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Posts Tagged ‘Net Cash Stock’

Yesterday I ran a post on Dr. Michael Burry, the value investor who was one of the first, if not the first, to figure out how to short sub-prime mortgage bonds in his fund, Scion Capital. In The Big Short, Michael Lewis discusses Burry’s entry into value investing:

Late one night in November 1996, while on a cardiology rotation at Saint Thomas Hospital, in Nashville, Tennessee, he logged on to a hospital computer and went to a message board called techstocks.com. There he created a thread called “value investing.” Having read everything there was to read about investing, he decided to learn a bit more about “investing in the real world.” A mania for Internet stocks gripped the market. A site for the Silicon Valley investor, circa 1996, was not a natural home for a sober-minded value investor. Still, many came, all with opinions. A few people grumbled about the very idea of a doctor having anything useful to say about investments, but over time he came to dominate the discussion. Dr. Mike Burry—as he always signed himself—sensed that other people on the thread were taking his advice and making money with it.

Michael Burry’s blog, http://www.valuestocks.net, seems to be lost to the sands of time, but Burry’s techstocks.com “Value Investing” thread (now Silicon Investor) still exists. The original post in the thread hints at the content to come:

Started: 11/16/1996 11:01:00 PM

Ok, how about a value investing thread?

What we are looking for are value plays. Obscene value plays. In the Graham tradition.

This week’s Barron’s lists a tech stock named Premenos, which trades at 9 and has 5 1/2 bucks in cash. The business is valued at 3 1/2, and it has a lot of potential. Interesting.

We want to stay away from the obscenely high PE’s and look at net working capital models, etc. Schooling in the art of fundamental analysis is also appropriate here.

Good luck to all. Hope this thread survives.

Mike

Hat tip Toby.

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Jae Jun at Old School Value has updated his great post back-testing the performance of net current asset value (NCAV) against “net net working capital” (NNWC) by refining the back-test (see NCAV NNWC Backtest Refined). His new back-test increases the rebalancing period to 6 months from 4 weeks, excludes companies with daily volume below 30,000 shares, and introduces the 66% margin of safety to the NCAV stocks (I wasn’t aware that this was missing from yesterday’s back-test, and would explain why the performance of the NCAV stocks was so poor).

Jae Jun’s original back-test compared the performance of NCAV and NNWC stocks over the last three years. He calculated NNWC by discounting the current asset value of stocks in line with Graham’s liquidation value discounts, but excludes the “Fixed and miscellaneous assets” included by Graham. Here’s Jae Jun’s NNWC formula:

NNWC = Cash + (0.75 x Accounts receivables) + (0.5 x  Inventory)

Here’s Graham’s suggested discounts (extracted from Chapter XLIII of Security Analysis: The Classic 1934 Edition “Significance of the Current Asset Value”):

As I noted yesterday, excluding the “Fixed and miscellaneous assets” from the liquidating value calculation makes for an exceptionally austere valuation.

Jae Jun has refined his screening criteria as follows:

  • Volume is greater than 30k
  • NCAV margin of safety included
  • Slippage increased to 1%
  • Rebalance frequency changed to 6 months
  • Test period remains at 3 years

Here are Jae Jun’s back-test results with the new criteria:

For the period 2001 to 2004

For the period 2004 to 2007

For the period 2007 to 2010


It’s an impressive analysis by Jae Jun. Dividing the return into three periods is very helpful. While the returns overall are excellent, there were some serious smash-ups along the way, particularly the February 2007 to March 2009 period. As Klarman and Taleb have both discussed, it demonstrates that your starting date as an investor makes a big difference to your impression of the markets or whatever theory you use to invest. Compare, for example, the experiences of two different NCAV investors, one starting in February 2003 and the second starting in February 2007. The 2003 investor was up 500% in the first year, and had a good claim to possessing some investment genius. The 2007 investor was feeling very ill in March 2009, down around 75% and considering a career in truck driving. Both were following the same strategy, and so really had no basis for either conclusion. I doubt that thought consoles the trucker.

Jae Jun’s Old School Value NNWC NCAV Screen is available here (it’s free).

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In his Are Japanese equities worth more dead than alive?, SocGen’s Dylan Grice conducted some research into the performance of sub-liquidation value stocks in Japan since the mid 1990s. Grice’s findings are compelling:

My Factset backtest suggests such stocks trading below liquidation value have averaged a monthly return of 1.5% since the mid 1990s, compared to -0.2% for the Topix. There is no such thing as a toxic asset, only a toxic price. It may well be that these companies have no future, that they shouldn’t be valued as going concerns and that they are worth more dead than alive. If so, they are already trading at a value lower than would be fetched in a fire sale. But what if the outlook isn’t so gloomy? If these assets aren’t actually complete duds, we could be looking at some real bargains…

In the same article, Grice identifies five Graham net net stocks in Japan with market capitalizations bigger than $1B:

He argues that such stocks may offer value beyond the net current asset value:

The following chart shows the debt to shareholders equity ratios for each of the stocks highlighted as a liquidation candidate above, rebased so that the last year’s number equals 100. It’s clear that these companies have been aggressively delivering in the last decade.

Despite the “Japan has weak shareholder rights” cover story, management seems to be doing the right thing:

But as it happens, most of these companies have also been buying back stock too. So per share book values have been rising steadily throughout the appalling macro climate these companies have found themselves in. Contrary to what I expected to find, these companies that are currently priced at levels making liquidation seem the most profitable option have in fact been steadily creating shareholder wealth.

This is really extraordinary. The currency is a risk that I can’t quantify, but it warrants further investigation.

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Since last week’s Japanese liquidation value: 1932 US redux post, I’ve been attempting to determine whether the historical performance of Japanese sub-liquidation value stocks matches the experience in the US, which has been outstanding since the strategy was first identified by Benjamin Graham in 1932. The risk to the Japanese net net experience is the perception (rightly or not) that the weakness of shareholder rights in Japan means that net current asset value stocks there are destined to continue to trade at a discount to net current asset value. As I mentioned yesterday, I’m a little chary of the “Japan has weak shareholder rights” narrative. I’d rather look at the data, but the data are a little wanting.

As we all know, the US net net experience has been very good. Research undertaken by Professor Henry Oppenheimer on Graham’s liquidation value strategy between 1970 and 1983, published in the paper Ben Graham’s Net Current Asset Values: A Performance Update, indicates that “[the] mean return from net current asset stocks for the 13-year period was 29.4% per year versus 11.5% per year for the NYSE-AMEX Index. One million dollars invested in the net current asset portfolio on December 31, 1970 would have increased to $25,497,300 by December 31, 1983.” That’s an outstanding return.

In The performance of Japanese common stocks in relation to their net current asset values, a 1993 paper by Bildersee, Cheh and Zutshi, the authors undertook research similar to Oppenheimer’s in Japan over the period 1975 and 1988. Their findings, described in another paper, indicate that the Japanese net net investor’s experience has not been as outstanding as the US investor’s:

In the first study outside of the USA, Bildersee, Cheh and Zutshi (1993)’s paper focuses on the Japanese market from 1975 to 1988. In order to maintain a sample large enough for cross-sectional analysis, Graham’s criterion was relaxed so that firms are required to merely have an NCAV/MV ratio greater than zero. They found the mean market-adjusted return of the aggregate portfolio is around 1 percent per month (13 percent per year).

As an astute reader noted last week “…the test period for [the Bildersee] study is not the best. It includes Japan’s best analog to America’s Roaring Twenties. The Nikkei peaked on 12/29/89, and never recovered:”

Many of the “assets” on public companies’ books at that time were real estate bubble-related. At the peak in 1989, the aggregate market price for all private real estate in the city of Tokyo was purportedly greater than that of the entire state of California. You can see how the sudden runup in real estate during the bubble could cause asset-heavy companies to outperform the market.

So a better crucible for Japanese NCAVs might be the deflationary period, say beginning 1/1/90, which is more analogous to the US in 1932.

To see how the strategy has performed more recently, I’ve taken the Japanese net net stocks identified in James Montier’s Graham’’s net-nets: outdated or outstanding? article from September 2008 and tracked their performance from the data of the article to today. Before I plow into the results, I’d like to discuss my methodology and the various problems with it:

  1. It was not possible to track all of the stocks identified by Montier. Where I couldn’t find a closing price for a stock, I’ve excluded it from the results and marked the stock as “N/A”. I’ve had to exclude 18 of 84 stocks, which is a meaningful proportion. It’s possible that these stocks were either taken over or went bust, and so would have had an effect on the results not reflected in my results.
  2. The opening prices were not always available. In some instances I had to use the price on another date close to the opening date (i.e +/1 month).

Without further ado, here are the results of Montier’s Graham’’s net-nets: outdated or outstanding? picks:

The 68 stocks tracked gained on average 0.5% between September 2008 and February 2010, which is a disappointing outcome. The results relative to the  Japanese index are a little better. By way of comparison, the Nikkei 225 (roughly equivalent to the DJIA) fell from 12,834 to close yesterday at 10,057, a drop of 21.6%. Encouragingly, the net nets outperformed the N225 by a little over 21%.

The paucity of the data is a real problem for this study. I’ll update this post as I find more complete data or a more recent study.

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Zero Hedge has an article Uncovering Liquidation Value… In Japan? discussing SocGen’s Dylan Grice’s Are Japanese equities worth more dead than alive. The title is a nod to Benjamin Graham’s landmark 1932 Forbes article, Inflated Treasuries and Deflated Stockholders, where he discussed the large number of companies in the US then trading at a discount to liquidation value:

…a great number of American businesses are quoted in the market for much less than their liquidating value; that in the best judgment of Wall Street, these businesses are worth more dead than alive. For most industrial companies should bring, in orderly liquidation, at least as much as their quick assets alone.

Grice writes:

In the space of a generation, Japan has gone from the world economy’s thrusting up-and-coming superpower to its slowing silver-haired retiree. Accordingly, the Japanese market attracts a low valuation. The chart [below] shows FTSE Japan’s equity price to book ratio and enterprise price to book ratio, since equity P/B ratios alone can be distorted by leverage. Both metrics show Japan to be trading at a low premium to book compared to its recent history. So it’s certainly cheap. But does it offer value? The answer can be seen in the chart above, which shows corporate Japan’s RoEs and RoAs over recent decades to have averaged a mere 6.8% and 3.8% respectively. This is hardly the sort of earnings power which should command any premium over book value at all. Indeed, to my mind the question is one of how big a discount the market should trade at relative to book.

The fundamental problem in 1932 America, according to Graham, was that investors weren’t paying attention to the assets owned by the company, instead focussing exclusively on “earning power” and therefore “reported earnings – which might only be temporary or even deceptive – and in a complete eclipse of what had always been regarded as a vital factor in security values, namely the company’s working capital position.” Graham proposed that investors should become not only “balance sheet conscious,” but “ownership conscious:”

If they realized their rights as business owners, we would not have before us the insane spectacle of treasuries bloated with cash and their proprietors in a wild scramble to give away their interest on any terms they can get. Perhaps the corporation itself buys back the shares they throw on the market, and by a final touch of irony, we see the stockholders’ pitifully inadequate payment made to themwith their own cash.

In his article, Grice makes a parallel argument about valuations based on earnings in Japan now:

Regular readers will know I favour a Residual Income approach to valuation. It’s not perfect, and it’s still a work in process, but anchoring estimates of intrinsic value on the earnings power of company assets (relative to a required rate of return, which I set at an exacting 10%) helps avoid value traps. Things don?t necessarily come up as offering value just because they’re on low multiples. The left chart below shows Japan’s ratio of Intrinsic Value to Price (IVP ratio, where a higher number indicates higher value) to be only 0.6, suggesting that in an absolute sense, Japan is intrinsically worth only about 60% of its current market value.

Grice arrives at the same conclusion about Japan as Graham did in 1932 about the US:

But here the tension between “going concern” valuation and “liquidation” valuation becomes important. Let’s just imagine the unimaginable for a second, and that my IVP ratios are correct. Japan currently trades on a P/B ratio of 1.5x, but if it is only worth 60% of that, its “fair value” P/B ratio (assuming we value it as a going concern) would be around 0.9x. Of course, that would only be true on average. Nearly all stocks would trade either above or below that level. And of those trading below, some would trade slightly below, others significantly below. And of those which traded significantly below, some might be expected to flirt with liquidation values which called into question whether or not the “going concern” valuation was appropriate. Indeed, this is exactly what is beginning to happen.

It seems that there are quite a few stocks trading at a discount to net current asset value in Japan:

Grice likes the net current asset value strategy in Japan (sort of):

Not only are these assets cheap but, unlike the overall market, they probably offer value as well. My Factset backtest suggests such stocks trading below liquidation value have averaged a monthly return of 1.5% since the mid 1990s, compared to -0.2% for the Topix. There is no such thing as a toxic asset, only a toxic price. It may well be that these companies have no future, that they shouldn’t be valued as going concerns and that they are worth more dead than alive. If so, they are already trading at a value lower than would be fetched in a fire sale. But what if the outlook isn’t so gloomy? If these assets aren’t actually complete duds, we could be looking at some real bargains…

So should we be filling our boots with companies trading below liquidation value? Not necessarily. But I would say the burden of proof has shifted. Why wouldn’t you want to own assets that have been generating shareholder wealth yet which trade at below their liquidation values?

It is interesting that this article echoes another SocGen article, this one a September 2008 report by James Montier called Graham’’s net-nets: outdated or outstanding? in which Montier looked at Graham sub-liquidation stocks globally. Of the 175 stocks identified around the world, Montier found that over half were in Japan.

Now all we have to do is figure out how to invest in Japan.

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CoSine Communications Inc (OTC:COSN) has released its 10Q for the quarter ended September 30, 2009.

We’ve been following COSN (see Greenbackd’s COSN post archive) because it is a cash box controlled by activist investor Steel Partners. Steel Partners own 47.5% of the stock and sits on the board. The stock is up 11.4% since our initial post to close Friday at $1.95. I initially estimated the net cash value to be around $22.2M or $2.20 per share. After reviewing the 10Q I’ve slightly reduced it in line with the ~$0.3M cash burn for the last two quarters to $21.9M or $2.17 per share. The net cash value has remained relatively stable through 2006, 2007, 2008 and 2009. COSN presents an opportunity to invest alongside Steel Partners at a discount to net cash in a company with substantial NOLs.

The value proposition updated

Little has changed over the last two quarters. The valuation on COSN remains straight-forward: It has around $22.7m in cash and short-term investments, $0.2M in liabilities and 10.1M shares outstanding. I’ve set out the valuation below in the usual manner (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):

COSN Summary 2009 09 30

Balance sheet adjustments

I’ve made the following adjustments to the balance sheet estimates above:

  • Cash burn: The company used $0.58M in cash in the last three quarters, which we’ve annualized to $0.6M.
  • Off-balance sheet arrangements and contractual obligations: According to COSN’s 10Q, it has no off-balance sheet arrangements.

NOLS

A quick primer on net operating loss carry-forwards (“NOLs”) from the most 2009 10K:

NOLs may be carried forward to offset federal and state taxable income in future years and eliminate income taxes otherwise payable on such taxable income, subject to certain adjustments. Based on current federal corporate income tax rates, our NOLs and other carry-forwards could provide a benefit to us, if fully utilized, of significant future tax savings. However, our ability to use these tax benefits in future years will depend upon the amount of our otherwise taxable income. If we do not have sufficient taxable income in future years to use the tax benefits before they expire, we will lose the benefit of these NOLs permanently. Consequently, our ability to use the tax benefits associated with our substantial NOLs will depend significantly on our success in identifying suitable acquisition candidates, and once identified, successfully consummating an acquisition of these candidates.

Additionally, if we underwent an ownership change, the NOLs would be subject to an annual limit on the amount of the taxable income that may be offset by our NOLs generated prior to the ownership change. If an ownership change were to occur, we may be unable to use a significant portion of our NOLs to offset taxable income. In general, an ownership change occurs when, as of any testing date, the aggregate of the increase in percentage points is more than 50 percentage points of the total amount of a corporation’s stock owned by “5-percent stockholders,” within the meaning of the NOLs limitations, whose percentage ownership of the stock has increased as of such date over the lowest percentage of the stock owned by each such “5-percent stockholder” at any time during the three-year period preceding such date. In general, persons who own 5% or more of a corporation’s stock are “5-percent stockholders,” and all other persons who own less than 5% of a corporation’s stock are treated, together, as a single, public group “5-percent stockholder,” regardless of whether they own an aggregate of 5% of a corporation’s stock.

The amount of NOLs that we have claimed has not been audited or otherwise validated by the U.S. Internal Revenue Service (“IRS”). The IRS could challenge our calculation of the amount of our NOLs or our determinations as to when a prior change in ownership occurred and other provisions of the Internal Revenue Code may limit our ability to carry forward our NOLs to offset taxable income in future years. If the IRS was successful with respect to any such challenge, the potential tax benefit of the NOLs to us could be substantially reduced.

According to the 10K, as of December 31, 2008, COSN had federal NOLs of approximately $353M, which begin to expire in 2018 if not utilized and state NOLs of approximately $213M, which will begin to expire in 2009 if not utilized. The NOLs have a substantial value as a tax shield should COSN acquire a business with taxable earnings, but assessing that value is beyond us.

Catalyst

Steel Partners’ most recent 13D filing sets out its 47.5% holding. Steel Partners’ strategy is to use COSN’s cash to acquire a business with taxable earnings that can be offset by the NOLs. From the 10Q:

Redeployment Strategy and Liquidity

In July 2005, after a comprehensive review of strategic alternatives, our board of directors approved a strategy to redeploy our existing resources to identify and acquire one or more new business operations with existing or prospective taxable earnings that can be offset by use of our NOLs.

Ordinarly, I would prefer a return of cash to the acquisition of a business. This situation is different from the usual case because Steel Partners’ business is investment, and so I think the risk that they might make a bad investment is low. That said, there’s no assurance that they will find a suitable candidate, or if they do, that COSN will be able to use the NOLs.

Conclusion

COSN initially presented an opportunity to invest alongside Steel Partners at a 26% discount to net cash in a company with substantial NOLs. With the increase in the stock price the discount to its net cash position has narrowed to around 11%. I’m maintaining the position in the Greenbackd Portfolio.

[Full Disclosure:  We do not have a holding in COSN. 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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Forward Industries Inc (NASDAQ:FORD) has fired its investment and engaged another. It looks like FORD is intent on spending the cash on its balance sheet, which is a shame. Rather than make an acquisition, they should focus on the work on their desk and pay a big dividend. There’s a half chance that the bank could suggest a sale of the company, but that seems unlikely. I can’t believe there are no activists out there willing to take on this company. It’s 40% off its 52-week high. It’s net cash. There are no big holders. Management’s not doing a bad job, but an acquisition is a ridiculous idea. This is an instance of a management trying to plow a dollar back into the business and turn it into fifty cents. I could use that dollar more profitably. Then again, I’d probably just spend it on pennywhistles and moonpies.

We started following FORD (see our post archive here) because it was trading at a discount to its net cash and liquidation values, although there was no obvious catalyst. Management appeared to be considering a “strategic transaction” of some kind, which might have included an “acquisition or some other combination.” Trinad Management had an activist position in the stock, but had been selling at the time we opened the position and only one stockholder owned more than 5% of the stock. The stock is up 36.8% since we opened the position to close yesterday at $1.97, giving the company a market capitalization of $13.4M. Following our review of the most recent 10Q, we’ve estimate the liquidation value to $19.5M or $2.47 per share.

Here’s a link to the announcement (it’s just a marketing announcement by the bank so I’m not going to repost it).

FORD is trading at a substantial discount to its liquidation and net cash values. The risk to this position is management spraying the cash away on an acquisition. A far better use of the company’s cash is a buyback, special dividend or return of capital. Another concern is Trinad Management exiting its activist position in the stock. Those concerns aside, I’m going to maintain the position because it still looks cheap at a discount to net cash.

[Full Disclosure:  We have a holding in FORD. 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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Disgruntled VaxGen Inc (OTC:VXGN) shareholders have initiated a class action against the board of VXGN over possible breaches of fiduciary duty in the sale to OXGN. The board certainly deserves the suit because of the appalling deal struck with OXGN. Priced at a discount to VXGN’s net cash and liquidation values, and payment in the watered scrip of a speculative biotech play, it’s a real dud for VXGN shareholders (see our more detailed take on the terms of the VXGN / OXGN deal). A successful outcome in any litigation may be a Pyrrhic victory for participating VXGN shareholders. As we understand it, VXGN’s board is indemnified out of VXGN’s assets and so as any damages award will return to VXGN plaintiffs VXGN’s assets less legal fees and the break fee. Perhaps someone more knowledgable can illuminate the situation for us in the comments. It’s also possible that the merger will not survive the shareholder vote. As reader bellamyj notes, in November 2007 VXGN announced another disastrous merger with Raven Biotechnologies. Over the next few days VXGN stock fell almost 50% and the merger was terminated the day before the special meeting, apparently due to shareholder opposition. Perhaps that will happen again. If it does, OXGN will still tear out ~$2.5M from VXGN, but it may be a better outcome than the deal on the table.

About our VXGN position

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.” Management has said that, 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. The board has, however, been dragging its feet on the liquidation. Given their relatively high compensation and almost non-existent shareholding, it’s not hard to see why.

There are two competing alternate proxy slates seeking nomination to the board of VXGN, Value Investors for Change and the VaxGen Full Value Committee. Value Investors for Change, led by Spencer Capital, filed preliminary proxy documents in August to remove the board. In the proxy documents, Value Investors for Change call out VXGN’s board on its “track record of failure and exorbitant cash compensation”:

VaxGen does not have any operations, other than preparing public reports. The Company has three employees, including the part-time principal executive officer and director, and four non-employee directors. Since the Company’s failed merger with Raven Biotechnologies, Inc. in March 2008, the Board has publicly disclosed that it would either pursue a strategic transaction or a series of strategic transactions or dissolve the Company. The Company has done neither. In the meantime, members of the Board have treated themselves to exorbitant cash compensation. Until July 2009, two non-employee members of the Board were paid over $300,000 per year in compensation. The principal executive officer will likely receive over $400,000 in cash compensation this year.

The VaxGen Full Value Committee comprising BA Value Investors’ Steven N. Bronson and ROI Capital Management’s Mark T. Boyer and Mitchell J. Soboleski, intends to replace the current board with directors who will focus on the following objectives:

1. Returning capital to [VXGN]’s shareholders, including an immediate distribution of $10,000,000 in cash;

2. Terminating [VXGN]’s lease with its landlord, Oyster Point Tech Center, LLC, and settling with the landlord the obligations of [VXGN] on the remaining lease payments;

3. Exploring ways to monetize [VXGN] as a “public shell,” including the utilization of [VXGN]’s Substantial Net Operating Losses; and

4. Protecting for the benefit of shareholders royalty payments receivable from the sale of [VXGN]’s intellectual property.

BA Value Investors had previously disclosed an activist holding and, in a June 12 letter to the board, 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.”

VXGN is up 25.0% since we initiated the position. At its $0.60 close yesterday, it has a market capitalization of $22.5M. We last estimated the company’s liquidation value to be around $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 authors of a letter sent to the board on July 14 of this year adjudge VXGN’s liquidation value to be significantly higher at $2.12 per share:

Excluding the lease obligations, the net financial assets alone of $37.2 million equate to $1.12 per share. The EBS royalties (assuming a 6% royalty rate and a $500 million contract as contemplated by NIH/HHS and EBS) of $30 million and milestones of $6 million total $36 million of potential additional future value (based clearly on assumptions, none of which are assured), or $1.09 per share. Adding $1.12 and $1.09 equals $2.21 per share.

Here’s the press release announcing the litigation:

Levi & Korsinsky, LLP Investigates Possible Breach of Fiduciary Duty by the Board of VaxGen, Inc. – VXGN.OB

Levi & Korsinsky is investigating the Board of Directors of VaxGen, Inc. (“VaxGen” or the “Company”) (OTC BB: VXGN) for possible breaches of fiduciary duty and other violations of state law in connection with their attempt to sell the Company to Oxigene Inc. (“Oxigene”) (NasdaqGM: OXGN). Under the terms of the transaction, VaxGen shareholders will receive 0.4719 Oxigene shares for every VaxGen share they own which, based on the $1.42 per share closing price of Oxigene stock on October 14, 2009, the day prior to the announcement, is valued at approximately $0.67. In addition, Oxigene is to place approximately 8.5 million common shares in escrow to be released to VaxGen shareholders contingent upon the occurrence of certain events over the two-year period following the closing.

The investigation concerns whether the VaxGen Board of Directors breached their fiduciary duties to VaxGen shareholders given that (i) the Company has approximately $1.07 per share in cash with no debt; (ii) the Company has a book value of approximately $0.99 a share; (iii) at least one analyst has set a $2.00 price target for VaxGen stock; and (iv) and the Board agreed to a non-solicitation provision and a termination fee up to $1,425,000 that will all but ensure that no superior offers will ever be forthcoming.

If you own common stock in VaxGen and wish to obtain additional information, please contact us at the number listed below or visit http://www.zlk.com/vxgn1.html.

Levi & Korsinsky has expertise in prosecuting investor securities litigation and extensive experience in actions involving financial fraud and represents investors throughout the nation, concentrating its practice in securities and shareholder litigation.

Hat tip JM.

[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.]

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We’re adding Aspen Exploration Corporation (OTC:ASPN) to the Greenbackd Portfolio for the reasons identified by MCN1 in his September 3 guest post. ASPN closed yesterday at $0.985, giving it a market capitalization of just $7.2M. We estimate the liquidation value to be around 20% higher at $8.5M or $1.17 per share. Again, not a huge upside but reasonably certain. There are several potential catalysts in the stock. Investor Tymothi O. Tombar filed a 13D notice on July 30, 2009 disclosing a 5.8% holding and calling for the liquidation of the company. Additionally, the company plans to distribute substantially all of the net, after-tax proceeds from the completion of the Venoco sale to its stockholders, an amount that the company estimates will be from $5M to $5.5M.

About ASPN

From the most recent 10K:

Aspen was incorporated under the laws of the State of Delaware on February 28, 1980 for the primary purpose of acquiring, exploring and developing oil and gas and other mineral properties. Our principal executive offices are located at 2050 S. Oneida St., Suite 208, Denver, Colorado 80224-2426. Our telephone number is (303) 639-9860, and our facsimile number is (303) 639-9863. Our websites are http://www.aspenexploration.com and http://www.aspnx.com. Our email address is aecorp2@qwestoffice.net. During our fiscal year ended June 30, 2009, we were engaged primarily in the exploration, development and production of oil and gas properties in California and Montana. On June 30, 2009, the Company disposed of all of its remaining oil and gas producing assets and is not currently engaged in any oil and gas producing activities. We have an interest in an inactive subsidiary: Aspen Gold Mining Co., a company that has not been engaged in business since 1995.

During more than the past five years through June 30, 2009, our emphasis had been participation in the oil and gas segment, acquiring interests in producing oil or gas properties and participating in drilling operations. We were engaged in a broad range of activities associated with the oil and gas business in an effort to develop oil and gas reserves. Our participation in the oil and gas exploration and development segment consisted of two different lines of business – ownership of working interests and operating properties.

(1) We acquired and held operating interests in oil and gas properties where we acted as the operator of oil and gas wells and properties; and

(2) We acquired and held non-operating interests in oil and gas properties.

Previously, we held a non-operating working interest in approximately 37 oil wells in the East Poplar Field, Roosevelt County, Montana which contributed only nominally (if at all) to our positive cash flow and profitability, and during much of the latter half of calendar 2008 resulted in operating losses. Effective January 1, 2009, we sold our entire interest in these oil properties.

Prior to June 30, 2009, we operated 67 gas wells in the Sacramento Valley of northern California. Additionally, we held a non-operated interest in 26 gas wells in the Sacramento Valley of northern California. As described below, we sold our interest in our California properties on June 30, 2009.

Additionally, in the past we have engaged in business activities related to the exploration and development of other minerals and resources. At the present time, we are not engaged in any drilling operations or acreage acquisition programs nor have we drilled any new wells in our current fiscal year.

The value proposition

ASPN is another relatively simple value proposition: it’s liquid assets of $10.7M of cash and marketable securities against total liabilities of around $2.3M, and it has no active business operations. We’ve set out the valuation below in the usual manner (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):

ASPN Summary G

The catalyst

ASPN proposes to distribute substantially all of the net, after-tax proceeds from the Venoco transaction to its stockholders. It estimates that this amount will be between $5M and $5.5M or between $0.69 and $0.76 per share. ASPN “needs to complete certain calculations before it is able to determine the dollar amount of the assets to be distributed” but “believes it will be able to make this calculation after the October 28, 2009 settlement date based on preliminary tax calculations.” It also proposes to present a dissolution proposal to its stockholders at its next annual meeting, tentatively scheduled for late November 2009. Such a dissolution is not certain, as ASPN “intends to consider other opportunities in the broad scope of the natural resources industry, which may include an acquisition of assets or business operations, or a merger or other business combination.” ASPN has “engaged in preliminary discussions with third parties about various possibilities” however “none of these discussions have resulted in an agreement or any definitive steps toward the conclusion of any future relationship.” One issue worth noting is that such a transaction “may or may not require stockholder approval”:

If the transaction does not require stockholder approval, the board of directors will be entitled to accomplish the transaction in its discretion, although the board may (but would not be required to) seek an advisory vote of the stockholders. There can be no assurance that Aspen will identify an appropriate business opportunity or corporate transaction and consummate any such transactions.

Tymothi O. Tombar filed a 13D notice on July 30, 2009 disclosing a 5.8% holding and calling for the liquidation of the company:

As Aspen currently has no active business operations and a significant amount of liquid assets, Mr. Tombar believes that there is broad shareholder support for the implementation of a plan of liquidation and distribution of substantially all of the proceeds from the Sale and Aspen’s additional liquid assets to Aspen’s stockholders. Mr. Tombar is considering several stockholder resolutions in accordance with SEC Rule 14a-8 for inclusion in Aspen’s proxy statement for its next meeting of stockholders. In the unlikely event of a delayed meeting of stockholders beyond the anticipated late October or November 2009, Mr. Tombar may acquire a sufficient number of additional shares of Aspen’s stock or contact other shareholders with the intent of calling a special meeting to consider shareholder proposals and the election of new directors to the board of the corporation.

Conclusion

ASPN is trading at a small discount to its liquidation value with a likely catalyst in the near future. At its $0.985 close yesterday, it has a market capitalization of $7.2M against a liquidation value we estimate at $8.5M or $1.17 per share. It’s not a huge upside but we believe it’s reasonably certain given that has no active business operations. There are several potential catalysts in the stock. Investor Tymothi O. Tombar filed a 13D notice on July 30, 2009 disclosing a 5.8% holding and calling for the liquidation of the company. Additionally, the company plans to distribute substantially all of the net, after-tax proceeds from the completion of the Venoco sale to its stockholders, an amount that the company estimates will be from $5M to $5.5M, which equates to between $0.69 and $0.76 per share.

ASPN closed yesterday at $0.985.

The S&P500 closed at 1,057.07.

[Full Disclosure:  We have a holding in ASPN. 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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It’s been a big week for VaxGen Inc (OTC:VXGN). On Tuesday last week the “VaxGen Full Value Committee” nominated five director candidates to the board. Then on Thursday BizJournals.com reported that VXGN’s “failed AIDS vaccine” was “successful in a new trial that combined it with another failed vaccine in reducing the risk of becoming infected with HIV.” The stock ran on the news, prompting VXGN to clarify yesterday that it “retains an option to obtain the exclusive right to manufacture, commercialize, and further develop the HIV vaccine candidates in the U.S., Europe, Japan and other countries that are members of the Organization of Economic Cooperation and Development” but “has no rights or obligations to manufacture or develop the vaccine candidates unless and until it exercises this option.”

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.” Management has said that, 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. The board has, however, been dragging its feet on the liquidation. Given their relatively high compensation and almost non-existent shareholding, it’s not hard to see why.

BA Value Investors had previously disclosed an activist holding and, in a June 12 letter to the board, 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.”

Another group led by Spencer Capital and styling itself “Value Investors for Change” has also filed preliminary proxy documents to remove the board. In the proxy documents, Value Investors for Change call out VXGN’s board on its “track record of failure and exorbitant cash compensation”:

VaxGen does not have any operations, other than preparing public reports. The Company has three employees, including the part-time principal executive officer and director, and four non-employee directors. Since the Company’s failed merger with Raven Biotechnologies, Inc. in March 2008, the Board has publicly disclosed that it would either pursue a strategic transaction or a series of strategic transactions or dissolve the Company. The Company has done neither. In the meantime, members of the Board have treated themselves to exorbitant cash compensation. Until July 2009, two non-employee members of the Board were paid over $300,000 per year in compensation. The principal executive officer will likely receive over $400,000 in cash compensation this year.

VXGN is up 41.7% since we initiated the position. At its $0.68 close yesterday, it has a market capitalization of $22.5M. We last estimated the company’s liquidation value to be around $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 authors of a letter sent to the board on July 14 of this year adjudge VXGN’s liquidation value to be significantly higher at $2.12 per share:

Excluding the lease obligations, the net financial assets alone of $37.2 million equate to $1.12 per share. The EBS royalties (assuming a 6% royalty rate and a $500 million contract as contemplated by NIH/HHS and EBS) of $30 million and milestones of $6 million total $36 million of potential additional future value (based clearly on assumptions, none of which are assured), or $1.09 per share. Adding $1.12 and $1.09 equals $2.21 per share.

The entry of the VaxGen Full Value Committee into the proxy contest will certainly make the next meeting an interesting spectacle, and, with any luck, we will see a liquidation of VXGN soon, either at the hands of the present board, by Value Investors for Change or the VaxGen Full Value Committee. We believe VXGN’s rights to the AIDS vaccine should make little difference to the outcome of the proxy contest.

The press release announcing the nomination is set out below:

Contact: Steven N. Bronson

Telephone: 561-362-4199 ext 4

The VaxGen Full Value Committee Nominates Five Highly

Qualified Candidates to Replace Current VaxGen Board

Boca Raton, FL, September 22, 2009 –(Business Wire)–The VaxGen Full Value Committee (Committee) today reported that, on September 17th, it delivered to VaxGen Inc. (VXGN.OB) a solicitation notice for the nomination of five highly qualified director candidates to reconstitute the board of VaxGen at the upcoming 2009 annual meeting.

Members of the Committee, which currently consist of BA Value Investors LLC, a private investment firm founded by Steven N. Bronson, and ROI Capital Management, a registered investment advisor managed by Mark T. Boyer and Mitchell J. Soboleski, collectively own 13.7% of the outstanding common stock of VaxGen. The Committee expects that, if elected, its nominees will work to–

1. Return capital to VaxGen’s shareholders, including an immediate distribution of $10,000,000 in cash;

2. Negotiate a termination of VaxGen’s real property lease, which is out of all proportion to the Company’s needs and constitutes a serious drain on the Company’s resources;

3. Explore ways to monetize VaxGen’s value as a “public shell,” including the utilization of the Company’s substantial net operating losses; and

4. Protect for the benefit of shareholders royalty payments receivable as a result of the sale of VaxGen’s intellectual property.

The VaxGen Full Value Committee is dedicated to maximizing value for all shareholders. After the Company’s failed merger with Raven Biotechnologies, Inc. in March 2008, the Board publicly disclosed that it would either pursue one or more strategic transactions or, failing to do so, dissolve the Company. The Company has done neither. Instead, members of the VaxGen board of directors have been paid compensation in amounts that the Committee believes are exorbitant, considering that the Company has no operations and is continuing to burn cash and cumulate losses. Since 2008, over $300,000 annually was paid to each of two non-employee directors serving on the strategic transaction committee of the Company’s board. It was only after Mr. Bronson’s letter to the board in June 2009 that the Company announced that it was discontinuing the compensation to the two outside board members for service on this committee. The Committee is committed to eliminating this type of board conduct.

Certain information concerning the Committee’s nominees follows.

Steven N. Bronson. Mr. Bronson, age 44, is the President of Catalyst Financial LLC, a privately held full service investment banking firm, and has held that position since September 1998. Mr. Bronson also serves as an officer and director of 4net Software, Inc., Ridgefield Acquisition Corp. and BKF Capital Group, Inc.David E. Castaneda. Mr. Castaneda, age 45, is the President of the Market Development Consulting Group, Inc. (MDC Group), a management consulting firm he founded in 1991 to offer expertise in corporate finance, corporate development and investor relations. From January 2004 to October 2007, he was Vice President Investor Relations for Cheniere Energy, Inc.

Leonard Hagan. Mr. Hagan, age 56, is a partner at Hagan & Burns CPA’s, PC in New York and has held that position since 2004. Mr. Hagan is also a director of 4net Software, Inc., BKF Capital Group, Inc. and Ridgefield Acquisition Corp.

Mark Boyer. Mr. Boyer, age 52, has been the President and a Director of ROI Capital Management, an investment advisor, since July 1992.

E. Steven zum Tobel. Mr. zum Tobel, age 42, is the founder, director and shareholder of First American Capital & Trading Corporation, a wholesale institutional specialty brokerage firm. He has been with First American Capital since 2002.

The press release clarifying the rights to the HIV vaccine is set out below:

VaxGen Congratulates HIV Prime-Boost Vaccine Study Collaborators and Clarifies Commercial Rights

South San Francisco, California — September 25, 2009 — VaxGen, Inc. today congratulated the Thai Ministry of Health, the U.S. Army, Sanofi Pasteur and VaxGen’s licensee Global Solutions for Infectious Disease (GSID) on the encouraging results demonstrated in the RV144 clinical trial. The top-line results of the placebo controlled study in 16,000 Thai volunteers were released today, and according to the sponsors of the trial, demonstrated that the vaccine regimen reduced HIV infection in a community-based population by 31.2% compared with placebo. The full results of the clinical trial have not yet been released by the study sponsors. The vaccine regimen tested in the study combined a priming vaccine developed by Sanofi Pasteur (ALVAC® HIV vCP1521) and GSID’s boosting vaccine (AIDSVAX® B/E).

In January 2006, VaxGen granted to GSID a worldwide license to research, develop, manufacture, register, use, market, import, offer for sale, and sell its HIV vaccine candidates, including the AIDSVAX B/E vaccine. VaxGen retains an option to obtain the exclusive right to manufacture, commercialize, and further develop the HIV vaccine candidates in the U.S., Europe, Japan and other countries that are members of the Organization of Economic Cooperation and Development. This option is, however, subject to an option held by Genentech, Inc. to commercialize HIV vaccines in North America. VaxGen’s option may be exercised during a period immediately following the filing of an application for marketing approval (i.e., a Biologics License Application with the U.S. FDA, or equivalent). VaxGen has no rights or obligations to manufacture or develop the vaccine candidates unless and until it exercises this option. If VaxGen exercises its option, it will owe royalties to GSID and be required to reimburse 50% of GSID’s development expenses. If VaxGen does not exercise its option, it will be entitled to receive royalties for sales in the above-mentioned countries. VaxGen is not entitled to royalties on sales in developing countries as defined in the agreement with GSID. VaxGen believes it will not receive any payments under the agreement, if ever, for many years.

Substantial additional research and clinical development will be required to clarify the public health benefits of this outcome. The vaccine combination tested in Thailand was developed based on the strains of HIV that circulate in that country. Separate versions of the vaccine may have to be developed for HIV strains that predominate elsewhere in the world, including Europe and North America. “We are very pleased that this clinical study has yielded encouraging results, and may provide significant new scientific insights into the future development of effective HIV vaccines,” said James P. Panek, VaxGen President. “However, we believe potential commercialization of such a vaccine remains many years away.”

[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.]


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