Almost a year ago I wrote about the pending liquidation of Sio Gene Therapies (OTCMKTS:SIOX) with the expectation that a first liquidation distribution would be made in a couple of months. It took a lot more time than initially estimated, apparently because it was more time consuming than expected to liquidate some of the foreign subsidiaries. But the long wait was worth it, because today we finally got a press release with a small surprise to the upside. The initial liquidation distribution will be $0.435/share while the company originally provided a range between $0.38 and $0.42/share. My guess is that we can thank the current interest rate environment for this bump in combination with the delay.
A key part of the investment thesis in Sio Gene Therapies was the expectation that after the initial liquidation distribution we could expect one or more additional distributions. The company is keeping $7.2 million as a contingency reserve, and in the initial proxy statement the possibility of distributing this money to shareholders wasn’t even mentioned. This could add up to $0.10/share, and in the latest press release at least they write something about distributing excess cash (subject to uncertainties inherent in winding up the business). Might take a couple of years or more, but I expect to get something at some point.
Author is long Sio Gene Therapies
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