Noble Equity Fund, LP
1 Newark Street, Ste 25
Hoboken, NJ 07030
Attn: Board of Directors
1585 South Perry Street
Castle Rock, CO 80104
February 23, 2016
To the Board of Directors of Venaxis:
Given that the stock of Venaxis is trading down from the time the merger with Strand Life Sciences was announced and is trading at a 60% discount to its tangible book value, we implore you to reconsider the aforementioned transaction.
We find that the proposed transaction with Strand has no merit and destroys significant value for shareholders. Further, we find that the terms of the deal are egregiously non-protective of shareholders.
- At the end of March 2016, the tangible book value and net cash value of Venaxis will approximate $0.52 and $0.50 per share, respectively. This implies that investors are anticipating that the proposed transaction will destroy 60% of this value immediately.
- The breakup fee for the proposed transaction is at least $3.5 million, but not more than $4 million. On the high end, this equates to 52% of the value of Venaxis on the day that this deal was announced. At best, there was no effort to negotiate on behalf of shareholders on this point.
- Strand Life Sciences is a company with nominal commercial revenues and notable losses. As announced by the company itself, management will be looking to raise money once the deal closes. Given the state of flux the capital markets are in, it's highly questionable whether management will be able to raise money at a price that will be acceptable to shareholders in order to market a Lab Developed (Non-FDA approved) Test.
- Since at least June of 2015, Venaxis has been in discussions with Strand. Yet, when the deal was announced, Venaxis management was scant on Strand's financial results and on justification of the deal. Leaving out most details regarding the operations of Strand until the preliminary proxy was posted meant investors did not have a chance to purchase more shares with requisite knowledge before the voting record date.
- While the preliminary proxy revealed some details of Strand's operations, shareholders should be given more clarity on what the revenues of the company will approximate in light of a key intellectual property transfer at the end of 2015.
- The above-mentioned value of approximately $0.50 per share at the end of March 2016 does not take into account the considerable value that remaining intangible assets could prove to be worth. The APPY2 assay that the company developed has up to 75% greater specificity than APPY1. This improved performance means that the test has a much greater chance of FDA approval than the first-generation test did. The company is also a party to a license agreement with a maker of animal health products to use its technology. From this agreement, Venaxis may be owed milestone payments and royalties in the range of millions of dollars in coming years.
- The primary line of business that Venaxis will be spending money on progressing is Strand's StrandAdvantage Panel, a NGS-based 152 gene cancer test. Current companies that compete in this space on greater scale are losing substantial sums of money due to reimbursement issues as well as a mismatch between salesforce spending and accurately estimating the size of the existing clinical market for this product.
- Upon planned closing of the proposed merger, Biomark Capital will hold close to a majority of outstanding Venaxis shares. With this will likely come a discounted valuation on shares in the future.
- The process that the Venaxis Board of Directors and management undertook to find an acquisition target is not well described in the proxy. Out of 150 potential targets, Strand is the only one given any detail on. We implore the Board to disclose further details and considerations among the final few acquisition targets.
- Considering that Venaxis will be merging with a business that posts continuing (and likely increasing) losses, we request that management and the Board disclose to shareholders what the estimated losses will be during the first 12 months of combined operation so that shareholders have a greater understanding of how much money the new company will be required to raise in order to remain solvent.
- The Strand merger introduces the company to significant operations (over 100 employees) in India, a geography that the current Venaxis management does not have significant experience with. Additionally, the company will be exposed to significantly greater foreign exchange risk than it was previously.
- We request an explanation as to why the Board does not see fit to distribute the remaining assets to shareholders in lieu of a merger, given that the company has no commercial operations. Even when including the breakup fee, giving cash on hand back to shareholders will be an immediate 50% return on investment for shareholders.
Currently, Noble and its affiliates own close to 2% of shares. We are disappointed with the transaction that the Board ultimately chose. Given that shares have languished significantly below tangible book value since the merger was announced, the market reflects that the announced deal is significantly dilutive for shareholders. We implore the Board to make the above additional disclosures, to reconsider the proposed transaction and to set a new record date for shareholders after an appropriate amount of time has passed following additional disclosures.
Noble Equity Capital Management, LLC
Managing Member, Noble Equity Fund, LP
Disclosure: I am/we are long APPY.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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