suite 10
South San Francisco, California 94080Gentlemen and Lady:
BA Value Investors, LLC is the owner of more than 5% of the stock of VaxGen, Inc.
VaxGen refers to itself as a biopharmaceutical company. This may have been the case at one time. It is not the case now. The Company has burned through over $200 million in invested capital. It is burdened by a 65,000 square foot facility that sits idle. It has terminated all product development activities. It has sold or otherwise terminated its drug development programs. It experienced a $12 million net loss in 2008. Its share price has fallen by over 95% in the last five years, and it now has a market capitalization of only $16 million. Its principal remaining assets of some $36 million in cash and investment securities are steadily being eroded.
Yet, the Company continues to pay out over $60,000 per month to its board members, and close to $200,000 per year to its president and principal executive officer, as the Company purports to seek strategic transactions in the worst economic environment of the past half century. While outrageous, it is unfortunately not surprising that a board which owns virtually no shares and has almost zero economic interest in the fortunes of the Company would be making these payments and failing to act even remotely in the interests of shareholders.
BA Value Investors, LLC believes that it speaks for all shareholders when it says that this state of affairs must come to an immediate halt. Instead, the Company must act now to stop the waste and return the Company’s remaining assets to its shareholder owners.
First, the Company must–
o reduce the size of its board. Three directors are all that are needed for a company with no business and no strategic prospects;
o reduce director compensation. The Strategic Transaction Committee must be disbanded and payments to its members stopped at once. There is no justification for more than $15,000 in annual compensation to a director of the Company;
o change auditors. The Company does not need and should not be paying for a Big Four auditing firm;
o terminate the lease. The Company should settle with its landlord at a substantial discount to the remaining lease payments and vacate the South San Francisco property; and
o cut other costs. The Company should eliminate all expenses that are not absolutely necessary for a company whose activities are limited to returning remaining assets to shareholders and operating as a public shell.
Second, the Company must–
o make an immediate distribution of $10,000,000 in cash to shareholders;
o following termination of the lease and settlement with the landlord, distribute the remaining Company cash to shareholders, leaving only enough for the maintenance of the Company as a public shell; and
o distribute to shareholders any royalty payments received from the sale of the Company’s intellectual property.
Third, the Company should–
o explore ways to monetize the Company as a public shell, including, if possible, through utilization of the Company’s substantial NOLs.
There is no excuse or justification here for any delay. If the board is unwilling to undertake these steps, shareholders will have not choice but to reconstitute the board with directors who are representative of the shareholders and protective of their interests.
I am available to discuss these matters with members of the board on a non-confidential basis. I can be reached at 561-362-4199.
Very truly yours,
Steven N. Bronson, Managing Member
[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 