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Affymax Inc. (AFFY)  - A Couchman controlled NOL stub

1/11/2020

9 Comments

 
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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.

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AFFY Long-range chart

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.


Long AFFY



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! :)  
9 Comments
Tim Eriksen
1/12/2020 10:27:03 pm

Couple of things. Love your blog and ideas. Have some concerns about NOL analysis.
1. The 5% is not the maximum stake an investor can acquire without triggering an ownership change The rule is a 50% ownership change among 5% owners over a three year period. Buying 5% triggers an adjustment in the calculation. Rights plan limit any change to 5% to insure no harm to the NOLs, but the are often used to prevent any new owners/ownership change. A single 5% owner has little to no impact on NOLs unless they are already close to the 50% limit..
2. The NOLs in this case are of little to no value. With $2-3 million of cash how are they going to earn $120 million in the next 10-15 years. Thus they are not worth even remotely close to 25% of the $481 million. Plus you have to factor in the time value of money. When a shell company pays out cash, it is decimating its ability to make meaningful use of its NOLs,
3. In a sale the acquirer does not gain full use of the NOLs. It is extremely limited. My understanding as a non-lawyer is a buyer only gets to use the equity value of the company less financial assets multiplied by the Section 382 rate, currently less than 3%. So in this case it is zero since the cash is greater than the market cap. See page 44 of the Golf Trust DEF14A filed on 2/8/2010 for more details.

Tim

Reply
David
1/12/2020 10:53:27 pm

Hi Tim,

Thanks for the clarification regarding the ownership rules change.

With regards to the use of the NOL's I'm aware that a sale can compromise the NOL's.

From what I can gather there are other ways to maintain the NOL's through certain types of mergers. Thus a profitable company can utilize the tax assets. I don't think Couchman has any plans to try and just utilize the NOL's through AFFY alone without employing the use of some Merger, RTO, Morris Trust etc to monetize the tax assets.

Who knows, maybe you are right. Maybe this thing is dead in the water. That's why I buy a basket of this stuff.

These types of investments seem pretty hard to value, particularly without current financials to look at.

I'm basically betting that Couchman's track record results in something positive happening here. I guess we'll see.

Thanks for your input, I'm certainly no expert in NOL stubs so I'm learning as I go.

Regards,

David

Reply
Brandon
1/20/2020 02:03:57 am

Hey David,

Regarding the annoying need to fax that form to HQ, there are several free e-fax websites. I've had success with faxzero.com. Much easier than tracking down the actual machine :)

Cheers,
Brandon

Reply
Eric Schleien link
6/16/2020 01:21:47 am

is couchman still alive? just odd this shit has been around now for years w no action

Reply
David
6/17/2020 06:16:25 pm

Yeah, Couchman is still in the game.

He's been buying ENZN through MTRX lately.

https://www.otcmarkets.com/filing/html?id=14047201&guid=08zFU6-asmB0X3h


Not sure what's going on with AFFY but ECRO and ORGN have taught me that patience is a virtue.

Reply
Kristin
6/19/2020 04:58:50 am

Very interesting post on AFFY. To be clear, there is not a 3 year waiting period on utilization of the NOLs in a reverse merger or any other transaction for that matter. The 3 year period has to do with how long the calculations are measured and can be shorter if there is an "ownership change".
In the event of a sale, determining the amount of NOLs available to the buyer is a bit more involved than described. The AFR is quite low right now, so that certainly results in a low number, but there are a bunch of other inputs in the calculation that you'd have to consider to be more precise.
There are different ways to value NOLs and it helps to model the scenarios in a few different ways.

Kristin

Reply
David
8/8/2020 09:23:32 pm

The following proposal of tax credit cash-outs could provide an additional catalyst for AFFY, MYRX and other NOL shells with tax credits on the books;

https://ih.advfn.com/stock-market/NYSE/duke-energy-DUK/stock-news/82884592/corporations-seek-tax-credit-cash-out-in-next-coro

"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."

https://otcmarkets.com/filing/html?id=9891463&guid=TcIFUWAqNvB9wth

Reply
Fred link
8/12/2020 01:48:05 pm

Interesting stuff about AFFY. I used to work at that company. It was sad to know that their drug killed people but was still approved by the FDA. Really sad to know that people were going to die ... and they did. Of course nothing happened to anyone who worked there... except they wen to the next place and made a lot of money. Well, for the stock, I have been assuming that a reverse-merger is in the cards. Why else would Couchman be involved? Seems like the waiting time has passed, and any lawsuits have probably passed their timeframe too (?). Not sure what is holding up a reverse-merger and then using whatever of the NOLs which are allowed ....?.... I noticed that NKLA -- Nikola Motor Company--- got into their IPO via a reverse merger... probably for different reasons ... well, anyway, good to know that there still may be some action with this stock.....I bought for 10 cents ... but they issued a 5 cent dividend .... so I'm in for 5 cents ....haha ... well, who knows .... I advise people to buy FCEL .......

Reply
Stuart Carden link
6/27/2023 07:10:37 pm

Hello niice blog

Reply



Leave a Reply.

    David J. Flood

    UK based Investor. I focus
    ​on Net-nets, Pico/Nano caps, AIM/OTC/Dark stocks & Special Situations. Balance sheets & Long-range price charts are my guide. Looking for inflection points. Do not construe my blog as investment advice, always conduct your own due diligence.  Caveat Emptor!


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