Updated on July 18, 2020 to correct the following statement: “c. Why did the company agree to give a full refund, including for the 13,000 test kits that had been delivered, given that Aytu had a binding commitment to buy 500,000 test kits? Why is that in the interest of the company?”
The refund is for the deposits paid for undelivered kits. The company is not required to give a refund for the 13,000 test kits that had been delivered. The fact remains that the company did not announce on a timely basis that the binding commitment for Aytu Bioscience to purchase 500,000 test kits by the next business day – i.e., by April 24 – did not happen. Nor did it announce timely that the delivery of the 1.25 million kits were unlikely to happen within three months as per the original announcement.
By Mak Yuen Teen
On April 26, 2020, I posted an article “Battling Disclosure Viruses” on this website, raising many questions about the disclosures by Catalist-listed Biolidics Limited about its Covid-19 rapid-test kits, which are actually developed and manufactured in China. On May 6, 2020, I posted a follow-up article “Biolidics in a Nutshell” raising further questions about the value added by Biolidics with respect to the test kits, given that it neither developed nor manufactured it – even though my own university, where Biolidics began as a startup, seemed to have misunderstood and mis-stated Biolidics’ role in the development of these test kits. I also questioned the market potential for Biolidics’ test kits in a crowded and rapidly evolving market for similar test kits and other diagnostic tests for Covid-19.
It seems that bad habits are hard to die, especially if regulators are too slow in calling out questionable conduct and initiating investigations. The recent announcement by the company of its termination agreement with Nasdaq-listed Aytu Bioscience is the latest case of questionable disclosure.
On April 23, 2020, Biolidics had announced an “exclusive distribution” agreement entered into that same day with Aytu. Under the agreement, Aytu was said to have committed to buy 1.25 million test kits within the first 3 months from Biolidics.
The announcement specifically said: “Under the terms of the Agreement, Aytu has a binding commitment to purchase from the Company an initial 500,000 COVID-19 Rapid Test Kits within one business day from the date of the Agreement. Aytu is required to purchase from the Company no less than 1,250,000 COVID-19 Rapid Test Kits within the first three months from the date of the Agreement in order to retain exclusivity (the “Minimum Exclusive Commitment”). All third party orders arising from Biolidics’ own referrals and sales will not be included in this Minimum Exclusive Commitment.” (emphasis mine)
It adds: “Further, Aytu shall pay for and lead the clinical trials processes, to complete and obtain clearance for the COVID-19 Rapid Test Kits under Section 501(k) of the USA Food, Drug and Cosmetic Act…from the U.S. Food and Drug Administration….If Aytu completes the Clearance, Aytu shall maintain exclusivity for the remainder of the term of the Agreement…” (emphasis mine)
It goes on to say: “The Agreement is likely to contribute positively to the revenue of the Company for the current financial year ending 31 December 2020. However, the Company is unable to quantify the financial impact as there are no minimum purchase quantities beyond the first three months of the Agreement.” (emphasis mine)
That announcement followed a series of earlier announcements which helped push the price and trading volume of Biolidics up, as shown in the following chart which I posted with my earlier April 26 article.
As I expected, the distribution agreement with Aytu was terminated. This was announced by the company on June 28, more than two months after the earlier announcement. The latest announcement tried to put a positive spin on the bad news by saying that the company has decided to pursue a “Development Project” with Aytu instead, and will withdraw the test kits from the US market. No specifics were provided about this so-called “Development Project”, the terms of which were said to be in the process of being negotiated and the two companies having said to have signed a “non-binding letter of intent”. Given the company’s past track record of questionable disclosures, investors would be well-advised to disregard this so-called “Development Project”.
Biolidics now said that the two parties had mutually agreed to terminate the distribution agreement with effect from June 27, 2020, and to release the claims of the other party of all obligations and duties pursuant to the terms of the termination agreement. It added that under the termination agreement, the company “is obligated to process a full refund in favour of Aytu for all deposits paid by Aytu with respect to undelivered orders of the COVID-19 Antibody Test Kits”. The company also intends to voluntarily withdraw its application to the US FDA for the test kits and therefore they will no longer be available in the US.
On July 3, the company responded to a series of questions from SGX regarding the termination of the distribution agreement. The company now disclosed that the company had to date only delivered 13,000 of the test kits to Aytu. Recall that the original announcement on April 23 said Aytu had a binding commitment to purchase 500,000 test kits by April 24.
While SGX’s questions are pertinent, the company’s responses do not address the following:
a. Why did the company not announce earlier that it had only delivered 13,000 of the 500,000 test kits, which Aytu was supposed to have acquired by April 24, when the original announcement said that there was a binding commitment for Aytu to buy 500,000 test kits by the next business day?
b. If 1.25 million test kits were expected to be purchased by Aytu by July 23, 2020 to retain exclusivity, and only 13,000 had been delivered by June 28, why did the company not announce this timely? Surely the company did not expect that most of the 1.25 million test kits would be purchased in less than the one month remaining based on the original distribution agreement, especially given how the market for the test kits had continued to become more highly regulated and competitive since the company’s original announcement?
c. Why did the company agree to give a full refund for deposits paid for the rest of the 500,000 test kits given that Aytu had a binding commitment to buy 500,000 test kits? Why is that in the interest of the company?
d. The original announcement also said that Aytu will pay for the clinical trials processes to complete and obtain clearance from the US FDA for the test kits. When did the company become aware that this was not proceeding?
Following the company’s announcement about the termination agreement on June 26, its share price fell by 22% by the close of the next trading day, on June 29. Trading volume on June 29 was about six times that of the previous trading day. Clearly, the information about the termination is material.
While SGX’s latest queries and previous queries are good ones, the regulators should conduct a full investigation of possible disclosure breaches, market manipulation and insider trading, starting from the around mid-March. Where there are breaches, those responsible must be held accountable.
The Biolidics case is just the latest blow to the credibility of the market.
