My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, August 31, 2015

The Best of The Blunt Bean Counter - Business and Income Tax Issues in Selling a Corporation

This summer I am posting the "best of" The Blunt Bean Counter blog while I work on my golf game (I will be back to regular posting next week). Today, I am re-posting a June 5, 2012 post on the issues in selling your corporation. This post is as pertinent today as it was three years ago when first posted (Note: I have updated any time sensitive numbers and tax changes).

I cannot stress how emotionally taxing the sale process is for someone who has never gone through it before. I dread when a client tells me they are selling their business, as I know the next few months will be very stressful for them (and indirectly me) as they just don't have the experience of going through the "sale dance". Hopefully if you are selling your business, some of the tips below can at least prepare you for the issues and tension to come.

 

Business and Income Tax Issues in Selling a Corporation

 

The sale of your business/corporation is typically a once in a lifetime event. Thus, in most cases, you will never have experienced the anxiety, manic ups and downs, legal and income tax issues, negotiating stances, walk-away threats and all the other fun that comes with the experience.

In order to navigate the sale minefield and to come up with a fair negotiated deal, you will require a team that includes a strong lawyer(s), accountant and maybe even a mergers and acquisitions consultant. 

With all that to look forward to, I figured I would provide some of the meat and potato issues you will also have to solve and negotiate.

Assets vs. Shares


In general, the sale of shares will yield a better return for the seller than the sale of assets, especially if the vendor(s) have their $813,600 (indexed yearly for inflation) Qualifying Small Business Corporation (“QSBC”) capital gains exemptions available. However, the purchaser in most cases will prefer to purchase the assets and goodwill of a business for the following two reasons:

(1) The purchaser can depreciate assets and amortize goodwill for income tax purposes, whereas the cost of a share purchase is allocated to the cost base of the shares

(2) the purchaser does not assume any legal liability of the vendor when they purchase assets and goodwill; whereas under a share purchase agreement, the purchaser becomes liable for any past sins of the acquired corporation (of course, the purchaser’s lawyer will covenant away most of these issues as best they can).

Consequently, the purchaser typically wishes to buy assets whereas the seller wishes to sell shares and thus, the first negotiation point. Whichever way it goes, the buyer knows why you want to sell shares and will typically discount the offer when buying shares instead of assets.

Working Capital (“WC”)


WC is the difference between current assets and current liabilities and measures the liquidity of a company. In simple terms, working capital is cash plus accounts receivable and inventory less accounts payable. WC can be a huge bone of contention in any sale, but especially in an asset sale. The seller in most cases blissfully assumes they will keep all the WC and also get a multiple of the corporation's earnings as the sale price. The purchaser typically wants enough WC left in the business such that they will not need to finance the business once they have made the initial purchase and contributed whatever cash or line of credit they feel is required upon the initial purchase.

The WC is a very esoteric concept at best and very hard for most sellers to grasp. Thus, it is vital to deal with this issue upfront and not leave it to the end where it can derail a deal, something I have experienced first-hand.


Valuation


Most sellers have valuation multiples dancing around in their heads like little sugar plum fairies. However, most industries have standard valuation multiples. For most small businesses the multiple is somewhere between 2 and 4 times earnings, with a higher multiple for strategic acquisitions, especially where the purchaser is a public company, since they themselves may have a 15 to 20 multiple.

For many acquisitions, especially by public and larger corporations, the multiple is based on Earnings before Interest, Taxes and Amortization (“EBITA”). However, in addition to EBITA, there will be adjustments to the upside for management salaries in excess of the salary that would be required to replace the current owner (typically you are adding back bonuses paid to the seller in excess of their monthly wages and any other family wages). Occasionally the adjustment could be to the downside, but that is typically only in situations where the business is a technology company or similar that is just starting to make money or finalize a desired product, and the owners wages have not yet caught up to market value. Finally, there will be other additions to EBITA for things like car expenses, advertising and promotion, etc. that a new owner would not necessarily need to incur upon the sale.

Where a purchase is made by a private company, instead of EBITA, the price may be based on a capitalization of normalized after-tax earnings or discretionary cash flows.

Retention


In most cases, the purchaser will require the seller to stay on for a year or two to ensure a smooth transition. The owner will thus be entitled to a salary for that period in addition to the sales proceeds. The retention period can go several ways, some blow up quickly, some end after the year or two, but often the former owner stays on as the business is now growing due to additional funds or more sophisticated management and they enjoy remaining with their baby without the stress of ownership.

 

Continued Ownership

 

It is not uncommon for a purchaser to require that the seller maintain some ownership in their company so that they still have some “skin” in the game, especially when they will be staying on with the business. This is also the case where the purchaser is consolidating several similar businesses with the intent of going public. In these cases, we counsel our clients to assume the worst (i.e. that the new owner will make a mess of the business) and to ensure they receive proceeds equal to or only slightly less than they initially desired. We have seen several disasters in consolidation purchases where the seller ends up with minimal proceeds after keeping significant share positions with the lure of the consolidated entity going public and the consolidated company just does not have the expected synergies.

Tax Reorganizations

 

Where the deal is a share purchase, often the current corporate structure is not conducive to utilizing the QSBC capital gains exemption, especially where a holding company is in place or the company being sold has a large cash position. As I state in this post, the capital gains exemption is not a Gimme. It is thus vital to ensure at least some initial income tax planning is done so that if the deal moves forward, proper consideration has been given to the income tax planning and the planning is not a wild last minute scramble.

I have only touched on a few of the multitude of issues you encounter upon the sale of your business. As noted initially, it is vital to understand the process and how stressful it may be from the start, and to assemble the proper team to help you navigate through the sale process.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, August 24, 2015

The Best of The Blunt Bean Counter - A Family Vacation- A Memory Worth Not Dying For

This summer I am posting the "best of" The Blunt Bean Counter blog while I work on my golf game. Today, I am re-posting a May 8, 2012 post on the merits of a grandparent/parent taking their family on a vacation if they have the financial means.

A Family Vacation- A Memory Worth Not Dying For

I have written several times on the topic of whether parents, who have the financial means, should provide partial gifts while they are alive, as opposed to just leaving an inheritance to their children or grandchildren.

I am a proponent of providing partial gifts while alive if you have the financial resources. My rationale is simple. Why not receive the pleasure of your gift either directly (such as a family vacation) or vicariously (by observing your children or grandchildren enjoy their gift such as a bike, car or even cottage).

The concept of a partial gift being used at least in part for a family vacation has substantial appeal to many parents. A family vacation is appealing because a parent can participate in the experience, the vacation more often than not, results in memories that last a lifetime for all the participants, and lastly, the parent has control over the gift.

I can attest personally to the benefits of a family vacation. Several years ago, my in-laws funded a Disney Cruise vacation for their children, their children's spouses and their grandchildren. This trip had a profound impact on the bonding of the grandchildren. In the case of my in-laws, the memories and enhancement of their grandchildren’s relationships was priceless and continues to this day.

Another very poignant and moving example of the gift of travel is the story of Les Brooks. Les, a Vietnam veteran, had unresolved issues relating to the war and as he states in a Princess Cruises travel blog (unfortunately the link has expired)  “Vietnam was a place I left in 1966 praying I would never have to go back. But Christle sensed the deeper truth…I was curious about the place; I wanted and needed to see for myself what life was like today for the people of a country that I left so torn apart by war.”.

One day during the course of a conversation, Les’ mother asked him if he could take a trip anywhere in the world, where would he go. After thinking about the question he surprised his mother by saying Vietnam. Unbeknownst to Les, she later booked him on a cruise to Vietnam. 

Sadly, his mother passed away before Les took the cruise and could not observe the impact this gift had on her son’s life; but I would surmise, she knew the impact it would have as she paid for the cruise. Les says this about the special gift his mother provided while alive; “I realize my mother’s gift had opened the door to many profound gifts. Through her kindness and intuition, she provided the way back to Vietnam and my healing. There, through the smiling acceptance and unspoken forgiveness of that little girl and the many other Vietnamese who welcomed me, I was able to put aside much of the guilt that had gnawed at me for so long."


While Les’ gift was not a family bonding vacation, it was a gift provided while his mother was alive, a trip that may never have occurred if Les inherited the money and spent it otherwise.

The concept of using a partial gift to fund a family vacation has become popular for both family bonding and financial reasons as discussed in this USA Today article . As grandparent David Campbell says in the article, he is mostly motivated by a desire to make his children's lives a little easier. "It's getting to a point I'd like them to enjoy life," says Campbell, a regional sales manager. "And if they're going to enjoy it, they might as well enjoy it with me."

I have observed the family vacation phenomenon on several of my own vacations. Suddenly a horde of people arrive at the pool or restaurant (not necessarily a welcome site for other vacationers) with corny matching t-shirts, saying “Smith Family Vacation 2011” or some other similar sentiment. 

Although we all know that any large family gathering can veer off the rails, these trips often bridge the generation gap between offspring and grandparents and parents. I often hear people reference these types of family vacations when they have a family get-together or the topic arises over dinner with non-family members.

Personally, I would rather hear my grandchildren say or know they are saying "When I was young, my grandparents took me on the most amazing trip!", than, “I just inherited $25,000 from my grandparents, what should I buy with it?”

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, August 17, 2015

The Best of The Blunt Bean Counter - Estate Freeze - A Tax Solution for the Succession of a Small Business

This summer I am posting the "best of" The Blunt Bean Counter blog while I work on my golf game. Today, I am re-posting a June, 2014 blog post on Estate Freezes. If this topic interests you, there were two follow-up posts based on noted author Tom Deans, that suggest an Estate Freeze could be the wrong solution for family succession and a discussion of some vital issues when transferring a family business.

Estate Freeze – A Tax Solution for the Succession of a Small Business


Winston Churchill once said, “Let our advance worrying, become advance thinking and planning.” Small business owners often worry about their exit strategy and/or succession plan. They may also be concerned about what would happen to their business if they have a health scare or receive an ultimatum from a child working in their business. Often a small business owner’s worry becomes their anxiety, instead of their advanced planning.

As a small business owner, at the end of the day, there are essentially only two exit strategy/succession options you need to plan and/or consider:

(1) A sale of your business, typically to a competitor, sometimes to current management or very infrequently, an actual sale to a child or other family member; or

(2) A transfer of the business to your children without a sale (for purposes of this article I will refer to this option as an “estate freeze”).

My blog post today discusses estate freezes. How you can transfer your business tax-free to a successor (typically your children, sometimes to existing management) while continuing to control and receive remuneration from your business.

As noted in the links in the first paragraph, Tom Deans the author of Every Family's Business (the bestselling family business book of all-time) believes a business should in most cases be sold and never handed over to the next generation (such as done with an estate freeze) without the parent(s) adequately being compensated for the business, including their children.

What is an Estate Freeze?

The most tax efficient manner to transfer your business to your children is to undertake an estate freeze. An estate freeze allows your child(ren) to carry on your business, while at the same time you receive shares worth the current value of your business. In addition, once your share value is locked-in, your future income tax liability in respect of your company’s shares is fixed and can only decrease. Keep in mind that when you freeze the value of your company you are not receiving any monies for your shares at that time. There may be ways to monetize that value in the future, but on an estate freeze, you typically only receive shares of value, not cash.

The key risk in any estate freeze is that your children may partially or fully devalue these shares and your company. So while an estate freeze may be the most tax efficient way to transfer your business, it may not be the best decision from an economic or monetization perspective. 

In a typical estate freeze, you exchange your common shares of your corporation on a tax-free basis for preferred shares that have a permanent value (“frozen value”) equal to the common shares’ fair market value (“FMV”) at the time of the freeze. Subsequently, a successor or successors, say your children or family trust can subscribe for new common shares of the corporation for a nominal amount.

This concept is best explained with an example. Assume Mr. A has an incorporated business worth $3,000,000 and wants to undertake an estate freeze. In the course of the freeze, Mr. A is issued new preferred shares worth $3,000,000 and his children or a family trust subscribes for new common shares for nominal consideration. Mr. A’s tax liability in relation to these shares on death, is now fixed at approximately $750,000 in Ontario at the high rate. Often, a key aspect of an estate freeze is a plan to reduce the tax liability by redeeming the preferred shares on a year by year basis as discussed below.

If you have access to your lifetime capital gains exemption (currently at $813,600 but indexed for inflation), your income tax liability may be reduced when the shares are eventually sold or upon your death if you still own them at that time. Finally, you may choose to crystallize your exemption when you freeze the shares.

The preferred shares received on the freeze can be created such that they allow you to maintain voting control of your corporation until you are satisfied your child(ren), is(are) running the company in the manner you desire. This maybe a double-edged sword, as you may tend to hold onto control long after your successors have proven themselves. This may become a contentious issue.

Preferred shares can also serve as a source of retirement income. Typically what is done is that your preferred shares are redeemed gradually. So, for example, if you need $100,000 before tax a year to live, you can redeem $100,000 of your preferred shares each year. Let’s say you live 20 years and redeem a $100,000 a year. By the time of your death, you will have redeemed $2,000,000 ($100,000 x 20 years) of your preferred shares and they will now only be worth $1,000,000 ($3,000,000 original value less $2,000,000) at your death. Your income tax liability on these shares at the time of your death will now only be approximately $250,000.

The Benefits of an Estate Freeze


1. On death (something we should all be planning for), an individual is subject to a deemed disposition (i.e. a sale) on all of his/her assets at FMV, which would include his/her shares of the business. An estate freeze sets your maximum income tax liability upon this deemed sale and as discussed above, this liability can be lowered over the years by redeeming the shares.

2. Family members will be able to become shareholders of the business at a minimal cost and be motivated to build the business (although Tom Deans would dispute this assertion).

3. Instead of having children directly subscribe for new common shares, you can create a discretionary family trust to hold the common shares. Every year, the corporation can pay dividends to the family trust which can then allocate the dividends to family members with lower marginal tax rates. This mechanism allows for great income splitting opportunities.

4. On the eventual sale of the business, the children or family trust may realize a significant capital gain. Assuming that the business qualifies for the capital gains exemption, the family trust can allocate this capital gain to each beneficiary who may be able to use his/her own lifetime capital gains exemption limit to shield $813,600 or more of capital gains from income tax.

One of the more critical aspects of an estate freeze is the determination of the fair market value ("FMV") of your business. In order to ensure that an estate freeze proceeds as smoothly as possible, the FMV of the company must be calculated. In the event that the FMV determined is challenged by the Canada Revenue Agency (the “CRA”) the attributes of the preferred shares will have a purchase price adjustment clause that will let the freezer reset the FMV. The CRA has stated in the past that they will generally accept the use of a purchase price adjustment clause if a “reasonable attempt” has been made in valuing the company. Engaging a third party independent Chartered Business Valuator to prepare a valuation report is generally accepted as a “reasonable attempt” in estimating the FMV.

Issues to Consider Before Implementing an Estate Freeze


An estate freeze does not make sense for all business owners. While the above benefits do sound very enticing, it depends on each owner’s personal circumstances. Issues to be considered include:

1. Are you relying on the value of the company to fund your retirement? If so, it may be best to sell and ensure you have a secure retirement.

2. Do you have an identified successor, i.e. child, able and willing to work in your business?

3. Can you bring one child into the business without creating a dispute amongst your children?

4. Are your children married and how may a divorce or separation impact the business?

Long-time readers of my blog will know that I am a proponent of family discussions and getting over the money taboo. I cannot overstate the importance of having a detailed discussion with your family if you plan to hand your business over to one or more of your children. If you pass that hurdle, you must speak with your accountant and lawyer to ensure you understand the implications of the freeze and how to properly implement the corporate restructuring. Finally, your tax advisor will want to structure the freeze such that it can be “thawed” if the business suffers a setback due to the economy, or your child(ren) prove incapable of running the company.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, August 10, 2015

The Best of The Blunt Bean Counter - Stress Testing your Spouse's Financial Readiness if you were to Die Suddenly

This summer I am posting the "best of" The Blunt Bean Counter blog while I work on my golf game. Today, I am re-posting an October, 2012 blog on stress testing your spouse's financial readiness if you were to die suddenly. This post has proven to be my most impactful blog post ever. It spawned a couple of newspaper articles, led to a BNN appearance, various interviews and has been the topic of several speeches.

Stress Testing your Spouse's Financial Readiness if you were to Die Suddenly


I have written about several morbid estate planning topics on my blog. However, I think today’s post easily ranks as #1 on the morbidity scale.
I will have the impertinence to suggest that you should stress test how financially and organizationally ready your spouse would be should you die suddenly, or vice versa.

Essentially I am telling you to take a financial and organizational walk through your death.

As I don’t want to be known as Morbid Mark, I am going to provide a side benefit of undertaking this morbid task. Girls, instead of the usual headache excuse, tell your guy sure, but first lets stress test your death. I guarantee you will have the night off. Guys, if your wife is taking you to the ballet, just before you are about to leave, tell her you just want to financially stress test her death and I don’t think you will have to attend the Nutcracker.

Seriously though, even with today’s modern families, where both spouses often have some level of financial acumen, most families really give little thought to what would happen if god-forbid one of them passed away unexpectedly.

It is important to understand that this post is not intended for older readers, but to anyone married or in a common law relationship, no matter their age. A 40 year old can get hit by a car anytime, just as much as an elderly person can pass away due to old age. The idea for this blog came about because I realized if I passed away suddenly, I had only partially provided my wife a financial road map or our assets, insurance polices etc. Why I am even cognizant of such a morbid concern is that my father passed away suddenly 25 years ago and if I was not an accountant, my mother would have been overwhelmed trying to find insurance polices, bank accounts and various other investments at a time of intense grief and shock.

Many of the comments I make below were discussed in Roma Luciw's Globe and Mail article Why you should stress-test your finances for a sudden death, so I apologize for any duplication if you read that article, but there are additional links below.

Some of the issues that need to be stress-tested:

  1. If you have pre-paid your funeral or have certain wishes, ensure your spouse is aware of where this information is located.
  2. Does your spouse know where to find a copy of and/or the lawyer who drafted your will? More importantly, is your will up-to-date? If you own your own company, do you have two wills?
  3. Do you have a folder for all your insurance policies? Does your spouse know where it’s located? While in good health, you should prepare a summary of all insurance policies you have on an excel spreadsheet; list the policy number, the insurance company, the type of insurance as well as the value of the insurance and staple it to the front of your insurance folder. You may also want to create a special password protected file (let’s call it the “Information Folder” for lack of a better name) on your spouse’s computer that contains this summary information.
  4. Do you have a list of the assets you own and where they are located? As I discussed in my blog Where are the Assets, you should complete and update yearly a basic information checklist. Again, I suggest a PDF placed in your Information Folder.
  5. As I discussed in this blog on Memory Overload, the use of multiple passwords is so prevalent that you should consider making a list of your key passwords for your spouse, that again is either put into the Information Folder or another more secure location. The objective of this exercise is to ensure your spouse will not be locked out of your various financial accounts because he/she does not know the passwords.
  6. Do you have a contact list for your spouse with the phone numbers and contact information of your accountant, lawyer and financial advisor? Have you introduced your spouse to these people? Again, consider creating a PDF and putting it in the Information File.
  7. Consider any accounts, safety deposit boxes, etc. your spouse may not be aware of. There are various reasons one spouse does not make another spouse aware of these items. However, the reason for their existence is not relevant here, what is important is that you somehow ensure that someone will become aware of the existence of these accounts or safety deposit boxes if you die. 
The above list is far from comprehensive. However, the intention of this blog was not completeness, but to get you to take a step back and consider the unthinkable and whether or not you have prepared the proper trail to allow your grieving spouse to move forward financially with the least amount of stress. I know this is morbid and people tend to procrastinate or ignore anything related to death, but look at this as selfless instead of morbid and maybe you will be moved to act.
 
This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, August 3, 2015

The Best of The Blunt Bean Counter - Resverlogix - A Cautionary Tale

This summer I am posting the "best of" The Blunt Bean Counter blog while I work on my golf game. Today, I am re-posting a November, 2010 blog post on my trials and tribulations as a shareholder in Resverlogix, a small Canadian public bio-tech stock. [Note: I have edited the original post to reduce the length and updated the tale at the conclusion of the post].

I selected this post as a "best of" for two reasons:

1. It is still an interesting story and my experience should still prove as a caution for your investing, even almost 4 years after my post was published.

2. This post has a soft spot for me. Back in November, 2010, I was a struggling blogger with maybe 3 readers. When I posted this blog, it was picked up by Seeking Alpha a large U.S. investment research and discussion site as a featured article and by several Canadian finance bloggers as a "blog to read". This publicity started my blog on the way to where it is today (a blog with 13 readers :)

Resverlogix - A Cautionary Tale

This post will recount the saga of my share ownership of  Resverlogix Corp. (“RVX”), a TSX-listed company. This is a cautionary tale in investing and a very interesting story and it should not be construed as investment advice. If I had the inclination, there is enough gossip and innuendo surrounding this stock that I could spin this story into one that could be printed in the National Enquirer; however, it is my intent to be mostly matter of fact and reflect the investment element.

The saga begins in the spring of 1996 when I was made aware of a bio-tech stock out of Calgary called Resverlogix Corp. (“RVX”). The company was working on a drug (RVX-208) to turn on Apolipoprotein A-1 (“ApoA-1”). ApoA-1 is the major protein component of high density lipoprotein (HDL). HDL is known as the “good cholesterol.” In extremely simplistic terms it is hoped that the protein will promote the removal of plaque from the arteries by reverse cholesterol transport (cholesterol is removed from the arteries and delivered to the liver for excretion).
With my eyes wide open to the fact that bio-techs are very risky, I dipped my toe into RVX as the concept denoted above was very novel and extremely exciting. In addition, the CEO Don McCaffrey stated it was the intention of RVX to sell pre-clinical, which in my mind removed substantial bio-tech risk.
In early December 2006, Pfizer announced that its cholesterol drug Torcetrapib failed its clinical tests and Pfizer’s stock plummeted. If I had done more then dip my toes in RVX, I would be writing this blog post from the Turks and Caicos because after Pfizer’s failure, RVX was seen as a possible successor and fueled by rumours of a sale, RVX stock went from $5 to $30 within about ten weeks. Helping fuel the fun was a press release stating that RVX has hired UBS Securities as an investment banker to help with a “strategic alternatives.” Not a bad profit for a ten week time frame.
What follows is the roller coaster ride from hell. The stock drops from $30 to $13 in two months as no deal emerges and by August of 2007 it is at $9.  By the end of the October, 2008 stock market crash, RVX is down to $2.30. I blow most of my gains on the initial huge run by buying back shares as I think the price is a bargain. This story includes my ignorance.
The dramatic stock drop was caused by RVX not receiving any public offers, Big Pharma’s reluctance to make purchases due to numerous drug failures and financing issues.
Anyone who has ever been involved with a small-cap stock, and especially a small-cap bio-tech stock, is aware that financing is a huge issue. RVX engaged in “death spiral financing,” a process where the convertible financing used to fund a small-cap company can be used against the company in the marketplace causing the company’s stock to fall dramatically. It can lead to the company’s ultimate downfall.
While RVX stock stayed low, the science moved along tremendously with positive testing and good results in Phase 1B/2A testing . In October 2009, RVX announced it would move ahead with parallel tests called Assert and Assure. These studies were to be run by renowned researchers  at the Cleveland Clinic. This was considered to be important confirmation that RVX had a potential blockbuster drug.
The primary endpoint of Assert was to determine if RVX-208 would increase ApoA-1 and to examine safety and tolerability. Assure was going to use a process called intravascular ultrasound to detect changes in plaque and examine early lipid effects and plaque on the coronary vessels. Assert moved ahead quickly, dosing patients ahead of schedule in late 2009.
What was extremely interesting to investors was that at the beginning of 2010, even though the stock price of RVX was only $2.40, the science had moved at a rapid pace and  if Assure was successful, a “big if,” investors were hopeful a bidding war for RVX would ensue, with estimates in the range of $30-$60. Of course, if Assure failed, RVX would most likely fall to less then $1.
I personally felt that $2.40 was a ridiculously low price for a drug with potential yearly sales of 10-20 billion dollar and purchased more shares at that point. Score one for my investing intelligence.
The stock floated around the $2-$3 range until March 2010 when the stock took off up to $7.50, mostly propelled by an article by Ellen Gibson of Bloom berg stating “Resverlogix Corp., without a marketed product, may accomplish what Pfizer Inc., the world’s biggest drug maker, couldn’t: Creating a new medicine that fights heart disease by raising so-called good cholesterol.” There was some additional publicity that followed and the stock jumped around in the $5 to $8 range. At this point I sold a portion of my stock and bought call options. The options provided me high leverage but could expire worthless, but most importantly, the options allowed me to remove a significant amount of my cash investment, while retaining potential upside to the stock.
In May 2010 it was announced that the Assure trial would be delayed as RVX was having trouble recruiting patients. The RVX spin was positive saying that since Assert had finished early, the researchers could now use what they learned in Assert to plan Assure; however, many months were wasted. The market did not appreciate the delay in Assure and the stock price fell from $6.80 to $2.80 in late June.
RVX decided to present the Assert data at a Late Breaking Trial Session on November 17th at the American Heart Association (“AHA”) conference. These session slots are supposedly only provided to those companies providing significant trial results, whether good or bad, and there is an embargo on any information being released prior to the presentation. RVX would lose their presentation spot if any information was released.
At RVX’s Annual General Meeting in early September, which I did not attend, the trial’s principal investigator Dr. Stephen Nicholls of the Cleveland Clinic spoke, and while he could not speak about Assert results, those there blogged about his appearance and said that his apparent enthusiasm for RVX 208 bode well for the AHA presentation. After the AGM, the stock rose from the high two's into the mid-fours over the next several weeks as attention was directed towards the November 17th AHA presentation.
Many investors were unaware that Merck would also be presenting results on a HDL drug they were working on known as Anacetrapib, a drug from the same family of inhibitors as Pfizer’s Torcetrapib which, as noted above, had failed miserably. Thus, investors who had heard of Merck’s presentation were not expecting much.
I expected an increase in RVX’s stock price as the AHA approached on anticipation of positive results that would put them one step closer to Assure testing and the small possibility that the Assert results would bring an offer from Big Pharma. Not much happened until the week of November 14th, which is now a week I will never forget and leads to the title of this article.
On Monday, November 16th, in anticipation of the AHA presentation, RVX stock ran from $5.72 to $6.39. On Tuesday, the day before the presentation, the stock ran to a high of $6.98 in the morning and then settled at $6.70 or so until 3:30, at which time, out of nowhere, the stock dropped to $4.50 on significant volume. Needless to say, it was a shocking last half hour of trading and rumours on the stock bullboards ran from a leak of bad results to the shorts pulling a “Bear Raid;” a tactic where shorts try and push the stock down to cover their shorts. This “Bear Raid” theory seemed to make the most sense at the time, since the shorts had a large position with RVX’s presentation scheduled for the next day. A leak did not seem to make sense based on the embargo by the AHA.
Apparently the embargo on the late breaking sessions at the AHA on Wednesday was lifted first thing Wednesday morning. Early Wednesday morning Bloomberg reported that “Resverlogix Corp.’s most advanced experimental medicine, a cholesterol pill called RVX-208, failed to raise levels of a protein thought to help clear plaque from arteries in a study.”
The Bloomberg report was followed by an RVX press release that said the “Assert trial data demonstrated that the three key biomarkers in the reverse cholesterol transport (RCT) process showed dose dependant and consistent improvement.”
Following the RVX release, the Dow Jones reported “A study involving a new type of drug being developed by Resverlogix Corp. showed it failed to meet a goal of boosting levels of a specific protein the drug was designed to raise.”
To put the final nail in the RVX’s coffin for the day, Merck reported its Anacetrapib had tremendous results in increasing HDL and also reducing LDL the bad cholesterol.
The stock opened around $5.30 on Wednesday morning with investors obviously thinking the shorts had caused the prior day’s stock price drop, but after the press releases, the stock quickly dropped to a low of $3.35 by 9:45 am. However, investors were clearly now not sure what to believe; the headlines by Bloomberg and the Dow Jones, or RVX’s press release. The stock rebounded to $4 by the time of RVX’s actual presentation. By all accounts the presentation was very factual emphasizing that RVX did not achieve a statistically significant  % change in ApoA-1. Supposedly, to be statistically significant the p (probability value) would have to be less than 0.05 and RVX’s was 0.06.
Following the presentation, RVX’s stock slid to $2.73. It then slid Thursday to $2.14 before rebounding on the Friday to $2.34 to $2 when this blog was (initially) posted.
All in all, there was mass confusion and huge paper or actual stock losses for RVX shareholders. I probably will now need RVX-208 to combat the heart attack symptoms this experience caused.

You are probably thinking “Why the heck did Mark not sell the day before the AHA?” In retrospect, that would have been prudent, however, I had decided I was going for a home run and would accept a strike out. In the bloody aftermath, more detailed analysis of RVX-208 and Merck’s Anacetrapib were reported. The analysis ranged from optimism for Anacetrapib (MedPage Today, quoted Elliott Antman, MD, professor of medicine at Harvard Medical School (a very well respected researcher according to a doctor friend of mine) as saying "The important thing that we saw here with RVX-208 was the dose response. That means that something is happening with the drug. I think that the dose response trumps P-values.") to comments that the HDL levels were out of line and may never achieve clinical success.
I am not sure there is a moral to this story; this was cathartic to write and like I said, it is a saga, a saga that is still ongoing. I guess, if anything, this is just a cautionary tale about investing in biotech’s and investing in general.

Epilouge

In 2013, RVX came back to life as it undertook its ASSURE  Phase 2b clinical trial that evaluated RVX-208 in high-risk cardiovascular patients with low HDL. The company in early June spun-out RVX Therapeutics Inc.(a unit of RVX containing an epigenetics-based BETi drug discovery platform) to Zenith Epigenetics Corp. so that shareholders of RVX now owned one new common share of RVX and one common share of Zenith. As part of the spin-out, Zenith is entitled to a tiered royalty of 6-12% of revenue derived from RVX-208. Investors liked this transaction as if RVX did well Zenith shareholders would benefit to a lesser degree and they also had a separate platform of drugs. I received Zenith shares and still have them, as they are not publicly trade-able and I look at them as a lottery ticket.
Unfortunately, in June 2013, RVX announced the Assure trial did not meet its primary endpoint and the stock which had risen from the dead to as high as $4, again crashed down to around 23 cents.

In September 2014, the company announced that Post hoc analysis of data from the two Phase 2 clinical trials with RVX-208 showed a reduction in Major Adverse Cardiovascular Events (Mace) in patients with cardiovascular disease and a 77% reduction of  MACE in patients with diabetes mellitus. This news gave the stock new life and together with an April, 2015 announcement of a licensing agreement with an Asian company Shenzhen Hepalink Pharmaceutical Co., Ltd., the stock which seems to have nine lives, has awoken again and rose to a high of $3.14 in April. The stock has now settled back to $1.82 as of Friday as investors now wait in anticipation of a PHASE 3 trial that is scheduled to start in the fall of 2015.

This saga is now coming upon ten years for me as I still have some shares kicking around and the spin-off Zenith shares. Who knows, maybe the Phase 3 trial will finally cause a buy-out of RVX or maybe the stock is on its ninth life and the saga will finally come to a conclusion.

Disclaimer: This post is a cautionary investment tale. It is not meant in any manner, as an endorsement of RVX as a stock purchase. 
 
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