DNAprint Genomics (DNAG)

[SaveTheWorld]

"As Carrie pointed out on Friday, not having authorized shares under the cap makes it difficult for us to attract investments by corporations or institutions such as pharmaceutical companies because it adds another unknown variable to a deal."

Say what, Willis? What does he mean by "under the cap"?

http://www.chalberweid.ch/dnap/DNAP%20Newsletter%200103.pdf

Dear Shareholders,
You will be getting a proxy statement soon for our upcoming shareholders meeting, but the statement was filed with the SEC on Friday. With the proxy for the upcoming shareholders meeting, we are asking shareholders for an increase in authorized shares. The reason for the request is that we have reached our cap of 500M authorized shares. When we got started 3 years ago, there were 390M outstanding so a little over 100M shares have been issued over the past 3 years to fund our operations. At this very modest rate of annual dilution, we believe we have made considerable progress – developing a complete genomics discovery platform (ADMIXMAP) and using this platform in its various stages of development to generate several new genomics tests, one of which has recently been introduced to market (www.ancestrybydna.com).
Our goal is to become cash flow neutral as soon as possible. Though management believes it has made progress in this area, we do not know how long it will ultimately take for us to develop the markets we believe exist. This is because they are new markets and we must forge them – no genomics tests such as ours currently exist and we are among a handful of companies in the world generating the trailblazers. If media interest and the early advertising versus revenue returns from our first test is any indication of the market our tests will find, I think we should all feel encouraged.
DNAPster
“All the news that’s fit to DNAPrint”
Tony Frudakis, Ph.D., CEO January 2003
However, until we forge these markets, we will not be cash flow neutral and until we become cash flow neutral, we will continue to need to raise capital investment using our stock. There is no way around this, and this should come as no surprise to anyone because we stress this in each of our quarterly and annual reports. As our existing funding arrangement is in its later stages, we are diligently planning ahead to meet the requirements we will experience later this year. George and I cannot continue loaning money to this company forever and at some point, we have to establish a more solid financial base for the company to grow on. There is significant expense associated with conducting genomics research and forging new markets (test validation, advertising, business development etc.). The proxy statement discussed a warrants plan, which is a means by which the company can raise capital and minimize dilution to existing shareholders that participate. Without an increase, we would also not be able to accept investment by other companies or organizations if the opportunity arises. As Carrie pointed out on Friday, not having authorized shares under the cap makes it difficult for us to attract investments by corporations or institutions such as pharmaceutical companies because it adds another unknown variable to a deal.
Jack Luchese has raised several tens of millions of dollars for Cytrx using a warrants plan, and this is the plan management would like to use to
provide the funding for our continued operation. As we have said many times before, we have no present intention of executing a reverse split. At present, this would seem to offer no advantage to the company that I can think of – we would still not qualify for Nasdaq until we build a more solid financial base (which is, again, what the warrants plan is about), and the substance of the company would not have changed for the better. In my personal opinion, the increase in shares from 500 Million to 1500 Million does not make a reverse split any more necessary or likely. Even if we wanted to perform a split, and we do not at this time, your approval as a shareholder would be required and given the feeling among shareholders I have detected, such a request would likely not be approved. To qualify for a Nasdaq listing, we clearly need a higher share price. Rather than reversing our stock, I presently believe what I have in the past, that the most effective way for us to increase our share price is the natural way of building our market capitalization through expanding our business and growing our revenues and profits.
You will receive a copy of the proxy in the mail, and I urge each shareholder to vote “yes” for our request. I, along with other management and the board of directors strongly feel that the increase in shares is required for us to forge markets for our new products, grow our new brands, expand our overall business and grow our market capitalization.
If you wish to discuss this request with me, or other items relevant for the company, please attend the upcoming shareholders meeting. I'll be at the disposal of the investors all day, and I’ll
look forward to meeting or re-meeting many of you. If you cannot attend but would like to forward your questions or concerns to Carrie at:
[e-mail], or
[e-mail]
and she will forward them to me and Ill answer them prior to the shareholder’s meeting.
As for specific questions I have been asked, I will try to answer them one by one:
Why hasn’t pharma contributed any money for our technology so far? I have had serious discussions with potential partners and licensees, but the answer is that:
We believe that Orchid themselves are not viable partners because they are focused on staying alive in the current economic crisis, not investing in new products.
For existing products we have funded the development of, the Orchid option agreement serves as a deterrent to others from partner with us. Though a number of potential partners have been identified that are very enthusiastic about our company, they are concerned about litigation in the future from Orchid.
The Option does not apply for products developed through partner financing, and we are working hard to land some ADMIXMAP collaborators. Why have none been signed yet? I have spoken to 3 major companies about beginning screens, and there is considerable interest but decisions from these companies take months (This is one reason we have been able to move more quickly in terms of technology
development – they are big, layered and slow).
So while we work on building an ADMIXMAP clientele, what do we do about our existing products? As long as the Option remains in place, DNAPrint must simply commercialize its technology on its own – the Option only restricts us from licensing to others if Orchid wants the license (and even then we can license out if a third party is willing to pay more but as mentioned many feel uncomfortable due to the Option). However, this is why this may be for better rather than for worse – when partnering we would typically only retain 5-15% of the profits and receive an upfront license fee of a couple hundred thousand dollars. Is “validation” in this sense worth selling our future down the road? I don’t think so, and I believe DNAP is better off funding its own operations through dilution, keeping all of the rights to its products. Since the Option agreement forces us to do this, it is a good thing in the long run. For the short-term trader, hoping for alliance PR's so they can jump in and out of our stock, this may not be a good thing. Although this will not keep us from having any alliances, such as ADMIXMAP customers, it will reduce the number we strike for products like RETINOME and AncestybyDNA. For the long term investor, I believe this is a good thing because it forces us to grow a quality, substantive company rather than a virtual company that performs by proxy through partners.
Why was the news disseminated the way it was? It is a proxy for a shareholders meeting, and the SEC must review it for 10 days before we can mail it to shareholders. This is the law, and this is the way it happens for every company that is preparing for a shareholders meeting. It would be illegal for us to mail or email it to investors prior to the SEC period elapsing.
Why a tripling rather than a doubling? Jack, Hector and I debated about this back and forth. At present, we have no destination in mind for the shares created by the increase other than the warrants plan and it would seem unlikely that this plan would consume that many shares. However, we want to be prepared for any eventuality – to be in possession of the tools needed to keep DNAPrint going no matter how this plan works, what merger/acquisition opportunities might arise, what the market conditions are or how much and how rapidly we make scientific progress. The board feels that 1.5 billion should cover any possible scenario of events and we feel it is in your best interests as shareholders who would like to profit from their investments to allow us to manage the company in this way. You will be consulted for a proxy vote before any of these shares are issued, except the warrants plan as discussed below because it is directly to you. Ultimately, what happens to DNAPrint stock is up to you. It is your company and your vote. If you do not like how DNAPrint management wants to use DNAP shares, vote against management. If you trust us to further build the company we established, vote for management. It is the position of the board and management that you allow us the tools to manage the company and build the value of your investment.
Will we have to experience dilution in the future? The answer to this is yes. We will all have to experience dilution to keep DNAPrint growing. This is reality and you need to come to terms with if it is new to you. Other than our existing funding plan, there is nothing in
place to prevent management from being diluted so we are in the same boat as you. However, the warrants plan will be very similar to the existing funding agreement in effect, except it is designed to allow you the shareholder to participate. Therefore, you will get the same opportunity George and I had with our existing arrangement. If that is not democratic fairness, I do not know what is – not only does DNAP management put its money where its mouth is, but also we extend the same opportunity to all other existing shareholders before we seek investment from third parties such as companies or venture capitalists. If you do not want to take advantage of this opportunity – that is fine. If we do not raise significant funding from the warrants plan, then we can think about doing more private placements or go to venture capitalists. One way or the other, we need to procure funding to commercialize our existing products and keep our discovery machine operating. Advertising is not cheap. Meetings have to be attended to convince people to think in new ways about forensics and medicine. This type of challenge is nothing new for a cutting edge technology company. Life would be simpler if we manufactured razors or cigarettes, and we would be able to support ourselves more easily, but does the world need another tobacco or commodities company? Would you be as excited about the upside potential, and would our work here have the same impact on the world? I think the world needs technological advancement to reduce suffering and distribute wealth among working people, but this takes investment, which requires dilution until that company is cash-flow break even.
What has Jack done for the company? Jack gets paid the bulk of his equity compensation by bringing in cash to the company. This is cash your company needs to operate, and it would be raised in a very difficult market. His relationship with DNAP is performance based, so you should feel comfortable that if DNAP pays him shares, we will have obtained something of value from him. Jack was brought aboard because of his extensive network of investment contacts, and because he has successfully executed warrants plans similar to what we will be executing. As the CEO of a Nasdaq company that successfully navigated a warrants plan, he brings good experience. If he does 1/10th for DNAPrint what he did for his Cytrx, you will be better off for it since your company will have significant capital in the bank, which means your investment is subject to less risk.
Does DNAPrint need money to fund operations? Yes. This should be apparent to everyone who reads our quarterly and annual statements, and when profits will exceed expenses nobody can know since our type of product has never existed before. We have no cash in the bank, which you all know already, and the lenders we have relied on to this point, lenders who have reliably provided our capital on a monthly basis, cannot be relied on forever. It is our responsibility to ensure a funding mechanism is in place before the current one expires, which is what the increase in shares and warrants plan is about.
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. However, to compensate for this loss in revenue, we accelerated the introduction of AncestrybyDNA, and the launch of this has been successful in my view. Critics who criticize the lack of revenue coming from GMED do not give us credit for coming up with a new product out of the blue, and generating 6-figure revenues from it in the first few months. I suppose that is par for the course in today’s bear market – everyone is a pessimist!
What happened to the racecar driver? We terminated this arrangement after separating from Tampa Bay Financial. This was a TBF brainchild, and the board consensus on marketing changed after they resigned. You should be happy that we terminated this agreement, because it protects you and your share price. Though this is unappreciated by average investors, many of the other things we have done to protect your share price also go unappreciated by the average investors.
What does it mean management intends to spend time structuring the warrants plan for maximum advantage, and for whom? For the shareholder and the company, of course. Management is not the target beneficiary of the plan, and it is an opportunity for each of you to do what George and I have been doing for the past year. If you pass on the opportunity, we would go to outsiders with private placement as before but the intent of the warrants plan is to make it profitable for you the common shareholder to further invest in the company. This is a function of the strike price selected. If you wait to see the details of the plan, I think you will be pleased that the company is giving you the opportunity to profit from DNAPrint before giving it to a venture capital company.
Does an increase to 1.5 billion mean 1.5 billion will be issued? No, but we would like to sell some of these shares right away. Why? We need a new funding mechanism to kick in before the existing one terminates. The company cannot expect to garner loans from insiders forever, and we need to improve on a situation where insiders are the only ones funding the company. None of you whose emails I have read seem to appreciate the extents to which we have worked to keep DNAPrint healthy during this economic downturn. We are still here, and we haven’t had to fire employees or sell our first born to stay alive. Don’t we deserve some credit for that? Does this not suggest that when management says it wants to sell 100 million or 200 million shares to provide operating capital, that it is in your best interests as shareholders for this to occur?
Does DNAPrint need money to operate? The answer is yes. We are no different from any other cutting edge technology company attempting to forge new markets.
What is the warrants plan? This is a mechanism by which we can raise funding to help us reach self-sufficiency. Each shareholder as of a set date, which is yet to be determined but will be very soon, will acquire the right to purchase a unit which is comprised of shares and a
warrant. The warrant gives you the option to buy another unit if the price of DNAPrint stock makes it profitable for you to do so, and so on. It is a means by which we can make it profitable for you to invest in the company, and for us to raise operating capital. If you want to have access to the warrants program you will need to be in possession of your shares as of the set date for the plan. The idea is to make the plan profitable in the short term for investors, but if you are a long-term investor you will benefit by being among an exclusive group of people able to maintain and possibly grow their position at discount to market. If you are a short-term trader, since the shares would be registered, you could possibly profit soon after purchase, depending on our share price. The shares purchased would be registered and freely trading, and we would engage respectable and major PR firms (largely through Jacks contacts) that help us grow our investor base. Wait until you see the warrants plan. I think you will be very pleased. The final details have not yet been worked out, but it is designed to make it profitable for you, the existing and loyal investor, to fund DNAPrint and profit in the process. Ill put it this way: I am an investor in DNAPrint, and though I will not be able to participate in the warrants plan, I am excited for what it could do to our market cap and cash position. In this market, it is easy for a cutting edge company to starve to death, and you have to fight and kick to stay alive. That is what the warrants plan is – in this case the best defense is a good offense and the warrants plan is very offensively minded and aggressive.
Must the warrants plan be approved by shareholders? It is my understanding that most significant issuances of stock must be shareholder approved so the answer to most any type of issuance would be yes. However, since the warrants plan is to shareholders themselves, it does not require this approval so we are going to execute it as soon as the increase in shares is approved, if it is approved.
Is the warrants plan some sort of red flag to investors? If you mean, does the company need operating capital in the form of investment because it is not profitable, then the answer is yes and the answer is the same for every cutting edge technology company. If you mean, is DNAPrint as a developer of new technology unusual in that it needs capital to forge new markets and provide for flexibility and sustenance in a major bear market, the answer is no.
How much could the warrants plan net the company? It would seem quite optimistic to expect this plan to bring more than $1M to the company, but if the increase in shares is approved, the shares will be available to bring much more. What would DNAPrint be worth if we had $10M in the bank? Jack has raised several tens of millions at previous posts using this type of plan. Having money in the bank to operate is a good thing for your company, and DNAPrint has never had the luxury of having significant money in the bank. The warrants plan is designed to change that. If selling company paper to put significant money in the bank bothers you, you need to rethink what it is you expect from your investment in DNAPrint. We are a development stage company trying to develop a new breed of product and forge new markets and this normally requires a more solid financial backing than we have had to date. The warrants plan is our plan for acquiring this backing without going to
venture capitalists who would take advantage of depressed market conditions to “rape” current shareholders and management.
Why the positive spin from DNAP management? Would you prefer that we were pessimistic? We are not. I am excited enough about DNAPrint to spend my weekends working on DNAPrint manuscripts, patent applications and grant applications, so that tells you where I am coming from. I have made no more money running DNAPrint than I could have working any other job in biotech or outside, yet I wouldn’t trade places with anyone else in the world. The night it dawned on me that our AIM patent could help us corner the market on practical genome screening, I could not sleep and began writing the patent. To this day I feel that when that patent is granted, it will be by far the most significant achievement in my professional career. It is ok to be skeptical of the enthusiasm of others, but if you could spend a day in my shoes you’d understand why I am enthusiastic. It seems to me that those who profit by being early stage investors are those who know whose enthusiasm to trust and whose not to trust. My feeling is that if you have trust issues with DNAPrint, or me then it is probably best that you invest in another company. I am not a salesman, and I am not going to try to convince you otherwise. I am a scientist, and I hope that my enthusiasm is catching so that it helps me realize my dreams as a scientist and entrepreneur.
Why the speculation about deals? I cannot discuss ongoing negotiations, and nobody else should be discussing them with you either. I instruct my people to not discuss material non-public information and if I confirm that any have, they will be released. It is not good professional practice and it is against the law. Not only might it impact those deals if investors began calling the third party, it would place me in a position of liability.
Doesn’t it require blind faith in DNAP management to remain a DNAP investor? I suppose it does, but this is true of any company, especially a technology company trying to change the world. We are required to keep you informed with quarterly and annual statements, but we have gone above and beyond this obligation by communicating liberally with investors through letters such as this. How many CEOs would prepare this type of letter, for example? Not many – they would be worried about liability, or putting their foot in their mouth. However, I am different. My only concern is not self-preservation but building a company. I think DNAP management has done a good job building a technology company from nothing but ideas, and keeping it alive during the worst bear market since the depression. DNAPrint has spent much less, and accomplished more than most other genomics companies, and it is for this reason that I believe we have been relatively successful to date in terms of our market capitalization. For those investors who are impatient, you are going to have to come to grips with the fact that it is difficult to make money on stock purchases in bear markets, and there is little management can do about this, but you should also know that it is our solitary desire to reward those who invested in our company during its development stage.
Where did the shares go to get to 500M? We have been funding our operations by selling DNAPrint shares. This is why we are publicly trading – it provides us a vehicle by which to fund the
development of our products. Many of these shares went to investors such as yourself that participated in our private placements. I am one of those as is George, and we have been funding the company for the past year through loans. Each dollar we spend on research must come from product profit or investment. We have just begun generating product profits, and we have a ways to go before our products have penetrated the markets well enough to eliminate the need for investment.
How does the current funding plan work and why cant we just keep doing that? George and I have kept DNAPrint going for the past year. Obviously, the company is not in position to pay back the loan we have provided, so George and I are effectively purchasing shares of DNAPrint stock. You should refer to the recent proxy and notice that the position of both George and myself has increased, even though there are not enough shares under the cap to issue even half of the shares I have personally purchased so you are only seeing part of my holdings that I have purchased. I purchased this stock on faith, - faith that the increase in shares would be approved, my shares issued and that our science and management will make the purchase a profitable one. I am not obliged to purchase even one share – the fact that I do so should make you feel comfortable about your investment. In other words, how many CEOs put their money where their mouth is? Nonetheless, George and I are not in a position to continue doing this indefinitely as our resources will eventually run dry. We simply need to find a more powerful funding mechanism to grow the company, and to provide basic sustenance when our current mechanism expires. That is what the warrants plan is all about and why the increase in shares is needed.
Thanks for your support of DNAP, and thanks for taking the time to vote. Your management is working hard to realize the goals we all hold in common. If you have other questions please send them and Ill prepare a similar letter to coincide with the upcoming shareholders meeting.
Tony.