GenoMed Inc. (GMED)

[mingwan0]

Some facts about the DNAP/GMED Genotyping Agreement

The DNAP/GMED Genotyping Agreement is an exhibit attached to the 10K filed on April 9, 2002:

http://www.sec.gov/Archives/edgar/data/1127354/000107087602000030/genotypingagmt1015.htm

The main provisions of this agreement were as follows:

GMED agreed to place at DNAP certain equipment (mainly the Orchid UHT genotyping platform system) to facilitate increased genotyping throughput by DNAP. DNAP was to provide GMED with at least 3 Million genotypes during the first year of the, GMED was to provide DNAP with DNA specimens for genotyping. GMED was to make monthly payments to DNAP calculated at the rate of 40 cents per genotype.

If GMED was to realize a NET profit that exceeded US$10 million which was "directly or indirectly enabled by compositions of matter produced under the terms" of the agreement then GMED would pay DNAP a royalty of 5% on these realized NET profits.

During the term of the Agreement, DNAP was allowed to use GMED's equipment for its own internal R&D, and for other contract genotyping with GMED approval. For the latter DNAP and GMED were to share total NET profits at a ratio of 3:1 to reflect their relative contributions.

The minimum term of the agreement was 2 years, after which it was to continue indefinitely, but could be terminated by either party on a material breach by the other (the breaching party being allowed thirty (30) days to cure such breach).

On discontinuation of the agreement GMED would pay any outstanding debts to DNAP and DNAP would return GMED's equipment. Normal clauses like Force Majeure were included (neither party is liable for any failure of delay caused by events outside its control).

From the January 2003 DNAP shareholder newsletter:

"What happened to GMED revenue? We have received part of this revenue but nowhere near what GMED agreed to provide. The contract is not yet up, but it is a certainty that GMED will be in default of this agreement by the time it is up. Their problems are the same as everyone’s – they have difficulty-raising funding. Do not forget that DNAPrint got the use of a faster cheaper machine that cost 200K as part of this deal, so we have already benefited from that partnership. We have received probably another 100K from them for early work orders but this is a far cry from $1.6M and there is little we can do about it but sue them. If you look at their financial statements, I think you would see that this would make little sense."

So, where does that leave us? There are a number of unresolved issues and open questions. I think in practice that GMED were in default of the agreement by the time the term expired. The effective date of the agreement was January 15, 2002 so the initial two year term has expired and we can assume that is has not been extended. Some of the clauses survive expiration of the agreement though, and so there are continuing liabilities under the agreement for both parties.

GMED were clearly in breach of the agreement, but we do not know whether they were formally given 30 days to remedy this, failed to do so and hence the agreement was formally terminated by DNAP. Similarly we do not know if GMED could have, or did, claim no joy under the force majeure provision.

Who is the current owner of the Orchid equipment purchased by GMED? Technically I think GMED still own it. Does this mean that GMED could now ask for it back if they wanted to undertake their own genotyping? If they could why haven't they?

Could DNAP at this stage sue GMED (given that they now will have revenue)? This does not make much sense to my mind, even if DNAP could sue GMED.

Will the agreement be resurrected? I seem to remember Dave Moskowitz saying at some point that he potentially had access to alternate genotyping capabilities at reduced cost. If it was resurrected would DNAP reduce the cost? According to their website they "offer genotyping rates as low as $0.47 (in volume) per genotype" which is still more than the rate contained in the agreement.

Would any future GMED revenues be covered by the net profit clause in the agreement and would DNAP actually be able to claim their 5% royalty on these profits? Presumably any revenues that were or would be related to the circa US$100K genotyping that was undertaken would be covered in this context. I do not think therefore in practice that DNAP will see any such royalties unless the agreement is resurrected.

Does DNAP still need GMED's approval for third party genotyping work? Would they still be required to split revenues in the 3:1 ratio with GMED for any such work? Technically the answer to both of these questions is yes.

So I think as things stand that the Orchid machine is the property of GMED. DNAP cannot use it for third party genotyping without GMED's permission (and then they share such revenues), and DNAP does not stand to benefit from any royalties related to GMED revenues. It will be interesting to see the pending 10K's from both companies to see if there is any mention of the agreement and where, in practice, we go from here.