TLDR: I estimate a likely recovery of 2.5X over the current stock price of Sangamo assuming milestone payments are successfulBefore we get started, a small request, since we just hit 4,000 subscribers. If you enjoyed any of my articles or made money on them this year, please post a link on X, Threads, Bluesky, Telegram, Discord, or whatever platform you prefer of your favorite one today. My growth has been slowing down quite a bit and I am happy to keep this Substack free as long as I am increasing my audience since many of my ideas come from you :)It will only take a second and it is much cheaper than getting a monthly subscription bill. Thank you for the consideration and your continued support of this investment writing experiment I have been running!Thanks for reading Triple S Special Situations Investing! Subscribe for free to receive new posts and support my work.IntroductionAs many of you know, I cut my teeth on investing in bankruptcy dockets, but I very rarely get involved on the equity side of things.I had a few of you reach out on this idea, but until last Friday I didn’t see a clear buy signal for owning this security.Let’s walk through what has happened and why I am now in the mix as of this week. BackstorySangamo Therapeutics is a gene therapy company that filed chapter 11 in Delaware on June 23.Filing in Delaware is now a prerequisite for me to enter an equity bankruptcy investment as Texas judges epitomize the three wise monkeys (do or don’t do yourself a favor & read about the Judge Jones sex scandal).The company now trades as SGMOQ on the OTC with ~415 million shares outstanding at a price of ~16 cents.To start with, this is an unusual bankruptcy case as it had no secured debt on file.For those less familiar, understanding creditor classes and priority of them is key in analyzing a potential return waterfall.Each class needs to have their full investment returned before the next one sees a penny (outside of unusual circumstances where you can prove criminal or illegal conduct that results in disgorgement or subordination).When you don’t have a secured lender, that leaves one less piggy to feed at the trough with the typical order of priority being the DIP loan lender (who finances the bankruptcy expenses), the unsecured creditors and contract rejection claims, and then preferred (not present here also) followed by common equity.I could go in more detail than this, but you can learn the rest from Dr. Claude or YouTube University as this isn’t a 101 class I am teaching.SGMO filed because it ran out of operating cashflow, which makes for an interesting special situation.Since the bankruptcy, the debtor has been hosting auctions of company assets to raise cash.Which leads to….How equity gets paidThere was an auction in which the following assets were sold:Eli Lilly, through a vehicle called Merope, bought the zinc-finger platform, the capsids, the prion program, and the partnered license streams (Genentech, Astellas, Takeda, Alexion) for $50M.PTC Therapeutics bought the Fabry disease gene therapy ($111.0M) plus milestone payments of $80m on FDA accelerated approval and $20m on full approval (potentially $211M in total)And $2.6M for some lab equipment.Beyond this there are a few other things to consider in the asset column which we will get into shortly such as Hemophilia A, ST-503, the French sub, and the NOL shell.Milestone paymentsThe most important of these assets is of course the milestone payments, so let’s start with that.The milestone piece of the PTC contract is two payments: $80 million on FDA accelerated approval of the Fabry program, $20 million more at full approval, so $100 million total.“The first accelerated approval by the FDA of a US BLA for a Company Product for the treatment of Fabry disease based on the STAAR Studies” is what appears in the contract without a ton of weasel language in there, which is usually my first concern with future payments.The acquirer needs to use commercially reasonable efforts to develop and pursue the approval of the therapy.The milestone payments can also be sold and assigned (to a third party/liquidating trust/reorganized debtor) and don’t have an end date, which is great for flexibility and achieving the payouts.Most importantly, the accelerated pathway was previously agreed with the FDA in writing.PTC (the purchaser) told its own shareholders they think they can get this moving forward as early as 2027.“A rolling BLA submission to FDA for accelerated approval of ST-920 is expected to be completed in Q4 2026. The BLA is based on evidence of meaningful favorable clinical effect on renal function and safety and tolerability profile over 52 weeks in the Phase 1/2 STAAR study.”Frequent TripleS flyers know there is some risk around BLAs given how Qure went down, but the hope is with Prasad gone that the FDA will be reasonable going forward and this has a high probability of getting done.Otherwise, why has PTC agreed to pay $111 million cash up front for this asset?Hemophilia ASangamo owns giroctocogene fitelparvovec, a hemophilia gene therapy with a completed Phase 3 that met its endpoints. Sounds great right?Unfortunately, Hemophilia treatments have not been particularly profitable and there are existing working therapies.Pfizer ran the trial, was successful, and handed the drug back to Sangamo for free.This could be worth something to the right company, but I don’t give this much value outside of someone wanting an option on this therapy for some unknown reason. ST-503This is a Phase 1/2 gene therapy for small fiber neuropathy with fast track designation.As someone who has dealt with this issue, it sucks.Having a treatment outside of pain killers would be great.The trial is super early stage, so it seems unlikely anyone would pay major dollars for this, but I do think it has value.The French subTo be honest, I tried to make heads or tails of this. The balance sheet was very confusing. There appear to be some cash and R&D credits along with intercompany obligations.If you add these all up, they are worth up to $17 million.However, it’s France, so who knows if that money is trapped there permanently or if there are additional obligations I am missing.Odds and EndsThere is also the the Tregs Platform, including the TX200 program and related regulatory T-cell assets and the sickle cell disease program. These are likely zeros. The committee, and the NOL shellBefore we get into the NOL shell, let’s talk about what this bankruptcy has that 99% of bankruptcies don’t. An equity committee! 🥳On August 5, the US Trustee appointed an official equity committee, with Orrick as counsel.Official equity committees are the exception, and judges say so loudly when they deny them as a matter of course.That means that the estate is paying for lawyers to defend the rights of equity holders in this bankruptcy, which only ever happens in the case of a solvent estate.To date, the equity committee has extended the auction on the remaining company assets as the DIP lender is trying to take them at a discount.The DIP lender is lending $35m and told the court it wants 100% of the reorganized equity for the NOLs.There are over a billion dollars of NOLs.Approximately $980.4 million of federal and $470.3 million of state NOLs. Additionally, $130m of foreign NOLs, $53m of federal R&D credits, and $35m of state R&D credits.Readers of this blog know I love NOL shells.I recently wrote about Domo and previously covered ContextLogic.What are these NOLs worth?If the DIP lender gets their way, I imagine they are trying to steal them for $10-$20 million.We won’t know the real number until the plan hits the docket next month.In a fair world, they should be worth $50 to $80 million to someone who has capital (like a reorganized debtor) and a way to use them intelligently.Which tells you exactly why the DIP lender wants 100% of it for the price of all or some of its bridge loan, and why the equity committee is trying to blow this up.The bankruptcy NOL exception works best when historic shareholders and creditors keep the company, and this estate pays creditors in full and leaves equity standing.(I will skip the primer overview on NOL tax law and ownership changes, which you can easily google.)Due to the DIP lender being a plan sponsor, it gives them an alternative way to keep the NOLs alive if current shareholders aren’t in the shell.On August 24, the equity committee filed an emergency motion to stop the Remaining Assets auction from closing early and got shortened notice the same day.The committee said the debtor’s banker shopped the NOLs and remaining assets to a small group of bidders, handed out deficient diligence, and then set an August 31 bid deadline over the committee’s objection.“Raymond James engaged only a limited universe of potential counterparties and received a single qualified bid—FSI’s Plan Sponsor Alternative.”The committee also said that its own advisors, working their industry relationships, have already turned up several credible buyers for the shell et al.Seventy-two hours later it had won without a hearing:“...the Debtor has further extended the Bid Deadline with respect to any Bids for the Remaining Assets and Plan Sponsor Alternative Bids through and including the date upon which an order of the Court confirming a chapter 11 plan... becomes a final, non-appealable order.”The good news is the shell auction now stays open for the whole case.Anyone can outbid FSI right up to plan confirmation.The debtor also intends to file a chapter 11 plan by September 25.Will equity keep the shell alive in a reorganized entity, will a bidder come in, or will the DIP lender steal this asset?That is a major value determinator.LiabilitiesThis is the section of which I have the least confidence in as it is very convoluted.* Please note this is my best effort to put this together on two cold brews on a hot Saturday and I am not paid to do this. I am certain I have made many errors as doing this properly would take me two uninterrupted days. This is probably 80 percent right. I expect these numbers to be firmer once we get a disclosure statement, but by then the trade may have moved up a lot. Do your own work and come up with your own numbers and do not blindly trust me. If you find something wrong, correct me in the comments. It will not hurt my feelings.*As I mentioned, there is no secured debt.The DIP loan, which is used to pay operating and professional fees, is going to be fully utilized given how most bankruptcies go, so I have it at $37.5 million in full.There are also payouts due to investment bankers and employees which roughly translates to $13.5 million with a cushion.$78.1 million of unsecured claims are listed in the opening document.$38.7 million of that is an intercompany payable to the company’s own French subsidiary, so that is canceled out to $39.4 million.From what I can see there are $17 million cure costs which offset some of the unsecured debt.I had Claude do a claim match to come up with the new unsecured number and it came out to be $25 million.There are also rejection damage claims on the order of up to $20 million on certain contracts, stemming from things such as building leases.I also included some slop for things I am missing as this is bankruptcy and I know that I always underestimate spending and liabilities early on.With all of that, we are talking on the order of $110 to $140 million of claims, with my best guess at ~$122 million.Adding it all upBelow is my final analysis.The current stock price basically reflects the base case cash value, and you are getting the potential Fabry payment and whatever the NOL shell is worth for free.I see a downside of around 30% from the current stock price if everything goes poorly from here.My expected investment outcome is a 2.5X and my upside case is a 3.5X.Keep in mind these numbers do not include the time value of money, nor do they include the cost of running a liquidating trust or the benefit of relisting a reorganized entity.I purposefully did not include these as you need to make your own assumptions.If you wanted to throw those in, then this is more like a 2X.RisksThe sales do not close (low risk).The fabry asset milestone payments do not occur (low to medium risk).The reorganized debtor or liquidating trust eat up all the assets (low to medium risk).The NOL shell does not sell for much beyond what the DIP lender wants to credit bid (medium risk).ConclusionTwo ways this ends.You get the disclosure statement and plan, and everything looks in line with my calcs, and the fabry payment occurs. You should do well.Everything goes to shit (hey, it’s bankruptcy for a reason) and you lose probably 30% of your money.I think there is now more upside than downside here, so I am in.AcknowledgementsThe mysterious KaiserSosai forced me to spend time on this, so thanks to him for this idea and giving me an opportunity to live up to my discord screen name!If you enjoyed this write-up, please like and restack.I don’t get paid to do this, so consider that my reward.Substack seems to throttle free article writers, which makes attracting new readers difficult. I do not want to charge for this substack, but the algorithm may end up requiring it. I am trying to avoid this, so please spread this substack if you can.Also, if you have other ideas I should write about, my DM’s are always openAll writeups are subject to our TOSThanks for reading Triple S Special Situations Investing! This post is public so feel free to share it.Share