Affymax (AFFY) is a non-operating shell company which trades on the OTC markets. In a former life it was a bio-pharmaceutical firm engaged in the development of OMONTYS (peginesatide), a injection delivered pharma product for the treatment of anemia.
OMONTYS passed phase 3 trials and all looked well but the product was recalled and sales were then discontinued in 2014 due to safety concerns, a small number of patients had serious and, at times, fatal reactions to the drug and it was subsequently shelved. The stock price promptly collapsed.
As a result management prepared for a liquidation of the company.
In Sept 2014 a gentleman by the name of Johnathan Couchman filed a 13D disclosing that he had acquired a 5% position in AFFY. This is the maximum stake an investor can acquire without triggering an ownership change and compromising any NOL carry-forwards.
An announcement was made in Nov 2014 that management would pay out a final special dividend of $0.05 per share, it was also noted that Couchman had been appointed as the CEO, President and Class 1 director of AFFY. The rest of the board resigned and left Couchman to explore strategic alternatives. At the same time AFFY adopted a tax benefit preservation plan to protect the NOL carry-forwards.
Before we learn more about Couchman we'll take a look at some numbers for AFFY;
Market Cap = $2,346,438
Share price = $0.0315
Common = 74,490,09
I'm not sure of the exact cash position of the company at present as shareholders must fill in an Attestation of Stock Ownership form and fax it through to HQ to get current financials. I don't have a fax machine and I don't know anyone that does.
Poor excuse I know, I'm working on it!
The last 10-K issued by AFFY prior to the firm being taken over by Couchman noted the following;
"At December 31, 2013 , we had federal and state net operating loss carryforwards of $481.0 million and $491.0 million , respectively. The federal net operating loss carryforwards begin to expire in 2028 and state net operating loss carryforwards begin to expire in 2018, if not utilized. At December 31, 2013 , we had federal and state research credit carryforwards of $ 9.0 million and $ 7.0 million , respectively. The federal credits begin to expire, if not utilized, in 2022 and state credits are carried forward indefinitely."
Not all of those carry-forwards are still viable though as there had already been an ownership change in the past. This news report notes the following;
"The Company had federal NOLs totaling approximately $481 million at December 31, 2013, a substantial portion of which are limited due to a prior “ownership change” (as defined in Section 382 of the Internal Revenue Code)."
I've not being able to get an exact figure for the what the current federal NOL carry-forwards are yet. for the sake of valuation I'm going to assume that only 25% are still viable.
That gets us to around $120 Mil
Now lets assume that only 25% of the remaining viable NOL carry-forwards get utilized, that gets us to round $30 Mil.
That's around 12x the current market cap.
Bear in mind we've not considered the value of the State NOL carry-forwards in the above figure.
Depsite the fact that I've not been able to pin down an exact figure it seems pretty clear that there is the potential for significant upside here.
As far as I understand it one has to wait three years in order to be able to utilize the NOL carry-forwards in transactions such as reverse takeover mergers (RTO's). The three year period has long since past so maybe a deal happens sooner rather than later.
But why do I think a deal might happen at all?
This brings us back to Mr. Couchman. He has a pretty decent track record of monetizing NOL stubs.
Between 2007-2010 he successfully oversaw an RTO transaction between Golf Trust of America (GTA) and Pernix Therapeutics. GTA was a busted former golf course REIT with $85 in NOL's. This deal returned around 150% to GTA investors over the period of Couchman's involvement.
Another one involved Footstar Inc (FTAR) and Xstelos Holdings. The former was a failing footwear retailer with NOL's of around $123. This deal resulted in a gain of around 140% for FTAR share holders.
Couchman is also involved in a few other NOL stubs including Myrexis (MYRX) which I'll be writing up soon.
So, what are the risks here. Well for starters, past success is no guarantee of future performance. Maybe AFFY doesn't pan out like the other deals have. It's been a while since Couchman took over and nothing has happened yet.
Maybe the firm ends up just being liquidated and the common ends up with little to nothing.
I'm an optimist though, when things look bleak or downright moribund I think to myself "Just imagine what will happen to this stock if some good news pops out of the ether". The share price has being building a base for so long it's like a tightly coiled spring just waiting to be released.
AFFY is tiny, thinly traded and has been left for dead, and yet the potential for significant upside remains. Into the basket it goes.
Note: I'd like to say thanks to clancy836 for his V.I.C. write-up on AFFY which is where I drew a bunch of information from to write this post. I recommend reading it for a more detailed appraisal of the investment. I'd also like to thank the anonymous Nonamestocks.com reader who mentioned AFFY which is where I got the idea from originally. Thanks! :)
David J. Flood
UK based Value Investor.
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