A liquidation that I have been tracking for a couple of months is Sio Gene Therapies Inc. (NASDAQ:SIOX). The company is a failed biotech that decided to wind-up operations and return the remaining cash to shareholders and yesterday they released the first preliminary proxy statement with an estimate of liquidation proceeds. Sio Gene Therapies estimates that their initial liquation distribution will be between $0.38/share and $0.42/share. With no directly obvious source of cash for a second distribution and a stock price at almost $0.41/share this doesn’t look very attractive, but I think it is. In the proxy statement we find this helpful table:
If you look at this you would think that the initial liquidation distribution is probably going to be their last one as well, since there is no cash leftover. But in the table, there is one line item that deserves closer scrutiny. A lot of money is “disappearing” in the reserve for potential or unanticipated claims and contingencies. When a company is liquidating it is mandatory to keep a reserve for a certain number of years (3 in most cases) in case unexpected claims show up. This is of course certainly possible. It could be as simple as the company missing some invoices in their administration or it could be worse with a full-blown lawsuit about Some Bad Thing in the past. But this is of course not expected to happen, and I think that shareholders should expect to get the majority of this reserve at the end of the liquidation process.
If we add back the full 7 million (low estimate) slash 6 million (high estimate) reserve back to the estimated cash the upside from the current share price is respectively 13.60% and 18.87%. The company is targeting to file their Certificate of Dissolution in April 2023 and process the initial liquidation distribution shortly thereafter. You don’t have to do any math to realize that this will result in an excellent internal rate of return. Of course, this fully depends on the release of their reserve for potential or unanticipated claims. But there is quite some margin for error here. I assume that the initial distribution will take place at the end of April 2023 and the final distribution 3 years later. In the low scenario we keep an IRR of 10.6% when 3.5 million of the reserve is used, and in the high scenario we can use the full 6.0 million reserve and still achieve a 12.7% IRR. I think that is an attractive bet, so I bought some shares.
Author is long Sio Gene Therapies
Just wanted to comment that this is an interesting post & situation.
But I have no experience or expertise here, so can’t contribute anything meaningful 🙂
Have you encountered any other liquidations where you saw something similar happen (can be both good or bad outcomes)?
What is the tax treatment on those distributions to foreign investors?
Let me preface this that nothing on this blog is ever tax or investing advice, but when a company has large accumulated losses (like in this case) the distributions are in general classified as a return of capital and not taxed at the source.
I was involved in a liquidation where mgmt put about $2 million into a reserve similar to this one. The company didn’t say anything (as far as I can remember) about if/when that money could ever be returned to shareholders. Has anyone ever seen a subsequent release of funds in other liquidations?
The skeptic in me imagines that unscrupulous mgmt teams could find ways to divert that cash to themselves as these seem like situations where very few people are paying attention and the amounts are not large enough to attract the attention of folks with the resources to litigate.
How long ago was the liquidation? You should certainly expect that it takes 3 years or more, so it requires patience. But of course, there is not always something left at the end…
The contingency reserve seems quite high. But I agree with your assessment.
See Note 4 of the latest 10Q. SIOX retains the right to receive an additional $7mm of milestone payments related to the 2021 sale of its ownership stake in Arvelle Therapeutics to Angelini Pharma.
The milestone payments are in connection to the therapeutic cenobamate (EU brand name ONTOZRY). My research suggests that this milestone payment has a decent likelihood of paying out.
See: “With the expansion of sales in Europe through the approval of Ontozry in France, we expect to secure sales royalties and milestone revenue related to sales performance from Angelini Pharma,” an SK Biopharmaceuticals official said. (December 12, 2022 article in Korea Biomedical Review- https://www.koreabiomed.com/news/articleView.html?idxno=15260)
Curious on your take.
Sale PR: https://www.arvelletx.com/2021/01/angelini-pharma-acquires-arvelle-therapeutics-to-create-a-leading-european-innovator-in-central-nervous-system-cns-and-mental-health-disorder-treatments/
I think part of the milestone payment has been received already, if you read a little bit farther in the same paragraph in the 10Q you will see:
So they have received $4.3 million of milestone payments already, so only $2.7 million in potential milestone payments remain outstanding. Based on the quote you provided I think it might be true that we might get the remaining milestone payments as well, but since I have no idea what the actual milestones are and how likely it is that they are met I haven’t ascribed any value to this CVR.
They are reserving almost 25% of the entire initial distribution! That seems absurdly high.
It does seems like they’re being very conservative assessing unanticipated claims.
Perhaps overly conservative.
It seems very high indeed, although I don’t think you should see it as a percentage of the initial distribution. A reserve of a couple of million is pretty reasonable. Depending on how much cash is left over that could be a very small percentage, or it could be all there is.
I want to make sure I am understanding this correctly:
Pay 0.41 a share now, receive roughly that amount back in April 23, and then an additional 8c 3 years later?
On a similar note, Calithera Biosciences looks to be doing something similar soon
Yeah, I have that one on my watchlist as well. Not sure yet if it’s going to be attractive.
Large preferred with liquidation preference on $CALA. Although it’s conceivable it could work out still.
Hasn’t Calithera said no proceeds for equity holders?
Yeah, it looks like a total zero.