PDLI - PDL Biopharma Inc

[wabuffo]

Benchmark's questions:

 

principal and interest payments due under a credit agreement entered into by the Company, as a lender, with CareView Communications, Inc., the recoverable amount of which is expected to be substantially less than the principal and interest payable

 

The only note receivable that looks like it will have decent recoveries is Wellstat Diagnostics.  Its best to assume Hyperion and CareView are goose-eggs (any recovery should be treated as possible upside but doubtful).

 

amounts received in connection with our agreement with a counterparty pursuant to which we sold the remaining assets of DFM, LLC, to which we are entitled to a single-digit percentage of any net final award in connection with its monetization process using certain intangible assets included in the sale;

 

If we get anything its a bonus.  They sold all of the assets of DFM for $5m in Sept 2019.  They retained ownership of a royalty stream but according to the latest 10-K, the max value of that royalty stream is $2m so its not very material.

 

amounts received from a royalty based on a “know-how” license for technology provided in the design of solanezumab, an Eli Lilly-licensed humanized monoclonal antibody being tested in a study of older individuals who may be at risk of memory loss and cognitive decline due to Alzheimer’s disease. The 2% royalty on net sales is payable for 12.5 years after the product’s first commercial sale, and is currently in ongoing clinical studies with Phase 3 testing results expected in July of 2022

 

Here too, anything we get is a bonus. 

 

If they distribute the cash say by end of 2020,  but receives royalty payment later. Is the shareholders supposed to track this themselves for tax purpose? How are these treated?

 

Generally - the distributions will be return-of-capital and the Company should file IRS From 8937s which the broker back-offices will use to properly categorize these distributions for year-end brokerage account tax forms.  That's not always a certainty, though.

 

In terms of the actual process of liquidation, that could take many years.  In some cases, the stock ceases trading and the remaining assets are placed in a Liquidating Trust.  The Trust then may (or may not) file with the Delaware Chancery Court and begin a three-year minimum process of settling its final liabilities/claims and monetizing its remaining assets.  There's no cookie-cutter process to follow and every liquidation is a little different.  I've had some liquidations go on for a decade after the shareholder vote to approve dissolution and liquidation.

 

wabuffo

[benchmark]

 

 

 

 

Generally - the distributions will be return-of-capital and the Company should file IRS From 8937s which the broker back-offices will use to properly categorize these distributions for year-end brokerage account tax forms.  That's not always a certainty, though.

 

In terms of the actual process of liquidation, that could take many years.  In some cases, the stock ceases trading and the remaining assets are placed in a Liquidating Trust.  The Trust then may (or may not) file with the Delaware Chancery Court and begin a three-year minimum process of settling its final liabilities/claims and monetizing its remaining assets.  There's no cookie-cutter process to follow and every liquidation is a little different.  I've had some liquidations go on for a decade after the shareholder vote to approve dissolution and liquidation.

 

wabuffo

 

According the the doc they file: It seems that this is not treated as return-of-capital, as my understanding of return-of-capital generally is not treated as taxable for common holders?

 

Distributions made pursuant to the Plan of Dissolution to a U.S. Holder will be treated as received by the U.S. Holder in exchange for the U.S. Holder’s shares of our common stock. The amount of any such distribution allocable to a block of shares of our common stock owned by the U.S. Holder will reduce the U.S. Holder’s tax basis in such shares, but not below zero. Any excess amount allocable to such shares will be taxable as capital gain. Such gain generally will be taxable as long-term capital gain if the shares have been held for more than one year. Any tax basis remaining in a share of our common stock following the final liquidating distribution by the Company will be treated as a capital loss. The deductibility of capital losses is subject to limitations.

[wabuffo]

According the the doc they file: It seems that this is not treated as return-of-capital, as my understanding of return-of-capital generally is not treated as taxable for common holders?

 

benchmark - I think you misunderstood the definition of return-of-capital.  Under US tax rules, your acquisition cost of shares forms your cost basis.  As you receive distributions, those go towards reducing your cost basis.  If/when you receive a cumulative amount of distributions per share that is greater than your cost basis (i.e, your "adjusted" cost basis drops below zero), then the amount that exceeds your cost basis is treated as a taxable capital gain.

 

For example:  You buy a stock that is liquidating for $5 per share.  After a few months, the company distributes $4 per share to you and all shareholders.  This $4 per share reduces your cost basis in the stock to $1 ($5 - $4) but you owe no taxes (yet).  A year later, the company wraps up all of its liabilities and completes its monetization of assets and distributes a final $2 per share.  Your cost basis drops below $0.  Of the $2 distribution per share, $1 is now considered a taxable capital gain.  (The first dollar of the distribution takes your cost basis to zero, the second dollar is a $1 taxable gain).

 

That is what the section you quoted actually says if one cuts through the legalese. 

 

So yes, initially, distributions are generally free from tax, in that they first go to reducing your cost basis.  But one hopes that an investment in a liquidating stock will produce capital gains (just like any other common stock investment - its just the sequence of cash inflows and outflows that determines the gain is different).

 

This is what gives liquidations such great risk-adjusted returns.  They are very capital efficient in terms of recycling your capital in cash (up to 100% of your cash investment) while delaying the ultimate day far out into the future when one has to deal with the taxman.  This is contrast to receiving dividends, or selling a portion of one's holdings in a stock with gains which result in immediate taxable events upon the liquidity event occurring.

 

The downside is that liquidations tend to be like "roach motels" (one can get in, but one can't get out) since they can be illiquid or often the stock ceases trading altogether.

 

wabuffo

[benchmark]

Wabuffo, thanks for the details.

 

 

This is what gives liquidations such great risk-adjusted returns.  They are very capital efficient in terms of recycling your capital in cash (up to 100% of your cash investment) while delaying the ultimate day far out into the future when one has to deal with the taxman. 

 

This makes sense. However, if the return comes in drips, I assume that one has to deal with the taxman every year. In your example, if the extra dollar comes in 20cents every year for 5 years.

 

 

The downside is that liquidations tend to be like "roach motels" (one can get in, but one can't get out) since they can be illiquid or often the stock ceases trading altogether.

 

Maybe this is a counter point of 'capital efficient'? i.e., the liquidation might take years, hence your capital is tied up for a long time as well? so one may not want to invest a large sum into liquidation, unless one has confidence in the timeline.

 

In the case of PDLI, it seems that this will take at least a couple of years -- assuming they file at the end of 2020?

[lnofeisone]

Wabuffo, thanks for the details.

 

 

This is what gives liquidations such great risk-adjusted returns.  They are very capital efficient in terms of recycling your capital in cash (up to 100% of your cash investment) while delaying the ultimate day far out into the future when one has to deal with the taxman. 

 

This makes sense. However, if the return comes in drips, I assume that one has to deal with the taxman every year. In your example, if the extra dollar comes in 20cents every year for 5 years.

 

 

Correct. If I recall correctly, there are some quirks around incurring losses with liquidation.  you have to wait for company to fully liquidate before you can report the loss.

 

This is a good starting point to see all things taxes wrt liquidations.

https://www.govinfo.gov/content/pkg/CFR-2008-title26-vol4/pdf/CFR-2008-title26-vol4-part1-subjectgroup-id57.pdf

[wabuffo]

you have to wait for company to fully liquidate before you can report the loss.

 

That's only if the stock ceases to trade on any exchange.  If it continues to trade (usually on the pink sheets), you are always free to sell out of it.  Of course, liquidity can be a problem if you own a lot of shares.

 

Maybe this is a counter point of 'capital efficient'? i.e., the liquidation might take years, hence your capital is tied up for a long time as well?

 

Definitely true - however, I would say that my general experience (though not always the case) is that one receives significant distributions early in the process and the last distributions at the end are typically small and relate to some regulatory or tax requirements that need to get resolved before the last funds can be disbursed.  A typical sequence like this produces good IRRs and excellent capital recycling characteristics.  But your mileage may vary.

 

wabuffo

[writser]

Definitely true - however, I would say that my general experience (though not always the case) is that one receives significant distributions early in the process and the last distributions at the end are typically small and relate to some regulatory or tax requirements that need to get resolved before the last funds can be disbursed.  A typical sequence like this produces good IRRs and excellent capital recycling characteristics.  But your mileage may vary.

 

wabuffo

 

Agreed. That's also the plan in this specific case. As of last week PDLI still guided towards a disposal of all major assets by the end of 2020 / H1 of 2021. Of course, whether they actually succeed in doing so is another question.

 

While we cannot provide a definitive timeline for the liquidation process, we are targeting the end of 2020 for completing the liquidation of our more significant assets as part of the Plan of Liquidation. However, we further recognize that, the duration and extent of the public health issues related to the COVID-19 pandemic make it possible, and perhaps probable, that the timing of the liquidation of such assets may be delayed into the first half of 2021./

[wabuffo]

https://www.sec.gov/Archives/edgar/data/882104/000088210420000100/pdli-20200707def14adoc.htm

 

We estimate that we will have between approximately $360 million to $680 million of cash and other non-cash assets that we will be able to distribute to our stockholders in connection with the Dissolution, which implies a per share distribution with an aggregate value of between approximately $3.16 and $5.97 based on 113,944,729 shares outstanding as of June 19, 2020. This estimate includes our prior distribution of 13,333,334 shares of common stock of Evofem to our stockholders of record on May 15, 2020. The distribution was completed on May 21, 2020 and accounts for approximately $64.4 million of this estimate, based on the closing price of Evofem common stock on the date of distribution ($4.83 per share of Evofem common stock).

 

So adjusting for the EVFM distribution already made, PDLI is projecting a total distribution range of $2.59 - $5.40 per common share, if my math is correct.

 

wabuffo

[benchmark]

 

So adjusting for the EVFM distribution already made, PDLI is projecting a total distribution range of $2.59 - $5.40 per common share, if my math is correct.

 

wabuffo

 

Maybe that's why the stock has been going down :)

[nspo]

Has anyone come up with a liquidation value aside from what management is saying? Obviously we've seen that Engine's estimate, even including the recent EVFM sale, is quite a bit higher.

[vpagano]

Any effect on liquidation range in the judgement of people here? Shares responded nicely.

 

http://investor.pdl.com/news-releases/news-release-details/pdl-biopharma-enters-agreement-divestiture-noden-pharmaceutical

[wabuffo]

It's good news, but PDLI is providing $33m in vendor financing to the buyer.  My cynical first reaction was "oh great! another note receivable issued by PDLI that will eventually get written down to pennies on the dollar...."

 

wabuffo

[aryadhana]

Does anyone here have saved Engine's presentation? 

[vpagano]

Settlement agreement PR today:

 

https://seekingalpha.com/pr/17969084-pdl-biopharma-enters-settlement-agreement-wellstat

 

INCLINE VILLAGE, Nev., Aug. 12, 2020 /PRNewswire/ -- PDL BioPharma, Inc. (PDLI) ("PDL" or the "Company") (Nasdaq: PDLI) announces it has entered into a settlement agreement (the "Settlement Agreement") with related entities of Defined Diagnostics, LLC (f/k/a Wellstat Diagnostics, LLC) ("Wellstat Diagnostics" and, together with such related entities, the "Wellstat Parties") resolving previously reported litigation relating to loans made to Wellstat Diagnostics by PDL. The loans totaling $44,100,000 were made pursuant to a loan agreement between Wellstat Diagnostics and PDL dated August 2013, and the notes were carried on PDL's balance sheet for $51,391,184 as of June 30, 2020.

 

Under the terms of the Settlement Agreement, the parties agreed that the Wellstat Parties would pay an amount of $7,500,000 upon the signing of the Agreement and either (1) $5,000,000 by February 10, 2021 and $55,000,000 by July 26, 2021; or (2) $67,500,000 by July 26, 2021. Further under the terms of the Agreement, upon payment of either $5,000,000 prior to April 21, 2021 or completion of the payment of $67,500,000 by July 26, 2021, the Company will transfer to Wellstat Diagnostics on an "as is" and "where is" basis certain assets currently owned by the Company which were obtained through the Company's credit bid in 2017 for the assets of Wellstat Diagnostics. If the Wellstat Parties fail to make payment in full by July 26, 2021, the Company shall be authorized to record and confess judgment against the Wellstat Parties for an amount of $92,500,000 or such lesser amount as may be owed under the Agreement.

 

"We are pleased that we have finally reached this settlement with the Wellstat parties. We look forward to receiving the agreed payments, which should increase the net proceeds from our monetization strategy that we can ultimately distribute to our stockholders," commented PDL's President and CEO Dominique Monnet. "I commend our legal team, led by our General Counsel Christopher Stone, for their dedication and persistence."

 

In September 2019, PDL announced that the Supreme Court of New York County of New York, Commercial Division, issued a summary judgment in favor of PDL in the Company's litigation with Wellstat Diagnostics recognizing the validity and enforceability of guarantees on the loans made by the guarantors under the loan facility.

 

 

Does this imply that there is incremental gain here? Carried on the Balance Sheet for $51.4M, payout of at least $7.5M + $5M + $55M = $67.5M, increase of $16.1M. At 114M shares outstanding that's $0.14 / share. I would assume this bumps the expected distribution range then?

 

Still holding some of a small position I had scooped up <$3.

[vpagano]

PDL BioPharma advancing Lensar spinoff

 

PDL BioPharma (PDLI -0.4%) medical device subsidiary LENSAR has filed a regulatory document with the SEC for a potential spinoff. The board, currently exploring strategic alternatives, will make a final decision on the potential move in the coming weeks.

 

The unit has specific know-how in next-generation femtosecond cataract laser technology. Its LENSAR Laser System has been cleared in the U.S. for the treatment of anterior capsulotomy, lens fragmentation and corneal and arcuate incisions

 

If LENSAR is floated shares will trade on Nasdaq under the symbol "LNSR."

 

SVB Leerink is advising.

 

https://seekingalpha.com/pr/17984496-pdl-biopharma-announces-filing-of-form-10-registration-statement-securities-and-exchange

 

Sold half of what I had in the mid $3.70's but tracking.

[vpagano]

Sold my spinoff shares after they popped because I had no idea how to value that business. What would be the updated value range of liquidation? As in what value was allocated pre-spinoff to Lensar?

[writser]

The company did not disclose that so you have to value the rest yourself.

[nspo]

Post spin up 17% on cost basis. Thanks guys for alerting me of this one!