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US Subsidiary of ZyGem Shuttered After Forced Bankruptcy; Questions Surround Asset Disbursement

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ZyGem LLC, a former US subsidiary of New Zealand-based biotech firm ZyGem Limited, is no longer in business after a group of former employees and contractors earlier this year filed a petition with a federal court to force the company into Chapter 7 bankruptcy for debts owed, PCR Insider has learned.

In addition, a US bankruptcy court this week granted authority to the appointed bankruptcy case trustee to obtain information about the financial records of ZyGem and subsidiary MicroLab Diagnostics for the purpose of liquidating the company's assets, according to court documents.

The forced bankruptcy would initially seem to scuttle a rapid DNA forensic testing system that ZyGem had been developing in partnership with Lockheed Martin. That platform, called RapID, was based on microfluidic chip and infrared DNA technology that was originally developed in the laboratory of University of Virginia researcher James Landers, and used to found spinout MicroLab Diagnostics, which ZyGem acquired in mid-2010.

However, PCR Insider has also learned that Lockheed Martin, at least for the time being, is still working to commercialize the DNA testing platform in collaboration with the Landers lab and a newly formed entity called MicroLab Horizon — an entity that, according to at least one source familiar with the situation, was created by ZyGem board members to "loot the core assets" of ZyGem and avoid making good on owed debts.

According to court documents filed over the last several months, on April 10 two former ZyGem executives — President and CEO Paul Kinnon and CFO Gary Levine — and three contractors — law firm LeClairRyan, public relations firm Biocom Partners, and the UK's Vision Resources (believed to be a management consultancy) — filed an involuntary petition for chapter 7 bankruptcy against ZyGem with the US Bankruptcy Court for the Western District of Virginia.

In total, the five petitioners claimed some $1.56 million in unpaid debt for work provided, with Kinnon having by far the largest claim of approximately $1.2 million.

In May, ZyGem filed an objection to the petition, asserting, among other items, that several of the claims for compensation were inappropriately made against New Zealand's ZyGem Limited instead of US affiliate ZyGem LLC.

Despite ZyGem's attempt to draw a distinction between the two entities, it lost the appeal, and on June 19 the court granted an order for relief to the petitioners. On the following day, the court appointed an impartial trustee, William Schneider, to oversee the liquidation of ZyGem's assets.

However, two days later ZyGem filed its schedules and statement of financial affairs, and failed to list any assets, specifically noting that it owned no stocks, shares, or interest in any public or private entities.

This prompted the trustee, Schneider, to file in September a complaint with the US Bankruptcy Court for the Western District of Virginia against ZyGem to determine the property of ZyGem's estate, to turn over that property, and to attempt to avoid any fraudulent transfers of property by the company to other entities.

In addition to ZyGem Corporation, this complaint also named as defendants three separate entities — Microlab Horizon, ZyGem Horizon, and Microlab Diagnostics — and alleged that ZyGem had in recent months created any or all of the entities to unlawfully transfer assets, including the DNA analysis technologies, to them after the initial forced bankruptcy petition had been filed.

The most recent development in the case occurred this week, when the court granted a motion for authority to conduct an examination of representatives of ZyGem Corporation and MicroLab Diagnostics and to compel them to produce financial and other documents related to the case.

'Unscrupulous people'

The exact origins of the initial forced bankruptcy lawsuit are not completely clear from court filings. The documents do, however, detail a long and convoluted history of ZyGem and its various affiliates and subsidiaries. According to the documents, ZyGem Limited was founded in New Zealand in 1999 as a research company dedicated to the discovery of novel life science tools from thermophilic organisms living in extreme environments.

Kinnon became president and CEO of ZyGem Limited in 2007, simultaneous to the company forming ZyGem LLC in to consolidate its operations and facilitate growth in the US, including the development of the rapid DNA testing device. The court documents also allege that, through various stock inversion schemes, ZyGem LLC became a 100-percent-owned subsidiary of ZyGem Limited as of May 2012.

Also during that stretch of time, in April 2010, ZyGem Limited acquired Charlottesville, Va.-based MicroLab Diagnostics, a company that had been co-founded by UVA's Landers through the licensing of various microfluidic and PCR technologies from UVA. The acquisition, Kinnon told PCR Insider at the time, was expected to help transform ZyGem from a provider of DNA extraction products into a purveyor of fully integrated DNA-testing platforms for the forensics, biodefense, and eventually clinical diagnostics markets (PCR Insider 5/26/2010).

The court documents also point out several instances from this time period where ZyGem referred to MicroLab Diagnostics as a wholly owned subsidiary, despite ZyGem's recent attempts to claim that it is not, nor ever has been, a subsidiary.

The court filings also indicate that on Nov. 20 of last year, Ross Townshend, identified as a director of ZyGem, issued a board-approved letter indicating that Kinnon is "no longer the president, an officer of [ZyGem], a partner, or [a] member of the board in respect of MicroLab Diagnostics … a wholly owned subsidiary of ZyGem."

It would seem then that Kinnon's firing was a catalyst for the eventual demise of ZyGem's US subsidiary and for the filing of the forced bankruptcy petition. However, a source familiar with the situation from the plaintiffs' side told PCR Insider under condition of anonymity that the real impetus for the petition was the appointment of several new ZyGem board members by investors, and the belief that these board members were charged with dismantling the company and disbursing its assets.

"The impetus [of the forced bankruptcy petition] was that the former management team … became aware [of] unscrupulous people who were brought on the board without putting a penny into the company [and] had plans to siphon off all the important assets, and leave everyone owed money by ZyGem empty handed," the source said. "The former management team saw the forced bankruptcy suit as their only recourse to try and salvage what was due to them."

These same board members, the source claimed, were responsible for firing Kinnon. "Their whole plan was to loot the assets of the company and roll it into a new company," the source said.

Furthermore, the source claimed that Kinnon was fired soon after he brought an offer to the board from Life Technologies to acquire ZyGem — an offer that the board refused. The source did not say that this incident definitively led to Kinnon's departure, but that it was likely to have played a role.

Life Technologies did not return an email from PCR Insider seeking to confirm that it had made an offer to acquire ZyGem. However, it is well known that Life Tech had been seeking a rapid DNA testing platform to add to its industry-leading portfolio of products for human identification and DNA testing in forensics and other applied markets. In fact, in April Life Tech announced that it had become the worldwide distributor for a competing portable DNA testing product marketed by UK-based LGC Forensics (PCR Insider 4/4/2013).

PCR Insider also attempted to reach several individuals still affiliated with ZyGem — including Neville Jordan, who was an early investor and board member of ZyGem, and who currently serves as non-executive chairman, according to ZyGem's website — but received no response. ZyGem's website makes no mention of the rapid DNA testing platform, nor does it include archived news releases for several distribution agreements and partnerships executed while Kinnon was CEO of the company. In addition, the publicly available phone number for ZyGem LLC's office in Solana Beach, Calif., has been disconnected.

Unauthorized development

The fate of the DNA testing platform remains to be seen. The platform was to combine sample prep using proprietary ZyGem lysis and DNA extraction technology, with PCR amplification, capillary electrophoresis, and analysis into a highly portable platform. In addition, the system was to feature infrared PCR technology originally developed in the Landers lab.

ZyGem also had a partnership in place with Lockheed Martin to develop the platform (PCR Insider 5/5/2011).

Last October, when two competing platforms — one from IntegenX and the other from partners NetBio and GE Healthcare — hit the market, a Zygem spokesperson told PCR Insider that the company was completing final development and validation of the system and hoped to launch it commercially in 2013 (PCR Insider 10/4/2012).

A July press release from the University of Virginia news site UVA Today noted that the university, and specifically Landers' lab, continues to work with Lockheed Martin to develop the platform, now called IntrepID S2A-90. The press release also identifies an entity called MicroLab Horizon, which is said to have acquired the pertinent technology from MicroLab Diagnostics. The press release does not mention ZyGem.

A spokesperson from Lockheed Martin this week did not deny any of the content in the University of Virginia press release, and confirmed that Lockheed Martin was still developing the DNA analysis platform with unspecific partners, but declined to provide additional details.

MicroLab Horizon is one of the entities named in the bankruptcy trustee's complaint against ZyGem and its subsidiaries. According to the source familiar with the bankruptcy proceedings, the apparent transferral of intellectual property from ZyGem to MicroLab Horizon or any other entity appears to be at odds with the court order issued to ZyGem to liquidate its assets and make good on its dues owed to the plaintiffs.

"[The plaintiffs] won the appeal, the ruling was affirmed, and now it is in the determining-of-assets phase," the source said. "But now [MicroLab Horizon] is out there on the internet … and ZyGem … has returned to being a local New Zealand reagents company, and it's basically what everyone was worried about — they've stripped all the assets out of the company."

The court documents in support of the bankruptcy trustee's complaint against ZyGem similarly point out that the company and any subsidiaries — including those that ZyGem claims it has no stake in — are unauthorized to continue development of the DNA analysis platform.

Specifically, the documents allege that on January 27, ZyGem entered into a licensing agreement with Northwestern University for the use of certain patents in the development and production of the platform. The terms of the agreement, the filing alleges, granted ZyGem and its "affiliates" use of the licensed patents.

However, "if the subsidiaries are not wholly owned subsidiaries of [ZyGem] or otherwise affiliates of [ZyGem] as defined in the Northwestern agreement and as alleged by [ZyGem], they are not authorized to use the patents … and, therefore, cannot continue developing the DNA analysis equipment," the complaint states.

In addition to seeking judgment to determine the property of the ZyGem estate and to find that the various entities are indeed subsidiaries of ZyGem — which, as indicated above, the court granted this week — the trustee is asking the court to compel the subsidiaries to make available any property for distribution to the plaintiffs.

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