6/20/23 reply from SQI lawyer, Margaret Nelligan for behalf of “insiders” to Markowski’s 6/20/23 memo to SQI director Gerry Connor
Re SQI Diagnostics Inc.
Michael
Let us start out by saying that we share your enthusiasm for SQI’s RALIdx and RALI Lung products. Where we may disagree is in the expectation that the insiders were an endless supply of capital.
A little history may be helpful. The insiders were early investors in SQI and after becoming disenchanted with the direction of the company, got involved and became directors, I believe, in 2014. The RALI products were not the focus then. Instead the company’s main product thrust was in Multiplexing which we felt was a more economic process for large pharmaceutical companies. The business plan went through a couple of iterations since then, all calling for further financings, which the insiders provided. Unfortunately, none of the business plans or products ever became a financial success while we were assured that if we took the lead to show support for the company that other investors would follow our lead. This never happened. Consequently, the insiders ownership concentration grew well beyond what we had intended.
We then switched to debt financing as a way to limit any further ownership concentration. Pivot Financial was brought in to bridge finance an acquisition and was supposedly backstopped by an equity financing that failed to materialize. Their condition was that the insiders had to take almost half their financing but be subordinate to their position and that the whole facility be made senior to our then existing debt, which we agreed to. As the company continued to struggle the insiders further deferred payment of any interest for the benefit of the company’s cash flow while keeping Pivot’s tranche current. We did do another small financing for the company but the company was criticized for its share structure and having too much potential dilution due to the number of warrants outstanding. To address this we agreed to sell shares and use the proceeds to exercise these warrants at a significant financial disadvantage by selling shares at $.05 and exercising warrants at $.20.
Michael, the insiders have worked on behalf of SQI for free, never once accepting any options or other financial benefits, lent our professional reputations and single handedly financed the company for the last eight years. Yet the company has never met any of its intended goals and more recently shifted its strategy again from the use of Squid Lights to process tests to a new point of care product which would require the company to once again go through certification and regulatory approval. In the company’s estimation this will take at least a year to reach any hoped for commercialization and is yet another in a long list of promised results for a company that has not shown any success in the past.
We think asking the current insiders to continue to support plan after plan without any success is an unfair expectation. We don’t have unlimited resources, we’re of an age to not be taking on highly speculative investments and at some point one reaches their limit. We’ve collectively lost approximately $60 million.
To suggest that we had a self interest in filing for bankruptcy is totally inaccurate. We collectively own about 75% of the equity which gets wiped out. Of approximately $15 million in debt over $11 million is owed to the insiders and about $8 million of this was senior debt that gets eliminated. We do have a minority piece of Pivot’s debt which is subordinated and we fully expect to get crammed down on any reorganization. Any further financing will further diminish our ownership and we currently anticipate an insignificant participation compared to our current 75%. Clearly, the current course of action is highly detrimental to our position and maintaining the existing share structure would be much more favourable to us. Because the company was not successful in raising additional funds through either the use of an investment banker or our ability to sell shares and convert the proceeds, the company simply ran out of money and Pivot elected to foreclose. We were not part of that action.
You refer to one of your clients wanting to purchase 5 million shares and Looking Glass having a $1.0 million investor. We were offering shares in the market daily and would make them available through arbitragers which did allow us to sell some shares. These purported bids never materialized. It is curious to us as to why a buyer would not have contacted us or the company if they were seriously interested in purchasing shares. We press released our intentions to sell shares and exercise warrants repeatedly. So, any reasonable trader would know how to source a seller. But no one ever materialized.
So, Michael, We’ve taken the time to provide you with some background and some facts. You’re going to do what you want but to suggest to we have acted in our own self interest is factually incorrect. In fact, we have worked diligently and lent financial support for almost a decade. We believe there is some value in the IP but we are not in a position to carry on financing the company alone and we have not found any others that are willing to step in including UHN which holds half the IP.
It was too tall an order for us to accomplish.
We hope this is helpful
Collectively, the “Insiders”.