As filed with the Securities and Exchange Commission on July 24, 2008September 26, 2012
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AutoGenomics, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 3826 | |||
(State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification No.) |
2251 Rutherford Road2980 Scott Street
Carlsbad,Vista, California 9200892081
(760) 804-7378477-2248
(Address, including zip code and telephone number, including area code, of registrant’s principal executive offices)
Fareed Kureshy
President and Chief Executive Officer
AutoGenomics, Inc.
2251 Rutherford Road2980 Scott Street
Carlsbad,Vista, California 9200892081
(760) 804-7378477-2248
(Name, address, including zip code and telephone number, including area code, of agent for service)
Copy to:
Costa Mesa, CA 92626-7653 (714) 830-0600 |
(858) 550-6000 |
Approximate date of commencement of proposed sale to the public:As soon as practicable after this Registration Statement becomes effective.effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||||
Non-accelerated filer | x | (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered | Proposed Maximum Aggregate Offering Price (1)(2) | Amount of Registration Fee | ||||
Common Stock, $0.01 par value | $86,300,000 | $3,391.59 | ||||
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Title of Each Class of Securities to be Registered | Proposed Maximum Offering Price (1) (2) | Amount of Registration Fee (3) | ||
Common Stock, $0.01 par value | $65,000,000 | $7,449.00 | ||
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(1) | Estimated solely for the purpose of computing the amount of the registration fee, in accordance with Rule 457(o) promulgated under the Securities Act of 1933. |
(2) | Includes offering price of shares that the underwriters have the option to purchase to cover |
(3) | Calculated pursuant to Rule 457(o) under the Securities Act of 1933, as amended, based on an estimate of the proposed maximum aggregate offering price. |
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we areis not soliciting an offer to buy these securities in any statejurisdiction where thesuch offer or sale is not permitted.
Subject to completion, dated July 24, 2008SUBJECT TO COMPLETION, DATED SEPTEMBER 26, 2012
Preliminary Prospectus
shares Shares
AutoGenomics, Inc.Common Stock
Common
We are offering shares
of our common stock. This is anour initial public offering, ofand no public market currently exists for our common shares by AutoGenomics, Inc. We are selling common shares.stock. We expect the initial public offering price to be between $and $ per share.
We intend to apply to list our common sharesstock on the NASDAQ Global Market under the symbol AGMX.“AGMX.”
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We are an “emerging growth company,” as defined under federal securities laws, and have granted the underwriters an option for a period of 30 dayselected to purchase upcomply with certain reduced public company reporting requirements available to additional common shares.
The underwriters are offering the common stock as set forth under “Underwriting.” Delivery of the shares will be made on our about , 2008.such companies.
Investing in our common sharesstock involves a high degree of risk. SeePlease read “Risk factorsFactors” beginning on page 13.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacydetermined if this prospectus is truthful or accuracy of this prospectus.complete. Any representation to the contrary is a criminal offense.
, 2008
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Initial public offering price | $ | $ | ||||||
Underwriting discounts and commissions | $ | $ | ||||||
Proceeds, before expenses, to us | $ | $ |
Delivery of the shares of common stock is expected to be made on or about , 2012. We have granted the underwriters an option for a period of 30 days to purchase, on the same terms and conditions set forth above, up to an additional shares of our common stock to cover overallotments. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us will be $ and the total proceeds to us, before expenses, will be $ .
Leerink Swann
Stephens Inc. | Mizuho Securities |
Cantor Fitzgerald & Co.
The date of this prospectus is , 2012.
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F-1 |
INFINITI™, BioFilmChip™, Intellipac™INFINITI, BioFilmChip, Intellipac and Qmatic™QMatic are our trademarks. All other service marks, trademarks and trade names referred to in this prospectus are the property of their respective owners.
We are presently a California corporation. We intend to reincorporate in Delaware prior to the consummation of the offering. In connection with our reincorporation, we intend to effectuate a for reverse stock split of our common stock.
You should rely only on the information contained in this prospectus. Neither we, nor the underwriters, have authorized anyone to provide you with additional or different information or information different fromthan that contained in this prospectus.prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of shares of ourthe common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
No action is being taken in any jurisdiction outside the United States to permit a public offering of the common shares or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to that jurisdiction.
Until , 20082012 (25 days after the date of this prospectus), all dealers that buy, sell or trade in our common shares,stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
i
This summary highlights thecertain information contained elsewhere in this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. For a more complete understanding of the information that you may consider important in making your investment decision, we encourage you to read this entire prospectus. Among the other information in this prospectus, you should carefully consider the information set forth under the heading “Risk Factors” and our financial statements and accompanying notes included elsewhere in this prospectus. Unless the context requires otherwise, the words “we,” “us,” “our,” “Company” and “AutoGenomics” refer to AutoGenomics, Inc.
OverviewOur Company
We design, develop, manufacture and market a fully integratedthe INFINITI molecular diagnostics system. The system calledincludes an extensive and expanding menu of genetic tests and a family of highly automated analyzers. Our tests provide reference laboratories, hospitals and specialty clinics with genetic test results in a broad range of market segments, including personalized medicine, women’s health, oncology and infectious disease. Each of our genetic tests is performed on an INFINITI analyzer utilizing our high-margin and test-specific consumables, which include our proprietary BioFilmChip microarrays and our proprietary Intellipac Reagent Management Modules. Our INFINITI analyzers are capable of both mid- to high-volume testing and generating many different laboratory results from one patient sample at the INFINITI™ thatsame time, which is commonly referred to as multiplexing, while providing a high level of accuracy and reproducibility. Our INFINITI system is easy to use, as it eliminates the need for multiple, specialized instruments and automates many of the discrete processes of traditional genetic testing performed by clinical laboratories. Our system is capable of running a broad menu of tests, the results of which assist in detecting the predisposition to and presence of disease, monitoring disease progression and/or guiding appropriate therapy. We believe that the versatility of our system to run the broad menu of tests that we currently offer and are developing will facilitate the acceptance and rapid adoption of our system and reduce the need for multiple testing technologies, platforms and specialized technicians in the laboratory. Our system is cost-effective, easy to use, highly sensitive and designed to test for multiple biomarkers on the same sample simultaneously. We believe these attributes could significantly improve laboratory productivity, workflow and cost per reportable result over existing technologies and methods and could allow a broader range of laboratories, including those operated by smaller hospitals, to perform molecular diagnostics tests. Our system is designed to permit us to develop new and enhanced applications without modification to our platform. The INFINITI™ system is also capable of proteomic analysis.testing.
The INFINITI™ system consists of the INFINITI™ Analyzer (the bench top instrument on which our diagnostics tests are performed) and the consumable products used to run tests on our system, including the BioFilmChip™ Microarray and the Intellipac™ Reagent Management Module. The INFINITI™ system is designed to address the major areas of infectious disease, cancer, genetic disorders, personalized medicine (pharmacogenetics), cardiovascular disease/thrombophilia, women’s health, newborn screening and central nervous system disorders. As of June 30, 2008,2012, we offered 26 applications,50 tests for use on our INFINITI analyzers, and had more than 15 additional tests in development. Our current and in-development tests are focused on the areas of personalized medicine (including pain management, mental health and cardiovascular health assessment), women’s health, oncology, infectious disease, genetic disorders, newborn screening and blood banking, which we planbelieve represent large and growing market opportunities in genetic testing. We believe the depth and breadth of our test menu is a significant competitive advantage that will allow laboratories to utilize laboratory space, labor and capital investment more efficiently to conduct additional molecular diagnostic tests. The proprietary design of our INFINITI system allows us to introduce sixnew and enhanced tests to our genetic test menu without the need to modify our INFINITI analyzers. We intend to increase the number of tests offered in each of our target market segments, which will further increase the utility of our INFINITI system to our customers. Our internal test development efforts are generally driven by our customers’ current and anticipated needs, our analysis and projections for the molecular diagnostics market, and our ability to leverage our core competencies such as automation and multiplexing. We have entered into, and expect to continue to enter into, collaborative relationships with leading research and academic institutions for the development of additional applications byor enhanced tests to further increase the enddepth and breadth of our genetic test menu. Since the first quarterinitial launch of 2009. Our leading offerings include: (i)our INFINITI system in 2007 we have introduced more than five new or enhanced tests designed to identify mutations in patients that may cause an increased sensitivity to Warfarin, marketed as Coumadin, the most-prescribed anticoagulant for thromboembolic therapy in North America and Europe; (ii) primary screening and genotyping (risk profiling) tests for Human Papillomavirus (HPV), the primary cause of cervical cancer; (iii) a test designed to identify genetic mutations associated with an increased risk of developing cystic fibrosis, an inherited chronic disease that affects the lungs and digestive system; and (iv) a test designed to identify variants of CYP450 2D6, a gene estimated to be involved in the metabolism of as many as 20% of commonly prescribed drugs, and which is used to guide appropriate therapies.per year.
We have received 510(k) clearance from the U.S. Food and Drug Administration, (FDA) in February 2007or FDA, 510(k) clearance for commercial saleour INFINITI Analyzer and five of the INFINITI™ Analyzer. In addition,our genetic tests, and we have received 510(k) clearance for
four of our tests, specifically a test for Warfarin sensitivity and our Factor II, Factor V and Factor II-V panel tests, which aid in the determination ofsubmitted an individual’s risk for the development of blood clots. We have also submitted notifications for 510(k) clearanceadditional notification to the FDA for two additional tests and intend to pursue510(k) clearance or approval as required byof our UGT1A1 test. We are finalizing the FDAprotocol for our other tests. We have submitted a proposed clinical protocol to the FDA for our pre-investigational device exemption (pre-IDE) meeting to determine the clinical trial necessary to support a premarket approval (PMA) application, to the FDAor PMA, for our HPV screening test. Like other companies offering molecularHPV-HR tests on a commercial basis, mostand intend to commence this clinical trial in 2013. The balance of the tests that we offer have not been cleared or approved for diagnostic use by the FDA. These molecularour tests are available to laboratories on acurrently offered for sale in the United States under research use only, or RUO, basis. As requireddesignation. Internationally, we have obtained aConformité Européenne, or CE, mark for our INFINITI Analyzer and a total of 22 of our tests. This designation is supported by FDA regulations, these tests must be labeled, “For Research Use Only. Not for use in diagnostic procedures.” Although many laboratories may use our products in their own laboratory-developed diagnostic tests, we are not permitted to market these products for diagnostic purposes. In June 2008,completed clinical and validation studies that demonstrate the analytical performance of each CE marking of conformity was affixed to the INFINITI™ Analyzer in accordance with the European In Vitro Diagnostic Devices (IVDD) Directive.marked test. The CE marking allowsmark facilitates the INFINITI™marketing and sale of our INFINITI Analyzer to be marketedand CE marked tests in the European Union and the European Economic Area. Certain aspects of the method and design of the INFINITI™ system, includingArea as well as certain of the microarray and reagent management technologies used in our system, are covered by eight issued patents (including two in the U.S and six foreign counterparts) and 33 pending patent applications (including 11 in the U.S., 20 foreign counterparts and two Patent Cooperation Treaty applications).
We attribute our growth prospects to the following:
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As of June 30, 2008, we had an installed base of 58 INFINITI™ Analyzers in reference laboratories, hospital laboratories and specialty clinics in North America, including ARUP Laboratories, Cleveland Clinic, The Johns Hopkins Hospital, Louisiana State University Hospital Health Science Center, Montreal Heart Institute, New York Presbyterian Hospital and San Francisco General Hospital.
We believe that compared to traditional genetic testing methods our INFINITI system can significantly improve laboratory productivity, workflow and throughput while reducing the cost per reportable result. We believe that these and other attributes of our INFINITI system decrease the cost and complexity of genetic testing and reduce the need for specialized laboratory personnel, training, equipment and facilities. Our INFINITI system has been designed to enable our customers to start performing, or to more cost-effectively perform, molecular diagnostic tests, which we believe will facilitate acceptance and adoption of our INFINITI system.
We experienced meaningful revenue growth in the first six months of 2012, with revenue of $8.7 million during this period, $7.8 million of which was derived from microarray sales, as compared to revenue of $7.5 million and $8.0 million for fiscal years 2010 and 2011, respectively, of which $3.9 million and $6.8 million was derived from microarray sales, respectively. We expect to continue to generate the substantial majority of our revenue through the sale of our genetic tests for the foreseeable future. As of June 30, 2012, we had 175 total INFINITI analyzers placed with customers.
Market opportunityOpportunity
Industry Background
Molecular diagnostics tests, a new and expanding part of thein vitro diagnostics market, arediagnostic testing is used to measure or detect the presence of genetic and protein biomarkers associated with a predisposition to, or the presence of, a particular disease or condition. Currently, the clinical marketcondition, or other genetic variance such as drug response. The information provided by molecular diagnostic testing may enable physicians to achieve better patient outcomes and better contain health care costs through, for molecular diagnostics is primarily genetic testing.example, earlier diagnosis of disease, improved monitoring of disease progression and more personalized treatment. According to Kalorama Information, an independent market research firm, estimated that the U.S.global molecular diagnostics market was $3.2is expected to grow from an estimated $4.8 billion in 2007. Kalorama Information also has estimated that this market will grow from $3.22010 to $8.1 billion to $5.4 billion between 2007 and 2012,in 2015, which represents a compound annual growth rate of approximately 11%. Kalorama Information further states that, a large portionrate we believe will be greater than the growth of the overall diagnostics market.
Current practices in developing and running molecular diagnostic tests are currently conducted using “home-brew” teststypically involve manual and are not included in these estimates.complex procedures that require significant expertise, time and expense. We believe there are a numberthe resource and time constraints of trends that will increasetraditional testing methods have limited the demand for molecular diagnostics tests, including the discovery of biomarkers associated with diseases, tailoring of therapies based on a patient’s genetic profile, decentralizationgrowth of the molecular diagnostics market, relabelingand that the recent availability of drugs by the FDAmore automated and increased regulationintegrated testing methods will result in accelerated use of molecular diagnostic testing. Additionally, growing understanding of the utility of genetic information for the diagnosis and treatment of disease, as well the increase in identification of new biomarkers, may lead to increased growth in the molecular diagnostics tests.market.
Our Target Markets
CurrentWe believe there are additional factors that will continue to drive growth in the molecular diagnostics market segments we target, including:
• | Personalized Medicine and Companion Diagnostics. The matching of treatment options to a patient’s specific genetic profile has emerged as an important trend in medicine because the efficacy and side-effect profile of certain treatments can be predicted by the presence or absence of specific genetic markers in a particular patient. Better targeted and more effective pharmacogenomic-based treatments have the potential to improve healthcare outcomes and lower healthcare costs. |
• | Pain Management. Pharmacogenomics is playing an integral role in the administration and management of pain medication, as gene mutations can be key factors in determining whether specific pain medications will be effective, or will otherwise result in adverse side effects. |
• | Mental Health. Mental health represents a major component of overall pharmaceutical sales. According to the Centers for Disease Control and Prevention, or CDC, as much as 11% of the U.S. population is taking antidepressants at a given time, while as many as 23% of women between the age of 40 and 59 are on psychiatric medication. |
• | Cardiovascular Health Assessment. According to the World Health Organization, or WHO, cardiovascular diseases were responsible for 30% of global deaths in 2008. It is estimated that by 2030, 23.6 million people will die from some form of cardiovascular disease in the United States. In addition to the increasing prevalence of cardiovascular diseases, the information generated by molecular diagnostic testing is becoming increasingly important for determining the predisposition and treatment of cardiovascular diseases. |
• | Women’s Health. We believe the women’s health diagnostics market will continue to grow and represent a substantial market opportunity. Non-molecular tests are commonly employed in this market, but the use of molecular diagnostics is expanding significantly due to increased applications, better performance and better clinical discriminatory capabilities. |
• | Cancer and Companion Diagnostics. Because of the high cost of many cancer therapeutics, and the varied levels of efficacy and toxicity across different patients, tests to diagnose or direct the treatment of, or to determine the predisposition to, various forms of cancer are becoming increasingly important. According to Kalorama, the world market for molecular tests in oncology is estimated at $150 million in 2010 and with annual growth of 15% will reach $300 million in 2015. |
• | Infectious Diseases. According to the WHO, infectious diseases caused approximately 20% of all recorded deaths in 2008. Within this group, HIV, tuberculosis, or TB, and respiratory infections were the top three contributors to overall mortality in adults aged 15-59, at 35%, 21% and 10%, respectively. Molecular diagnostic testing offers advantages in identifying infectious disease pathogens compared to traditional testing methods. |
• | Genetic Disorders. Genetic and inherited disease testing is a cornerstone of molecular diagnostic testing. Molecular diagnostic tests offer significant advantages over prior, often subjective, forms of diagnosis. |
• | Newborn Screening. Many common newborn screening panels require the identification of multiple (often five or more) genetic markers which makes traditional testing impractical. Classic testing algorithms are limited in that they utilize subjective analysis of a newborn’s parental health history with little to no genetic evaluation. Targeted genetic evaluation can inform the clinician if the newborn is at risk for developing the disease in question. |
• | Blood Banking. As genetic testing products have become more prevalent, more accurate and more cost-effective, the use of genetic tests in screening in the blood banking market has grown, and is expected to continue to grow. |
The Limitations of Traditional Testing Methods
Traditional testing platforms to detect genetic testing technologies are often practiced through “home-brew” tests and commercially available kits which are largely manually operated and use discrete instrumentation and results-interpretation techniques requiring highly skilled labor. These existing technologies suffer frombiomarkers have a number of limitationsdrawbacks, which we believe have significantly limited thetheir use, of molecular diagnostics testing, including limited automation, shortages of specialized laboratory technicians, an inability to multiplex, limited testing menus, highincluding:
High cost per result or a lack of standardization. reportable result;
Impractical for use by smaller reference labs, hospitals and specialty clinics;
Limited testing menu;
Inability to multiplex;
Limited automation and throughput capability;
Need for specialized labor; and
Inaccurate results and challenges with reproducibility.
These limitations have created the need in the molecular diagnostics market for a fullyhighly integrated system to perform standardized,a large menu of automated, cost-effective and cost-effectiveeasy to use tests with a high degree of accuracy and sensitivity.reproducibility.
Our solutionThe AutoGenomics Solution
The INFINITI™Our INFINITI system is cost-effective, easy to use, highly sensitive andhas been designed to test for multiple biomarkers onenable a broad range of reference laboratories, hospital laboratories and specialty clinics to start performing, or to more cost-effectively perform, molecular diagnostic testing, which we believe will drive adoption and use of our INFINITI system as well as expand the same sample simultaneously. potential of the molecular diagnostic testing market.
To use our system, an operator only needs to loadloads the prepared test samples into the bench-top INFINITI™ Analyzer,an INFINITI analyzer, along with the specific BioFilmChips™BioFilmChip and Intellipac™Intellipac Reagent Management Modules that support a broad menu of applications.Module, for the desired test. Once the INFINITI™ AnalyzerINFINITI analyzer is loaded and the tests aretest is initiated, no supervisionfurther action by the operator is required. After the test is completed, the system generates an electronic report that can be transmitted directly to a laboratory information system.
Our INFINITI system has severala number of key advantages, including:
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• | Ability to decentralize molecular diagnostics. We believe that medium-sized reference laboratories, hospital laboratories and specialty clinics are increasingly seeking to add or expand molecular diagnostics capabilities to treat patients more efficiently and provide a more comprehensive offering, lower the cost of providing healthcare, and participate in the value provided by diagnostic testing. We believe that this trend is being facilitated in part by new technologies like ours that are more automated, easier to use, more cost-effective and require less bench space in a laboratory than traditional genetic testing methods. |
• | Broad menu of |
• | Ability to multiplex. Many diseases and patient responses to therapy are caused by multiple genetic mutations that necessitate testing for multiple biomarkers to diagnose those diseases or to predict and/or monitor therapy response. Our INFINITI system is able to multiplex up to 1,024 individual features of biochemical sensors within a single microarray, which reduces the amount of sample needed, reduces the time required to run the test, and often reduces the need for multiple tests. |
• | Multiple patient array technology. Our proprietary multiple patient array, or MPA, technology is designed to test up to eight patient samples on a single microarray. This significantly enhances throughput by up to 300% while reducing cost per sample by up to 75% as compared to our single patient microarrays. Our MPA technology is particularly well suited for addressing high volume test markets such as HPV and TB. |
• | Better workflow. Our broad offering of INFINITI analyzers combined with |
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• | Increased accuracy of |
Our strategyProducts
Our INFINITI Analyzers
Our INFINITI system includes a family of analyzers, each of which is designed to address customer-specific needs based on the customer’s productivity, workflow and throughput requirements. Our INFINITI analyzers integrate and automate the discrete processes of sample handling, reagent management, hybridization, detection, results analysis and reporting in a self-contained system. They have been designed to operate on a “load and go” basis, which means that to run a genetic test, an operator loads prepared samples into the INFINITI analyzer along with the BioFilmChip microarrays and the Intellipac Reagent Management Modules specific to that test. From the perspective of the operator, the test protocols are substantially identical for all of our genetic tests, which eliminates the need to retrain operators when additional tests are added. After the test is completed, the INFINITI analyzer generates an electronic report that can be transmitted directly to a laboratory information system. Our BioFilmChips and Intellipac Reagent Management Modules are test-specific, but are not analyzer-specific, so all of our INFINITI analyzers use substantially the same consumables.
The following table illustrates the test capabilities of our different INFINITI analyzers:
Analyzer | Capacity per Run | Patient Results * | ||
INFINITI | 24 samples | up to 96 per day | ||
INFINITI PLUS | 48 samples | up to 192 per day | ||
INFINITI PLUS 96 (in beta testing) | 96 samples | up to 288 per day | ||
INFINITI HTS (in beta testing) | 384 samples | up to 1,152 per day |
* | numbers presented are based on average time to complete an HPV-HR Quad test run |
Selected Key Tests
We have a demonstrated track record of successfully developing genetic tests that leverage our core competencies and that address current and anticipated customer needs. We believe that by offering a wide variety of tests for each of our target market segments, we will provide significant value to our customers in these areas by allowing them to consolidate multiple testing platforms, expand their testing capabilities, increase workflow, reduce costs, and limit additional investment in equipment, personnel and training. Some of our key test offerings in our focus market segments currently include:
• | HPV.We have developed four HPV tests, which are designed for screening and/or genotyping and each of which addresses a different segment of the HPV testing market. Our tests include our HPV-HR Quad and HPV-HR Hex tests, designed to screen for and genotype 14 high-risk types of HPV simultaneously, our HPV Quad test, designed to screen for 13 high-risk and two low-risk types of HPV |
and our HPV Genotyping test, designed to identify 26 types of HPV. Our HPV-HR Quad, HPV-HR Hex and HPV Quad tests are designed to allow a laboratory to test samples from four to six different patients simultaneously on a single BioFilmChip. We believe our tests offer several competitive advantages: consolidation of multiple testing steps, better automation, reduction of sample requirements and enhanced accuracy and reproducibility. We plan to seek a PMA for our HPV-HR tests and 510(k) clearance for our HPV Genotyping test. Our HPV-HR Quad, HPV Quad and HPV Genotyping tests have been CE marked. |
• | Other STDs.We have launched a variety of panels consisting of tests that our customers use to identify numerous organisms associated with sexually transmitted diseases, or STDs. Our panels are designed to screen for multiple STDs in a single sample. |
• | Breast Cancer.We have developed tests such as our CHEK-2 and the Breast Cancer Panel-AJ tests, which are designed to identify individuals at greater risk for breast cancer, and our CYP450 2D6T test, which is designed to determine if a woman will benefit from tamoxifen, a frequently prescribed drug for the prevention of breast cancer recurrence. |
• | Colorectal Cancer.We have developed KRAS and KRAS-BRAF tests, which enable laboratories to identify certain genetic mutations associated with poor response to anti-epidermal growth factor receptor, or EGFR, therapies. |
• | Personalized Medicine.One of our leading personalized medicine offerings is our CYP450 2C19 Panel test, which is designed to enable laboratories to identify certain gene variants that affect the metabolism and efficacy of the anticoagulant drug Plavix (clopidogrel). Our other leading tests in this area currently include our CYP450 2C19 Plus, Warfarin and CYP450 2D6I tests, which are designed to enable laboratories to identify certain gene variants associated with responsiveness to certain medications for psychiatric disorders, the oral anticoagulant Warfarin and certain antidepressants and cancer drugs, respectively. |
• | Infectious Disease. Our Multidrug Resistance Tuberculosis (MDR-TB) test is a multiplexed test that can identifyMycobacterium tuberculosis infections (as opposed to nontuberculous mycobacterium infections) while simultaneously determining resistance to the three front-line TB treatments: rifampin, isoniazid and pyrazinamide. |
• | Genetic Disorders.Our Familial Mediterranean Fever (FMF) panel multiplexes multiple markers into a single test that allows simultaneous identification of the five most common FMF variations as well as eight other variations spanning 14 ethnicities. |
• | Newborn Screening.Our Ashkenazi Jewish Panel is capable of simultaneously detecting 31 genetic variants that account for eight diseases commonly found among those of Ashkenazi Jewish descent. |
• | Blood Banking. We have several tests for blood typing and infectious disease screening currently in development that are intended to take advantage of our multiplexed automation capabilities. |
BioFilmChip
Our proprietary BioFilmChip microarrays consist of four layers of a three-dimensional hydro-gel matrix coated on polyester film sandwiched between a plastic base and a reaction body to form a microarray. Each of the emulsion layers has a unique formulation designed to address a specific function: one layer smoothes the film surface; a second layer blocks any intrinsic fluorescence, allowing for greater sensitivity; a third layer is a medium to attach biochemical sensors; and a fourth layer breaks the surface tension so the sample is spread evenly on the chip. Our microarrays are printed with 36 to 1,024 individual features of biochemical sensors depending on the requirements of the test. These spotted microarrays are then packaged into specifically designed magazines and are used on all INFINITI analyzers.
Intellipac Reagent Management Module
Our proprietary Intellipac Reagent Management Modules hold the reagent needed to run our specific genetic tests. Our reagent module is designed to communicate all relevant information about a test to the INFINITI analyzer without any intervention from the operator, saving time and reducing errors. A read-write memory chip embedded in the module saves test-specific information on the module, including reagent identification, expiration dates, lot number, amount of reagent remaining for future tests, specific instructions for test processing, the time last used and the serial number for the instrument.
Our Strategy
Our objective is to become a leading provider of genetic tests to a broad array of customers within our target market segments. We believe our INFINITI system will allow us to achieve this objective by facilitating molecular diagnostics products to hospitals,diagnostic testing by reference laboratories, hospital laboratories and specialty clinics. To achieve our objective, we intend to:
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• | Develop and launch new |
• | Target molecular diagnostic laboratories with high potential utilization of our INFINITI system.We believe that our INFINITI system’s automation, broad genetic test menu and family of analyzers designed to address various throughput requirements will generate demand from both larger reference laboratories seeking a more flexible and efficient molecular diagnostic platform and from smaller reference laboratories, hospital laboratories and specialty clinics for whom it has not previously been cost-effective to develop their own tests. |
• | Expand our domestic sales force and international distribution of our products. We are marketing and selling the INFINITI system in the United States through our own sales and marketing organization and believe there is a meaningful opportunity to further penetrate existing markets and customers as well as enter new markets by expanding our U.S. sales force. We also plan to expand our global distribution networks to address increasing international demand in addition to driving increased utilization with our existing distributors. |
• | Pursue regulatory clearances, approvals and certifications for products and facilities, as necessary. We have received FDA 510(k) clearance for our INFINITI Analyzer and five of our genetic tests, and we have submitted an additional notification to the FDA for 510(k) clearance of our UGT1A1 test. We are finalizing the protocol for a clinical trial necessary to support a PMA application to the FDA for our HPV-HR tests and intend to commence the clinical trial in 2013. We intend to seek regulatory clearance or approval, as necessary, for our tests. |
• | Align with key opinion leaders at leading institutions and increase scientific awareness of our products. |
awareness of our system, to demonstrate its benefits relative to existing technologies and to accelerate its adoption in the molecular diagnostics market. |
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Our HPV opportunity
Certain types of Human Papillomavirus (HPV) are the primary causes of cervical cancer. A leading company in the HPV DNA testing market estimates that the U.S. HPV testing market in 2007 was approximately $400 million, and that the potential market size may exceed one billion dollars by 2010. Our strategy is to become a key provider of HPV testing products. We have developed two HPV tests, one for primary screening of high-risk types of HPV and the other for genotyping, which are available for sale on an RUO basis. Our HPV-QUAD screening test is designed to simultaneously detect the presence of high-risk types of HPV in four different patient samples on a single BioFilmChip™. Our HPV genotyping test is designed to identify 26 high and low risk HPV types. We believe our tests will offer several competitive advantages over existing tests such as full automation, low sample requirement, reducing the incidence of QNS (Quantity Not Sufficient) samples (not a sufficient amount of sample left after pap specimen processing for ancillary testing) and a high degree of accuracy and specificity. We submitted a proposed clinical protocol to the FDA to be discussed during an upcoming meeting. At this meeting, we will seek to obtain the FDA’s input regarding the design of the clinical trial necessary to pursue PMA approval of the HPV-QUAD screening test. We believe that this PMA process will take two to three years to complete, although it could take longer depending on the definitive requirements imposed by the FDA and approval is not assured. We intend to submit a 510(k) notification to the FDA for our HPV genotyping test in 2009.
Additionally, we expect that our near-term offerings will include a test to detect the presence of four infections that are associated with the development of pelvic inflammatory disease, a pharmacogenetic test to identify gene mutations that affect the toxicity and efficacy of the cancer drug Fluorouracil, a pharmacogenetic test to identify patients that may respond to certain lung cancer treatments and a test to detect the presence of certain types of nontuberculous mycobacteria. We intend to pursue FDA clearance or approval for each of these tests.
Sales and marketing
Our sales and marketing strategy is to focus on key customers and customer segments to quickly establish a large installed base and to generate sales of testing consumables, including our BioFilmChips™ and Intellipac™ Reagent Management Modules. We focus our sales efforts on reference laboratories, specialty clinics and hospital laboratories and emphasize the low cost, ease of use, bench-top convenience and high quality and consistent results of our system, as well as the potential versatility afforded by a broad test menu on a single system. We offer the INFINITI™ Analyzer through direct sale and a Reagent Access Plan where an INFINITI™ Analyzer is placed at the customer’s location at no direct cost to the customer in return for a commitment by the customer to purchase a minimum volume of consumables, through which the direct cost of the equipment is recouped. To execute our marketing strategy, we have established a direct sales force of 18 sales persons located in key metropolitan cities in the U.S. We currently have distributors in Asia, Canada, the European Union and Switzerland. We plan to expand our distribution networks in those locations to increase international sales.
Risks affecting usAffecting Us
Our business is subject to numerous risks, as more fully described in the section entitled “Risk Factors” immediately followingelsewhere in this prospectus, summary, including the following:
There is limited information available to evaluate our business, sinceas we have a limited operating history and limited current revenues.revenue;
We have a long history of losses sinceand negative cash flows and may not be able to maintain profitability in the current fiscal year or in future fiscal periods;
Most of our inceptionexisting indebtedness is currently due and expect continued losses forpayable, and we do not have the foreseeable future.resources to satisfy this indebtedness absent the completion of this offering;
After completing this offering, we may not be able to meet our cash requirements without obtaining additional capital, and if we are unable to do so, we may have to curtail or cease operations;
Our financial results depend on commercial acceptance of the INFINITI™INFINITI system and its tests and the development of additional tests.tests;
OurChanges in regulations or the FDA’s enforcement discretion, or violations of regulations by us, could significantly limit our ability to sell our products to our target customers;
We currently derive a significant portion of our revenue from a few customers;
Many of our competitors are large and well capitalized, and we face significant competition.
Our failure to comply with regulatory requirements or receive regulatory clearance or approval for our products or operations in the U.S. or abroad would adversely affect our revenues and potential for future growth.competition;
If third-party payors dothe medical relevance of the biomarkers targeted by our tests is not reimbursedemonstrated or is not recognized by others, we may experience reduced demand for our customers for the use ofproducts;
We have identified material weaknesses and significant deficiencies in our clinical diagnostic products or if they reduce reimbursement levels, our ability to sell our products will be materiallyinternal controls; and adversely affected.
Our success will depend partlyin part on our ability to operate without infringing or misappropriating the proprietary rights of others, on our ability to own or license patents that are adequate to reduce competition and on our ability to license intellectual property from third parties for certain test applicationstests and manufacturing processes needed for our business.
Corporate history and informationInformation
We were incorporated as Neuron Technologies, Incorporated in California in April 1999, as Neuron Technologies, Incorporated,and changed our name to AutoGenomics, Incorporated in August 2000 and2000. We subsequently changed our name to AutoGenomics, Inc. in October 2002. We intend to reincorporatereincorporated in Delaware prior to the consummation of the offering.in November 2008. Our principal executive offices are located at 2251 Rutherford Road, Carlsbad,2980 Scott Street, Vista, California, 92008.92081. Our telephone number is (760) 804-7378.477-2248. Our website address is www.autogenomics.com. Information contained onin or that can be accessed through our website is not incorporated by reference into this prospectus and should not be considered to be part of this prospectus.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012. As an emerging growth company, we are eligible to comply with less stringent disclosure requirements than those applicable to larger, more established companies. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. We refer to the Jumpstart Our Business Startups Act of 2012 herein as the “JOBS Act,” and references herein to “emerging growth company” shall have the meaning associated with it in the JOBS Act.
Summary of the offeringThe Offering
Common stock to be offered by us | shares |
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Use of proceeds |
We anticipate that we will use the net proceeds from this offering to (i) |
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Risk factors | Investing in our common stock involves a high degree of risk. You should carefully read and consider the information set forth under the heading “Risk Factors” and all other information set forth in this prospectus before deciding to invest in our common stock. |
The number of shares of common stock to be outstanding after this offering is based on the following (all as of March 31, 2008): 7,285,668June 30, 2012: 8,037,081 shares of common stock, 1,554,9821,579,227 shares of Series A Convertible Preferred Stock, 4,302,0404,468,369 shares of Series B Convertible Preferred Stock, 6,405,0896,417,680 shares of Series C Convertible Preferred Stock, and 3,423,258 shares of Series D Convertible Preferred Stock, and 685,555 shares of Series E Convertible Preferred Stock and excludes as of that date:
3,176,4055,446,762 shares of common stock issuable upon exercise of options outstanding at a weighted average exercise price of $0.31$1.57 per share;
3,187,9271,186,357 and 250,000 shares of common stock reserved for future issuance under our 2008 Equity Incentive Award Plan and 2008 Employee Stock Purchase Plan, which we expect will be approved by our stockholders prior to the completion of this offering;respectively; and
250,000 warrants to purchase 8,426,675 shares of common stock 34,618and warrants to purchase 381,300 shares of Series A Convertible Preferred Stock, 213,818 warrants to purchase shares of Series B Convertible Preferred Stock and 444,909 warrants to purchase shares of Series C Convertible Preferred Stock.our preferred stock.
Effective immediately prior to the completion of this offering, each outstanding share of our Series A Convertible Preferred Stock will automatically convert into two shares of our common stock, each outstanding share of our Series B, Series C and Series E Convertible Preferred Stock will convert into 1.0042 shares of our common stock, and each outstanding share of our Series B, Series C and Series D Convertible Preferred Stock will convert into one share1.0169 shares of our common stock. Our outstanding warrants to purchase our convertible preferred stock will automatically become exercisable for shares of our common stock in connection with the completion of this offering.
Except as otherwise indicated, all information contained in this prospectus assumes:
no issuance of any options under our 2008 Equity Incentive Award Plan after June 30, 2012 and no exercise of the underwriters’ option to purchase additional shares of common stock from us to cover over-allotments;any outstanding warrants or options after June 30, 2012; and
no exercise by the filingunderwriters of our Delaware certificate of incorporation and the adoption of our bylaws prior to the completion of this offering.their overallotment option.
The information in this prospectus does not reflect the for reverse stock split of our common stock that we plan to complete in connection with our reincorporation in Delaware.
Summary financial dataFinancial Data
The following tables provide our summary financial data and should be read in conjunction with our audited financial statements, the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The summary statement of operations data for each of the years ended December 31, 20062010 and 2007 and the nine months ended December 31, 20052011 were derived from our audited financial statements appearing elsewhere in this prospectus. (Our fiscal year ended December 31, 2005 included nine months because we changed our fiscal year end from March 31 to December 31 in 2005.) The summary statement of operations data for the threesix months ended March 31, 2007June 30, 2011 and 2008June 30, 2012 and the summary balance sheet data as of March 31, 2008June 30, 2012 were derived from our unaudited financial statements appearing elsewhere in this prospectus.statements. The unaudited financial data, in management’s opinion, hashave been prepared on the same basis as the audited financial statements and related notes included elsewhere in this prospectus, and includesinclude all adjustments, consisting only of normal recurring adjustments, that our management considers necessary for a fair presentation of the information for the periods presented. The results of operations for the threesix months ended March 31, 2008June 30, 2012 are not necessarily indicative of the results that may be expected for the full fiscal year ended December 31, 2012 or any other period.
Nine months ended December 31, | Years ended December 31, | Three months ended March 31, | |||||||||||||
2005 | 2006 | 2007 | 2007 | 2008 | |||||||||||
Statement of operations data: | |||||||||||||||
Product sales | $ 311,068 | $ 499,961 | $ 1,606,631 | $ 141,045 | $ 185,161 | ||||||||||
Cost of sales | 1,005,184 | 2,078,846 | 3,654,519 | 600,017 | 952,547 | ||||||||||
Gross loss | (694,116 | ) | (1,578,885 | ) | (2,047,888 | ) | (458,972 | ) | (767,386 | ) | |||||
Operating expenses: | |||||||||||||||
Research and development | 1,796,733 | 2,296,165 | 2,565,926 | 652,869 | 667,028 | ||||||||||
General and administrative | 826,567 | 1,474,902 | 2,423,077 | 482,049 | 666,705 | ||||||||||
Sales and marketing | 670,486 | 975,019 | 2,685,432 | 553,183 | 866,557 | ||||||||||
Total operating expenses | 3,293,786 | 4,746,086 | 7,674,435 | 1,688,101 | 2,200,290 | ||||||||||
Loss from operations | (3,987,902 | ) | (6,324,971 | ) | (9,722,323 | ) | (2,147,073 | ) | (2,967,676 | ) | |||||
Interest income | 65,765 | 70,316 | 283,692 | 95,852 | 52,177 | ||||||||||
Interest expense | (370 | ) | (235,029 | ) | (1,206 | ) | (347 | ) | (101,640 | ) | |||||
Other income/(expense), net | 244 | 412 | 8,210 | 183 | (9,203 | ) | |||||||||
Change in fair value of warrant liabilities | 32,776 | 75,916 | 138,905 | 32,742 | (180,683 | ) | |||||||||
Net loss | (3,889,487 | ) | (6,413,356 | ) | (9,292,722 | ) | (2,018,643 | ) | (3,207,025 | ) | |||||
Accretion to liquidation value of preferred stock | (447,108 | ) | (817,823 | ) | (74,451 | ) | (76,332 | ) | 94,824 | ||||||
Net loss attributable to common stockholders | $(4,336,595 | ) | $(7,231,179 | ) | $(9,367,173 | ) | $(2,094,975 | ) | $(3,112,201 | ) | |||||
Basic and diluted net loss per share attributable to common stockholders | $ (0.76 | ) | $ (1.19 | ) | $ (1.40 | ) | $ (0.34 | ) | $ (0.43 | ) | |||||
Shares used to compute basic and diluted net loss per share attributable to common stockholders | 5,708,755 | 6,065,728 | 6,671,063 | 6,167,771 | 7,276,657 | ||||||||||
Years ended December 31, | Six months ended June 30, | |||||||||||||||
2010 | 2011 | 2011 | 2012 | |||||||||||||
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Statement of operations data: | ||||||||||||||||
Net revenue | $ | 7,504 | $ | 8,005 | $ | 3,495 | $ | 8,693 | ||||||||
Cost of sales | 7,666 | 6,019 | 2,800 | 3,390 | ||||||||||||
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Gross profit/(loss) | (162 | ) | 1,986 | 695 | 5,303 | |||||||||||
Operating expenses | ||||||||||||||||
Research and development | 3,560 | 2,768 | 1,345 | 1,112 | ||||||||||||
General and administrative | 5,376 | 3,360 | 1,509 | 1,496 | ||||||||||||
Sales and marketing | 4,717 | 2,672 | 1,286 | 954 | ||||||||||||
Impairment of film coating equipment | 981 | — | — | — | ||||||||||||
Initial public offering costs - terminated offering | 1,752 | — | — | — | ||||||||||||
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Total operating expenses | 16,386 | 8,800 | 4,140 | 3,562 | ||||||||||||
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Income/(loss) from operations | (16,548 | ) | (6,814 | ) | (3,445 | ) | 1,741 | |||||||||
Interest expense, net | (4,109 | ) | (3,626 | ) | (2,132 | ) | (1,579 | ) | ||||||||
Other income/(expense), net | 36 | (2 | ) | (2 | ) | 3 | ||||||||||
Change in fair value of warrant liabilities | 926 | 445 | 515 | 294 | ||||||||||||
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Net income/(loss) | (19,695 | ) | (9,997 | ) | (5,064 | ) | 459 | |||||||||
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Net income/(loss) per share attributable to common stockholders | ||||||||||||||||
Basic | $ | (2.52 | ) | $ | (1.25 | ) | $ | (0.63 | ) | $ | 0.06 | |||||
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Diluted | $ | 0.02 | ||||||||||||||
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Shares used to compute net income/(loss) per share attributable to common stockholders | ||||||||||||||||
Basic | 7,823,355 | 7,979,527 | 7,978,984 | 8,028,070 | ||||||||||||
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Diluted | 26,288,216 | |||||||||||||||
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Actual | Pro forma (1) | Pro forma as adjusted (2) | ||||||||||
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Balance sheet data: | ||||||||||||
Cash and cash equivalents | $ | 309 | $ | 309 | $ | |||||||
Current assets | 5,540 | 5,540 | ||||||||||
Total assets | 7,115 | 7,115 | ||||||||||
Total debt (3) | 20,884 | 20,884 | ||||||||||
Convertible preferred stock (4) | 47,343 | — | ||||||||||
Total stockholders’ deficit | (78,162 | ) | (30,819 | ) |
(1) | On a pro forma basis after giving effect to the conversion of all outstanding shares of convertible preferred stock into common stock, which will occur immediately prior to the completion of this offering. |
(2) | On |
Amounts include principal only of promissory notes payable. |
(4) | Our convertible preferred stock |
Before deciding to invest in our common stock, you should carefully consider each of the following risk factors and all of the other information set forth in this prospectus. The following risks and the risks described elsewhere in this prospectus, including in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” could materially harm our business, financial condition, future results and cash flow. If that occurs, the trading price of our common stock could decline, and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.
Risks relatingRelating to our businessOur Business
SinceBecause we have a limited operating history and limited current revenues,revenue, there is limited information available to evaluate our business.
We have a limited operating history upon which one can evaluate our business and our products. We only recently started selling our products. As an early commercial-stage company in the new and rapidly evolving market for molecular diagnostics, we face numerous risks and uncertainties. SomeBased on our limited operating experience, we may not be able to effectively:
drive adoption of these risks relateour system;
attract and retain customers for our products;
demonstrate the commercial viability of our tests;
comply with evolving regulatory requirements applicable to our ability to:products that are intended for research use only;
obtain regulatory approvals to market and sell our products;
attract and retain customers for our products;
anticipate and adapt to changes in the molecular diagnostics market;
focus our research and development efforts in areas that generate revenues;appropriate returns on these efforts;
maintain and develop strategic relationships with vendors and manufacturers to acquire necessary materials and the production of our products;
implement an effective marketing strategy to promote awareness of our products;
scale our manufacturing capacity to meet potential demand;
avoid infringement and misappropriation of third-party intellectual property;
obtain licenses on commercially reasonable terms to third-party intellectual property;
obtain valid and enforceable patents that give us a competitive advantage;
protect our systemsproprietary technology;
provide appropriate levels of customer support for our products;
protect our operations from any equipment- or software-related system failures;
develop and operate computer systems and related infrastructure that are adequate to manage our growth and provide our services effectively; and
attract, retain and motivate qualified personnel;
drive adoption of our system;
scale our manufacturing capacity to meet potential demand;
demonstrate and maintain the accuracy of our tests; and
protect our proprietary technology.personnel.
Our operations are subject to allmany of the risks inherent in the growth of a new business enterprise.business. The likelihood of our success must be evaluated in light of the challenges, expenses, difficulties, complications and delays frequently encountered in the operation of a new business. We cannot assure you that we will achieve anticipated revenue growth and become profitable.maintain profitability in the current or future fiscal years. Our failure to meet any of these goals could have a material adverse effect on us and may force us to reduce or cease our operations.
We have a long history of operating losses since our inception and expect continued losses for the foreseeable future.negative cash flows and we may not be able to maintain profitability.
Since our inception, we have not been profitable. We have incurred substantial costs to develop our technology. As of June 30, 2012, we had an accumulated deficit of $93.2 million. We expect to continue to spend substantial financial and other resources on developingconducting clinical studies and trials, seeking regulatory approvals, servicing our technology, engaging in laboratory testing, manufacturing new products,existing indebtedness, introducing new tests andproducts, expanding our sales and marketing activities.activities, developing our technology and manufacturing capabilities, engaging in laboratory testing and manufacturing new products. As a result, we will need to generate significant revenue to achieve and maintain profitability.
We expect operating lossesOur ability to generate significant revenue will depend on our ability to successfully implement our business strategies and negative cash flows to continue foraddress the future asrisks and uncertainties facing us, and we continue to incur significant expenses. We cannot assure you that we will be successful in implementing our business strategies or in addressing the risks and uncertainties facing us.these efforts. Even if we do address these risks successfully and implement our business strategies, we may not become profitable. If we weregenerate sufficient revenue to achieve profitability, wemaintain profitability. We cannot assure you that we would be able to sustain or increase profitability on a quarterly or annual basis in the future.
Our operating results may be variable and unpredictable.
Due to the nature of the molecular diagnostic testing market and facets of our business, our revenue and operating results may be difficult to predict and may vary significantly from period to period. The sales cycles for our products may be lengthy, which willmay make it difficult for us to accurately forecast revenuesrevenue in a given period,period. Specifically, initial sales of our consumable products are often dependent on completing customer validation processes that may be time-consuming and may cause revenues and operating resultsunique to vary significantly from period to period.each customer. In addition to its length, the sales cycle associated with our products is subject to a number of significant risks, including the budgetary constraints of our customers, their inventory management practices and possibly internal acceptance reviews and the timing of FDA approval and review, all of which are beyond our control. Sales of our products will also involve the purchasing decisions of large, mediumreference laboratories, hospital laboratories and small hospitals and laboratories,specialty clinics, which can require many levels of pre-approvals, further lengthening sales time. These purchasing decisions are subject to a number of significant risk factors beyond their and our control.control and are difficult for us to predict. For example, reference laboratories, hospitals and laboratoriesspecialty clinics may purchase fewer of our consumable products due to a decline in the volumes of tests needed at these facilities. As a result, we may expend considerable resources on unsuccessful sales efforts or we may not be able to complete sales as anticipated. In addition, a significant percentage of our revenue is generated from a few customers. Changes in ordering volume from one or more of these customers could materially impact our operating results. Our international sales are also difficult to predict because they depend upon the activities of our distributors, over which we have limited control.
Our revenue and operating results may also vary due to the evolving mix between sales of our INFINITI analyzers and consumables and the introduction of new or enhanced tests. Changes in the relative mix of our INFINITI analyzers and consumables sales can have a significant impact on our gross margin, as consumable sales typically have significantly higher margins than those of INFINITI analyzer sales. Further, our revenue and operating results are difficult to predict because many of our tests have only recently been launched and we do not have sufficient history to forecast revenue reliably for those tests. The difficulty in accurately forecasting, and any period-to-period variations in, our revenue and operating results may cause our stock price to fluctuate significantly in the future.
WeOur independent registered public accounting firm has included an explanatory paragraph relating to our ability to continue as a going concern in its report on our audited financial statements included in this prospectus.
As of December 31, 2011 and June 30, 2012, we did not have sufficient working capital to fund our planned operations through December 31, 2012 without additional financing. These conditions raise substantial doubt about our ability to continue as a going concern. Accordingly, the report of our independent registered public accounting firm on our audited financial statements included in this prospectus contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern; however, the audited
financial statements have been prepared assuming that we will continue as a going concern, which contemplates the recovery of our assets on rental or loan to our customers and the satisfaction of our liabilities in the normal course of business.
After completion of this offering, we may not be able to meet our cash requirements without obtaining additional capital from external sources, and if we are unable to do so, we may have to curtail or cease operations.
We anticipate that our current cash and cash equivalents and cash provided by this offering and our operating activities will be sufficient to meet our currently estimated cash requirements for at least the next 12 months; however, we expect capital outlays and operating expenditures to increase over the next several years as we expand our infrastructure, commercialization, training and support, manufacturing and research and development activities. We anticipate that our current cash and cash equivalents and cash provided by our operating activities, together with the net proceeds of this offering, will be sufficient to meet our currently estimated needs for at least the next 12 months. However, we operate in a market that makes our prospects difficult to evaluate, and we may need additional financing to execute on our current or future business strategies. The amount of additional capital we may need to raise depends on many factors, including:
the level of research and development investment required to maintain and improve our technology, including efforts to expand our molecular diagnostic applicationstest menu, to fund clinical studies and clinical trials of our applicationstests and to invest in the enhancementdevelopment of our INFINITI™ Analyzer;new products;
the amount of future cash provided by or used in operating activities;
the costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;
our need or decision to acquire or license complementary technologies or acquire complementary businesses; and
changes in regulatory policies or laws that affect our operations.
We have a history of operating losses and negative cash flows since our inception and we may not be able to maintain profitability. We cannot be certain that additional capital will be available when and as needed or that our actual cash requirements will not be greater than anticipated. If we require additional capital at a time when investment in diagnostics companies, or in the marketplace in general, is limited due to the then prevailingthen-prevailing market or other conditions, we may not be able to raise such funds at the time that we desire or any time thereafter. If we are unable to raise additional capital, we may be required to curtail some or all of our operations, including commercialization and research and development efforts, and forced to forego otherwise valuable business opportunities. Any failure to raise additional capital when needed could have a material adverse effect on us. In addition, if we raise additional funds through the issuance of common stock, preferred stock or convertible securities, the percentage ownership of our stockholders could be significantly diluted, and these newly issuedany preferred stock or convertible securities may have rights, preferences or privileges senior to those of existingcommon stockholders. If we obtain additional debt financing, a substantial portion of our operating cash flow or other cash resources may be dedicated to the payment of principal and interest on such indebtedness, and the terms of the debt securities issued could impose significant restrictions on our operations. If we raise additional funds through collaborations and licensing arrangements, we may be required to relinquish significant rights to our technologies or products, or grant licenses on terms that are not favorable to us.
Our existing indebtedness could adversely affect our ability to continue operations and to raise additional capital to fund our operations, and could prevent us from meeting our obligations.
As of June 30, 2012, the principal amount of our total indebtedness was approximately $20.9 million and there was approximately $3.4 million in accrued and unpaid interest on this principal amount. We are currently in default on most of our indebtedness and our lenders can demand repayment in full at any time. We do not have sufficient cash to satisfy our debt obligations. While we are currently in discussions with our lenders to extend our debt maturity dates or restructure our debt obligations, there are no assurances that these discussions will be
successful. If this were to happen, we may lose or be forced to sell some or all of our assets to satisfy our debt, which would have a material adverse effect on us.
Even if we are successful in negotiating revised payment terms or otherwise restructuring our indebtedness, our outstanding debt and related debt service obligations that remain after this offering could have important adverse consequences to us, including:
heightening our vulnerability to downturns in our business, our industry or the general economy and restricting us from making improvements to our products, acquiring complementary technology or businesses, or exploring other business opportunities;
requiring a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;
limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes;
limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who have greater capital resources; and
subjecting us to financial and other restrictive covenants in our indebtedness, the failure with which to comply could result in an event of default.
If our cash flows and capital resources continue to be insufficient to fund our existing and future debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Failure to pay our indebtedness on time would constitute an event of default under the agreements governing such indebtedness, and could constitute an event of default under the agreements governing our other indebtedness. Future events of default under such agreements would give rise to these creditors’ ability to accelerate the applicable debt obligations and/or seek other remedies against us, which could have a material adverse effect on us. We intend to use a portion of the proceeds of this offering to pay down our outstanding indebtedness. See “Use of Proceeds”.
Our past inability to pay our indebtedness and trade payables when due could adversely affect our reputation and business prospects.
We have in the past been, and are currently, in default on a substantial amount of indebtedness owed to various persons due to our inability to repay our indebtedness by their applicable maturity dates. We have also periodically been unable to timely pay various trade payables, including amounts owed to our suppliers, services providers and landlord. These events may have a negative impact on our reputation and perceived credit-worthiness, and make it more difficult for us to maintain existing relationships and enter into new relationships with suppliers and service providers, or to obtain future financing, particularly debt financing. In addition, concerns about our long-term ability to continue operations may deter potential customers from investing the time and resources necessary to install our INFINITI analyzers and use our system to conduct genetic testing. To the extent that our reputation has been harmed from our past failure to timely pay our debt and trade payables, it may take us many years to repair our reputation. In the meantime, we may receive less favorable terms from our suppliers and service providers, find it more difficult to obtain financing, and face challenges convincing customers to invest in the long-term use of the INFINITI system.
Our financial results depend on commercial acceptance of the INFINITI™INFINITI system, its menu of tests and the development of additional tests.tests and other products.
Our future depends on the success of the INFINITI™INFINITI system, which depends primarily on its acceptance by hospitals, reference laboratories, hospitals and specialty clinics as a reliable, accurate and cost-effective replacement for
traditional molecular diagnostics systems.diagnostic testing methods. Many hospitalsreference laboratories and laboratorieshospitals already use expensive molecular diagnostics testing instruments in their laboratorieswhich they have made substantial investments, and may be reluctant to change their current procedures for performing such analyses. In addition, many laboratories currently rely on their own LDTs. These laboratories, hospitals and specialty clinics may be reluctant to discontinue using LDTs due to the time and expense already invested in developing and validating these tests and their familiarity with these tests compared to the INFINITI system. If we are unable to displace molecular diagnostic testing instruments and LDTs currently in use, our market opportunity will be limited and we may not be able to achieve significant sales of our products.
We continue to seek to develop additional tests for our INFINITI™INFINITI system as well as additional products (such as our INFINITI PLUS 96 and INFINITI HTS analyzers, both of which are currently in the beta testing phase) to respond to hospitals’what we perceive to be the needs of reference laboratories, hospital laboratories and laboratories’ needs. However,specialty clinics; however, we cannot guarantee that we will be able to develop enough additional tests quickly enoughor other products in a timely manner or in a manner that is cost-effective or at all. The development of new or enhanced tests and other products is a complex and uncertain process requiring the accurate anticipation of technological and market trends, as well as precise technological execution. We are currently not able to estimate when or if we will be able to develop, obtain licenses to third-party intellectual property on commercially acceptable terms for, obtain regulatory approval or clearance for, commercialize or sell, additional tests or enhance existing products. If we are unable to increase sales of the INFINITI™our INFINITI system and its tests or to successfully develop, obtain licenses to third-party intellectual property on commercially acceptable terms for, obtain regulatory approval or clearance for and commercialize, additional tests or other products, or tests, our revenuesrevenue, prospects and our ability to achievemaintain profitability would be impaired.
We conduct business in a heavily regulated industry, and any changes in regulations or the FDA’s enforcement discretion, or violations of regulations by us, could adversely affect our business, prospects, results of operations or financial condition.
The clinical laboratory testing industry is highly regulated, and we cannot assure you that the regulatory environment in which we operate will not change significantly and adversely in the future. In particular, the laws and regulations governing the marketing of molecular research use or diagnostic products for use as laboratory-developed tests are extremely complex and in many instances there are no significant regulatory or judicial interpretations of these laws and regulations. While we believe that we are currently in material compliance with applicable laws and regulations as historically enforced by the FDA, we cannot assure you that the FDA or other regulatory agencies would agree with our determination, and a determination that we have violated these laws, or a public announcement that we are being investigated for possible violations of these laws, could adversely affect our business, prospects, results of operations or financial condition.
In addition, a significant change in any of these laws may require us to change our business model in order to maintain compliance with these laws. For instance, in June 2011 the FDA issued a Draft Guidance entitled “Commercially Distributed In Vitro Diagnostic Products Labeled for Research Use Only or Investigational Use Only: Frequently Asked Questions,” which, if enforced, would limit our marketing of research use only, or RUO, tests to general discovery laboratories and would require us to halt sales to clinical laboratories that validate and use our RUO tests as laboratory developed tests, or LDTs. The FDA has generally exercised its enforcement discretion to not enforce applicable regulations with respect to LDTs. However, the FDA has indicated, since 2010, that it intends to reconsider its policy regarding enforcement and to begin drafting an oversight framework for such tests. Sales of RUO products accounted for 87%, 92% and 95%, respectively, of our net revenue for 2010, 2011 and the first six months of 2012, respectively. Accordingly, if the FDA imposes significant changes to the regulation or enforcement of LDTs, including our RUO tests that are used as LDTs, it could reduce our revenues or increase our costs and adversely affect our business, prospects, results of operations or financial condition.
Because we derive a significant portion of our revenue from a few customers, our business, financial condition and results of operations could be materially adversely affected by the loss of one or more of these customers, a significant decline in sales to one or more of these customers or a delay in collection of payments from one or more of these customers.
We have in the past derived, and expect to continue to derive, a significant portion of our revenue from a few major customers. For fiscal years 2010 and 2011, we had two and three customers, respectively, that each represented between 12% and 14% of our revenue in each year. For the six months ended June 30, 2012, we had two customers that each represented more than 15% of our revenue, one of whom represented 46% of our revenue during such period. Our continued business relationship with these major customers, and the amount of purchases and timing of payment by these major customers, may be impacted by several factors beyond our control, including product offerings by our competitors, pricing pressures or the financial health of these customers. The loss of any of these major customers, or a significant decline in sales to or a delay in collection of payments from any of these customers, could materially adversely affect our business, financial condition and results of operations.
Our business may suffer if we have difficulty acquiring and retaining customers.
A large part of our business strategy depends on our ability to place our INFINITI analyzers with customers that are high-volume users of genetic tests in our areas of focus to drive sales of our consumable products. We may not succeed in acquiring and retaining a sufficiently large customer base for our molecular diagnostics products.INFINITI system in order to execute on our strategy. If we are unable to establish and grow our usera sufficient installed base of INFINITI analyzers or if customers with which we place INFINITI analyzers do not use them, we may not be able to generate revenuesrevenue or successfully implement our business strategy. In addition, if we are unable to bring our products to market as quickly as anticipated or to acquire and develop our customer base as quickly as we have projected, our ability to generate revenuesrevenue could be materially adversely impacted. We
Failure by our customers or distributors to pay for products we have sold to them could have a material adverse effect on our financial condition and results of operations.
In certain cases, we may not be able to recognize revenue on sales even though we may have delivered products to our customers or distributors. For example, we have in the past sold, and may continue to sell, our INFINITI analyzers to certain of our international distributors where our ability to collect payment was not reasonably assured. Although our customers and distributors are required to pay us for the products that we sell to them, from time to time certain of our customers and distributors have not paid us or have delayed payment. In particular, some of our distributors experience long delays in receiving reimbursement from foreign government payors and healthcare providers, which in turn causes them to withhold payment to us. As of December 31, 2011 and June 30, 2012, approximately $0.2 million and $0.1 million, respectively, of our accounts receivable were 90 days or more past due. In the past we have deferred, and in the future we may be required to defer, the recognition of revenue where the collection of payment is not reasonably assured until such payment is received. Deferring the recognition of revenue could negatively impact our results of operations for any period in which the related sales occurred. Although we have reserved for or deferred the recognition of revenue related to the amount of all late payments on our balance sheets, we also may incur unexpected costs or losses resulting from these sales in the event of any delays or failures to make payment for the related products. If we are unable to collect payment from our customers or distributors for products we have sold to them, we may never be able to recover our costs to manufacture and sell such products, which could have a material adverse effect on our financial condition and results of operations.
If our customers are unwilling or unable to validate the INFINITI system or follow required protocols, our business could be harmed.
In most cases, we are dependent on our customers to validate our INFINITI system and the associated tests we offer. Individual laboratories have their own validation procedures and protocols that our system and tests
must pass and we cannot predict how long each validation process will take or whether laboratories will be willing or able to validate our INFINITI system. To the extent that any laboratories are unwilling or unable to validate our INFINITI system, we will not be able to generate meaningful revenue from sales to these laboratories.
Proper use of the INFINITI system also requires our customers to follow certain processes to assure that our tests are valid.sample collection and other protocols. If our customerswe are unable to accuratelydevelop these protocols or if, despite our efforts, customers do not follow thesethe required protocols, the INFINITI system may not generate a result or a correct result. With respect to international customers, we are generally dependent on our distributors to provide support services. Failure by our customers to follow required protocols may lead to a perception, even if unfounded, that the INFINITI system does not function properly. Such perceptions could damage our reputation and brand and reduce the frequency that our customers use the INFINITI system and purchase our consumable products.
Many of our competitors are large and well capitalized, and we face significant competition.
We face, and will continue to face, significant competition from organizations such as largein vitro diagnostics companies that compete directly or indirectly with us in the general molecular diagnostics market. We compete in an industry characterized by: (i) rapid technological change, (ii) evolving industry standards and regulatory requirements, (iii) emerging competition and (iv) new product introductions. Our competitors may develop and commercialize products and technologies that may mitigate any advantages our products may currently have and that may compete successfully with our products and technologies. Since several potentially competing companies and institutions have greater financial resources, more established brand names and larger existing customer bases than we do, they may be able to: (a) provide broader services and product lines, (b) make greater investments in research and development, (c) undertake more extensive sales efforts and marketing campaigns and (d) adopt more aggressive pricing policies than we are able. Some of our competitors are also our suppliers, and there can be no assurance that these suppliers will continue to provide us products at competitive prices or at all. Many of our competitors have also been able to enter into long-term, exclusive agreements with major potential customers, such as large reference labs, oftentimes by offering favorable pricing and other terms. Until these agreements expire, our ability to place our analyzers with and sell our testing consumables to these customers will be limited. Even after exclusive agreements expire, we may not be able to compete with the terms offered by our competitors in their efforts to extend exclusive relationships with these major potential customers. In addition, we compete against companies on the basis of the relative regulatory status of their and our products. Some of our competitors may have already received regulatory approval and conducted extensive clinical trials for tests we seek to sell. For example, other companies have received approval of PMAs from the FDA for HPV screening tests. We expect that it may take us several years to receive approval of a PMA for our HPV-HR tests, if at all. Any tests that we offer on an RUO basis may be at a competitive disadvantage to similar tests offered by others that have received FDA clearances or approvals.
We face competition from enhanced or alternative technologies and products.
We expect to continue to face competition from enhanced or alternative technologies and products. One or more of our competitors could develop a product that is superior to a product we offer or intend to offer or our technology and products may be damaged.rendered obsolete or uneconomical by advances in existing technologies. At least two of our competitors currently offer on a commercial basis self-contained, integrated systems for molecular diagnostic testing that are similar in many ways to our products. If we are unable to keep pace with technological advances in the molecular diagnostics market, our business, financial condition and results of operations may suffer.
Our business may be materially adversely affected if the molecular research use and diagnostics market fails to develop or if we fail to capture a significant share of the market.
Our revenues are dependent on the acceptance of molecular diagnostics products by laboratories. Our business may suffer if the market for research use and molecular diagnostics products fails to develop or develops more slowly than expected. Furthermore, evenOur revenue is dependent on the acceptance of molecular research use and diagnostics products by laboratories, hospitals and specialty clinics and on the expanded use of molecular diagnostic testing by physicians and hospitals. Even if we are successful in gaining acceptance of our products in laboratories, hospitals and specialty clinics, our revenue may be limited if physicians and hospitals curtail or do not expand the use of molecular diagnostic testing. Moreover, we rely in part on reference laboratories to drive demand for molecular diagnostic testing with physicians and hospitals. Reference laboratories are private, commercial facilities that conduct high-volume routine and specialty testing and which are relied upon for testing by many physicians and hospitals. If these laboratories are unsuccessful in their efforts to drive demand for testing, or if laboratories that use our INFINITI system lose market share to other laboratories that use competing molecular diagnostics products, our growth potential will be limited. Even if the market does develop, we cannot assure you that we will be successful in capturing a significant share of it by expanding the sale of our products at the prices we currently project. In the event that the market in general, or our market share in particular, does not grow as we expect, our business may be materially adversely affected.
We have limited experience pricing and marketing our products and we may not be able to appropriately adjust our pricing and marketing efforts in response to changes in the market.
We intend to generate revenuesrevenue from one-time sales of testing platformsour INFINITI analyzers and recurring sales of microarraysconsumables, including our BioFilmChips and reagent management modules.Intellipac Reagent Management Modules. We have limited experience marketing and pricing molecular research use and diagnostics products. As such, we cannot assure you that our expectations as to pricing and marketing of these products are appropriate. The molecular research use and diagnostics market is also rapidly evolving due to, among other things, regulatory changes and the introduction of new technologies. If we are unable to appropriately adjust our pricing and marketing efforts in response to this changing environment, we may lose market share by pricing our products too high or lose potential revenue by pricing our products lower than required to maintain or grow our market share. Our failure to price and market our products appropriately could impact our ability to attract and retain customers in the molecular research use and diagnostics market, or to establish and maintain recurring revenue streams on similar or acceptable terms. In light of these factors, we cannot assure you that we will be able to attract a sufficient number of customers or generate sufficient revenuesrevenue to support our operations.
We are subject to risks relating to the different sales methods we use to commercialize the INFINITI™ Analyzer.placement of INFINITI analyzers under our domestic placement plans.
WeIn the United States, we offer the INFINITI™ AnalyzerINFINITI analyzer through direct sale, monthly rental plans and a Reagent Access Plan.our direct placement plan. Under the Reagent Access Plan,our domestic placement plan, an INFINITI™ AnalyzerINFINITI analyzer is placed at the customer’s location at no direct cost to the customer in returnwith the intent of generating recurring demand for a commitmentour high-margin testing consumables, including our test-specific BioFilmChips and Intellipac Reagent Management Modules. The customers under our domestic placement plans are required by the customerterms of the plans to purchase minimum amounts of consumables; however, in some cases, customers have not met this requirement. We have the right to reclaim an INFINITI analyzer placed with a customer pursuant to a domestic placement plan if the customer does not purchase the minimum volumeamount of test applications, through whichconsumables. During the direct costyears ended December 31, 2010 and 2011 and the six months ended June 30, 2012, we reclaimed 20, 14, and 13 INFINITI analyzers, respectively, either because the customer failed to purchase the minimum amount of consumables or otherwise elected not to retain the INFINITI analyzer at the end of the equipment is recouped.term of the applicable domestic placement plan. We bear the costs of producing these INFINITI™ AnalyzersINFINITI analyzers and rely on the purchasing commitmentrevenue from the sale of our customersconsumables to recoup our costs. As a result, we could expend significant resources to produce INFINITI™ AnalyzersINFINITI analyzers for our Reagent Access Plan butdomestic placement plans and not generate enough revenue from the sale of consumables to recoup our customers may not purchase the expected quantity of consumables. In a limited number of instances, we have reclaimed INFINITI™ Analyzers placed under a Reagent Access Plan because our customer failed to meet its consumables commitment. In the event that our customers under our Reagent Access Plan do not purchase consumables as expected,costs, in which case our business could be materially adversely affected.
The capital spending policies of our customers have a significant effect on the demand for our products.
Our targeted customers include reference laboratories, hospital laboratories and specialty clinics, and hospital laboratories, and their capital spending policies can have a significant effect on the demand for our products. These policies are based on a wide variety of factors, including governmental regulation or price controls, reimbursement policies, the resources available for purchasing diagnostic test applications,tests, the spending priorities among various types of diagnostic test applicationstests and the policies regarding capital expenditures during recessionary periods. Any decrease in capital spending by clinicalreference laboratories, hospital laboratories or specialty clinics could cause our revenuesrevenue to decline. As a result, we are subject to significant volatility in revenue. Therefore, our operating results can be materially affected (negatively and positively) by the spending policies and priorities of our customers.
Our competitors are large and well capitalized, andcustomers, over which we face significant competition.
We face, and will continue to face, significant competition from organizations such as largein vitro diagnostics companies that compete directly or indirectly with us in the general molecular diagnostics market. We compete in an industry characterized by: (i) rapid technological change, (ii) evolving industry standards, (iii) emerging competition and (iv) new product introductions. Although we believe that our products offer significant advantages over products currently on the market, our competitors may develop and commercialize products and technologies that may mitigate these advantages and compete successfully with our products and technologies. Since several potentially competing companies and institutions have greater financial resources, more well-established brand names and larger existing customer bases than we do, they may be able to: (i) provide broader services and product lines, (ii) make greater investments in research and development, (iii) undertake more extensive marketing campaigns and (iv) adopt more aggressive pricing policies than we are able. In addition, we compete against companies on the basis of the relative regulatory status of their and our products. Some of our competitors may have already received regulatory approval and conducted extensive clinical trials for tests we seek to sell. For example, one company has received approval of a PMA from the FDA for their HPV primary screening test. We expect that it may take us several years to receive approval of a PMA for our HPV primary screening test and approval of a PMA by the FDA is not assured.
We face competition from enhanced or alternative technologies.
We expect to continue to face competition from enhanced or alternative technologies. Our technology and products may be rendered obsolete or uneconomical by advances in existing technological approaches or products or the development of different approaches or products by one or more of our competitors. One of our competitors could develop a product that is superior to a product we offer or intend to offer. If we are unable to keep pace with technological advances in the molecular diagnostics market, our business, financial condition and results of operations may suffer.little control.
We rely on the innovation and resources of larger industry participants and public programs to advance genomicgenetic research, establish the medical relevance of biomarkers, and educate physicians/physicians and clinicians on molecular diagnostics.
The linkageslink between the genetic variations that our products detect and the underlying disease states areor response to medications is not always fully medically validated.validated, and our current and future products may involve biomarkers whose medical relevance is unproven. Additionally, the availability of validated biomarkers is dependent on significant investment in genomicgenetic research, often funded through public programs for which there are no assurances of on-goingongoing support. Should any government limit patent rights to specific genetic information, private investment in this area could also be significantly curtailed. In addition, the adoption of molecular diagnostics is dependent to a great extent on the education and training of physicians and clinicians. We do not have the resources to undertake such training, and we are relying on larger industry participants and professional medical colleges to establish, communicate and educate physicians and clinicians regarding the use and application of molecular diagnostics.
Rapid growthWe have identified material weaknesses and significant deficiencies in our internal controls, and we cannot provide assurances that these weaknesses and deficiencies will be effectively remediated or that additional material weaknesses and significant deficiencies will not occur in the future. If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud, or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price.
We have historically operated as a private company and the number and qualifications of our finance and accounting staff have not been consistent with those of a public company. We also currently do not have an internal audit function. Further, we have in the past been required to expend significant time and resources to improve our internal controls over financial reporting. For example, in the first and second quarter of 2010, we identified material weaknesses and significant deficiencies in our internal controls under the standards established by the Public Company Accounting Oversight Board, or PCAOB, with respect to (i) revenue recognition as it relates to properly recording negotiated terms and conditions in customer agreements that deviate from our standard terms and conditions, (ii) the misapplication of generally accepted accounting principles, or GAAP, with respect to the timing of the recognition of revenue for product sales characterized by multiple deliverables or additional elements, and (iii) our financial statement closing process and errors in calculating and allocating the fair value of the warrants and the amortization of the related interest expense related to our accounting for warrants issued with our promissory notes. In response to the identification of these material weaknesses, we terminated one of our sales personnel that had contributed to the failure to communicate negotiated terms and conditions, revised our sales and revenue recognition policies and procedures and trained our personnel with respect to the revised policies and procedures, and amended our code of ethics and required all of our employees to certify compliance with this code.
Furthermore, in connection with the audits of our financial statements for the years ended December 31, 2010 and 2011, and the review of our financial statements for the period ended June 30, 2012, both our
independent registered public accounting firm and our management discovered several conditions that we deemed to again be material weaknesses and significant deficiencies in our internal controls, as follows:
We noted several issues related to effective oversight by management primarily attributed to lack of significant prior audit experience and expertise relating to complex accounting issues (such as debt and equity accounting and valuation). A lack of sufficient controls over debt/equity accounting and recordkeeping of equity and debt holders’ transactions resulted in material adjustments.
We lacked a comprehensive, consistent and supportable methodology to capture the cost of manufacturing our inventory, specifically as it relates to labor and overhead charges and inventory reserves. In addition, updates to our costing system were not performed timely to ensure accurate recordkeeping.
A lack of qualified accounting and finance resources as well as effective oversight by those in charge of governance resulted in insufficient controls over timely financial statement preparation and review as well as the inability to timely and accurately account for complex transactions. A lack of technical knowledge and expertise attributed to non-compliance with certain GAAP accounting disclosure requirements.
The design of monitoring controls used to assess the design and operating effectiveness of our internal controls is inadequate. We also do not have an adequate internal process to report deficiencies in internal control to management on a timely basis.
We believe that we have taken actions that have substantially remediated the material weaknesses and significant deficiencies identified in 2010. In response to the identification of our more recent material weaknesses and significant deficiencies, we (i) intend to hire additional finance and accounting personnel, in addition to providing more resources and/or assistance on equity accounting and other complicated GAAP accounting matters, or otherwise engage a third party finance specialist to perform that accounting function for us, (ii) are in the process of establishing a review process to effectively supervise the entries made by our finance personnel, and (iii) will seek to establish better operating controls and involve our board of directors in our internal controls process, which will involve establishing formal procedures to communicate deficiencies in internal controls on a timely basis, and encourage our board of directors to more actively participate in guiding management as it relates to internal controls matters. However, we cannot assure you that our internal control over financial reporting, as modified, will enable us to identify or avoid material weaknesses or significant deficiencies in the future. Regardless, following the completion of this offering we will be required to expend significant time and resources to further improve our internal controls over financial reporting, including by expanding our finance and accounting staff.
Growth in our business could strain our managerial, operational, manufacturing, customer support, sales, financial and information systems resources.
The anticipated future growth necessary to establish and expand our operations will place a significant strain on our managerial, operational, manufacturing, sales, financial and information systems resources. These increased demands could cause us to operate our business less effectively, which in turn could cause deterioration in the financial performance of our business. To increase revenues and achieve growth, we will need to establish and expand our sales efforts and continue to improve and develop our products. WeThe future growth of our business will also require us to expand our customer support resources, including adding additional personnel for customer training and technical product support. If our customer support infrastructure does not keep pace with future growth of our customer base, we may lose customers and our reputation and future sales potential may be harmed. In addition, we expect that we
will need to improve our financial and managerial controls, billing systems, reporting systems and procedures, and that we also will need to expand, train and manage our workforce. We may be unable to hire, train and retain a sufficient number of qualified personnel or successfully manage our growth. This growth may also place increased burdens on our international distributors, increase the complexities we face related to international sales and increase our inventory-related risk. Future growth will also make it difficult for us to adequately predict the expenditures we will need to make in the future.
If we do not make the necessary capital or other expenditures to accommodate our anticipated growth, or if we are unable to manage our growth effectively, our business, financial condition and results of operations will suffer. We cannot anticipate all of the demands that our expanding operations will impose on our business, personnel, systems and controls and procedures, and our failure to appropriately address such demands could have a material adverse effect on us.
The loss of the services of one or more of our key personnel or failure to attract assimilate and retain other highly qualified personnel in the future could adversely affect operations and result in a loss of revenues.revenue.
We are dependent on the continued services and performance of senior management and educated, technically-trained personnel. We currently do not have employment or severance agreements with any of these persons. Certain of the members of our senior management, including certain of our named executive officers, are at or close to traditional retirement age in the United States. Our business also depends and will depend in the future on the ability to identify, attract, hire, train, retain and motivate senior management and other highly skilled technical, managerial, marketing and customer service personnel. Competition for such personnel is intense, and we cannot assure you that we will be able to successfully attract assimilate orand retain sufficiently qualified personnel in the future. While we do not currently expect any of our senior management or other technically-trained personnel to retire or otherwise cease employment with us in the near-term, we will need to effectively plan for management succession to maintain effective leadership and continuity in our business. The failure to attract and retain necessary technical, managerial, marketingsenior management and customer servicetechnically-trained personnel and to successfully plan for management succession could adversely affect our business and result in a loss of revenues.revenue.
Our failure to comply with regulatory requirements or receive regulatory clearance or approval for our products or operations in the U.S.United States or abroad would adversely affect our revenuesrevenue and potential for future growth.
As a manufacturer of molecular research use and diagnostics products, our products are medical devices that are subject to extensive regulation in the U.S.United States by the FDA, and by respective authorities in foreign countries where we do business. The FDA regulates virtually all aspects of a medical device’s design and testing, manufacture, safety, labeling, storage, recordkeeping, reporting, clearance and approval, promotion and distribution. The FDA also regulates the export of medical devices to foreign countries. Failure to comply with the regulatory requirements of the FDA and other applicable U.S. regulatory requirements may subject a company to administrative or judicially imposed sanctions ranging from warning letters to criminal penalties or product withdrawal.withdrawal or recall. Unless an exemption applies, a medical device must receive either clearance or premarket approval from the FDA before it can be marketed in the U.S. For example, in limited circumstances, a product may be sold on an RUO basis before receiving clearance or premarket approval.United States. The FDA’s 510(k) clearance process for Class II devices usually takes from three to twelve months, but may take significantly longer. The premarket approval process for Class III devices generally takes from one to three years from the time the application is filed with the FDA, but also can be significantly longer. Premarket approval typically requires extensive clinical data and can be significantly longer, more expensive and more uncertain than the 510(k) clearance process. Despite the time, effort and expense expended, there can be no assurance that a particular device ultimately will be approvedcleared or clearedapproved by the FDA through either the 510(k) clearance process or the premarket approval process.
Medical devices may only be marketed for the indications for which they are approved or cleared. We may be required to obtain additional new premarket approvals, premarket approval supplements or 510(k) clearances to market additional products or for new indications for or modifications to our existing products. We cannot be certain that we would obtain additional premarket approvals or 510(k) clearances in a timely manner or at all. We have modified various aspects of our devices in the past and we determined that new approvals, supplements or clearances were not required. The FDA may not agree with our decisions not to seek approvals, supplements or clearances for particular device modifications. If the FDA requires us to obtain premarket approvals, supplement approvals, or 510(k) clearances for any modification to a
previously cleared or approved device, we may be required to cease manufacturing and marketing the modified device or to recall such modified device until we
obtain FDA clearance or approval and we may be subject to significant regulatory fines or penalties. In addition, we cannot assure you that the FDA will clear or approve such submissions in a timely manner, if at all.
WeThe vast majority of the tests that we currently sell, tests thatwhich together represented 87%, 92% and 95% of our net revenue for 2010, 2011 and the first six months of 2012, respectively, have not been cleared or approved for clinical use by the FDA. These tests are labeled “For Research Use Only. Not for use in diagnostic procedures.” as required by FDA regulations. These tests are marketed to allow for the collection of research data and in some cases, aremay be used for clinical purposes by laboratories certified under the Clinical Laboratory Improvement Amendments of 1988 (CLIA) for clinical applications inCLIA as laboratory-developed tests pursuant to guidelines issued by the College of American Pathologists. WeThe FDA has not adopted these guidelines and we are not permitted to represent these products as effectivein vitro diagnostic products. On December 4, 2009, the FDA issued a letter to us indicating that certain of our promotional materials for our RUO tests may include diagnostic/clinical claims which may cause these products to bein vitro diagnostic tests for clinical use for which FDA clearance or approval is required. In addition, the FDA noted that the allegations in its letter may not constitute an exhaustive list of potential violations and must establish distribution controlsnoted that we are required to assurecomply with the RUO requirements for all of our products that have not received FDA clearance or approval. We responded to the FDA’s allegations in a letter dated December 14, 2009 and believe that we have taken appropriate action to modify and revise the promotional materials in light of the FDA’s concerns. However, the FDA has not responded to our tests distributed for research, method comparisonssubmission and has not confirmed its agreement with our approach. If the FDA does not agree with our approach, it could require that we take additional steps, initiate enforcement action or clinical studiesrequire that we recall or trials are used only for those purposes.withdraw certain or all of our RUO products from the market. Our failure to comply with the FDA’s regulatory requirements, obtain FDA clearance or approvals of new or existing products new indications or product modifications or enhancements that we develop in the future, any limitations imposed by the FDA on such products’ development or use, or the costs of obtaining FDA clearance or approvals could have a material adverse effect on our business.
Furthermore, molecular diagnostics-related regulatory policies are complex and continuing to develop, and itbusiness, particularly given the proportion of our business that is possible that the FDA could disagree with our interpretation of the existing regulations or that we could be exposed to additional regulation in the future. If any regulatory change results in the application of additional regulations to the molecular diagnostics industry, this could increase substantially the cost of developing and selling such testingreliant upon RUO products.
In many of the foreign countries in which we market our products, including those countries in the European Union, we are subject to extensive regulations similar to those of the FDA. The regulationAs discussed under “Business — Government Regulation,” there are additional regulatory requirements outside of the United States, including certifications, registrations or approvals that may require third-party certification of compliance with ISO 13485:2003, a quality management system standard developed by the International Organization for Standardization, or ISO. This certification must be satisfied in order for us to market our products in Europe falls primarily withinthose jurisdictions. If we fail to satisfy such requirements or obtain the European Economic Area, which consists of the fifteen member states of the European Union, as well as Iceland, Liechtenstein and Norway. The Council of the European Union (formerly the Council of the European Communities) and the Council of the European Parliament have adopted three directivesrequisite certifications, registrations or approvals in order to harmonize national provisions regulating the design, manufacture, clinical studies and trials, labeling and adverse event reporting for medical devices to ensure that medical devices marketed in member states are safe and effective for their intended uses. The member states of the European Economic Area have implemented the directives into their respective national law. Medical devices that comply with the conformity requirements of the national provisions and the directives will be entitled to bear a CE marking. Unless an exemption applies, only medical devices which bear a CE marking may be marketed within the European Economic Area. Switzerland also allows the marketing of medical devices that bear a CE marking. Due to the movement towards harmonization of standards in the European Union and the expansion of the European Union, we expect a changing regulatory environment in Europe characterized by a shift from a country-by-country regulatory system to a European Union-wide single regulatory system. Failure to receive, or delays in the receipt of, relevant foreign qualifications, such as the CE marking,these countries, it could have a material adverse effect on our international operations.
If the FDA or another regulatory agency determines that we have promoted off-label use of our products, or are not in compliance with restrictions on the marketing of products labeled for research use only, we may be subject to various penalties, including civil or criminal penalties.
The FDA and other regulatory agencies actively enforce regulations prohibiting the promotion of a medical device for a use that has not been cleared or approved by the FDA. Use of a device outside its cleared or approved indications is known as “off-label” use. If the FDA or another regulatory agency determines that our promotional materials or training constitutes promotion of an off-label use, it could require us to modify our training or promotional materials or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine and criminal penalties.
As required by the FDA, we have a policy in place requiring that our labeling and marketing practices comply with FDA regulations for products labeled for research use only. We also have a policy in place to refrain from making statements that could be considered off-label promotion of our products. Although our policy is to refrain from making statements that could be considered off-label promotion of our products or outside of the restrictions for products labeled for research use only, the FDA or another regulatory agency could conclude that we have engaged in off-label promotion or marketing of products labeled for research use only. If the FDA disagrees with the marketing of these products, we may be subject to a variety of enforcement actions ranging
from public warning letters, fines, injunctions, consent decrees and civil penalties to suspension or delayed issuance of approvals, seizure or recall of our products, total or partial shutdown of production, withdrawal of approvals or clearances already granted, and criminal prosecution. In addition, the off-label use of our products or the use of our products labeled for research use only for clinical purposes may increase the risk of injury to patients, and, in turn, the risk of product liability claims. Product liability claims are expensive to defend and could divert our management’s attention and result in substantial damage awards against us.
We may fail to receive positivefavorable clinical results from the diagnostic test applicationstests currently in development that require clinical trials, and even if we receive positivefavorable clinical results, we may still fail to receive the necessary clearances or approvals to market these tests.
We are investing in the research and development of new products to expand the menu of testing options for the INFINITI™INFINITI system. To commercialize our products, we are required to undertake time-consuming and costly development activities, sometimes including clinical trials for which the outcome is uncertain. We have submittedare in the process of finalizing the protocol for a proposed clinical protocol to the FDA for our pre-investigational device exemption (pre-IDE) meeting to determine the clinical trial necessary to support a premarket approval (PMA)PMA application to the FDA for our HPV screening test. Clinical testing under this proposedHPV-HR tests and intend to commence the clinical trial in 2013 once the protocol is anticipatedcomplete. As discussed under “Use of Proceeds,” we intend to commence in 2009.use a portion of the net proceeds of this offering to fund the clinical trial. We do not know whether clinical trials of our HPV screening testHPV-HR tests or any other pre-clinical or clinical trials will begin on time or be completed on schedule, if at all. The commencement and completion of clinical trials can be delayed for a number of reasons, including delays related to:
obtaining sufficient funding for the clinical trial;
satisfying regulatory requirements to commence a clinical trial;
reaching agreement on acceptable terms with prospective clinical research organizations, or CROs, clinical investigators and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs, clinical investigators and trial sites;
manufacturing or obtaining sufficient quantities of a product candidate for use in clinical trials;
obtaining institutional review board or IRB, approval to initiate and conduct a clinical trial at a prospective site;
identifying, recruiting and training suitable clinical investigators; and
identifying, recruiting and enrolling subjects to participate in clinical trials.
Clinical trials may also be delayed, halted or repeated as a result of ambiguous or negative interim results or unforeseen complications in testing. In addition, a clinical trial may be suspended or terminated by us, the FDA, the IRBinstitutional review board overseeing the clinical trial at issue, any of our clinical trial sites with respect to that site, or other regulatory authorities due to a number of factors, including:
failure by us, our employees, our CROs or their employees to conduct the clinical trial in accordance with all applicable FDA or other regulatory requirements or our clinical protocols;
inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;
lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct additional trials and studies and increased expenses associated with the services of our CROs and other third parties;
lack of effectiveness of any product candidate during clinical trials;
slower than expected rates of subject recruitment and enrollment rates in clinical trials;
failure of our CROs or other third-party contractors to comply with all contractual requirements or to perform their services in a timely or acceptable manner; or
unfavorable results from on-goingongoing clinical trials and pre-clinical studies.
Clinical investigations ofin vitro diagnostic tests, including our products and product candidates, typically are exempt from the investigational device exemption, or IDE, requirements. Thus, we do not need the FDA’s prior approval to conduct clinical trials onof our products, provided the testing is non-invasive, does not require an invasive sampling procedure that presents a significant risk, and does not intentionally introduce energy into the subject.subject and is not used as a diagnostic procedure without confirmation of the diagnosis by another, medically established diagnostic device or procedure. The FDA requires each sponsor of a clinical trial to make this determination in the first instance, but the FDA can review any decision. If the FDA disagrees with our decision not to submit an IDE for the clinical trials we are currently conducting, the agency may retroactively require us to submit an IDE and halt the clinical trial until the IDE is approved.
Products that appear promising during early development and preclinical studies may, nonetheless, fail to demonstrate the results needed to support regulatory approval.approval or commercial viability. Even if we receive favorable clinical results, we may still fail to obtain the necessary FDA clearance and approvals. Any such failure, or any material delay in obtaining the necessary clearance or approvals, could materially adversely affect our business, financial condition and results of operations.
Our products are subject to recalls even after receiving FDA clearance or approval, or after receiving CE-markings,affixing the CE marking, which would harm our reputation and business.
We are subject to medical device reporting orregulations (e.g., MDR, regulationsvigilance reporting) that require us to report to the FDA or governmental authorities in other countries if our products cause or contribute to a death or serious injury, or malfunction in a way that would be reasonably likely to contribute to death or serious injury if the malfunction were to recur. The FDA and similar governmental authorities in other countries have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacturing. To date, we have not conducted a product recall. A government mandated, or voluntary, recall by us could occur as a result of component failures, manufacturing errors or design defects, including defects in labeling. Any recall would divert managerial and financial resources and could harm our reputation with customers. There can be no assurance that there will not be product recalls in the future or that such recalls would not have a material adverse effect on our business.
If we fail to comply with the FDA’s Quality System Regulationregulation and similar requirements in other jurisdictions, our manufacturing could be delayed, and our product sales and profitability could suffer.
Our manufacturing processes are required to comply with the FDA’s Quality System Regulation,regulation, which covers the procedures concerning (and documentation of) the design, testing, production processes, controls, quality assurance, labeling, packaging, storage and shipping of our devices. We also are subject to similar requirements in other jurisdictions and to state requirements and licenses applicable to manufacturers of medical devices. In addition, we must engage in extensive recordkeeping and reporting and must make available our manufacturing facilities and records for periodic unscheduled inspections by governmental agencies, including the FDA, state authorities and comparable agencies in other countries. Moreover, failure to pass a Quality System Regulationregulation inspection or to comply with these and other applicable regulatory
requirements could result in disruption of our operations and manufacturing delays. Failure to take adequate corrective action could result in, among other things, significant fines, suspension of approvals, seizures or recalls of products, operating restrictions and criminal prosecutions. We cannot assure you that the FDA or other governmental authorities would agree with our interpretation of applicable regulatory requirements or that we have in all instances fully complied with all applicable requirements. Any failure to comply with applicable requirements could adversely affect our product sales and profitability.
IfThe California Department of Health Services, Food and Drug Branch audited our quality system in 2007. That audit resulted in two observations related to CAPA documentation and failure to make instructions available to employers to define how an activity is to be carried out. We responded to those observations on October 16, 2007 and have not received any further correspondence. The FDA also audited our quality system in April 2009. This audit resulted in a Form 483 notice of inspectional observations that identified eight deficiencies relating primarily to CAPA documentation. On April 30, 2009, we formally addressed the observations from the audit.
On September 22, 2009, we received a copy of the establishment inspection report, or EIR, from the FDA or another regulatory agency determines thatDistrict Director for the audit conducted in April 2009. Although we have promoted off-label use of our products, or areaddressed the audit observations from this audit, we cannot assure you that the FDA will not in compliance with restrictions on the marketing of products labeled for research use only, we may be subject to various penalties, including civil or criminal penalties, and the off-label use of our products or the use of our products labeled for research use only for clinical purposes may result in injuries that lead to product liability suits, which could be costlyraise issues relating to our business.
The FDA andactivities as a result of this or any other regulatory agencies actively enforce regulations prohibiting the promotion of a medical device for a use that has not been cleared or approved by the FDA. Use of a device outside its cleared or approved indications is known as “off-label” use. Physicians may use our products for off-label uses, as the FDA does not restrict or regulate a physician’s choice of treatment within the practice of medicine. However, if the FDA or another regulatory agency determines that our promotional materials or training constitutes promotion of an off-label use, it could require us to modify our training or promotional materials or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine and criminal penalties.
We also market tests that have not been cleared or approved for clinical diagnostic use by the FDA. These tests are labeled “For Research Use Only. Not for use in diagnostic procedures.” as required by FDA regulations. These tests are marketed to allow for the collection of research data, and, in some cases, are used by laboratories certified under CLIA for clinical applications in laboratory-developed tests pursuant to guidelines issued by the College of American Pathologists. These guidelines have not been adopted by the FDA and we are not permitted to represent these products as effectivein vitro diagnostic products. We must also establish distribution controls to assure that our tests distributed for research, method comparisons or clinical studies or trials are used only for those purposes.
Although our policy is to refrain from statements that could be considered off-label promotion of our products or outside of the restrictions for products labeled for research use only, the FDA or another regulatory agency could conclude that we have engaged in off-label promotion or marketing of products labeled for research use only without the necessary clearance or approval. If the FDA disagrees with the marketing of these products, we may be subject to a variety of enforcement actions ranging from public warning letters, fines, injunctions, consent decrees and civil penalties to suspension or delayed issuance of approvals, seizure or recall of our products, total or partial shutdown of production, withdrawal of approvals or clearances already granted, and criminal prosecution. In addition, the off-label use of our products or the use of our products labeled for research use only for clinical purposes may increase the risk of injury to patients, and, in turn, the risk of product liability claims. Product liability claims are expensive to defend and could divert our management’s attention and result in substantial damage awards against us.audit.
We may not be able to compete effectively if we are unable to protect our proprietary rights.
Our success depends in part on our ability to protect our intellectual property rights, which involve complex legal, scientific, and factual questions and uncertainties. We rely upon patent, trade secret, copyright and contract laws to protect proprietary technology and trademark law to protect brand identities. We cannot be certain that we have taken
adequate steps to prevent misappropriation of our technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to ours. We also cannot be certain that we have taken adequate steps to protect our inventions through patents or our brand identities through trademarks. To date we have not sought trademark protection for our brand identities in countries outside of the United States, and this may adversely affect our ability to prevent unauthorized use of these brand identities after we, or our distributors, have expended resources to increase their recognition. Our success depends in part on our ability to obtain and maintain patent protection for our products and their use, maintain trade secret protection and operate without infringing upon the proprietary rights of others. Our policy is to protect our proprietary technology through patents, where appropriate, and in other cases, through trade secrets. In addition, we rely on the licenses of patents of third parties. We cannot assure you that any patent applications filed by, assigned to, or licensed to us will be granted, that any patents issued to or licensed by us will provide us with any competitive advantages or adequate protection for inventions, that any patents issued to or licensed by us will not be challenged, invalidated, held to be unenforceable, or circumvented by others or that issued patents, or patents that may be issued, will provide protection against competitive products or otherwise be commercially valuable.
If we fail to obtain and/or maintain sufficient patent protection for our products, our ability to gainrealize a competitive advantage for these products willcould be materially affected, materially which may have a material adverse effect on our results of operations. In particular, if we fail to obtain and/or maintain patent protection, competitors may be able to produce products that would be directly competitive with our products using similar or identical processes. Furthermore,processes with impunity. Moreover, should any government or court limit or alter patent rights relating to specific genetic information or diagnostic methods, our business could be materially and adversely affected.
Patent law relating to the scope of claims in the fields of healthcare and biosciences generally, and molecular diagnostics in particular, is evolving and our patent rights are subject to this uncertainty. For example, on March 29, 2010, the U.S. District Court in New York invalidated seven patents held by Myriad Genetics related to the genes BRCA1 and BRCA2. Mutations in these genes have been associated with breast cancer, indicating that such patents “are directed to a law of nature and were therefore improperly granted”; however, that decision was overruled by the Federal Circuit, Association for Molecular Pathology v. USPTO, Fed. Cir., No. 2010-1406, 8/16/2012, which held that isolated BRCA1/2 DNA molecules used for diagnosing increased breast and ovarian cancer risk are eligible for patent protection under 35 U.S.C. §101. If patents covering naturally occurring genes are invalidated, it could adversely impact the scope of our patent protection relating to naturally occurring genes and certain aspects of their diagnostic methods.
Our patent rights on our products might conflict with the patent rights of others, whether existing now or in the future. We cannot assure you that the inventors of the patents and applications that we own and license were the first to invent or the first to file on the claimed inventions, and if others were determined to be the first inventors, such determination could materially reduce or even eliminate the value of such patents. We also cannot assure you that a third party does not have or will not obtain patents that dominate the patents we own or license now or in the future. Consequently, we could be subject to charges of patent infringement. The defense and prosecution of patent claims are both costly and time-consuming even if the outcome is ultimately in our favor. An adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease selling the affected products. As our products are distributed in
the marketplace, we expect to face opposition to our intellectual property by competitors. If we face opposition to our intellectual property, we likely will incur substantial costs defending our patents.
Additionally, we rely on trade secrets and proprietary know-how, which we seek to protect, in part, by confidentiality agreements with our collaborators, employees and consultants. We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any such breach or that our trade secrets will not otherwise become known or be independently developed by competitors.
Our success will depend partly on our ability to operate without infringing or misappropriating the proprietary rights of others and on our ability to license intellectual property from third parties for certain test applications and manufacturing processes needed for our business.others.
Thein vitro diagnostics industry has a history of patent litigation and likely will continue to experience patent litigation suits. A third party could claim that we are infringing a patent, which could prevent us from selling our INFINITI analyzers and tests, or from developing new technologies we expect to utilize or products we expect to sell. We may be sued for infringing or misappropriating the proprietary rights of others. We may have to pay substantial damages, including treble damages and the opposing party’s attorney fees, for past infringement if it is determined that our products or their use infringe on a third party’s proprietary rights. In addition, in the future we may be unableneed to obtain a necessary licenseone or more licenses to the intellectual property of others, whichand the failure to obtain such licenses could prevent us from manufacturing or selling the affected products. Thein vitro diagnostics industry has
Our INFINITI system utilizes a historywide variety of patent litigationtechnologies and likely will continue to experience patent litigation suits. A number of patents have been issued and may yet be issued covering certain fields of use that could prevent us from developing our technologies, or particular applications, or relating to certain other aspects of technologywe cannot assure you that we utilizehave identified or expectcan identify all inventions and patents that may be infringed by the development, manufacture, sale and use of our INFINITI system, including its various components. If relevant patents are upheld as valid and enforceable and we are found to utilize. Our inabilityinfringe, we could be prevented from selling our system unless we can obtain a license to obtainuse technology or maintain any necessary patent rights could have a material adverse effectideas covered by such patents or are able to redesign our INFINITI system to avoid infringement. A license may not be available at all or on commercially reasonable terms, and we may not be able to redesign our business, financial condition or results of operations.INFINITI system to avoid infringement.
The landscape for intellectual property rights in the genomic field of genetics is complex. Although a significant amount of intellectual property in the genomic field of genetics is already in the public domain, some of our existing and future test applicationstests for the INFINITI™INFINITI system could require modification, or may require the acquisition of certain rights from third parties. In the eventparties related to those tests which we needhave not yet obtained, to acquireavoid infringement. We may not be able to make such modifications or obtain such rights at all or on terms that are commercially acceptable. If we sell an otherwise infringing test without such modifications or such rights, a third party patent holder may sue us for patent infringement. If a court finds that we infringed the third party’s patent and that the infringement was willful, we could be ordered to pay treble damages and the patent holder’s attorneys’ fees, and we may needbe enjoined from further selling our tests, which may materially impact our business, financial condition or results of operations.
We also enter into collaborative agreements with research and academic institutions for the development of additional or enhanced tests to be run on our system. Under these agreements, the institution typically retains the intellectual property rights to any inventions or discoveries made solely by the institution, while we receive a right to negotiate a license to these intellectual property rights. If these institutions independently develop intellectual property that is necessary for us to sell new tests that arise from the collaboration, there can be no assurance that we will be able to obtain a license through our negotiation rights. Acquisition of any necessary intellectual property rights from third parties related to any of our existing or future tests, including licenses to patents, could also be time-consuming and expensive, and could require us to pay significant royalties to third parties. And likewise any such rights may not be available on commercially reasonable terms or at all.
We cannot assure you that licenses toany third party intellectual property rights to use certain technology or biomarkers that we determine are necessary to our business and the development of new tests for the INFINITI system can be acquired from third parties on commercially reasonable terms or at all. If suchResulting limitations on our ability to offer certain tests are not available to us on commercially reasonable terms or otherwise
expand our menu of test applications available on the INFINITI™ system will be reduced, which maytests could have a material adverse effect on our business, financial condition and results of operations and negatively impact a key basis upon which we compete.
We have hired and will continue to hire individuals who have experience in molecular diagnostics and these individuals may have confidential trade secret or proprietary information of third parties. We cannot assure you that these individuals will not use this third-party information in connection with performing services for us or otherwise reveal this third-party information to us. Thus, we could be sued for misappropriation of proprietary information and trade secrets. Such claims are expensive to defend and could divert our attention and result in substantial damage awards and injunctions that could have a material adverse effect on our business, financial condition or results of operations.
We may need to initiate lawsuits to protect or enforce our patents or other proprietary rights, which would be expensive and, if unsuccessful, may cause us to lose some of our intellectual property rights.
To protect or enforce our patent rights, it may be necessary for us to initiate patent litigation proceedings against third parties, such as infringement suits or interference proceedings. These lawsuits would be expensive, take significant time and would divert management’s attention from other business concerns. These lawsuitsIn the event that we seek to enforce any of our patents against an infringing party, it is likely that the party defending the claim will seek to invalidate the patents we assert, which could put our patents at risk of being invalidated, held unenforceable, or interpreted narrowly, and our patent applications at risk of not being issued. Further, these lawsuits may provoke the defendants to assert claims against us. The patent position ofin vitro diagnostics firms is highly uncertain, involves complex legal and factual questions and recently has been the subject of much litigation. We cannot assure you that we will prevail in any of such suits or proceedings or that the damages or other remedies awarded to us, if any, will be commercially valuable.
We are subject to litigation, which, if adversely determined, could cause us to incur substantial losses.
We are, from time to time, during the normal course of operating our businesses, subject to various litigation claims and legal disputes. Some of the litigation claims may not be covered under our insurance policies or our insurance carriers may seek to deny coverage. As a result, we might be required to incur significant legal fees, which may have a material adverse impact on our financial position. In addition, because we cannot predict the outcome of any action, it is possible that, as a result of current and/or future litigation, we will be subject to adverse judgments or settlements that could significantly reduce our earnings or result in losses.
For example, in November 2005, Oxford Gene Technology IP Ltd, or OGT, of Oxford, England, approached us with respect to licensing one of OGT’s U.S. patents. OGT maintained that we should license the technology covered by the relevant patent claims and offered licensing terms requiring substantial upfront payment and escalating licensing fees. The OGT patent expires in May 2009. On July 23, 2007, we filed a complaint for declaratory judgment against OGT in the U.S. District Court, Central District of California, requesting a judicial ruling that OGT’s asserted claims are invalid and not infringed by us. The District Court dismissed the complaint on jurisdictional grounds. On February 12, 2008, we appealed the dismissal to the U.S. Court of Appeals for the Federal Circuit, which appeal is currently pending. On August 31, 2007, we filed a request for reexamination of the relevant patent claims, which has been joined with a request for reexamination filed by two other parties. On July 17, 2008, the U.S. Patent and Trademark Office, or USPTO, rejected the patent claims in the joined reexamination request filed by another party. OGT now has the opportunity to amend its claims and/or re-argue the grounds for rejection, and the USPTO should issue a final office action in response to any such amendments
or arguments. In the event that the USPTO allows OGT’s patent claims, and OGT successfully asserts those claims against us, the outcome of that lawsuit could have a negative impact on our financial position, cash flows, and results of operations.
If our products contain undetected defects or errors or do not operate as expected, we could incur significant unexpected expenses, experience product returns and lost sales, suffer damage to our brand and reputation and be subject to product liability or other claims and product recalls and other field or regulatory actions.
Our products are complex and may contain undetected defects, errors or failures, particularly when first introduced or when new versions are released. Some errors and defects may be discovered only after a product has been installed and used by the customer. To the extent our products incorporate technologies of third parties, we will be dependent on the reliability of these technologies. For example, our INFINITI™ Analyzer incorporates a leading third party operating system, and we are therefore dependent on the third party to notify its customers when it makes changes to the operating system. Due to problems associated with changes made to the third party operating system, we did not ship any INFINITI™ Analyzers during the quarter ended March 31, 2008. If our products contain undetected defects or errors or do not operate as expected, we could experience decreased sales and increased product returns, loss of customers and market share and increased service, warranty and insurance costs. In addition, our reputation and brand could be damaged, and we could face potential legal claims regarding our products and be subject to product recalls or corrections and other field or regulatory actions. A successful product liability or other claim or product recall could result in negative publicity and further harm our reputation, result in unexpected expenses and materially adversely impact our business, financial condition and results of operations.
We may be held liable for any inaccuracies associated with our diagnostic test applications, which may require us to defend ourselves in costly litigation.
We In addition, we may be subject to claims resulting from false identification of genetic variations or other misdiagnoses made in connection with our test applications.tests. Litigating any such claims could be costly. We could expend significant funds during any litigation proceeding brought against us. Further, if a court were to require us to pay damages to a plaintiff or if we agree to pay damages in settlement of a claim, the amount of such damages could materially adversely affect our business, financial condition and results of operations.
We may beare subject, directly or indirectly, to federal and state healthcare fraud and abuse and other laws and regulations and could face substantial penalties if we are unable to fully comply with such laws.
While we do not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, many healthcare laws and regulations apply to our business. For example, we could beare subject to healthcare fraud and abuse and patient privacy regulation and enforcement by both the federal government and the states in which we conduct our business. TheThese healthcare laws and regulations that may affect our ability to operate include, for example:
the federal Anti-Kickback Law, which prohibits, among other things, persons or entities from soliciting, receiving, offering or providing remuneration, directly or indirectly, in return for or to induce either the referral of an individual for, or the purchase order or recommendation of, any item or services for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs;
federal false claims laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent, and which may apply to entities like us to the extent that our interactions with customers may affect their billing or coding practices;
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the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, which established new federal crimes for knowingly and willfully executing a scheme to defraud any healthcare benefit program or making false statements in connection with the delivery of or payment for healthcare benefits, items or services, as well as imposingand which imposed certain requirements relating to the privacy, security, and transmission of individually identifiable health information; and
state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws, which may apply to items or services reimbursed by any third-party payor, including commercial insurers, and state laws governing the privacy of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.insurers.
If our operations, or our sales techniques or product placement strategies, are found to be in violation of, or to encourage or assist the violation by third parties of, any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs, and the curtailment or restructuring of our operations. We currently do not have a comprehensive compliance program concerning our relationships with healthcare providers and we may need to implement such a program as our operations grow. Any penalties, damages, fines, exclusions, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that many of these laws are broad and their provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.
If third-party payors do not reimburse our customers for the use of our clinical diagnostic products or if they reduce reimbursement levels, our ability to sell our products will be harmed.
We sell our products primarily to reference laboratories and hospital laboratories, substantially all of which receive reimbursement for the healthcare services they provide to their patients from third-party payors, such as Medicare and Medicaid, private insurance plans and managed care programs. These third-party payors may deny reimbursement if they determine that a medical product was not used in accordance with cost-effective treatment methods, as determined by the third-party payor, or was used for an unapproved indication. Third-party payors also may refuse to reimburse for procedures and devices deemed to be experimental, or medically unnecessary.
In the U.S.,United States, the American Medical Association assigns specific Current Procedural Terminology, or CPT, codes, which are necessary for reimbursement of diagnostic tests. Once the CPT code is established, the Centers for Medicare and Medicaid Services establish reimbursement payment levels and coverage rules under
Medicaid and Medicare, and private payors independently establish rates and coverage rules. Although the tests performed by our tests in development havethere are previously assigned CPT Codes,codes for the tests that we cannot guarantee thatoffer and our tests are covered by such CPT codes and are therefore approved for reimbursement by Medicare and Medicaid as well as most third-party payors. Additionally,payors, certain of our future products may not be approved for reimbursement.
Third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for medical products and services. Increasingly,
Medicare, Medicaid and other third-party payors are challenging the prices charged for medical services, including clinical diagnostic tests. Levels of reimbursement may decrease in the future, and future legislation, regulation or reimbursement policies of third-party payors may adversely affect the demand for and price levels of our products. If our customers are not reimbursed for our products, they may reduce or discontinue purchases of our products, which would cause our revenuesrevenue to decline.
Our ability to use our net operating loss and research and development credit carryforwards may be subject to limitations.
As of December 31, 2007,June 30, 2012, we had approximately $25.1$68.1 million of net operating loss carryforwards and $0.6$1.1 million or research and development credit carryforwards for U.S. federal tax purposes. As of December 31, 2011, we had approximately $67.9 million of net operating loss carryforwards and $1.0 million of research and development credit carryforwards for U.S. federal income tax purposes. Realization of any tax benefit from our carryforwards is dependent on: (1)(i) our ability to generate future taxable income, and (2)(ii) the absence of certain “ownership changes” of our common stock. An “ownership change,” as defined in the applicable federal income tax rules, could place significant limitations, on an annual basis, on the amount of our future taxable income whichthat may be offset by our carryforwards. Such limitations, in conjunction with the net operating loss expiration provisions, could effectively eliminate our ability to utilize a substantial portion of our carryforwards.
ItAlthough we have not conducted a study to make this determination, it is possible that we have incurred one or more “ownership changes” in the past, in which case our ability to use our carryforwards may be limited. In addition, the issuance of shares of our common stock (including due to this offering) could cause an “ownership change” which could also limit our ability to use our carryforwards. Other issuances of shares of our common stock which could cause an “ownership change” include the issuance of shares of common stock upon future conversion or exercise of outstanding options and warrants.
We may be unsuccessful in our long-term goal of expanding our product offerings outside the U.S.United States.
For the nine months ended December 31, 2005, the years ended December 31, 20062010 and 20072011 and the threesix months ended March 31, 2008, 20%June 30, 2011 and 2012, 52%, 82%22%, 30%42% and 19%7%, respectively, of our revenues weresales revenue was from international sales. To the extent we continue offering our productscustomers in countries outside the U.S., we will beUnited States, including countries in Europe, Asia, the Middle East and South America. We are dependent on third-party distribution relationships.distributor relationships in these countries to market, sell and provide customer and technical support for our products. Distributors may not commit the necessary resources to market, sell and sellsupport our products to the level of our expectations. If distributors do not perform adequately, or we are unable to locate distributors in particular geographic areas, our ability to realize long-term international revenue growth would be materially adversely affected.
Furthermore, there are risks inherent in doing business internationally, including:
currency exchange rate fluctuations, devaluations and other conversion restrictions;
imposition of governmental controls and changes in laws, regulations or policies;
political and economic instability;
changes in U.S. and other national government trade policies affecting the markets for our products; and
changes in regulatory practices, tariffs and taxes.taxes; and
currency exchange rate fluctuations, devaluations and other conversion restrictions.
Any of these factors could have a material adverse effect on our business, results of operations or financial condition.
Manufacturing risks, shortages and inefficiencies may adversely affect our ability to produce products.
We must manufacture or engage third parties to manufacture components of our products in sufficient quantities and on a timely basis, while maintaining product quality and acceptable manufacturing costs and complying with regulatory requirements. In determining the required quantities of our products and the manufacturing schedule, we must make significant judgments and estimates based on historical experience, inventory levels, current market trends and other related factors. Because of the inherent nature of estimates, there could be significant differences between our estimates and the actual amounts of products we require.
We may also experience unforeseen technical complications in the processes we use to develop, manufacture, customize or receive orders for our products. Such complications could materially delay or limit the use of products we attempt to commercialize, substantially increase the anticipated cost of our products or prevent us from implementing our processes at appropriate quality and scale levels, thereby causing our business to suffer.
We have relationships with suppliers who are sources of raw materials and components for our product offerings. We do not have long-term agreements with our suppliers and have not arranged for alternate suppliers. It may be difficult to find alternate suppliers in a timely manner and on terms acceptable to us. Additionally, the availability of some components of the INFINITI system may be limited as only a few outside vendors produce them. In the event that we become subject to a shortage of components or raw materials, our business, financial condition and results of operations could be materially adversely affected.
We have limited experience with the specialized film coating process needed to produce our BioFilmChip Microarrays, and there are limited alternative sources for this aspect of our manufacturing process.
Our BioFilmChip microarrays are formed by coating polyester film with several layers of emulsion. To date, we have outsourced the special film coating process needed to produce our BioFilmChip microarrays. In connection with the establishment of manufacturing operations at our Vista, California facility, we purchased the film coating equipment required to conduct this process ourselves. We have not yet installed this equipment and have no experience as a company conducting the film coating process. If we are unable to successfully operate and maintain this equipment and produce the coated film necessary for our BioFilmChip microarrays, we will have to continue to outsource this operation to a third party. Film coating capacity is limited and is becoming less available in the marketplace as film vendors move away from analog formats and focus increasingly on digital formats. Although we believe we have adequate coated film for the foreseeable future, we cannot guarantee that we would be able to obtain an alternative supply if we are unable to manufacture the coated film ourselves.
We will need to expand manufacturing capacity by ourselves or with third parties.
We will need either to either continue to build internal manufacturing capacity or contract with one or more manufacturing partners, or both. We currently rely solely on internal manufacturing of our end products. Due to the complexity of our manufacturing process and the advanced technologies we employ, we may encounter difficulties in manufacturing our end products. We may not be able to build manufacturing capacity internally or find one or more suitable manufacturing partners, or both, to meet the volume, regulatory and quality requirements necessary to be successful in the market. If our products do not consistently meet our customers’ performance expectations or the requirements of the FDA and authorities in other countries, we may be unable to generate sufficient revenuesrevenue to become profitable. Significant additional resources, implementation of additional manufacturing equipment and changes in our manufacturing processes and organization may be required for the scale-up of each new product prior to commercialization or to meet increasing customer demand once commercialization begins, and this work may not be successfully or efficiently completed. Any delay in establishing or inability to expand our manufacturing capacity could delay our ability to develop or sell our products, which would result in lost revenue and materially adversely harm our business, financial condition and results of operations.
Our business may be materially adversely affected if we are unable to find alternate suppliers.
We have relationships with suppliers who are sources of raw materials and components for our product offerings. We have not arranged for alternate suppliers, and it may be difficult to find alternate suppliers in a timely manner and on terms acceptable to us. Additionally, some of the components of the INFINITI™ system are produced by only a few outside vendors. For example, the BioFilmChip™ Microarray consists of polyester film, which is coated by several layers of emulsion to form the microarray. Film coating capacity is becoming less available in the marketplace as film vendors move away from analog formats and focus increasingly on digital formats. Diminishing film coating capacity could limit our ability to produce quantities of our BioFilmChip™ Microarrays that are adequate for our business. Although we believe we have adequate coated film for the foreseeable future, in the event that we become subject to a shortage of coated polyester film or other raw materials, our business, financial condition and results of operations could be materially adversely affected.
Our business and future operating results may be adversely affected by events outside of our control.
We develop and manufacture the INFINITI™ system in our facility located in Carlsbad,Vista, California. This facility andAny damage to our facilities or the manufacturing equipment we use would be costly to replace and could require substantial lead timelead-time to repair or replace. Our business and operating results may be harmed due to interruption of our manufacturing by events outside of our control, including earthquakes tornadoes and fires. Other possible disruptions may include power loss and telecommunications failures. In the event of a disruption, we may lose customers and we may be unable to regain those customers thereafter. Our insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.
We use hazardous chemicals and biological materials and infectious diseases in our business. Any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly.
Our research and development and manufacturing processes involve the controlled use of hazardous materials, including chemicals, and biological materials and infectious diseases.materials. Our operations produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. We may be sued for any injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our insurance coverage and our total assets. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these hazardous materials and specified waste products, as well as the discharge of pollutants into the environment and human health and safety matters. Compliance with environmental laws and regulations may be expensive, and may impair our research, development and production efforts. If we fail to comply with these requirements, we could incur substantial costs, including civil or criminal fines and penalties, clean-upcleanup costs, or capital expenditures for control equipment or operational changes necessary to achieve and maintain compliance. In addition, we cannot predict the impact on our business of new or amended environmental laws or regulations, or any changes in the way existing and future laws and regulations are interpreted and enforced.
Risks relatingWe will incur increased costs as a result of being a public company, and our management will be required to devote substantial time to new compliance matters.
We will incur significant legal, accounting, and other expenses as a public company, including costs resulting from public company reporting obligations under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the rules and regulations regarding corporate governance practices, including those under the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Act, and the listing requirements of the NASDAQ Global Market.
Our management and other personnel will need to devote a substantial amount of time to ensure that we comply with all of these requirements. Moreover, despite recent reforms made possible by the JOBS Act, the reporting requirements, rules, and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly, particularly after we are no longer an “emerging growth company.” Any changes that we make to comply with these obligations may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis, or at all.
We also expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These factors could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, particularly to serve on our audit and compensation committees, or as executive officers.
As a public company, we will be subject to the requirements related to Section 404 of the Sarbanes-Oxley Act. If we are unable to comply with these requirements in a timely manner, it may affect the reliability of our internal control over financial reporting and negatively impact our business and stock price.
Beginning with our annual report on Form 10-K for the year ending December 31, 2013, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal controls over financial reporting beginning with our annual report on Form 10-K following the later of the year following our first annual report required by the Securities and Exchange Commission, or the SEC, and the date on which we are no longer an “emerging growth company.” We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
The process of designing and implementing effective internal controls and procedures is a continuous effort that requires us to anticipate and react to changes in our business and economic and regulatory environments. We cannot assure you that our efforts will be adequate to satisfy our reporting obligations as a public company or that we will be able to successfully complete the procedures and certification and attestation requirements related to Section 404 of the Sarbanes-Oxley Act or that we or our independent registered public accounting firm will not identify additional material weaknesses or significant deficiencies in our internal control over financial reporting. If we identify any reason that we cannot certify as to the effectiveness of our internal control over financial reporting, we could incur additional costs remedying the cause of our failure to certify as to the effectiveness of our internal control over financial reporting, and our reputation, investor perceptions of us and the price of our common stock could be materially adversely affected and you may not be able to rely on our financial statements.
Our international operations are subject to trade and anti-corruption laws and regulations.
Due to the international scope of our operations, we are subject to a complex system of import- and export-related laws and regulations, including U.S. regulations issued by the Bureau of Industry and Security and the Office of Foreign Assets Control, as well as the counterparts of these agencies in other countries. Any alleged or actual violations of these U.S. and foreign regulations may subject us to government scrutiny, investigation and civil and criminal penalties, and may limit our ability to import or export our products or to provide services outside the United States. We cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner in which existing laws might be administered or interpreted.
In addition, the U.S. Foreign Corrupt Practices Act and similar foreign anti-corruption laws generally prohibit companies and their intermediaries from making improper payments or providing anything of value to improperly influence foreign government officials for the purpose of obtaining or retaining business, or obtaining an unfair advantage. Recent years have seen a substantial increase in the global enforcement of anti-corruption laws. Our international distributors are domiciled in areas of the world with laws, rules and business practices that differ from those in the United States. As a result, we face the reputational and legal risk that our international distributors will violate applicable laws, rules and business practices. If we or our international distributors are determined to be in violation of these laws, rules and business practices, it may result in severe criminal or civil sanctions for us or our distributors, could disrupt our business, and could result in an adverse effect on our reputation, business and results of operations or financial condition.
Risks Relating to this Offering and our Common Stock
There has been no prior market for our common stock, and an active trading market may not develop.
Prior to this offering, there has been no public market for our common stock. An active trading market may not develop following the closing of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value and increase the volatility of your shares. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.
If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgradeWe are an “emerging growth company” and as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.
We are an “emerging growth company” as defined in the priceJOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock could decline.
Theless attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. Thestock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock could decline if onethat is held by non-affiliates exceeds $700.0 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
Under Section 107(b) of the JOBS Act, emerging growth companies can delay adopting new or more equity research analysts downgrade our stockrevised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or if those analysts issuerevised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other unfavorable commentary or cease publishing reports about us or our business.public companies that are not emerging growth companies.
The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for investors purchasing shares in this offering.
The initial public offering price for the shares of our common stock sold in this offering will be determined by negotiation between the representatives of the underwriters and us. This price may not reflect the market price of our common stock following this offering. In addition, the market price of our common stock is likely to be highly volatile and may fluctuate substantially due to many factors, including:
actual or anticipated fluctuations in our results of operations;
variance in our financial performance from the expectations of market analysts;
conditions and trends in the markets we serve;
changes in our pricing policies or the pricing policies of our competitors;
legislation or regulatory policies, practices or actions;
the announcements of significant new products, contracts, acquisitions or strategic alliances by us or our competitors;
the commencement or outcome of litigation;
our ability to repay remaining indebtedness after completion of this offering;
our sale of common stock or other securities in the future or sales of our common stock by our significant stockholders;
changes in market valuation or earnings of our competitors;
the trading volume of our common stock;
the loss of key personnel;
changes in the estimation of theestimated future size and growth rate of our markets;
general economic conditions; and
general volatility of the stock market.
These broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against that company. Such litigation, if instituted against us, could result in substantial costs and a diversion of management’s attention and resources, which could materially harm our financial condition and results of operations.
If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.
The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about our business and us. The price of our stock could decline if one or more equity research analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about our business or us.
We currently do not intend to pay dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.
We currently do not plan to declare dividends on shares of our common stock infor the foreseeable future. See “Dividend Policy” for more information. Consequently, your only opportunity to achieve a return on your investment in our company will be if the market price of our common stock appreciates and you sell your shares at a profit. There is no guarantee that the price of our common stock that will prevail in the market after this offering will ever exceed the price that you pay. In addition, the lack of dividends may limit the number of potential buyers of our common stock.
Future sales of our common stock may depress our share price.
After this offering and giving effect to the use of proceeds therefrom, we will have shares of common stock outstanding. Sales of substantial amounts of our common stock in the public market following this offering, or the perception that these sales may occur, could cause the market price of our common stock to decline. After the lock-up agreements pertaining to this offering expire, additional stockholders will be able to sell their shares in the public market, subject to legal restrictions on transfer. As described in “Shares Eligible for Future Sale — Registration Rights,” we also have granted certain of our security holders registration rights which, subject to certain limitations, will permit them to cause us to file a registration statement with respect to the registrable securities held by them. As soon as practicable upon completion of this offering, we also intend to file a registration statement covering shares of our common stock issuedissuable upon exercise of outstanding stock options or reserved for future issuance under our equity incentive and stock option plan.purchase plans. We may also sell additional shares of common stock in subsequent public offerings, which may materially adversely affect market prices for our common stock. See “Shares Eligible for Future Sale” for more information.
We have broad discretion in the use of the net proceeds from this offering, and our investment of these proceeds may not yield a favorable return.
Our management will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes described in “Use of Proceeds.” Accordingly, you will have to rely upon the judgment of our management with respect to the use of the proceeds. Our management may spend a portion or all of the net proceeds from this offering in ways that our stockholders may not desire or that may not yield a significant return or any return at all. Of the net proceeds from this offering, we intend to use approximately $5.7 million to satisfy outstanding accounts payable to advisers and service providers incurred in connection with our prior capital raising activities conducted from 2008 through 2010, and approximately $ million to retire existing debt obligations. The payment of these amounts will not enhance our business operations or increase our revenues. The failure by our management to effectively apply these funds effectivelythe remaining net proceeds from this offering could harm our business. Pending their use, we may also invest the net proceeds from this offering in a manner that does not produce income or that loses value.
As a new investor, you will experience immediate and substantial dilution as a result of this offering.
The initial public offering price of our common stock will be considerably more than the net tangible book value per share of our outstanding common stock. Accordingly, investors purchasing shares of common stock in this offering will:
pay a price per share that substantially exceeds the value of our assets after subtracting liabilities; and
contribute % of the total amount invested to fund our company, but will own only % of the shares of common stock outstanding after this offering and the use of proceeds therefrom.
To the extent that outstanding stock options and warrants are exercised, there will be further dilution to new investors. See “Dilution” for more information.
Certain provisions of our corporate governing documents and Delaware Lawlaw could make an acquisition of our company more difficult.
Upon completion of this offering, our amended and restatedOur certificate of incorporation and bylaws will contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. For example, our certificate of incorporation and bylaws will:bylaws:
authorize the issuance of preferred stock that can be created and issued by our board of directors without prior stockholder approval, commonly referred to as “blank check” preferred stock, with rights senior to those of our common stock;
provide that the directors on our board may be divided into three classes and that the term of the directors in each class be staggered, such that only the directors of one class are up for election in each annual meeting;
limit the persons who can call special stockholder meetings;
provide that a supermajority vote of our stockholders is required to amend our bylaws and some portions of our amended and restated certificate of incorporation and amended and restated bylaws;incorporation;
establish advance notice requirements to nominate persons for election to our board of directors or to propose matters that can be acted on by stockholders at stockholder meetings;
do not provide for cumulative voting in the election of directors; and
provide for the filling of vacancies on our board of directors between annual meetings by action of a majority of the directors and not by the stockholders.
These and other provisions in our organizational documents could allow our board of directors to affect your rights as a stockholder in a number of ways, including making it more difficult for stockholders to replace members of the board of directors. Because our board of directors is responsible for approving the appointment of members of our management team, these provisions could in turn affect any attempt to replace the current
management team. These provisions could also limit the price that investors would be willing to pay in the future for shares of our common stock.
In addition, upon our reincorporation, we will beare governed by the provisions of Section 203 of the Delaware General Corporation Law, or DGCL, which, subject to certain exceptions, imposesimpose certain restrictions on mergers and other business combinations between us and any holder of 15% or more of our common stock.stock and us. See “Description of Capital Stock — Provisions of our Certificate of Incorporation and Bylaws and Delaware Law that May Have an Anti-Takeover Effect.”
The requirements of being a public company may strain our resources and distract management.Special Note Regarding Forward-Looking Statements
As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, our administrative staff will be required to perform additional tasks. For example, underThis prospectus contains forward-looking statements within the meaning of Section 40427A of the Sarbanes-OxleySecurities Act of 2002,1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to future events or our future financial performance. All statements in this prospectus other than statements of historical fact, including statements regarding future events, our future financial performance, business strategy and plans, predictions about our markets, and objectives of management for future operations, are forward-looking statements.
In some cases, you can identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “potential,” “predicts,” “should,” “will” or “would,” or the negative of these terms or other comparable terminology. Forward-looking statements used in this prospectus address topics such as, among other things:
our business strategy;
our development of new products;
our anticipated growth strategies;
anticipated trends in our business, trends in the market for our annual report on Form 10-Kproducts and trends in the adoption of new technologies;
competition and competitive factors or trends in our market;
uncertainty regarding our future operating results, including our projected sales, net sales, financial results, cash flows, pricing, and similar items;
our intended use of proceeds;
our ability to continue to control costs and maintain quality;
anticipated changes in our expenses over future periods;
the protection or acquisition of, investment in, or legal proceedings regarding, our intellectual property;
our ability to obtain FDA or other regulatory clearances or approvals;
the regulatory environment for the first full fiscal year after the completion of this offering, we will need to document and test our internal control procedures, our management will need to assess and report on our internal control over financial reportingproducts and our independent registered public accounting firm will needbusiness, and our ability to issue an opinion on comply with and adapt to such environment; and
the effectiveness of those controls. Furthermore, if we identify any issuesplans, objectives, expectations and intentions expressed in complying with those requirements (for example, if wethis prospectus that are not historical facts.
These statements are only predictions. Actual events or our independent registered public accounting firm identifies a material weakness or significant deficiency in our internal control over financial reporting), we could incur additional costs rectifying those issues, and the existence of those issues could materially adversely affect us, our reputation, investor perceptions of us and the price of our common stock.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related regulations implemented by the Securities and Exchange Commission and NASDAQ along with changes in accounting requirements and financial reporting, are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. We are currently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of additional costs weresults may incur or the timing of such costs.differ materially. These laws, regulations and standardsforward-looking statements are subject to varying interpretations,a number of risks, uncertainties and assumptions, including those described in many cases due“Risk Factors.” We cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligation to their lack of specificity, and,publicly update or revise any forward-looking statements, whether as a result their applicationof new information, future events or otherwise, or to conform these statements to actual results or changes in practice continueour expectations.
Moreover, we operate in a competitive and rapidly changing environment. New risks emerge from time to evolve as guidancetime. It is provided by regulatorynot possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and governing bodies.assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
Market, Industry and Other Data
Unless otherwise indicated, information contained in this prospectus concerning our industry and the market segments in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, on assumptions that we have made that are based on that information and other similar sources and on our knowledge of the markets for our products. This could resultinformation involves a number of assumptions and limitations, and you are cautioned not to give undue weight to or reliance on such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in continuingwhich we operate is necessarily subject to a high degree of uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodiesrisk due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against usa variety of factors, including those described in “Risk Factors” and our business may be harmed. We also expect that being a public companyelsewhere in this prospectus. These and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. Theseother factors could also make it more difficult for uscause results to attractdiffer materially from those expressed in the estimates made by the independent parties and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.by us.
We estimate that our net proceeds (after deducting underwriting discounts and commissions payable to the underwriters and our estimated offering expenses) from this offering will be approximately $ million ($ million if the underwriters exercise their over-allotmentoverallotment option in full), based upon an assumed initial public offering price of $ per share, which is the midpoint of the range listed on the cover page of thusthis prospectus. A $1.00 increase or decrease in the assumed initial public offering price of $ per share would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and our estimated offering expenses. Similarly, an increase or decrease in the number of shares we sell in the offering will increase or decrease, as applicable, our net proceeds by an amount equal to such number of shares multiplied by the public offering price, less underwriting discounts and commissions.
WeFrom the anticipated net proceeds from this offering, we anticipate that we will use (i) approximately $$10.0 million to expandfund the expansion of our commercial infrastructuresales force, enhance our international distributor network, and increase our marketing and promotional activity and business development efforts, (ii) approximately $10.0 million in 2013 and 2014 in support of a PMA for our HPV-HR tests and of 510(k) and CE mark studies and submissions for several tests associated with womens’ health and personalized medicine, (iii) approximately $3.0 million to fund research and development activities to add new or enhanced tests to our menu, (iv) approximately $3.0 million to fund the expansion of our manufacturing capacity and (ii)efficiency, including purchasing automation equipment, (v) approximately $5.7 million to satisfy outstanding accounts payable to advisors and service providers incurred in connection with certain of our prior capital raising activities conducted from 2008 through 2010, and (vi) approximately $ million to fund clinical studiesrepay the principal and clinical trials ofinterest under our applications, including a clinical trial to support a PMA for our HPV screening test.outstanding promissory notes. We anticipate that we will use the remainder of the net proceeds from this offering for additional working capital and general corporate purposes.
The promissory notes described above were issued from September 2008 through March 2012 and bear a weighted average annual interest rate of 6.8%, with the principal and accrued interest balances generally due two years after issuance. We used the proceeds from the issuances of the notes for general corporate purposes. See “Note 3. Promissory Notes” included in our financial statements included as part of this prospectus. As of June 30, 2012, there was an aggregate of $24.3 million of principal and accrued interest outstanding under these promissory notes of which approximately $14.8 million in principal amount was in default. For each additional day that the notes remain outstanding, we are required to pay approximately $5,000 of additional interest under the notes. As of June 30, 2012, there was an aggregate of $3.9 million of principal and accrued interest outstanding under the notes we have issued to our directors, executive officers and holders of more than 5% of our common stock. See “Certain Relationships and Related Persons Transactions — Promissory Notes Financings.”
The expected use of the net proceeds of this offering represents our current intentions based upon our present plans and business condition. The amounts and timing of our actual expenditures may vary significantly and will depend upon numerous factors, such as the level of research and development investment required by our business (including for clinical studies and trials), cash flows from operations, the anticipated growth of our business and other factors. Pending the allocation of the net proceeds of this offering, we intend to invest the net proceeds of this offering in short-term, interest-bearing obligations, investment grade instruments, and certificates of deposit or guaranteed obligations of the U.S. government.
We currently do not anticipate paying any cash dividends after thethis offering and for the foreseeable future. Instead, we anticipate that all of our earnings on our common stock will be used to provide working capital, to support our operations and to finance the growth and development of our business. Any future determination relating to dividend policy will be made at the discretion of our board of directors and will depend on our future earnings, capital requirements, financial condition, future prospects, financing arrangements, applicable Delaware law, which provides that dividends are only payable out of surplus or current net profits, and other factors our board of directors deems relevant.
The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2008June 30, 2012 (i) on an (i) actual basis, and (ii) on an as adjusteda pro forma basis to reflect the conversion of all outstanding shares of our Series A, Series B, Series C, Series D and Series DE Convertible Preferred Stock into 17,240,35118,260,146 shares of our common stock and (iii) on a pro forma as adjusted basis to additionally reflect the receiptsale of shares of our common stock in this offering at an assumed initial offering price of $ per share, the midpoint of the range on the cover page of this prospectus, and after deducting underwriting discounts and commissions and our estimated offering expenses, and the application of approximately $ million of the net proceeds fromof this offering.offering to repay principal and interest under certain of our outstanding promissory notes, including notes to related parties.
The pro forma and pro forma as adjusted information below is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with “Use of Proceeds,” “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock” and our financial statements and the related notes appearing elsewhere in this prospectus.
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(1) | A $1.00 increase or decrease in the assumed initial public offering price of $ per share of our common stock in this offering would increase or decrease, as applicable, each of |
(2) | Amounts include principal only. |
(3) | Our convertible preferred stock |
(4) | Excludes, as of |
As of March 31, 2008,June 30, 2012, we had a net tangible book deficit of $34.4$78.2 million, or approximately $4.72$9.73 per share of common stock, not taking into account the conversion of all outstanding series of convertible preferred stock into common stock. Net tangible book deficit per share represents the amount of our total tangible assets less total liabilities, divided by the number of common shares outstanding.
Our pro forma net tangible book value afterAfter giving effect to the conversion of all outstanding series of convertible preferred stock into common stock as of March 31, 2008 was $11.1June 30, 2012, we would have had a net tangible book deficit of $30.8 million, or $0.45$1.18 per share of common stock. Pro forma net tangible book valuedeficit per share represents the amount of our total tangible assets less our total liabilities, divided by the number of shares of common stock outstanding as of March 31, 2008June 30, 2012 after giving effect to the conversion of all outstanding series of convertible preferred stock into shares of common stock, which will occur immediately prior to the completion of this offering.
After giving effect to the sale by us of shares of common stock in this offering at an assumed initial public offering price of $ per share, which is the midpoint of the range listed on the cover page of this prospectus, and after deducting underwriting discounts and commissions and our estimated offering expenses, our adjusted pro forma net tangible book value as of March 31, 2008June 30, 2012 would have been approximately $ million, or approximately $ per share. This amount represents an immediate increase in adjusted pro forma net tangible book value of $ per share to our existing stockholders and an immediate dilution in adjusted pro forma net tangible book value of approximately $ per share to new investors purchasing shares of common stock in this offering at the assumed initial public offering price.
A $1.00 increase or decrease We determine dilution to new investors participating in the assumed initial public offering price of $ per share would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $ million, assumingsubtracting the pro forma net tangible book value per share after this offering from the amount of cash that a new investor paid for a share of common stock in this offering.
Assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and our estimated offering expenses. We determine dilution by subtractingexpenses, a $1.00 increase or decrease in the adjustedassumed initial public offering price of $ per share would increase or decrease, as applicable, the pro forma net tangible book value by $ per share afterto our existing stockholders, and the dilution in pro forma net tangible book value by $ per share to new investors participating in this offering from the amount of cash that a new investor paid for a share of common stock.offering.
The following table illustrates this dilution on a per share basis:
Assumed initial public offering price per share | ||||||||
$ | ||||||||
Pro forma net tangible book value per share as of | $ | |||||||
Increase in pro forma net tangible book value per share attributable to this offering | $ | |||||||
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Dilution in pro forma net tangible book value per share to new stockholders | $ | |||||||
The following table summarizes, as of March 31, 2008,June 30, 2012, the differences for our existing stockholders and new investors in this offering, with respect to the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid before deducting fees and expenses at an assumed initial public offering price of $ per share, which is the midpoint of the range listed on the cover page of this prospectus, and after deducting underwriting discounts and commissions and our estimated offering expenses. The
following table assumes the conversion of all series of convertible preferred stock into common stock, which will be effected immediately prior to the completion of this offering.
Total shares | Total consideration | Average price per share | Shares purchased | Total consideration | Average price per share | |||||||||||||||||||||||
Number | Percentage | Amount | Percentage | Number | Percent | Amount | Percent | |||||||||||||||||||||
Existing stockholder | % | $ | % | $ | ||||||||||||||||||||||||
Existing stockholders | % | $ | % | $ | ||||||||||||||||||||||||
New stockholders in this offering | $ | % | $ | % | $ | |||||||||||||||||||||||
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Total | 100% | $ | 100% | 100 | % | $ | 100 | % | $ | |||||||||||||||||||
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The discussion and tables above assume no exercise of the underwriters’ over-allotmentoverallotment option. If the underwriters’ over-allotmentoverallotment option is exercised in full:
the number of shares of common stock held by existing stockholders will represent % of the total number of shares of common stock to be outstanding after this offering;offering and the number of shares of common stock held by investors participating in this offering will represent % of the total number of shares of common stock to be outstanding after this offering; and
our adjusted pro forma net tangible book value at March 31, 2008 will beJune 30, 2012 would have been $ million, or $ per share of common stock, representing an immediate increase in pro forma net tangible book value of $ per share of common stock to our existing stockholders and an immediate dilution of $ per share to investors purchasing sharesparticipating in this offering.
In addition, the above discussion and tables assume no exercise of stock options or warrants to purchase common stock or preferred stock. As of March 31, 2008,June 30, 2012, we had outstanding options to purchase a total of 3,176,4055,446,762 shares of common stock, warrants to purchase a total of 250,0008,426,675 shares of common stock and warrants to purchase 381,300 shares of our preferred stock convertible into 727,963382,914 shares of common stock at a weighted average exercise price of $0.31$1.57 per share, $0.50$3.56 per share and $2.74$3.31 per share, respectively.
If all of thesethe outstanding options and warrants as of June 30, 2012 with exercise prices at or below $ per share, which is the midpoint of the range listed on the cover page of this prospectus, had been exercised as of March 31, 2008 (and the convertible preferred stock issuable upon the exercise of the preferred stock purchase warrants was converted into common stock), our pro forma net tangible book valuedeficit would have been $0.48$ per share of common stock, adjusted pro forma net tangible book value after this offering would be $ per share of common stock and dilution in adjusted pro forma net tangible book value to investors in this offering would be $ per share of common stock.
In addition, if all of thesethe outstanding options and warrants as of March 31, 2008 were so exercised (and the convertible preferred stock issuable upon the exercise of the preferred stock purchase warrants was so converted), on an as adjusted basisof June 30, 2012, before deducting underwriting discounts and commissions and our estimated offering expenses, (i) existing stockholders would have purchased shares representing% of the total shares for $ , or approximately % of the total consideration paid, with an average price per share of $and (ii) using an assumed public offering price of $ per share, shares purchased by new stockholders in this offering would represent approximately% of the total shares for approximately $ , or approximately % of the total consideration paid.
Selected financial dataFinancial Data
The selected financial data set forth below is derived in part from and should be read in conjunction with our financial statements, the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The statement of operations data for each of the years ended December 31, 20062010, and 20072011 and the nine months ended December 31, 2005 and the balance sheetstatement of condition data as of December 31, 20062010 and 20072011 were derived from our audited financial statements appearing elsewhere in this prospectus. The statement of operations data for each of the yearssix months ended March 31, 2004June 30, 2011 and 2005June 30, 2012 and the summary balance sheetstatement of condition data as of March 31, 2004 and 2005 and December 31, 2005 were derived from our audited financial statements that are not included in this prospectus. (Our fiscal year ended December 31, 2005 included nine months because we changed our fiscal year end from March 31 to December 31 in 2005.) The summary statement of operations data for the three month periods ended March 31, 2007 and 2008 and the summary balance sheet data as of March 31, 2008June 30, 2012 were derived from our unaudited financial statements appearing elsewhere in this prospectus. This information isThe unaudited but,financial data, in management’s opinion, has been prepared on the same basis as the audited financial statements and related notes included elsewhere in this prospectus, and include all adjustments, consisting only of normal recurring adjustments, whichthat our management considers necessary for a fair presentation of the information for the periods presented. Historical results are not necessarily indicative of results to be expected for future periods. The results of operations for the threeyears ended December 2010 and 2011 and for the six months ended March 31, 2008June 30, 2012 are not necessarily indicative of the results that may be expected for the full fiscal year ended December 31, 2012 or any other period.
Years ended March 31, | Nine months ended December 31, | Years ended December 31, | Three months ended March 31, | |||||||||||||||||||||||||
2004 | 2005 | 2005 | 2006 | 2007 | 2007 | 2008 | ||||||||||||||||||||||
Statement of operations data: | ||||||||||||||||||||||||||||
Product sales | $ | — | $ | — | $ | 311,068 | $ | 499,961 | $ | 1,606,631 | $ | 141,045 | $ | 185,161 | ||||||||||||||
Cost of sales | — | — | 1,005,184 | 2,078,846 | 3,654,519 | 600,017 | 952,547 | |||||||||||||||||||||
Gross loss | — | — | (694,116 | ) | (1,578,885 | ) | (2,047,888 | ) | (458,972 | ) | (767,386 | ) | ||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||
Research and development | 1,838,176 | 2,252,647 | 1,796,733 | 2,296,165 | 2,565,926 | 652,869 | 667,028 | |||||||||||||||||||||
General and administrative | 1,157,207 | 1,262,595 | 826,567 | 1,474,902 | 2,423,077 | 482,049 | 666,705 | |||||||||||||||||||||
Sales and marketing | 231,365 | 551,639 | 670,486 | 975,019 | 2,685,432 | 553,183 | 866,557 | |||||||||||||||||||||
Total operating expenses | 3,226,748 | 4,066,881 | 3,293,786 | 4,746,086 | 7,674,435 | 1,688,101 | 2,200,290 | |||||||||||||||||||||
Loss from operations | (3,226,748 | ) | (4,066,881 | ) | (3,987,902 | ) | (6,324,971 | ) | (9,722,323 | ) | (2,147,073 | ) | (2,967,676 | ) | ||||||||||||||
Interest income | 6,672 | 40,120 | 65,765 | 70,316 | 283,692 | 95,852 | 52,177 | |||||||||||||||||||||
Interest expense | — | — | (370 | ) | (235,029 | ) | (1,206 | ) | (347 | ) | (101,640 | ) | ||||||||||||||||
Other income/(expense), net | (2,122 | ) | (1,193 | ) | 244 | 412 | 8,210 | 183 | (9,203 | ) | ||||||||||||||||||
Change in fair value of warrant liabilities | 7,741 | 7,862 | 32,776 | 75,916 | 138,905 | 32,742 | (180,683 | ) | ||||||||||||||||||||
Net loss | (3,214,457 | ) | (4,020,092 | ) | (3,889,487 | ) | (6,413,356 | ) | (9,292,722 | ) | (2,018,643 | ) | (3,207,025 | ) | ||||||||||||||
Accretion to liquidation value of preferred stock | (193,833 | ) | (27,313 | ) | (447,108 | ) | (817,823 | ) | (74,451 | ) | (76,332 | ) | 94,824 | |||||||||||||||
Net loss attributable to common stockholders | $ | (3,408,290 | ) | $ | (4,047,405 | ) | $ | (4,336,595 | ) | $ | (7,231,179 | ) | $ | (9,367,173 | ) | $ | (2,094,975 | ) | $ | (3,112,201 | ) | |||||||
Basic and diluted net loss per share attributable to common stockholders | $ | (0.65 | ) | $ | (0.72 | ) | $ | (0.76 | ) | $ | (1.19 | ) | $ | (1.40 | ) | $ | (0.34 | ) | $ | (0.43 | ) | |||||||
Shares used to compute basic and diluted net loss per share attributable to common stockholders | 5,266,444 | 5,642,426 | 5,708,755 | 6,065,728 | 6,671,063 | 6,167,771 | 7,276,657 | |||||||||||||||||||||
Years ended December 31, | Six months ended June 30, | |||||||||||||||
2010 | 2011 | 2011 | 2012 | |||||||||||||
(unaudited) | ||||||||||||||||
(in thousands, except share and per share data) | ||||||||||||||||
Statement of operations data: | ||||||||||||||||
Net revenue | $ | 7,504 | $ | 8,005 | $ | 3,495 | $ | 8,693 | ||||||||
Cost of sales | 7,666 | 6,019 | 2,800 | 3,390 | ||||||||||||
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Gross profit/(loss) | (162 | ) | 1,986 | 695 | 5,303 | |||||||||||
Operating expenses | ||||||||||||||||
Research and development | 3,560 | 2,768 | 1,345 | 1,112 | ||||||||||||
General and administrative | 5,376 | 3,360 | 1,509 | 1,496 | ||||||||||||
Sales and marketing | 4,717 | 2,672 | 1,286 | 954 | ||||||||||||
Impairment of film coating equipment | 981 | — | — | — | ||||||||||||
Initial public offering costs — terminated offering | 1,752 | — | — | — | ||||||||||||
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Total operating expenses | 16,386 | 8,800 | 4,140 | 3,562 | ||||||||||||
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Income/(loss) from operations | (16,548 | ) | (6,814 | ) | (3,445 | ) | 1,741 | |||||||||
Interest expense, net | (4,109 | ) | (3,626 | ) | (2,132 | ) | (1,579 | ) | ||||||||
Other income/(expense), net | 36 | (2 | ) | (2 | ) | 3 | ||||||||||
Change in fair value of warrant liabilities | 926 | 445 | 515 | 294 | ||||||||||||
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Net income/(loss) | (19,695 | ) | (9,997 | ) | (5,064 | ) | 459 | |||||||||
Net income/(loss) per share attributable to common stockholders | ||||||||||||||||
Basic | $ | (2.52 | ) | $ | (1.25 | ) | $ | (0.63 | ) | $ | 0.06 | |||||
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Diluted | $ | 0.02 | ||||||||||||||
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Shares used to compute net income/(loss) per share attributable to common stockholders | ||||||||||||||||
Basic | 7,823,355 | 7,979,527 | 7,978,984 | 8,028,070 | ||||||||||||
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Diluted | 26,288,216 | |||||||||||||||
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March 31, | December 31, | March 31, 2008 | 2010 | 2011 | 2012 | |||||||||||||||||||||||||||||||
2004 | 2005 | 2005 | 2006 | 2007 | (unaudited) | |||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
Balance sheet data: | ||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 567,188 | $ | 4,548,651 | $ | 2,360,777 | $ | 5,407,621 | $ | 2,614,837 | $ | 9,279,839 | $ | 129 | $ | 61 | $ | 309 | ||||||||||||||||||
Current assets | 643,148 | 5,119,126 | 4,145,336 | 6,918,598 | 5,471,511 | 12,618,336 | 3,559 | 3,749 | 5,540 | |||||||||||||||||||||||||||
Total assets | 786,731 | 5,380,544 | 4,580,097 | 7,929,036 | 6,981,671 | 14,210,107 | 5,924 | 5,412 | 7,115 | |||||||||||||||||||||||||||
Convertible preferred stock (1) | 6,911,572 | 15,242,906 | 16,729,821 | 27,855,334 | 34,334,823 | 45,483,942 | ||||||||||||||||||||||||||||||
Total debt (1) | 19,181 | 20,914 | 20,884 | |||||||||||||||||||||||||||||||||
Convertible preferred stock (2) | 46,044 | 47,343 | 47,343 | |||||||||||||||||||||||||||||||||
Total stockholders’ deficit | (7,341,398 | ) | (11,362,495 | ) | (15,533,290 | ) | (22,657,584 | ) | (31,176,474 | ) | (34,215,411 | ) | (70,895 | ) | (79,250 | ) | (78,162 | ) |
(1) | Amounts include principal only. |
(2) | Our convertible preferred stock had been classified as temporary equity on our balance sheets instead of in stockholders’ deficit |
Management’s discussionDiscussion and analysisAnalysis of financial
conditionFinancial Condition and resultsResults of operationsOperations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes appearing elsewhere in this prospectus. This discussion may contain forward-looking statements whichthat are based upon current expectations that involve risks and uncertainties. Our actual results and the timing of many events could differ materially from those anticipated in forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.
Overview
We design, develop, manufacture and market a fully integratedthe INFINITI molecular diagnosticdiagnostics system. The system called the INFINITI™ that automates the discrete processesincludes an extensive and expanding menu of genetic testing performed by clinical laboratories. The INFINITI™ system consiststests and a family of the INFINITI™ Analyzerhighly automated analyzers. Our tests provide reference laboratories, hospitals and the consumable products used to run tests on our system,specialty clinics with genetic test results in a broad range of market segments, including the BioFilmChip™ Microarray and the Intellipac™ Reagent Management Module.
The INFINITI™ system is designed to address the major areas of infectious disease, cancer, genetic disorders, personalized medicine, cardiovascular disease/thrombophilia, women’s health, newborn screeningoncology and central nervous system disorders, and asinfectious disease. As of June 30, 2008 we offered 26 applications. Our leading offerings include: (i) tests designed to identify mutations in patients that may cause an increased sensitivity to Warfarin, marketed as Coumadin, the most-prescribed anticoagulant for thromboembolic therapy in North America and Europe; (ii) primary screening and genotyping (risk typing)2012, our genetic test offering included 50 tests for Human Papillomavirus (HPV), the primary cause of cervical cancer; (iii) a test designed to identify genetic mutations associateduse on our INFINITI analyzers, with an increased risk of developing cystic fibrosis, an inherited chronic disease that affects the lungs and digestive system; and (iv) a test designed to identify variants of CYP450 2D6, a gene estimated to be involvedmore than 15 additional tests in the metabolism of as many as 20% of commonly prescribed drugs, which is used to guide appropriate therapies. Like other companies offering molecular tests on a commercial basis, most of the tests that we offer have not been cleared or approved for diagnostic use by the FDA. These molecular tests are available to laboratories on an RUO basis. As required by FDA regulations, these tests must be labeled, “For Research Use Only. Not for use in diagnostic procedures.” Although many laboratories may use our products in their own laboratory-developed diagnostic tests, we are not permitted to market these products for diagnostic purposes.development. We intend to pursue FDA clearance or approvalcontinue increasing the number of tests offered in each of our target market segments, which we believe will further increase the utility of our INFINITI system to our customers.
In the United States, we offer our INFINITI analyzers for those tests as required by the FDA.
We offer the INFINITI™ Analyzerplacement with customers through direct salesales, monthly rental plans and a Reagent Access Plan whereour domestic placement plan. Under the domestic placement plan, an INFINITI™ AnalyzerINFINITI analyzer is placed at the customer’s location at no directinitial cost to the customer in returncustomer. We expect to recover the cost of the instrument over time by generating significant recurring demand for a commitment byour high-margin testing consumables. Outside the customer to purchase a minimum volume of test applications. To executeUnited States, we offer our marketing strategy, we have establishedINFINITI analyzers solely on a direct sale basis through our network of distributors. We plan to use a portion of the net proceeds of this offering to expand our domestic sales force of 18and our international sales persons located in key metropolitan citiespresence.
Our BioFilmChips and Intellipac Reagent Management Modules and other consumable sales are made primarily pursuant to standard purchase orders. We are able to manufacture our consumables to satisfy demand for new or rescheduled purchase orders on relatively short notice. Thus, we do not have a significant backlog.
We have in the U.S.
In February 2007,past derived, and expect to continue to derive, a significant portion of our revenue from a few major customers. For fiscal years 2010 and 2011, we received 510(k) clearance fromhad two and three customers, respectively, that each represented between 12% and 14% of our revenue. For the FDAsix months ended June 30, 2012, we had two customers that each represented more than 15% of our revenue, including one that represented 46% of our revenue during the period. Sales outside the United States accounted for commercial sale52%, 22% and 7% of the INFINITI™ Analyzer. In addition, we received 510(k) clearance for a test for Warfarin sensitivity and for our Factor II, Factor V and Factor II-V panel tests, which aid in the determination of an individual’s riskproduct sales for the developmentyears ended December 31, 2010 and 2011 and the six months ended June 30, 2012, respectively. As of blood clots. InDecember 31, 2010, one customer accounted for 22% of our aggregate accounts receivable of $1.3 million. As of December 31, 2011, three customers accounted for 43%, 14%, and 10%, respectively, of our aggregate accounts receivable of $1.9 million. As of June 2008,30, 2012, two customers accounted for 43% and 27%, respectively, of our aggregate accounts receivable of $3.0 million. Our continued business relationship with these or any other major customers, and the CE markingamount of conformity was affixedpurchases and timing of payment by these or any other major customers, may be impacted by several factors beyond our control, including product offerings by our competitors, pricing pressures or the financial health of these or any other major customers. The loss of any of our major customers, or a significant decline in sales to the INFINITI™ Analyzeror a delay in accordance with the IVDD Directive. The CE marking allows the INFINITI™ Analyzer to be marketed in the European Economic Area.
From our inception in April 1999 through our fiscal year ended March 31, 2005, we focused on the design and development of our microarray film technology, an initial offering of genetic tests and the INFINITI™ system, includingINFINITI Analyzer. In 2005, we launched the INFINITI™INFINITI Analyzer BioFilmChip™, and Intellipac™ Reagent Management Module. We changed our first four tests. Our revenue has grown from $7.5 million in fiscal year end from March 312010 to December 31$8.0 million in 2005. As of2011, and was $8.7 million for the six months ended June 30, 20082012. Since our inception, we had an installed base of 58 INFINITI™ Analyzers.
We have incurred significant operating losses, since our inception, including net losses of $3.9$19.7 million $6.4 million, $9.3 million,
and $3.2$10.0 million in the nine monthsyears ended December 31, 2005, the twelve months ended December 31, 20062010 and 2007, and the three months ended March 31, 2008,2011, respectively. As of March 31, 2008June 30, 2012, we had an accumulated deficit of $34.3$93.2 million. Our historical operating losses are the result of significant expenses associated with the development of the INFINITI™ Analyzer and applications and sales and marketing expenses related to our product launch in 2005. In addition, we incurred significant general and administrative expenses as we developed infrastructure to support the business.
We expect to continue tomay incur net operating losses for the foreseeable futureremainder of 2012 as we seek to further expand our applicationstest menu and develop other products, conduct clinical studies and trials offor certain of our applicationstests, and invest in the continued commercialization of our INFINITI™INFINITI system. We also will incur substantial costs associated with the transition to operating as a public company. We are unable to predict the extent of any future losses or if we will be able to achieve sustained profitability.
Key Factors Affecting Performance
Microarray Sales. We generate most of our revenue through the sale of our genetic tests, and we expect this trend to continue for the foreseeable future. We closely track our microarray sales and the average revenue per microarray sale, and believe that taken together these metrics are key indicators of our performance. Our total microarray sales for fiscal years 2010 and 2011, and for the six months ended June 30, 2012, were $3.9 million, $6.8 million and $7.8 million, respectively. Our average revenue per microarray sale for the same periods was $84, $83 and $82, respectively. Because our tests are sold at various prices, the average revenue per microarray is impacted by the mix of tests sold during each period.
We believe that while instrument placements play a role in the generation of revenue for our business, in particular in driving related test consumable sales, they do not provide a direct correlation to future revenue growth, and thus we do not view it as a key metric for our business. This is in part due to the wide variation in levels of customer utilization of our INFINITI system product offerings.and in part due to the variability in throughput capability of the various models of our INFINITI analyzers. As of December 31, 2010 and 2011, and as of June 30, 2012, we had a total of 168, 179 and 175 INFINITI analyzers placed with customers, respectively. We measure INFINITI analyzer placements based on the number of INFINITI analyzers located at our customers’ facilities at a particular measurement time.
Investment in Infrastructure and Growth. Our ability to increase our sales of genetic tests and to further penetrate our target market segments are dependent in large part on our ability to invest in our infrastructure and in our sales and marketing efforts. In order to drive further growth, we plan to hire additional sales personnel and invest in marketing our products to our target customers both in the United States and internationally. This will lead to corresponding increases in our operating expenses, and thus may negatively impact our operating results in the short term, although we anticipate that these investments will grow and improve our business over the long term. Marketing and selling to our target customers involves a substantial amount of time and effort, as it generally involves physical site visits and an investment in educating potential customers regarding the capabilities and benefits of molecular diagnostic testing in general and of our INFINITI system specifically. There can be a significant amount of time invested in marketing to a customer before that customer makes a purchasing decision. Once a purchasing decision is made by the customer, there can be a material amount of time invested by the customer in validating our INFINITI system. As a result, it will be difficult for us to determine whether and when our investments in sales and infrastructure will be recovered through sales to new customers or additional sales to existing customers. We will also incur substantial operating costs in connection with our transition to operating as a public company.
Utilization of our Products. Our ability to achieve sales growth is substantially dependent on the adoption of our INFINITI analyzers and utilization of our genetic tests. In order for us to continue to grow our business, it is important to acquire new customers, add new and enhanced tests and generate additional revenue from existing customers. We believe there is significant opportunity to increase the number and type of genetic tests we sell as awareness of opportunities in molecular diagnostic testing becomes more apparent to our targeted customer base. We have invested, and intend to continue to invest, significant time and effort to develop detailed marketing aids to be used by, and to educate, our customers’ sales and marketing networks. We believe that this will assist our customers in taking advantage of meaningful growth opportunities in molecular diagnostic testing in our target market segments, which may result in increased demand for our products. We have experienced some sales growth attributable to these co-marketing efforts, but the correlation is not direct either in volume or in timing of
receipt of revenue. These investments in co-marketing increase our operating expenses, and it is uncertain as to whether these investments will positively impact our results going forward. We intend to invest in our sales and marketing organization and to pursue new customers in order to alleviate our current customer concentration. We believe that as more of our present and future customers realize the potential of molecular diagnostic testing generally, and pharmacogenomics specifically, our sales will continue to grow and diversify.
Regulatory Developments. Our INFINITI Analyzer and five of our genetic tests have been cleared by the U.S. Food and Drug Administration, or FDA, for sale in the United States under 510(k) clearance procedures. We have obtainedConformité Européenne, or CE, mark of conformity for 22 of our tests, which facilitates the marketing and sale of our INFINITI Analyzer and CE marked tests in the European Union and the European Economic Area as well as certain other international markets. The vast majority of the genetic tests that we currently sell, which together represented 87%, 92% and 95% of our net revenue for fiscal years 2010 and 2011 and the six months ended June 30, 2012, respectively, have not been cleared or approved for clinical use in the United States by the FDA. These tests are labeled “For Research Use Only. Not for use in diagnostic procedures.” as required by FDA regulations. We refer to these tests as RUO tests. If the regulatory environment for the sale of RUO tests changes, we may be required to seek additional clearances or approvals from the FDA for the sale of our tests. In addition, if we determine that the diagnostic marketplace generally prefers, or requires, FDA clearance or approval of genetic tests as a condition for adoption of our INFINITI system or the purchase of our genetic tests, then we may decide to seek additional clearances or approvals from the FDA. This would require substantial time and investment, and could restrict or delay our ability to realize sales opportunities and/or maintain profitability. For example, we have decided to seek a pre-market approval, or PMA, for our HPV-HR genetic tests, and we expect to spend approximately $8 million across 2013 and 2014 to conduct clinical trials and make related submissions to the FDA in connection with seeking a PMA for these tests. If we decide to seek 510(k) clearance for a test, the expense involved in seeking and obtaining such clearance has averaged approximately $350,000 per test. These expenditures are estimates based on information currently available to management and actual expenditures may vary from or exceed these estimates. If we invest capital to seek regulatory clearances or approvals, and do not receive these clearances or approvals, or do not realize sufficient returns on these investments in the form of additional sales, it would negatively impact our financial results and results of operations.
For a discussion of additional factors affecting our performance, see “Risk Factors.”
Financial operations overviewOperations Overview
Revenue
Our revenues are derivedWe generate revenue from the sale of our INFINITI™ Analyzer, consumable products, which include our INFINITI analyzers and our high-margin consumables used to run tests on our analyzers, including the BioFilmChip™ Microarray, Intellipac™our BioFilmChips, Intellipac Reagent Management Modules and various other disposable products consumed in the testing process. We do not recognize revenue on placement of INFINITI™ Analyzers underGenerally, the Reagent Access Plan. Our goal is to establish a large installed base of INFINITI™ Analyzers in hospital and clinical laboratories. We believe this installed base will drive the consumptionpricing of our consumable testing products.consumables for customers that participate in our domestic placement plans is higher than for our customers who own INFINITI analyzers; however, we may discount the price of consumables depending on the volume and nature of the products purchased by our customers. We expect to generatethat revenue generated through the sales of our products in both domestic and international markets will be driven largely by the domesticgrowth of the overall molecular diagnostic market, and in Europe, Canada and Asia driventhe breadth of our genetic test menu, increased utilization of our products by our existing customers, the expansion of our domestic sales force and the development of our international distribution network, and the development by usplacement of additional applications.INFINITI analyzers with new and with existing customers, and our development of additional and enhanced tests for sale in connection with our INFINITI system.
The variability of our revenue from period to period depends in part on our product sales mix of INFINITI analyzers and consumables. We anticipate volatility inthat our periodic revenue duefrom the sale of consumables will become a larger portion of our total revenue over time as we increase our customer base and our customers increase their utilization of our INFINITI system. In the United States, we believe that for the foreseeable future our domestic placement plan will continue to variability in the mixaccount for more placements of INFINITI™ Analyzers sold versus INFINITI™ Analyzers placed under our Reagent Access Plan.INFINITI analyzers than direct sales.
Cost of salesSales and Gross Profit
Cost of sales includes the expenses related to the production and estimated warranty costs of our various products. Included in these costs are materials, labor, and general manufacturing overhead and other costs. Our general manufacturing overhead and other costs include indirect labor, facilities costs, and depreciation of capitalized manufacturing equipment and INFINITI™ Analyzersequipment. Cost of sales also includes depreciation (over a three year period) of capitalized INFINITI analyzers placed under our domestic placement plans, since we place the Reagent Access Plan.analyzers at the customers’ facility at no direct cost to the customer.
Research and developmentDevelopment
Research and development expenses include the cost of the personnel and consultants related to our activities in developing and improving the INFINITI™ Analyzerour INFINITI analyzers and the development and expansion of our applicationtest menu. Also included in research and development costs are expenditures related to clinical studies and trials undertaken to validate and to obtain FDA clearanceand other regulatory clearances for our applications.tests. We expense all research and development costs in the period in
which they are incurred. We believe that continuedContinued development and improvement of the INFINITI™ Analyzerour INFINITI analyzers and expansion of our applicationtest menu are drivers forkey aspects of our future successbusiness strategy and we expect increasingthat our research and development expenditures will increase for the foreseeable future.
In the near term, weWe plan to undertakeincur significant expenditures in 2013 and 2014 for a clinical trial related to support the submission of a Pre-Market Approval (PMA) fromPMA application to the Federal Food and Drug AdministrationFDA for our Human Papillomavirus (HPV) screening test.HPV-HR tests. We currently expect the clinical trial to take two to three years to complete.complete and to cost approximately $8 million in the aggregate over the course of 2013 and 2014. We intend to submit a 510(k) notification to the FDA for our cystic fibrosis and our HPV genotyping tests in 2013. We are also conducting studies to support, and are preparing to submit, a pre-investigational device exemption, or pre-IDE, application for our CFTR and Flu A-sH1N1 tests. In addition, we have initiated clinical studies to support future submissions to the FDA for clearance of several of our other tests, including our 2D6, 3A4, 3A5, ureaplasma urealyticum, mycoplasma genitalium, mycoplasma hominis (Urogen Quad), bacterial vaginosis, or BV, candida vaginitis, or CV, chlymadia, gonorrhea and KRAS-BRAF genetic tests.
General and administrativeAdministrative
General and administrative expenses include the costs of the personnel and consultants charged to administration, finance and accounting, human resources and regulatory affairs. General and administrative expenses also include corporate, administration, accounting, patent, facility and facilityother costs and depreciation. We expect general and administrative expenses to increase infor the foreseeable future as a result of the need to hire additional administrative personnel to support the anticipated growth of theour business and as a result of higheradditional legal and accounting expenses related to compliance with Securities and related expenses associated with being a public company.Exchange Commission and exchange listing requirements, directors’ and officers’ insurance premiums and investor relations expenses.
Sales and marketingMarketing
Sales and marketing expenses include the costs of personnel related to selling and marketing the INFINITI™INFINITI system, customer support, advertising, and trade show participation.participation and other expenses. We expect a significant increase inour sales and marketing expenses into increase significantly for the foreseeable future as we expand our sales and marketing organization to drive the growth in sales of our installed baseconsumable products, and related sales revenue from consumable products.as we increase our technical support personnel to support this additional growth.
Interest incomeIncome
Interest income includes interest earned on our cash balances. These balances are invested primarily in money market accounts.
Interest expenseExpense
Interest expense is primarily a non-cash charge relatedrelates to our outstanding promissory notes, which are more fully described in this prospectus under the heading “Use of Proceeds” and in “Note 3. Promissory Notes” of our financial statements that are included elsewhere in this prospectus.
Promissory Notes
We have been converted intoissued promissory notes pursuant to a number of private placements since 1999. At times these promissory notes were issued with separate warrants to purchase shares of our Series C and Series D convertible preferredcommon stock. The fair value of these warrants is allocated as a debt discount using the relative fair value allocation method determined using the Black-Scholes valuation model. The discount is amortized using the effective interest method over the term of the related promissory notes.
Change in the Fair Value of Warrant Liabilities
One of our outstanding warrants to purchase shares of our common stock provides for adjustment of the exercise price based upon subsequent issuances at prices per share that are below the exercise price of the warrant, and is classified as a liability and recorded at fair value regardless of warrant liabilities
We have freestandingthe timing of the redemption feature or the redemption price or the likelihood of redemption. Our outstanding warrants outstanding to purchase shares of our convertible preferred stock. We follow Financial Accounting Standards Board, or FASB, Staff Position, or FSP, No. 150-5,Issuer’s Accounting under FASB Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares That Are Redeemable, an interpretation of SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. In accordance with FSP No. 150-5, freestanding warrants for shares thatstock are redeemable should bealso classified as liabilities on the balance sheeta liability and recorded at fair value.value regardless of the timing of the redemption feature or the redemption price or the likelihood of redemption. These warrants should then be re-measuredare subject to re-measurement at each balance sheet date and any change in fair value should beis recognized as a component of other interest income or expense.(expense), net. We classify the fair value of warrants to purchase shares of our convertible preferred stock as a liability and will continue to adjust the liability for changes in fair value until the earlier of the conversion, exercise or expiration of the warrants.
All of our other outstanding warrants at which time the liability willto purchase shares of our common stock that do not provide for exercise price adjustments were determined to be reclassified into stockholders’ deficit.equity instruments and thus included in stockholders deficit upon issuance and are not subject to re-measurement.
Critical accounting policies, significant judgments,Results of Operations
The following tables set forth selected items in our statements of operations for the periods presented, together with the difference in amounts over such periods in dollars and estimatesin percentages. The financial data set forth below is derived in part from and should be read in conjunction with our financial statements and the related notes included elsewhere in this prospectus.
Six months ended June 30, | Change | |||||||||||||||
2011 | 2012 | $ | % | |||||||||||||
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Net revenue | $ | 3,495 | $ | 8,693 | $ | 5,198 | 148.7 | % | ||||||||
Cost of sales | 2,800 | 3,390 | 590 | 21.0 | % | |||||||||||
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Gross profit/(loss) | 695 | 5,303 | 4,608 | 663.0 | % | |||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 1,345 | 1,112 | (233 | ) | (17.2 | )% | ||||||||||
General and administrative | 1,509 | 1,496 | (13 | ) | * | |||||||||||
Sales and marketing | 1,286 | 954 | (332 | ) | (25.8 | )% | ||||||||||
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Total operating expenses | 4,140 | 3,562 | (578 | ) | (14.0 | )% | ||||||||||
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Income/(loss) from operations | $ | (3,445 | ) | $ | 1,741 | $ | 5,186 | * | ||||||||
Interest income | — | — | — | * | ||||||||||||
Interest expense | (2,132 | ) | (1,579 | ) | 553 | 25.9 | % | |||||||||
Other income/(expense), net | (2 | ) | 3 | 5 | * | |||||||||||
Change in fair value of warrant liabilities | 515 | 294 | (221 | ) | * | |||||||||||
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Net income/(loss) | $ | (5,064 | ) | $ | 459 | $ | 5,523 | * | ||||||||
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* | Percentage change is not meaningful. |
Years ended December 31, | Change | |||||||||||||||
2010 | 2011 | $ | % | |||||||||||||
(unaudited) | ||||||||||||||||
(in thousands, except for percentages) | ||||||||||||||||
Net revenue | $ | 7,504 | $ | 8,005 | $ | 501 | 6.7 | % | ||||||||
Cost of sales | 7,666 | 6,019 | (1,647 | ) | (21.5 | )% | ||||||||||
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Gross profit/(loss) | (162 | ) | 1,986 | 2,148 | * | |||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 3,560 | 2,768 | (792 | ) | (22.2 | )% | ||||||||||
General and administrative | 5,376 | 3,360 | (2,016 | ) | (37.5 | )% | ||||||||||
Sales and marketing | 4,717 | 2,672 | (2,045 | ) | (43.4 | )% | ||||||||||
Impairment of film equipment | 981 | — | (981 | ) | * | |||||||||||
Initial public offering costs — terminated offering | 1,752 | — | (1,752 | ) | * | |||||||||||
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Total operating expenses | 16,386 | 8,800 | (7,586 | ) | (46.3 | )% | ||||||||||
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Loss from operations | $ | (16,548 | ) | $ | (6,814 | ) | $ | 9,734 | 58.8 | % | ||||||
Interest expense | (4,109 | ) | (3,626 | ) | 483 | 11.8 | % | |||||||||
Other income/(expense), net | 36 | (2 | ) | (38 | ) | * | ||||||||||
Change in fair value of warrant liabilities | 926 | 445 | (481 | ) | (51.9 | )% | ||||||||||
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Net loss | $ | (19,695 | ) | $ | (9,997 | ) | $ | 9,698 | 49.2 | % | ||||||
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* | Percentage change is not meaningful. |
Comparison of the Six Months Ended June 30, 2012 and 2011
Net revenue
Net revenue for the six months ended June 30, 2012 was $8.7 million compared to $3.5 million for the six months ended June 30, 2011. Net revenue for the six months ended June 30, 2012 consisted of $0.7 million from the sale of INFINITI analyzers and $8.0 million from the sale of consumables, including sales to one customer of $3.8 million. Net revenue for the six months ended June 30, 2011 consisted of $0.7 million from the sale of INFINITI analyzers and $2.8 million from the sale of consumables. The increase in net revenue is primarily attributable to increased acceptance and utilization of the INFINITI system in general and our personalized medicine and women’s health diagnostic testing products, specifically.
Cost of Sales and Gross Profit
Cost of sales for the six months ended June 30, 2012 was $3.4 million compared to $2.8 million for the six months ended June 30, 2011. The increase in cost of sales is due primarily to an increase in consumables sold. The increase in gross profit is due primarily to an increase in gross margins from the sale of high margin testing consumables.
Operating Expenses
Research and Development
Research and development expenses consisting primarily of personnel costs and development materials for the six months ended June 30, 2012 were $1.1 million compared to $1.3 million for the six months ended June 30, 2011. The decrease is attributable to reduced headcount as we focused on growing sales of existing products during a period of resource constraints. We expect our research and development expenses to grow in future periods following the completion of this offering, as we seek to further expand and enhance our test menu and conduct studies to support regulatory approvals for our products.
General and Administrative
General and administrative expenses which consist of personnel, professional services and other administrative expenses for the six months ended June 30, 2012 and 2011 were generally consistent at $1.5 million.
Sales and Marketing
Sales and marketing expenses for the six months ended June 30, 2012 were $1.0 million compared to $1.3 million for the six months ended June 30, 2011. The decrease in sales and marketing costs is due primarily to reduced headcount as we more narrowly focused our sales and marketing efforts on a targeted group of customers. We expect our sales and marketing expenses to grow in future periods following the completion of this offering, as we hire additional sales representatives and expand our international sales and marketing presence.
Interest Income
We changedhad no meaningful interest income for the six months ended June 30, 2012 and June 30, 2011.
Interest Expense
Interest expense for the six months ended June 30, 2012 was $1.6 million compared to interest expense of $2.1 million for the six months ended June 30, 2011. The decrease in interest expense is due primarily to the repayment of interest-bearing debt and the fair value associated with common stock warrants recorded as debt discount and amortized as interest expense under the effective interest method.
Other Income (Expense), Net
Other income for the six months ended June 30, 2012 was $3,000 compared to an expense of $2,000 for the six months ended June 30, 2011. The increase in other income is due primarily to non-operating activities.
Change in the Fair Value of Warrant Liabilities
The change in the fair value of warrant liabilities increased our fiscal year-end from March 31net income by $0.3 million for the six months ended June 30, 2012 and decreased our net loss by $0.5 million for the six months ended June 30, 2011. The change in fair value of warrant liabilities is due to the decrease in the fair value of our common stock and the decreased remaining contractual life over which the associated warrants are marked to market.
Comparison of the Years Ended December 31, effective2011 and 2010
Revenue
Revenue for the fiscal periodyear ended December 31, 2005. The fiscal periods discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are2011 was $8.0 million compared to $7.5 million for the nine monthsyear ended December 31, 2005, and2010. Revenue for the twelve monthsyear ended December 31, 20062011 consisted of $0.9 million from the sale of INFINITI analyzers and $7.1 million from the sale of consumables. Revenue for the year ended December 31, 2010 consisted of $3.4 million from the sale of INFINITI analyzers and $4.1 million from the sale of consumables. The decrease in revenue from sales of INFINITI analyzers year-over-year is due primarily to a weakening in capital sales in the industry in general and in our international distributor network, specifically. The increase in consumable revenue year-over-year is primarily due to our increased installed base and an increase in customer acceptance and utilization of our pharmacogenomic and women’s health diagnostic testing products.
Cost of Sales and Gross Profit
Cost of sales for the year ended December 31, 2011 was $6.0 million compared to $7.7 million for the year ended December 31, 2010. The decrease in cost of sales and increase in gross margin percentage year-over-year is due primarily to an increase in the sales mix of higher margin testing consumables over analyzers.
Operating Expenses
Research and Development
Research and development expenses consisting of personnel costs and costs to develop our diagnostic testing products and future generations of testing platforms for the year ended December 31, 2011 were $2.8 million compared to $3.6 million for the year ended December 31, 2010. The decrease in research and development expenses is due primarily to reduced headcount as we focused on growing sales of existing products during a period of resource constraints. We expect our research and development expenses to grow in future periods following the completion of this offering.
General and Administrative
General and administrative expenses for the year ended December 31, 2011 were $3.4 million compared to $5.4 million for the year ended December 31, 2010. The decrease primarily was driven by a reduction of management salaries and other general operating expenses, including legal, consulting and audit fees not incurred in 2011.
Sales and Marketing
Sales and marketing expenses for the year ended December 31, 2011 were $2.7 million compared to $4.7 million for the year ended December 31, 2010. The decrease was driven primarily by reduced headcount as we more narrowly focused our sales and marketing efforts on a targeted group of customers, and by extraordinary stock compensation costs not incurred in 2011.
Impairment of Film Coating Equipment
During the year ended December 31, 2010, we recognized $1.0 million of impairment cost related to film coating equipment that had not been installed as of the end of the fiscal year.
Initial Public Offering — Terminated Offering
During the year ended December 31, 2010, we recognized $1.8 million in legal and accounting costs associated with a proposed initial public offering that was not completed in 2010.
Interest Expense
Net interest expense for the year ended December 31, 2011 was $3.6 million compared to $4.1 million for the year ended December 31, 2010. The decrease was attributable primarily to the issuance of senior promissory notes during 2011 and associated common stock warrants recorded as a debt premium and amortized as a credit interest expense under the effective interest method.
Other Income (Expense), Net
Other expenses net for the year ended December 31, 2011 were $2,000 compared to other income of $36,000 in non-operating revenue for the year ended December 31, 2010. This change is primarily due to non-operating activities.
Change in the Fair Value of Warrant Liabilities
The change in the fair value of warrant liabilities decreased our net loss by $0.4 million for the year ended December 31, 2011 and decreased our net loss by $0.9 million for the year ended December 31, 2010. The change is attributable to a decrease in the fair value of our common stock and in the contractual life over which the associated preferred stock warrant liabilities are marked to market.
Liquidity and Capital Resources
Historical Cash Flows
From our inception in April 1999 through June 30, 2012, we have financed our operations primarily through sales of privately placed shares of convertible preferred stock and promissory notes.
Our primary uses of cash are to fund operating expenses, inventory purchases and the acquisition of machinery and equipment. Cash used to fund operating expenses excludes the impact of non-cash items such as the provision for excess and obsolete inventory, write-off of equipment depreciation, stock-based compensation and non-cash interest expense and is impacted by the timing of when we pay these expenses as reflected in the change in our outstanding accounts payable and accrued expenses. Acquisitions of machinery and equipment primarily consist of our cost to manufacture INFINITI analyzers utilized in our domestic placement plans, purchases of laboratory equipment, computer hardware and software and facility improvements.
As of June 30, 2012, we had cash and cash equivalents of $0.3 million compared to $23,000 and $61,000 as of June 30, 2011 and December 31, 2007.2011, respectively.
The following table summarizes our cash flows for each of the periods indicated:
Years ended December 31, | Six months ended June 30, | |||||||||||||||
2010 | 2011 | 2011 | 2012 | |||||||||||||
(unaudited) | ||||||||||||||||
(in thousands) | ||||||||||||||||
Net cash provided by/(used in) operating activities | $ | (6,736 | ) | $ | 2,846 | $ | (1,118 | ) | $ | 632 | ||||||
Net cash provided by/(used in) investing activities | (260 | ) | (5 | ) | — | (89 | ) | |||||||||
Net cash provided by/(used in) financing activities | 6,503 | 2,783 | 1,012 | (295 | ) | |||||||||||
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$ | (493 | ) | $ | (68 | ) | $ | (106 | ) | $ | 248 | ||||||
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Operating Activities
Net cash used in operating activities for the year ended December 31, 2010 of $6.7 million consisted of a net loss of $19.7 million, a decrease of $0.9 million related to the change in the fair value of preferred and common stock warrant liabilities and a decrease of $0.3 million in the reserve for doubtful accounts offset by $4.2 million of changes in working capital, $3.8 million of non-cash interest expense and amortization of debt discount/premium related to our promissory notes, $2.9 million in stock compensation expense, $1.0 million in impairment costs related to film coating equipment, $0.8 million of depreciation and amortization, $0.9 million in deferred rent expense and tenant improvement allowances related to our corporate headquarters, $0.4 million of amortization of deferred financing costs and an increase of $0.3 million in reserves for excess and obsolete inventory. The primary changes in working capital were increases of $0.7 million of prepaid and other current assets, $0.4 million in accounts receivable and decreases of $1.9 million in other current liabilities and accrued expenses offset by increases of $5.7 million in accounts payable and decreases of $1.4 million in inventory.
Net cash used in operating activities for the year ended December 31, 2011 of $2.8 million consisted of a net loss of $10.0 million and a decrease of $0.4 million related to changes in the fair value of preferred and common stock warrant liabilities offset by $3.3 million of non-cash interest expense and amortization of debt discount/premium related to our promissory notes, $1.7 million in stock compensation expense, $1.3 million of changes in working capital, $0.7 million of depreciation and amortization, $0.4 of amortization of deferred financing costs and $0.3 million in deferred rent expense related to our corporate headquarters. The primary changes in working capital were an increase of $2.0 million in accounts payable offset by increases of $0.6 million in accounts receivable and decreases of $0.1 in other current liabilities and accrued expenses.
Net cash used in operating activities for the six months ended June 30, 2011 of $1.1 million consisted of a net loss of $5.1 million and a decrease of $0.5 million related to changes in the fair value of preferred and common stock warrant liabilities offset by $1.9 million of non-cash interest expense and amortization of debt discount/premium related to our promissory notes, $1.3 million of changes in working capital, $0.6 million in stock compensation expense, $0.4 million of depreciation and amortization, $0.2 of amortization of deferred financing costs and $0.1 million in deferred rent expense related to our corporate headquarters. The primary changes in working capital were increases of $1.2 million in accounts payable and $0.1 million in other current liabilities and accrued expenses.
Net cash provided by operating activities for the six months ended June 30, 2012 of $0.6 million consisted of a net profit of $0.5 million, $1.5 million of non-cash interest expense and amortization of debt discount/premium related to our promissory notes, $0.4 million in stock compensation expense, $0.3 million of depreciation and amortization, and an increase of $0.2 million in deferred rent expense related to our corporate headquarters and an increase of $0.1 million in reserves for excess & obsolete inventory offset by $2.1 million of changes in working capital and a decrease of $0.3 million related to changes in the fair value of preferred and common stock warrant liabilities. The primary changes in working capital were increases of $1.1 million in accounts receivable, $0.4 million in prepaid expenses, $0.4 million in inventory and a decrease of $0.2 million in accounts payable and other current liabilities and accrued expenses.
Investing Activities
Net cash used in investing activities for all periods noted above consisted primarily of invested capital and facility investment to manufacture INFINITI analyzers utilized in our domestic placement plans and purchases of machinery and equipment, including furniture, computer equipment and software, in support of all functional areas of the business.
Financing Activities
For the years ended December 31, 2010 and 2011 and the six months ended June 30, 2011 and 2012, net cash provided by financing activities consisted primarily of net proceeds from the sale of promissory notes and shares of Series E Convertible Preferred Stock issued in private placement transactions of $6.1 million, $2.8 million, $1.0 million and $1.7 million, respectively. We also made payments on promissory notes and accrued interest in the amount of $2.0 million in the six months ended June 30, 2012. We used the proceeds from the issuances of the notes for general corporate purposes. Certain of these promissory notes limit our ability to incur additional indebtedness.
Promissory Notes
As of June 30, 2012, we had an aggregate of $24.3 million of principal and accrued interest under outstanding promissory notes, including those described above. For each additional day that the notes remain outstanding, we are required to pay approximately $5,000 of additional interest under the notes. As of June 30, 2012, there was an aggregate of $3.9 million of principal and accrued interest outstanding under promissory notes we have issued to our directors, executive officers and holders of more than 5% of our common stock.
The following table describes the components of our outstanding indebtedness as of the following dates:
December 31, | June 30, 2012 | |||||||||||
2010 | 2011 | |||||||||||
(unaudited) | ||||||||||||
(in thousands) | ||||||||||||
Subordinated Promissory Notes, 13% interest, due July 2011 | $ | 5,071 | $ | — | $ | — | ||||||
Subordinated Promissory Notes, 6% interest, due November to December 2011 | 595 | — | — | |||||||||
Senior Promissory Notes, 13% interest, due December 2011 | — | 400 | — | |||||||||
Senior Promissory Note, 13% interest, due February 2012 | — | 3,500 | 2,200 | |||||||||
Short Term Notes Payable, 12% interest, due April & May 2012 | — | 175 | 695 | |||||||||
Short Term Notes Payable, 10% interest, due June 2012 | — | — | 1,150 | |||||||||
Subordinated Promissory Notes, 7% interest, due December 2012 | 300 | 1,200 | 1,200 | |||||||||
Subordinated Promissory Notes, 8% interest, due December 2012 | 500 | 500 | 500 | |||||||||
Subordinated Promissory Notes, 6% interest, due February to June 2012 | 10,715 | 10,794 | 10,794 | |||||||||
Subordinated Promissory Notes, 6% interest, due December 2012 | 2,000 | 2,345 | 2,345 | |||||||||
Subordinated Promissory Notes, 13% interest, due December 2012 | $ | — | $ | 2,000 | $ | 2,000 | ||||||
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Total | 19,181 | 20,914 | 20,884 | |||||||||
Unamortized premium/(discount) | (2,522 | ) | (281 | ) | 163 | |||||||
Accrued interest | 2,120 | 2,882 | 3,445 | |||||||||
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Outstanding balance | $ | 18,779 | $ | 23,515 | $ | 24,492 | ||||||
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In February and March 2010, we issued $525,000 aggregate principal amount of subordinated promissory notes to certain accredited investors. The notes bear interest at the rate of 6.0% per annum, with the principal and accrued interest balances generally due two years after the date of issuance, depending on the provisions of the note. In connection with the issuance of these notes, we also issued warrants to purchase 149,100 shares of our common stock with an exercise price of $4.00 per share. The warrants are now fully exercisable and have a term of five years from their date of issue.
In March 2010, we issued $5,250,000 aggregate principal amount of subordinated notes in a private placement to certain accredited investors. The notes bear interest at the rate of 6.0% per annum, with the principal and accrued interest balances due two years after the date of issuance. In the private placement, we also issued warrants to purchase 1,575,000 shares of our common stock with an exercise price of $5.00 per share. The warrants are now fully exercisable and have a term of five years from their date of issue.
In April 2010, we and the applicable note holder amended a subordinated promissory note with a principal amount of $1,000,000 set to mature in August 2010 by extending the maturity date to April 2011. In connection with this amendment, we cancelled a warrant to purchase 284,000 shares of our common stock at an exercise price of $7.00 per share held by the note holder which was to expire five years after the issuance date, and reissued a warrant to purchase 284,000 shares of our common stock at an exercise price of $5.00 per share to the note holder which will expire six and one-half years after the original issuance date. Also in April 2010, we and the applicable note holders amended certain subordinated promissory notes with an aggregate principal amount of $5,040,000 set to mature between August 2010 and December 2011 by extending the maturity dates to April 2012. In connection with these amendments, we cancelled warrants to purchase 1,431,360 shares of our common stock at an exercise price of $7.00 per share held by the note holders which were to expire five years after the issuance date and reissued warrants to purchase 1,431,360 shares of our common stock at an exercise price of $5.00 per share to the note holders which will expire six and one-half years after the original issuance date.
In November 2010, we and the applicable note holder amended certain promissory notes with an aggregate principal amount of $2,500,000 set to mature in August 2010, February 2011, May 2011 and November 2011, by extending the maturity dates to December 2012. In connection with these amendments, we cancelled warrants to purchase 710,000 shares of our common stock at exercise prices of $4.00, $5.00 and $7.00 per share held by the note holder and reissued warrants to purchase 710,000 shares of our common stock at an exercise price of $3.00 per share to the note holder which will expire in January 2016.
From December 2010 through May 2011, we issued $1,300,000 aggregate principal amount of promissory notes to certain accredited investors. The notes bear interest at the rate of 7.0% per annum, and generally mature in December 2012. In connection with this offering, we also issued warrants to purchase 390,000 shares of our common stock with an exercise price of $3.00 per share. The warrants have a term of five years from their date of issue.
In June 2011, we and the applicable note holder amended a certain promissory note with an aggregate principal amount of $2,000,000 set to mature in July 2011, by extending the maturity date to December 2012. In connection with this amendment, we cancelled a warrant to purchase 568,000 shares of our common stock at an exercise price of $4.00 per share held by the note holder and reissued a warrant to purchase 568,000 shares of our common stock at an exercise price of $3.00 per share to the note holder which will expire in August 2014.
In August 2011, we and the applicable note holder exchanged promissory notes with an aggregate principal amount of $3,500,000 that matured in July 2011, for promissory notes with an aggregate principal amount of $3,900,000, set to expire December 2011 and February 2012. In connection with this exchange, we cancelled warrants to purchase 852,000 shares of our common stock at an exercise price of $4.00 per share held by the note holder and reissued a warrant to purchase 1,300,000 shares of our common stock at an exercise price of $3.00 to the note holder which will expire in August 2016.
In December 2011, we and the applicable note holders amended promissory notes with an aggregate principal amount of $595,000 that were set to expire in December 2011, by extending the maturity dates to dates in 2012. In connection with this amendment, we amended warrants to purchase 168,980 shares of our common stock by reducing the exercise price from $4.00 per share to $3.00 per share.
From November 2011 through January 2012, we issued $695,000 aggregate principal amount of promissory notes to certain accredited investors. The notes bear interest at the rate of 12.0% per annum, and generally matured in April 2012. In connection with the issuance of these notes, we issued warrants to purchase 347,500
shares of our common stock at an exercise price of $1.73 per share to the note holders which will expire five years from their date of issue.
In February 2012, we and the applicable note holder amended a certain promissory note with a principal amount of $250,000 set to mature in April 2012, by extending the maturity date to June 2012. In connection with this amendment, we amended a warrant to purchase 71,000 shares of our common stock at an exercise price of $5.00 per share held by the note holder, by reducing the exercise price to $3.00 per share and extending the term of the warrant until June 2017.
In February 2012, we and the applicable note holders amended certain promissory notes with an aggregate principal amount of $400,000 set to mature in February 2012, by extending the maturity dates to April 2012. In connection with these amendments, we amended warrants to purchase 113,600 shares of our common stock at an exercise price of $4.00 per share held by the note holder, by reducing the exercise price to $3.00 per share and extending the term of the warrant until April 2017.
In March 2012, we issued $1,150,000 aggregate principal amount of promissory notes to certain accredited investors. The notes bear interest at the rate of 10.0% per annum, with the principal and accrued interest balances matured in June 2012. In connection with the issuance of these notes, we issued warrants to purchase 345,000 shares of our common stock with an exercise price of $1.73 per share which will expire five years from their date of issue.
See the description of our outstanding indebtedness described elsewhere in this prospectus under the heading “Use of Proceeds” and “Note 3. Subordinated Promissory Notes” of our financial statements that are included elsewhere in this prospectus.
Contractual Obligations
As of June 30, 2012, the annual amounts of future minimum payments under certain of our contractual obligations were:
Payments due by period | ||||||||||||||||||||
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Contractual obligations: | ||||||||||||||||||||
Subordinated promissory notes (1) | $ | 24,329 | $ | 24,329 | $ | — | $ | — | $ | — | ||||||||||
Operating lease (2) | 27,886 | 1,590 | 3,439 | 3,814 | 19,043 | |||||||||||||||
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$ | 52,215 | $ | 25,919 | $ | 3,439 | $ | 3,814 | $ | 19,043 | |||||||||||
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(1) | From September 2008 through March 2012, we issued $24.3 million aggregate principal amount of promissory notes in private placements to certain accredited investors. The notes bear a weighted average annual interest rate of 6.8%, with the principal and accrued interest (shown above accrued through June 30, 2012). Most of these notes are now due and owing. We may elect to prepay the notes at any time without penalty. |
(2) | Our lease for our corporate offices in Vista, California commenced on February 1, 2009 and will expire in December 2029. This facility houses our research and development, manufacturing and warehousing operations and our administrative offices. |
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements or any special-purpose entities.
Working Capital Commitments and Liquidity
We have a history of operating losses and negative cash flows since our inception. We may not be able to achieve profitability on an annual basis or maintain profitability over any periods. If we do not consummate this offering or
obtain additional capital from other external sources, we do not have sufficient working capital to fund our planned operations, and repay the current portion of our promissory notes, through December 31, 2012. As a result, our independent registered public accounting firm included an explanatory paragraph relating to our ability to continue as a going concern in its report on our audited financial statements for the year ended December 31, 2011.
We anticipate that our current cash and cash equivalents and cash provided by this offering and our operating activities will be sufficient to meet our currently estimated cash requirements for at least the next 12 months. We anticipate that we will use the net proceeds from this offering to (i) fund the expansion of our sales force, enhance our international distributor support network, and increase our marketing and promotional activity and business development efforts, (ii) support a PMA for our HPV-HR test and 510(k) and CE mark studies and submissions for several tests associated with womens’ health and personalized medicine, (iii) fund research and development activities to add new or enhanced tests to our menu, (iv) fund the expansion of our manufacturing capacity and efficiency, including purchasing automation equipment, (v) satisfy outstanding accounts payable to advisors and service providers incurred in connection with certain of our prior capital raising activities conducted from 2008 through 2010, and (vi) repay principal and interest under our outstanding promissory notes. We anticipate that we will use the remainder of the net proceeds from this offering for additional working capital and general corporate purposes. See “Use of Proceeds.”
We expect capital outlays and operating expenditures to increase over the next several years as we expand our infrastructure, commercialization, manufacturing and research and development activities, and as a result we may need additional capital financing. The amount of additional capital we may need to raise depends on many factors, including:
the level of research and development investment required to maintain and improve our technology, including efforts to expand our molecular diagnostic test menu, to fund clinical studies and trials of our tests and to invest in the development of new analyzers;
the amount of future cash provided by or used in operating activities;
whether or not we are able to amend the terms and/or extend the maturity of our outstanding promissory notes;
the costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;
our need or decision to acquire or license complementary technologies or acquire complementary businesses; and
changes in regulatory policies or laws that affect our operations.
We cannot be certain that additional capital will be available when and as needed or that our actual cash requirements will not be greater than anticipated. If we require additional capital at a time when investment in diagnostics companies or in the marketplace in general is limited by the then prevailing market or other conditions, we may not be able to raise such funds at the time that we desire or any time thereafter. In addition, if we raise additional funds through the issuance of common stock or securities convertible into shares of common stock, the percentage ownership of our stockholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we obtain additional debt financing, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, and the terms of the debt securities issued could impose significant restrictions on our operations. If we raise additional funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our technologies or products, or grant licenses on terms that are not favorable to us.
In the United States, market and economic conditions continue to be challenging with relatively tight credit conditions and slow economic growth. Continued concerns regarding economic growth, recessionary conditions
in certain international economies, healthcare reforms, including changes in reimbursement policies and the scope of health insurance coverage, the levels of sovereign debt in the United States and Europe, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage and real estate market and expected increases in income taxes have contributed to relatively low expectations for the U.S. economy. These conditions, combined with relatively low business and consumer confidence and high levels of unemployment could continue to contribute to adverse market and economic conditions. As a result of these conditions, the cost and availability of credit may continue to be adversely affected by illiquid credit markets and wider credit spreads. Continued uncertainty with respect to these conditions may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our customers. If these market conditions continue, they may limit our ability to timely satisfy maturing liabilities, and access the capital markets to meet liquidity needs and invest in new technologies and products, resulting in adverse effects on our financial condition and results of operations.
Critical Accounting Policies, Significant Judgments and Estimates
Our financial statements and related notes included elsewhere in this prospectus arehave been prepared in accordance with United States generally accepted accounting principles in the United States.policies, or GAAP. The preparation of these statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues,revenue, costs, and expenses and related disclosures. We base such estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Changes in accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by company management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement preparation, financial condition, results of operations and cash flows will be affected.
The following accounting policies involve a greater degree of judgment and complexity than our other accounting policies. Accordingly, these are the policies we believe to be most critical to understanding and evaluating our financial condition and results of operation.operations.
Revenue recognitionRecognition
We generateOur revenue is primarily derived from the salesales of our products, which includeINFINITI analyzers and the INFINITI™ Analyzer, consumable products including the BioFilmChip™, Intellipac™BioFilmChip, Intellipac Reagent Management Module, and various disposable productsitems consumed in theby our diagnostic testing process.process, collectively referred to as consumables. Our productsINFINITI analyzers and all consumables are not sold with a right of return. We offer the INFINITI™ Analyzeroffered through direct sale. In addition, we offer the INFINITI™ Analyzersale in domestic markets and through distributors in international markets. Our INFINITI analyzers are available to domestic customers through our Reagent Access Plan wheredomestic placement plan. In such arrangements, customers receive an INFINITI™ Analyzer is placedanalyzer at the customer’s locationno direct cost in return for a commitment byto purchase minimum quantities of consumables based on an agreed pricing schedule over the contract period, which is usually two years, and which may be extended at the option of the customer or us. We reserve the option to purchase acancel the arrangement and repossess the analyzer if minimum volumequantities of our consumable products. Failure by the customer to satisfy this commitment could result in our reclaiming the INFINITI™ Analyzer. We doconsumables are not recognize revenue on the placement of the INFINITI™ Analyzer through the Reagent Access Plan. Our goal is to establish a large installed base of INFINITI™ Analyzers to achieve a significant recurring revenue stream from the sale of consumable testing products.purchased.
We recognize revenue when all four of the following criteria are met: (i) persuasive evidence thatof an arrangement exists, (ii) deliverythe price to the buyer is fixed or determinable, collectability is reasonably assured and risk of loss transfers, normally upon shipment. For sales that include customer specific acceptance criteria, revenue is recognized when the acceptance criteria have been met. Credit is extended based upon the evaluation of the product(s) has occurred, (iii)customer’s financial condition. Collectability is assessed based on a number of factors, including payment history and the creditworthiness of a customer. If we determine that collection is not reasonably assured, we do not recognize revenue until collection becomes reasonably assured, which is generally upon receipt of cash. We do not request collateral from our customers. We recognize revenue when the products have been shipped and the title and risk of loss have been transferred.
In instances where final acceptance of the product or system is required, we defer revenue until all the acceptance criteria have been met. The rights granted in the domestic placement plan in exchange for a minimum
annual purchase commitment constitutes a leasing arrangement. When a customer enters into a domestic placement plan agreement, the lease revenue is dependent on purchases of consumables, which is not measurable at the inception of the lease, and thus is accounted for as contingent rentals in their entirety. Accordingly, lease revenues are excluded from minimum lease payments but included in revenue as the consumables are purchased. The cost of the leased equipment is depreciated over its useful life and the expense included in cost of sales.
Arrangements to sell products to customers frequently include multiple deliverables, including the sale of the INFINITI analyzer combined with the sale of consumables. Sales to foreign distributors include training of their field agents whom will be responsible for installation, training, and maintenance for their customers internationally. We do not provide any price protection, rights of return, or extended payment terms to the distributors. Prior to January 1, 2011 we recognized revenue upon completion of training as we could not establish vendor-specific objective evidence (“VSOE”) of the training. Beginning on January 1, 2011, we adopted new authoritative guidance on multiple-element arrangements, using the prospective method for all arrangements entered into or materially modified from the date of adoption. Under this new guidance, we allocate arrangement consideration in multiple-element revenue arrangements at the inception of an arrangement to all deliverables or those packages in which all components of the package are delivered at the same time, based on the relative selling price method in accordance with the selling price hierarchy, which includes: (i) VSOE if available; (ii) third-party evidence (“TPE”) if VSOE is fixednot available, and determinable, and (iv) collectibility(iii) best estimate of selling price (“BESP”) if neither VSOE nor TPE is reasonably assured. In addition, we recordavailable.
Implementation of this new authoritative guidance had an insignificant impact on reported revenue in accordance with guidelines established by the Securities and Exchange Commission, or SEC, Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition. SAB No. 104 guides the timing ofas compared to revenue recognition based on factors including the passage of title, installation, payments, and customer acceptance. These accounting pronouncements require the use of significant management judgment. We use judgment when we assess collectability based on a customer’s credit worthiness and past payment history. If payment cannot be reasonably assured, we defer recognition of revenue until receipt of payment.
Warranty
We generally provide a one yearone-year warranty on the INFINITI™ Analyzer.our INFINITI analyzers. Accruals are provided for the estimated warranty expense at the time the associated revenue is recognized. The estimates of warranty expense are based on actual expenses incurred historically to service our INFINITI analyzers. We do not accrue warranty expense for international sales because our international distributors are responsible for servicing any INFINITI analyzers they sell to customers. Because we do not recognize revenue on the INFINITI™ Analyzer. Theseplacement of our INFINITI analyzers through our domestic placement plans, we also do not accrue any associated warranty expense. Warranty expense accruals by their very natureinherently require the use of management judgment. If we were to experience an increase in warranty claims or if our cost of servicing these warranties increased, our gross margins would be affected adversely. We periodically review our actual warranty expense to ensure that it is not materially different than actual results.
Income taxesTaxes
We account for income taxes utilizing the asset and liability method, in accordance with Statement of Financial Accounting Standards, or SFAS, No. 109,Accounting for Income Taxes.method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for tax loss carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income or expense in the period that includes the enactment date. Future tax benefits are recognized to the extent that realization of such benefit is more likely than not.
In June 2006, the FASB issued FASB Interpretation, or FIN, No. 48,Accounting for Uncertainty in Income Taxes—an Interpretation of FASBStatement No. 109. FIN No. 48 establishes a single model to address accounting for uncertain tax positions. FIN No. 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN No. 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. We adopted the provisions of FIN No. 48 on January 1, 2008.
At December 31, 2007,June 30, 2012, we had federal tax net operating loss carryforwards of $25,123,471$68.1 million and state tax net operating loss carryforwards of $24,582,952.$56.9 million. At December 31, 2011, we had federal tax net operating loss carryforwards of $67.9 million and state tax net operating loss carryforwards of $56.8 million. The federal and state tax net operating loss carryforwards will begin to expire in 20192020 and 2011,2012, respectively. At June 30, 2012 and at December 31, 2007,2011 we had federal research and development credit carryforwards of $558,166$1.1 million and state research credit carryforwards of $654,415.$1.3 million. The federal research and development credit carryforwards will begin to expire in 2022. The state research credit carryforwards do not expire.
Utilization of net operating loss carryforwards, credit carryforwards and certain deductions may be subject to substantial annual limitation due toas a result of ownership change limitations provided by the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, and similar state provisions. The tax benefits related to future utilization of federal and state net operating loss carryforwards, credit carryforwards and other deferred tax assets may be limited or lost if cumulative changes in ownership exceedsexceed 50% within any three-year period. We have not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since our formation due toas a result of the complexity and cost associated with such a study, and the fact that there may be additional ownership changes in the future. Such a limitation may occur as a result of a change in ownership resulting from this offering. If we have experienced an ownership change at any time since our formation, utilization of the net operating loss or credit carryforwards to offset future taxable income and taxes, respectively, would be subject to an annual limitation under Section 382 of the Internal Revenue Code, which is determined by first multiplying the value of our stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of all or a portion of the net operating loss or credit carryforwards before utilization. Until a study is completed and any limitation known, no amounts ofall domestic net operating losses orand tax credit carryforwards are being considered as an uncertain tax position and disclosed as unrecognized tax benefits under FIN No. 48 since nocurrent guidance. No tax benefits from our domestic net operating losses and tax credit carryforwards have been realized to date. The deferred tax assets related to these domestic loss and credit carryforwards and the offsetting valuation allowances have also been removed from the financial statements with no impact on earnings. These amounts are not recognized until they can be measured after a Section 382 analysis is completed.
Stock-based compensation
Prior to January 1, 2006, we accounted for stock-based employee compensation arrangements using the intrinsic value method of Accounting Principles Board, or APB, Opinion No. 25,Accounting for Stock Issued to Employees and related interpretations. Prior to January 1, 2006, we utilized the minimum value method to comply with the disclosure-only provisions of SFAS No. 123,Accounting for Stock-Based Compensation, as amended by SFAS No. 148,Accounting for Stock-Based Compensation, Transition and Disclosure. The pro forma net loss disclosed under the disclosure-only provisions of SFAS No. 123 were materially consistent with the net loss disclosed for the nine months ended December 31, 2005. Under APB Opinion No. 25, compensation expense for employees is based on the excess, if any, of the fair value of our common stock over the exercise price of the option on the date of grant. No stock-based compensation expense was recorded under APB Opinion No. 25 for the nine months ended December 31, 2005.
Effective January 1, 2006, we adopted prospectively SFAS No. 123R,Share-Based Payment, which requires compensationCompensation expense related to share-basedstock-based transactions, including employee stock options, to beis measured and recognized in the financial statements based on fair value. SFAS No. 123R revises SFAS No. 123,
The value of the portion of the award that is ultimately expected to vest is recognized as amended, and supersedes APB Opinion No. 25. Under the prospective approach, SFAS No. 123R applies to new awards and to awards modified, repurchased or cancelled after the required effective date. We recognize compensation expense over the vestingrequisite service period using the straight-line method and classify these amountsclassified in the statement of operations based on the department to which the related employee reports.
Under SFAS No. 123R, we elected to Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes valuation model to calculatedetermine the fair value of stock options.grants. The fair valuedetermination of stock options was estimated at each grant date using the following assumptions:
Years ended December 31, | Three months ended March 31, | |||||||||||
2006 | 2007 | 2007 | 2008 | |||||||||
Risk-free interest rate | 4.75 | % | 4.51 | % | 4.54 | % | 3.15 | % | ||||
Dividend yield | — | — | — | — | ||||||||
Expected life of options (years) | 6.18 | 5.86 | 5.78 | 5.86 | ||||||||
Volatility | 70.00 | % | 66.00 | % | 66.00 | % | 66.00 | % |
The weighted average grant date fair value per share of employeegrants using a valuation model is affected by assumptions regarding a number of complex and subjective variables. These variables include the fair value of our common stock, the expected term of our options, granted during the years ended December 31, 2006 and 2007 and the three months ended March 31, 2007 and 2008 was $0.34, $0.32, $0.31 and $0.86, respectively.
We derived the risk-free interest rate assumption from the U.S. Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those ofour expected stock price volatility over the expected term of the award being valued. We based the assumed dividend yield on our expectation that we will not payoptions, stock option exercise and cancellation behaviors, risk-free interest rates, and expected dividends, in the foreseeable future. We calculatedwhich are estimated as follows:
• | Fair Value of Our Common Stock. Because our stock is not publicly traded, we must estimate the fair value of our common stock, as discussed in “Common Stock Valuations” below. |
• | Expected Term. We estimate the expected term of our options using the simplified method allowed under SEC guidance. |
• | Volatility. As we do not have a trading history for our common stock, the expected stock price volatility for our common stock is estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock options. Industry peers consist of several public companies similar in size, stage of life cycle and financial leverage. We do not rely on implied volatilities of traded options in our industry peers’ common stock because the volume of activity has been relatively low. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock price becomes available, or until circumstances change such that the identified companies are no longer similar to us, in which case more suitable companies whose share prices are publicly available would be utilized in the calculation. |
• | Risk-free Interest Rate. The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group. |
• | Dividend Yield. We have not historically paid cash dividends or distributions and do not intend to pay cash dividends or distributions in the foreseeable future. Consequently, we used an expected dividend yield of zero. |
The following table presents the weighted average expected lifeassumptions used to estimate the fair value of options usinggrants during 2010, 2011 and for the simplified methodsix months ended June 30, 2012:
Years ended December 31, | Six months ended June 30, 2012 | |||||||||||
2010 | 2011 | |||||||||||
(unaudited) | ||||||||||||
Fair value | $ | 2.01-2.74 | $ | 1.73 | $ | 1.26 | ||||||
Risk-free interest rate | 1.35% - 2.93% | 0.80% - 1.23% | 0.80% | |||||||||
Dividend yield | — | — | — | |||||||||
Expected life of options (years) | 5.00 - 6.25 | 5.08 - 6.25 | 5.50 | |||||||||
Volatility | 68.65% - 71.59% | 69.89% - 75.00% | 69.89% |
Information for the first six months of fiscal year 2011 is not included in the above chart as prescribed by SAB No. 107,Share-Based Payment. This decision was based on the lack of relevant historical data due to our limited historical experience. In addition, due to our limited historical data, the estimated volatility also reflects the application of SAB No. 107, incorporating the historical volatility of comparable companies with publicly-available share prices. SFAS No. 123R requiresthere were no option grants during that period. We estimate forfeitures to be estimated at the time of grant and revised,revise, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We utilized our historical forfeitures to estimate our future forfeiture rate at 4%4.0% for 2006, 2007the years ended December 31, 2010 and 2011 and the threesix months ended MarchJune 30, 2011 and 2012.
The weighted average exercise price per share of employee stock options granted during the years ended December 31, 20072010 and 2008. Prior to adoption of SFAS No. 123R, we accounted for forfeitures of stock option grants as they occurred.2011 and the six months ended June 30, 2012 was $2.42, $1.73 and $1.73, respectively.
Common Stock Valuations
We engaged SVB Analytics, Inc., or SVB Analytics, an unrelated third-partyare required to estimate the fair value of the common stock underlying our stock-based awards when performing the fair value calculations with the Black-Scholes valuation specialist,model. The fair value of the common stock underlying our stock-based awards was determined on each grant date by our board of directors, with input from management. All options to perform a contemporaneous valuation analysispurchase shares of our common stock asare intended to be granted with an exercise price per share no less than the fair value per share of December 31, 2006, December 31, 2007our common stock underlying those options on the date of grant, based on the information known to us on the date of grant. In the absence of a public trading market for our common stock, on each grant date, we develop an estimate of the fair value of our common stock in order to determine an exercise price for the option grants. We have determined the fair value of our common stock using methodologies, approaches and April 30, 2008. Each valuation was prepared in accordanceassumptions consistent with the methodologies prescribed by the American Institute of Certified Public Accountants, or AICPA, Audit and Accounting Practice Aid Series:Valuation of Privately-Held-CompanyPrivately Held Company Equity Securities Issued as Compensation,. In accordance with or the AICPA guidance, SVB AnalyticsPractice Guide. In addition, our board of directors considered a variety of valuation methodologies (market approach, income approachvarious objective and cost approach). As of December 31, 2006 and December 31, 2007, SVB Analytics calculated the final enterprise valuations using a weighted combination of the results of both the market approach and the income approach and allocated this valuesubjective factors, along with input from management to the common stock based on the option pricing method. As of April 30, 2008, SVB Analytics utilized a probability weighted expected return method, or PWERM, to allocate value to the common stock. The enterprise values concluded in the PWERM analysis were based on a combination of market and income approaches and an option pricing method back solve technique. Given our proximity to a liquidity event (i.e., this offering) it was believed that greater clarity was available to the company to define and estimate likely outcomes. As such, the PWERM provided a more refined estimate of the likely value of common stock. These analyses result in estimates of the fair market value of our common stock at December 31, 2006, December 31, 2007 and April 30, 2008 of $0.50 per share, $0.64 per share and $2.75 per share, respectively. Since we had no specific corporate milestones between December 31, 2007 and April 30, 2008 to
which we could specifically assign the change in valuation during that period, we allocated the change ratably to each of the four months in the period.
The valuation methodologies employed by SVB Analytics in the determination of enterprise value as of December 31, 2006 and 2007 were based on three primary factors: (i) market approach using publicly traded comparables, (ii) market approach using M&A transaction comparables and (iii) income approach using discounted cash flow analysis. The market approach using publicly traded comparables is based on a revenue multiple derived from already public companies that are in the molecular diagnostics industry and have other similar characteristics, including size and business model. The market approach using M&A transaction comparables is based on a revenue multiple derived from M&A transactions for companies that competed in an industry or supplied a service similar to that of ours. The income approach using a discounted cash flow analysis is based on the residual value and free cash flow from our multi-year forecast discounted to present value based on our calculated weighted average cost of capital, or WACC. Each of the above approaches were equally weighted in the determination of our enterprise value for each period based on the current status of our business model and anticipated exit strategies. Once our enterprise value was determined, SVB Analytics then allocated a portion of the enterprise value to our common stock based on the option pricing method. The option pricing method utilizes the conversion rights and liquidation preferences of each class of stock and the Black-Scholes option model to calculate the value of each class of stock based on each security’s relative right to our enterprise value.
For the April 30, 2008 valuation, SVB Analytics relied primarily on the PWERM allocation methodology to estimate the value of the common stock. In its application of the PWERM, our timing and aggregate enterprise value was estimated for various potential liquidity scenarios (including initial public offering, merger and acquisition, or M&A, dissolution/no value to common, or private company). The enterprise values determined for these scenarios were based on income and market approaches as well as an option pricing method back solve technique. The option pricing method back solve approach utilizes the conversion rights and liquidation preferences of each class of stock and the Black-Scholes option model to calculate the value of each class of stock based on each security’s relative right to our enterprise value and is driven by a recent arm’s length transaction involving the sale of Series D preferred stock at $3.25 per share in March 2008. The transaction was considered arm’s length because 61% of the amount sold was to new investors.
Once our enterprise value was determined for each scenario, SVB Analytics then allocated a portion of the enterprise value to our common stock based on a “best economic outcome” model. For the initial public offering scenarios, the value assigned to the common stock is determined using a fully diluted outstanding share analysis based on the conversion of all preferred equity instruments into common stock. For M&A, dissolution/no value to common and private company scenarios, the model uses a break point analysis to determine the various enterprise values at which holders of each series of preferred stock would elect to convert to common stock and the points at which the holders of options and warrants would exercise as a result of the value of the common stock exceeding the exercise price.
The resulting proceeds to the common stockholders were then discounted to present value using our WACC. In those outcomes where we remained a private company, SVB Analytics estimated a likely discount for lack of liquidity as a private company and removed this amount from the value available to common stockholders. Each scenario is then assigned a weighting factor based on the probability of occurrence.
Determining the fair value of our common stock, including: the prices at which we sold shares of preferred stock, the superior rights and preferences of the preferred stock relative to our common stock at the time of each grant, our results of operations, financial position and status of our research and development efforts, our stage of development and business strategy, the lack of an active public market for our common and our preferred stock, and the likelihood of achieving a liquidity event such as an initial public offering, or IPO, or sale of our company in light of prevailing market conditions. The determination of fair value of our common stock also involves complex and subjective judgments including estimates of revenue, earnings, assumed market growth rates and estimated costs, as well as appropriate discount rates. At the time of each valuation,of the below-referenced valuations, the significant estimates used in the discounted cash flow approach included our best estimates of our revenue and revenue growth rates for several years into the future. Although each time we prepared such forecasts for use by SVB Analytics in the preparation of a valuation report, we did so based on assumptions that we believed to be reasonable and appropriate at that time, there can be no assurance that any such estimates for earlier periods or for future periods will prove to be accurate.
Our board of directors utilizes the methodologies described above to calculate our implied enterprise value as of each stock option grant date, taking into account our inability to achieve certain milestones, principally among which was the completion of an initial public offering. A probability-weighted expected return methodology, or PWERM, analysis is then used to allocate a portion of this implied enterprise value based on six possible scenarios: (i) an initial public offering of our common stock in the immediate future at a price per share of our common stock based on an implied enterprise value equal to a multiple of our management’s estimate of our then current-year revenue; (ii) an initial public offering of our common stock at the end of the subsequent fiscal year at a price per share of our common stock based on an implied enterprise value equal to a multiple of our management’s estimate of our next fiscal year’s revenue; (iii) a merger or sale of our company at a date that is approximately two and one-half years in the future at a price per share of our common stock based on an implied enterprise value equal to a multiple of our management’s estimate of that future fiscal year’s revenue; (iv) a merger or sale of our company at the end of the second future fiscal year ending after the then-current fiscal year at a price per share of our common stock based on an implied enterprise value equal to a multiple of our management’s estimate of that future fiscal year’s revenue; (v) a dissolution of our company with no value available to be distributed to the holders of our common stock; and (vi) remaining a private company. For the initial public offering scenarios, the value assigned to our common stock was determined using the number of outstanding shares of our common stock assuming the conversion of all outstanding shares of our preferred stock into shares of our common stock. For the merger or sale scenarios, a break point analysis was used to determine the various enterprise values at which holders of each series of our outstanding shares of preferred stock would elect to convert their shares of our preferred stock into shares of our common stock and the points at which the holders of outstanding options and warrants to acquire shares of our common stock would exercise their options or warrants. The values allocated to our common stock as of a future date under each scenario by the PWERM analysis are then discounted using a weighted average cost of capital to calculate an implied present value of the value allocated to our common stock under the PWERM analysis.
There is inherent uncertainty in these estimates and if we had made different assumptions than those described above, the fair value of the underlying common stock and amount of our stock-based compensation expense, net income (loss), and net income (loss) per share amounts would have differed.
The following is a quarterly summary of our stock option activity beginning in 2007:since January 1, 2011:
Grants made during quarter ended | Number of options granted | Exercise price | Fair value per share | Intrinsic value per share | ||||
March 31, 2007 | 471,000 | $0.50 | $0.50 | $ — | ||||
June 30, 2007 | 116,000 | $0.50 | $0.50 | $ — | ||||
September 30, 2007 | — | $0.50 | $0.50 | $ — | ||||
December 31, 2007 | 85,000 | $0.50 | $0.50 | $ — | ||||
March 31, 2008 | 89,000 | $0.50 | $1.14 | $0.64 | ||||
March 31, 2008 | 300,000 | $0.55 | $1.14 | $0.59 |
Grant date (1) | Number of options granted | Exercise price ($ per share) | Fair market value ($ per share) (2) | |||||||||
June 22, 2011 | 89,000 | 1.73 | 1.73 | |||||||||
August 3, 2011 | 600,218 | 1.73 | 1.73 | |||||||||
May 17, 2012 | 275,000 | 1.73 | 1.73 |
In July 2008,
(1) | The grant date for options represented in the above table is considered to be the date the key terms and conditions of the award are approved by our board of directors or compensation committee, as applicable. |
(2) | Represents the fair market value of our common stock at the date of grant as estimated by our board of directors on the date of grant. |
Significant factors considered by our board of directors in determining the fair value of our common stock at these grant dates include:
June 2011 Grant. On June 22, 2011, our board of directors determined that the fair value of our common stock was $1.73 per share. As part of this determination, our board of directors considered a valuation analysis prepared as at December 31, 2010. This valuation analysis used the following valuation methodologies to calculate our enterprise value: (i) a selected companies analysis using publicly available information regarding historical and compensation committee approved amendmentsprojected future financial performance, including last twelve months, or LTM, and projected next fiscal year revenues for 14 companies in the molecular diagnostics industry with publicly traded equity securities, (ii) a selected transactions analysis using publicly available information regarding the historical financial performance, including LTM revenues, for 27 companies in the molecular diagnostics industry that had been
acquired and (iii) a discounted cash flow analysis to determine the options granted duringnet present value of our future cash flows based on our management’s best estimates of our future financial performance from January 2012 to December 2016. We then utilized a PWERM analysis to allocate a portion of this implied enterprise value to our common stock on the quarter ended March 31, 2008same principles described above. For purposes of this PWERM analysis, the present values calculated for our common stock under each of the possible outcomes were weighted based on management’s estimates of the probability of each scenario occurring (initial public offering - early: 15.0%, initial public offering - late: 20.0%, merger/sale - high: 5.0%; merger/sale - low: 10.0%; dissolution: 25.0%; and staying private: 25%).
Finally, because our stock was not publicly traded, the implied present value of the value allocated to change their exerciseour common stock under the PWERM analysis was discounted for lack of marketability based on the Black-Scholes valuation model to take into account variables including an expected time to liquidity under the six possible scenarios described above, the potential share price per share tovolatility of our common stock, and a risk-free rate of return. The foregoing analysis resulted in an estimate of the fair market value of a share ofour common stock onas of December 31, 2010 of $1.73 per share.
Our board of directors concluded that no significant internal or external value-changing events had taken place between the December 31, 2010 valuation and the date of this stock option grant. During that six-month period, we were experiencing significant capital constraints due to the withdrawal of our initial public offering in 2010 and the slowdown in the economy generally.
August 2011 Grant. On August 3, 2011, our board of directors determined that the fair value of our common stock was still $1.73 per share. As part of this determination, our board of directors concluded that no significant internal or external value-changing events had taken place since the June 2011 grant date. It therefore considered the valuation analysis prepared as at December 31, 2010, which is more fully described under “— June 2011 Grant” above. Between June 22 and August 3, 2011 we continued to experience significant capital constraints due to outstanding promissory note obligations and the continued economic slowdown.
May 2012 Grant. On May 17, 2012, our board of directors determined that the fair value of our common stock was still $1.73 per share. As part of this determination, our board of directors concluded that no significant internal or external value-changing events had taken place since the August 2011 grant date. It therefore considered the valuation analysis prepared as at December 31, 2010, which is more fully described under “— June 2011 Grant” above. Between August 3, 2011 and May 17, 2012, we continued to experience significant capital constraints due to increasing amounts of outstanding promissory note obligations that had come due and were expected to come due in the immediate future, and the continued economic slowdown, countered by increasing revenues.
Retrospective Valuations
In August 2012, we conducted a retrospective valuation of our common stock as of December 31, 2011, and used the following valuation methodologies to calculate our enterprise value: (i) a selected companies analysis using publicly available information regarding historical and projected future financial performance, including LTM and projected next fiscal year revenues for 14 companies in the molecular diagnostics industry with publicly traded equity securities, (ii) a selected transactions analysis using publicly available information regarding the historical financial performance, including LTM revenues, for 30 companies in the molecular diagnostics industry that had been acquired and (iii) a discounted cash flow analysis to determine the net present value of our future cash flows based on our management’s best estimates of our future financial performance from January 2012 to December 2018, utilizing a discount rate based on our weighted average cost of capital.
A PWERM analysis then was used to allocate a portion of the implied enterprise value for our company based on those analyses to our common stock utilizing the same principles described above. For purposes of this PWERM analysis, the present values calculated for our common stock under each of the possible outcomes were
weighted based on management’s estimates of the probability of each scenario occurring (initial public offering - early: 5.0%, initial public offering - late: 15.0%, merger/sale - high: 10.0%; merger/sale - low: 20.0%; dissolution: 30.0%; and staying private: 20%).
Finally, because our stock was not publicly traded, the implied present value of the value allocated to our common stock under the PWERM analysis was discounted for lack of marketability based on the Black-Scholes put option valuation model to take into account variables, including an independent third party appraisal.expected time to liquidity under the six possible scenarios described above, the potential share price volatility of our common stock, and a risk-free rate of return. The foregoing analysis resulted in an estimate of the fair market value of our common stock as of December 31, 2011 of $1.26 per share which was lower than the $1.73 per share exercise price at which we granted stock options in June 2011, August 2011 and May 2012.
Subsequently, in September 2012, we conducted another retrospective valuation of our common stock as of June 30, 2012, and used the following valuation methodologies to calculate our enterprise value: (i) a selected companies analysis using publicly available information regarding historical and projected future financial performance, including LTM and projected next fiscal year revenues for 13 companies in the molecular diagnostics industry with publicly traded equity securities, (ii) a selected transactions analysis using publicly available information regarding the historical financial performance, including LTM revenues, for 31 companies in the molecular diagnostics industry that had been acquired and (iii) a discounted cash flow analysis to determine the net present value of our future cash flows based on our management’s best estimates of our future financial performance from June 30, 2012 to December 2018, utilizing a discount rate based on our weighted average cost of capital.
A PWERM analysis then was used to allocate a portion of the implied enterprise value for our company based on those analyses to our common stock utilizing the same principles described above. For purposes of this PWERM analysis, the present values calculated for our common stock under each of the possible outcomes were weighted based on management’s estimates of the probability of each scenario occurring (initial public offering - early: 10.0%, initial public offering - late: 20.0%, merger/sale - high: 10.0%; merger/sale - low: 20.0%; dissolution: 20.0%; and staying private: 20%).
Finally, because our stock was not publicly traded, the implied present value of the value allocated to our common stock under the PWERM analysis was discounted for lack of marketability based on the Black-Scholes valuation model to take into account variables including an expected time to liquidity under the six possible scenarios described above, the potential share price volatility of our common stock, and a risk-free rate of return. The foregoing analysis resulted in an estimate of the fair market value of our common stock as of June 30, 2012 of $1.71 per share, which was again lower than the $1.73 per share exercise price at which we granted stock options in June 2011, August 2011 and May 2012. While we did not downward adjust our prior fair value determinations for stock-based compensation purposes based on these retrospective valuations, we believe they confirm the conclusion that our stock option grants discussed above were all granted at exercise prices that were equal to or greater than the fair values as of their respective grant dates.
We recognized employee-stock basedemployee stock-based compensation in the statements of operations as follows:
Years ended December 31, | Three months ended March 31, | |||||||
2006 | 2007 | 2007 | 2008 | |||||
Cost of sales | $ 1,077 | $ 10,504 | $ 1,720 | $ 3,708 | ||||
Research and development | 3,650 | 15,435 | 2,961 | 4,960 | ||||
General and administrative | 4,663 | 93,543 | 37,818 | 34,777 | ||||
Sale and marketing | 796 | 12,234 | 1,203 | 6,472 | ||||
$ 10,186 | $131,716 | $ 43,702 | $ 49,917 | |||||
The adoption of SFAS No. 123R did not cause basic and diluted net loss per share of common stock to increase by a significant amount in 2006. No income tax benefit was recognized in the statement of operations for 2006.
Years ended December 31, | Six months ended June 30, | |||||||||||||||
2010 | 2011 | 2011 | 2012 | |||||||||||||
(unaudited) | ||||||||||||||||
(in thousands) | ||||||||||||||||
Cost of sales | $ | 227 | $ | 236 | $ | 73 | $ | 71 | ||||||||
Research and development | 432 | 395 | 122 | 91 | ||||||||||||
General and administrative | 901 | 780 | 306 | 175 | ||||||||||||
Sales and marketing | 1,203 | 166 | 53 | 49 | ||||||||||||
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$ | 2,763 | $ | 1,577 | $ | 554 | $ | 386 | |||||||||
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The total compensation cost related to unvested stock option grants not yet recognized as of March 31, 2008June 30, 2012 was $0.5$2.2 million, and the weighted average period over which these grants are expected to vest is 2.62was 1.4 years.
Based on the initial public offering price of $ per share, the intrinsic value of stock options outstanding at March 31, 2008June 30, 2012 would have been $ million, of which $ million would have and $ million would have been related to stock options that were vested and unvested, respectively, at that date.
We record equity instruments issued to non-employees as expense at theirIn most cases, the fair value overof the related service period asequity securities granted is more reliably determinable than the fair value of the goods or services received. The fair value of an equity award granted to a non-employee generally is determined in accordance with SFAS No. 123R and Emerging Issues Task Force (EITF) Issue No. 96-18,Accounting for Equity Instruments That are Issuedthe same manner as an equity award granted to Other Than Employees for Acquiring, or in Conjunction with Selling Goods and Services, and we periodically revalue them as the equity instruments vest.an employee. Stock-based compensation expense related to non-employee consultants totaled $40,513, $12,217, $5,649, $1,054$0.2 million and $10,847 for the nine months ended December 31, 2005,$0.1 million in the years ended December 31, 20062010 and 2007December 31, 2011, respectively, and $0 for each of the threesix months ended March 31, 2007June 30, 2011 and 2008, respectively.2012.
Inventory Valuation
Our 2008 Equity Incentive Award PlanWe report our inventories net of our reserve for slow-moving and the 2008 Employee Stock Purchase Plan, which we expect will be approved by our stockholders prior to the completion of this offering, would be considered a compensatory plan and compensation expense would be recorded in accordance with the provisions of SFAS No. 123R. Compensation expense will depend on the level of enrollment in these plans and assumptions used in the determination of the fair market value of the stock at date of grant.
obsolete parts. Inventory valuation
Inventory valuations are stated atis valued using the lower of cost (on a first-in, first-out (FIFO) basis) or market value and includeincludes direct labor, materials and manufacturing overhead. Our inventory includes raw materials, work-in-process and finished goods in instrument and reagent production. We periodically review inventory for evidence of slow-moving or obsolete parts and expired reagents, and a reserve is recorded based on management’s reviews of inventories on hand, compared to estimated future usage and sales, shelf-life assumptions, and assumptions about the likelihood of obsolescence.
ResultsRecently Issued Accounting Standards Not Yet Adopted
In May 2011, the Financial Accounting Standards Board, or FASB, issued an amendment to the accounting guidance on fair value measurements to ensure that GAAP and International Financial Reporting Standards have common requirements for fair value measurement and disclosures, including a consistent definition of operationsfair value. The guidance is effective for interim and annual periods beginning on or after December 15, 2011. We adopted this guidance and it did not have a material impact on our financial statements for the period ended June 30, 2012.
ComparisonIn June 2011, the FASB issued an amendment to the accounting guidance on the presentation of comprehensive income. The guidance eliminates the option to present components of other comprehensive income as part of the three monthsstatement of changes in stockholders’ equity, and instead requires that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We adopted this guidance and it did not have a material impact on our financial statements for the period ended MarchJune 30, 2012.
In December 2011, the FASB issued an amendment to the accounting guidance on disclosures about offsetting assets and liabilities. The guidance requires an entity to disclose both gross and net information about financial instruments and derivative instruments that are eligible for offset in the balance sheet or subject to an enforceable master netting arrangement or similar agreement. The guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. We do not expect the adoption of this guidance will have a material impact on our financial statements.
Under Section 107(b) of the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Ernst & Young LLP resigned from acting as our independent registered public accounting firm in August, 2010, and so was not asked to report on our financial statements for our fiscal year 2010. We did not have any disagreements with Ernst & Young LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure that was not resolved to the satisfaction of Ernst & Young LLP or that would have caused Ernst & Young LLP to make reference to the subject matter of the disagreement(s) in connection with its reports on our financial statements.
Prior to its resignation, Ernst & Young LLP had identified the following issues in its audit of our balance sheets as of December 31, 2008 and 2007
Revenue
Sales revenue for2009, and the three months ended March 31, 2008 was $0.2 million compared to $0.1 million for the three months ended March 31, 2007. Revenue for the quarter ended March 31, 2008 was from salesrelated statements of consumables while revenues for the quarter ended March 31, 2007 primarily were from INFINITI™ Analyzer sales. Our INFINITI™ Analyzer incorporates a leading third party operating system, and we are dependent on the third party to notify its customers when it makes changes to the operating system. We did not ship any INFINITI™ Analyzers during the quarter ended March 31, 2008 due to problems associated with changes made to the third party operating system. We have since resolved these problems and recommenced shipping INFINITI™ Analyzers.
Cost of sales
Cost of sales for the three months ended March 31, 2008 was $1.0 million compared to $0.6 million for the three months ended March 31, 2007. The increase was due primarily to increases in costs related to staffing, manufacturing overhead in anticipation of production requirements to meet anticipated sales demand, and amortization of INFINITI™ Analyzers capitalized under our Reagent Access Plan.
Research and development
Research and development expenses for the three months ended March 31, 2008 were $0.7 million compared to $0.7 million for the three months ended March 31, 2007. Research and development consulting and headcount related expense increases in 2008 were offset by non-recurring bonus payments in 2007.
General and administrative
General and administrative expenses for the three months ended March 31, 2008 were $0.7 million compared to $0.5 million for the three months ended March 31, 2007. The increase was driven by increased legal costs related to new patent applications and increased administrative payroll to support our anticipated growth.
Sales and marketing
Sales and marketing expenses for the three months ended March 31, 2008 were $0.9 million compared to $0.6 million for the three months ended March 31, 2007. The increase in sales and marketing expense was due to increased personnel costs, including travel costs, related to the increase in headcount in support of anticipated sales growth.
Interest income
Interest income for the three months ended March 31, 2008 was $0.1 million compared to interest income of $0.1 million for the three months ended March 31, 2007.
Interest expense
Interest expense for the three months ended March 31, 2008 was $0.1 million compared to interest expense of $0 for the three months ended March 31, 2007. The interest expense for the three months ended March 31, 2008 was related to notes convertible into shares of our Series Doperations, convertible preferred stock.
Change in the fair value of warrant liabilities
The change in the fair value of warrant liabilities increased our net loss by $0.2 million for the three months ended March 31, 2008stock and decreased our net loss by $33,000 for the three months ended March 31, 2007. The change is due primarily to the increase in the value of the underlying preferred stock.
Comparison of the years ended December 31, 2007stockholders’ deficit, and 2006
Revenue
Sales revenuecash flows for the year ended December 31, 2007 was $1.6 million compared to $0.5 millionand for each of the yeartwo years in the period ended December 31, 2006. The increase in revenue resulted from sales of INFINITI™ Analyzers in the United States driven by the expansion of our national sales force2009:
we had incurred recurring operating losses and the commencement of sales in the European Union through exclusive territorial arrangements with experienced medical technology distributors.
Cost of sales
Cost of sales for the year ended December 31, 2007 was $3.7 million compared to cost of sales of $2.1 million for the fiscal year ended December 31, 2006. The increase was due primarily to
increases in costs related to staffing, manufacturing overhead in anticipation of production requirements to meet anticipated sales demand, and amortization of INFINITI™ Analyzers capitalized under our Reagent Access Plan.
Research and development
Research and development expenses for the year ended December 31, 2007 were $2.6 million compared to $2.3 million for the fiscal year ended December 31, 2006. The increase in research and development costs was related to increased material requirements and staffing to support the development of our expanding menu of diagnostic tests and continued improvement of the INFINITI™ Analyzer.
General and administrative
General and administrative expenses for the year ended December 31, 2007 were $2.4 million compared to $1.5 million for the year ended December 31, 2006. The increase was driven by increased patent costs and increased payroll and consulting feeshad insufficient working capital to support our growing infrastructure.then planned operations, which raised substantial doubt about our ability to continue as a going concern;
Sales
we had material weaknesses in our internal control over financial reporting that resulted from two different internal control deficiencies. The first involved the failure to appropriately document negotiated terms and marketing
Salesconditions that deviated from our standard terms and marketing expenses forconditions, and to consistently and accurately communicate the year ended December 31, 2007 were $2.7 million compared to $1.0 million fornegotiated terms so that the fiscal year ended December 31, 2006.transactions could be properly recorded in the accounting records. The increase in sales and marketing expense was due to increased personnel costs, including travel costs,second related to the increasemisapplication of generally accepted accounting principles with respect to the timing of recognition of revenue for product sales characterized by multiple deliverables or additional elements; and
we had a material weakness in headcountour internal control over financial reporting related to our financial statement closing process, which resulted from having identified numerous post-closing accounting adjustments that we were required to record in supportconnection with the preparation of our sales growth.
Interest income
Interest income for2009 financial statements, and we discovered in the year ended December 31, 2007 was $0.3 million compared to $0.1 million for the year ended December 31, 2006. Our average cash balance for the year ended December 31, 2007 was higher due to the issuancefirst quarter of shares of Series C convertible preferred stock late in fiscal 2006 and early in fiscal 2007.
Interest expense
Interest expense for the year ended December 31, 2007 was $0 compared to interest expense for the year ended December 31, 2006 of $0.2 million. The interest expense for the year ended December 31, 2006 was2010 certain errors related to issuance of notes convertible into shares of our Series C convertible preferred stock.
Change in the fair value of warrant liabilities
The change in the fair value of warrant liabilities decreasedaccounting for warrants issued with our net loss by $0.1 million for both the years ended December 31, 2007subordinated promissory notes. These errors involved calculating and December 31, 2006. The change was due to the decrease inallocating the fair value of the related warrants as a resultand calculating the amortization of the declining expected life utilizedrelated interest expense.
See also “—Internal Control over Financial Reporting” below.
We engaged Marcum LLP as our independent registered public accounting firm in December 2010. Our audit committee of our board of directors approved this engagement. Prior to Ernst & Young LLP’s resignation and prior to the pricing model.
Comparisonappointment of Marcum LLP, we did not consult with Marcum LLP regarding the year ended December 31, 2006 and the nine months ended December 31, 2005
Revenue
Sales revenue for the year ended December 31, 2006 was $0.5 million compared to $0.3 million for the nine months ended December 31, 2005. The increase in revenue was attributable to salesapplication of the INFINITI™ Analyzer.
Cost of sales
Cost of sales was $2.1 million for the year ended December 31, 2006 compared to $1.0 million for the nine months ended December 31, 2005. The increase was due primarily to increases in costs related to staffing, manufacturing overhead in anticipation of production requirements to meet anticipated sales demand, and amortization of INFINITI™ Analyzers capitalized under our Reagent Access Plan.
Research and development
Research and development expenses were $2.3 million for the year ended December 31, 2006 compared to $1.8 million for the nine months ended December 31, 2005. Research and development activities were similar in both years with the difference in total expense relatedaccounting principles to a full year of spending in 2006 compared to only nine months in 2005.
General and administrative
General and administrative expenses were $1.5 million forspecific completed or contemplated transaction or any matter that was either the year ended December 31, 2006 compared to $0.8 million for the nine months ended December 31, 2005. The increase in general and administrative expense related to headcount increases during 2006 and a full year of spending in 2006 compared to only nine months in 2005.
Sales and marketing
Sales and marketing expenses were $1.0 million for the year ended December 31, 2006 compared to $0.7 million for the nine months ended December 31, 2005. Sales and marketing activities were similar in both years with the difference in total expense related to headcount increases during 2006 and a full year of spending in 2006 compared to only nine months in 2005.
Interest income
Interest income for both the year ended December 31, 2006 and the nine months ended December 31, 2005 was $0.1 million.
Interest expense
Interest expense for the year ended December 31, 2006 was $0.2 million compared to $0 for the nine months ended December 31, 2005. The interest expense for the year ended December 31, 2006 was related to the issuance of notes convertible into shares of our Series C convertible preferred stock.
Change in the fair value of warrant liabilities
The change in the fair value of warrant liabilities decreased our net loss by $0.1 million for the year ended December 31, 2006 and decreased our net loss by $33,000 for the nine months ended December 31, 2005. The change is due primarily to the greater number of warrants outstanding in 2006.
Liquidity and capital resources
Historical cash flows
From inception in April 1999 through March 2008, we have financed our operations primarily through sales of privately placed shares of convertible preferred stock.
Our primary uses of cash are to fund operating expenses, inventory purchases and the acquisition of machinery and equipment. Cash used to fund operating expenses excludes the impact of non-cash items such as the provision for excess and obsolete inventory, depreciation, stock-based compensation and non-cash interest expense and is impacted by the timing of when we pay these expenses as reflected in the change in our outstanding accounts payable and accrued expenses. Acquisitions of machinery and equipment primarily consist of our cost to manufacture INFINITI™ Analyzers utilized in our Reagent Access Plan, purchases of laboratory equipment, computer hardware and software and facility improvements.
As of March 31, 2008, we had cash and cash equivalents of $9.3 million compared to $2.6 million as of December 31, 2007.
The following table summarizes our cash flows for each of the periods indicated:
Nine months ended December 31, 2005 | Years ended December 31, | Three months ended March 31, | |||||||||||||
2006 | 2007 | 2007 | 2008 | ||||||||||||
(in thousands) | |||||||||||||||
Net cash used in operating activities | $(4,785 | ) | $(5,839 | ) | $(9,447 | ) | $(2,086 | ) | $(3,246 | ) | |||||
Net cash used in investing activities | (141 | ) | (790 | ) | (1,031 | ) | (238 | ) | (235 | ) | |||||
Net cash provided by financing activities | 2,738 | 9,676 | 7,685 | 6,499 | 10,146 | ||||||||||
$(2,188 | ) | $ 3,047 | $(2,793 | ) | $ 4,175 | $ 6,665 | |||||||||
Operating activities
Net cash used in operating activities for the nine months ended December 31, 2005 consisted primarilysubject of a net lossdisagreement or a reportable event, or regarding the type of $3.9 million and offsetting changes in various working capital accounts. The primary changes in working capital accounts were an increase of $1.1 million in inventory as a result of increased purchasing and production activity in anticipation of increased sales volume, offset by a net decrease of $0.2 million of other working capital accounts.
Net cash used in operating activities for the year ended December 31, 2006 consisted of a net loss of $6.4 million plus $0.1 million related to revaluation of warrant liabilities, offset by depreciation and amortization of $0.2 million, $0.3 million of changes in working capital and other and $0.2 million of non-cash interest expense related to promissory notes, which have now converted into shares of convertible preferred stock. The primary changes in working capital accounts were an increase in accounts receivable of $0.3 million as a result of the timing of sales near year-end, offset by a decrease of $0.5 million in inventory as a result of the timing of sales and inventory receipts near year-end.
Net cash used in operating activities for the year ended December 31, 2007 consisted of a net loss of $9.3 million plus $1.0 million of changes in working capital and $0.1 million related to revaluation of warrant liabilities, offset by depreciation and amortization of $0.4 million and $0.6 million of non-cash compensation. The primary changes in working capital accounts were an increase of $0.8 million in inventory as a result of increased purchasing and production activity in anticipation of increased sales volume and an increase of $0.4 million in accounts receivable as a result of significant sales growth in 2007, offset by an increase of $0.2 million in accounts payable as a result of increased operational volume and the timing of payments.
Net cash used in operating activities for the three months ended March 31, 2008 consisted of a net loss of $3.2 million plus $0.5 million of changes in working capital, offset by depreciation and amortization of $0.1 million, $0.1 million of non-cash interest expense related to promissory notes, which have now converted into shares of convertible preferred stock, $0.2 million related to revaluation of warrant liabilities and $0.1 million of other non-cash items. The primary changes in working capital accounts were an increase of $0.7 million in inventory as a result of increased purchasing and production activity in anticipation of increased sales volume and a net change of $0.2 million of other working capital accounts, offset by an decrease of $0.4 million in accounts receivable as a result of the collection of outstanding balances related to significant sales volume in the fourth quarter of 2007.
Investing activities
Net cash used in investing activities for all periods noted above consist primarily of cost to manufacture INFINITI™ Analyzers utilized in our Reagent Access Plan and purchases of machinery and equipment, including furniture, computer equipment and software, in support of all functional areas of the business.
Financing activities
Net cash provided by financing activities for all periods noted above consist primarily of sales of shares of convertible preferred stock in private placements.
Contractual obligations
As of December 31, 2007, the annual amounts of future minimum payments under certain of our contractual obligations were:
Payments due by period | ||||||||||
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||
(in thousands) | ||||||||||
Contractual obligations | ||||||||||
Capital lease | $ 2 | $ 2 | $— | $— | $— | |||||
Operating lease (1) | 951 | 431 | 520 | — | — | |||||
Total | $953 | $433 | $520 | $— | $— | |||||
Off-balance sheet arrangements
We do not have any off-balance sheet financing or unconsolidated special-purpose entities.
Working capital commitments and liquidity
We anticipate that our current cash and cash equivalents and cash provided by operating activities, together with the net proceeds of this offering, will be sufficient to meet our currently estimated needs for at least the next 12 months. However, we may need additional financing to execute on our current or future business strategies. We expect capital outlays and operating
expenditures to increase over the next several years as we expand our infrastructure, commercialization, manufacturing, and research and development activities. The amount of additional capital we may need to raise depends on many factors, including:
the level of research and development investment required to maintain and improve our technology, including efforts to expand our molecular diagnostic applications menu, to fund clinical studies and trials of our applications and to invest in the enhancement of our INFINITI™ Analyzer;
the amount of future cash provided by or used in operating activities;
the costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;
our need or decision to acquire or license complementary technologies or acquire complementary businesses; and
changes in regulatory policies or laws that affect our operations.
We cannot be certain that additional capital will be available when and as needed or that our actual cash requirements will not be greater than anticipated. If we require additional capital at a time when investment in diagnostics companies or in the marketplace in general is limited due to the then prevailing market or other conditions, we may not be able to raise such funds at the time that we desire or any time thereafter. In addition, if we raise additional funds through the issuance of common stock or securities convertible into shares of common stock, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we obtain additional debt financing, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, and the terms of the debt securities issued could impose significant restrictions on our operations. If we raise additional funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our technologies or products, or grant licenses on terms that are not favorable to us.
Recent accounting pronouncements
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurement, which defines and establishes a framework for measuring the fair value of assets and liabilities when required or permitted by other standards within generally accepted accounting principles in the United States but does not require any new fair value measurements. SFAS No. 157 also expands disclosures about fair value measurements and is effective for all financial statements issued for fiscal years beginning after November 15, 2007. However, in February 2008 the FASB issued FSP No. 157-2,Effective Date of FASB Statement No. 157, which delays the effective date of SFAS No. 157 in accordance with the provisions in FSP No. 157-2 as of January 1, 2008. The adoption of SFAS No. 157 did not have a significant impact on our financial statements and the resulting fair values calculated in accordance with SFAS No. 157 were not significantly different than the fair values that would have been calculated in accordance with the previous guidance.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities, which allows an entity to choose to measure certain
financial instruments and liabilities at fair value. Subsequent measurements for the financial instruments and liabilities an entity elects to measure at fair value will be recognized in earnings. SFAS No. 159 also establishes additional disclosure requirements. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 did not have a significant impactrendered on our financial statements.
In June 2007, the FASB ratified EITF Issue No. 07-3,Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities. EITF No. 07-3 provides clarification surrounding the accounting for nonrefundable research and development advance payments, whereby such payments should be recorded as an asset when the advance payment is made and recognized as an expense when the research and development activities are performed. EITF No. 07-3 is effective for interim and annual reporting periods beginning after December 15, 2007. We adopted EITF No. 07-3 as of January 1, 2008. The adoption of EITF No. 07-3 did not have a significant impact on our financial statements.
In December 2007, the FASB ratified EITF Issue No. 07-1,Accounting for Collaborative Agreements, which addresses the accounting for participants in collaborative agreements, defined as contractual arrangements that involve a joint operating activity, that are conducted without the creation of a separate legal entity. EITF No. 07-1 requires participants in a collaborative agreement to make separate disclosures for each period a statement of operations is presented regarding the nature and purpose of the agreement, the rights and obligations under the agreement, the accounting policy for the agreement, and the classification of and amounts arising from the agreement between participants. These arrangements involve two or more parties who are both active participants in the activity and that are exposed to significant risks and rewards dependent on the commercial success of the activity. EITF No. 07-1 provides that a company should report the effects of adoption as a change in accounting principle through retrospective application to all periods and requires specific additional disclosures. EITF No. 07-1 is effective for interim and annual reporting periods beginning after December 15, 2008. We are currently assessing the impact the adoption of EITF No. 07-1 will have on our financial statements.
Qualitative and quantitative disclosuresQuantitative Disclosures about market riskMarket Risk
Our exposure to market risk is currently confined to our cash and cash equivalents. We have not used derivative financial instruments for speculation or trading purposes. In addition, we have not invested in Auction Rate Securities. auction rate securities. Our subordinated promissory notes have a weighted average fixed annual interest rate of 6.8%.
The primary objective of our investment activities is to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. To achieve these objectives, we invest our cash primarily in liquid money market funds. As a result, we believe we have minimal interest rate risk; however,risk. Due to our limited funds invested in interest bearing accounts, a one percentage point change in the average interest rate on our portfolioinvested funds would have changedhad a minimal effect on interest income for 2007the years ended December 31, 2010 and 2011 and the six months ended June 30, 2012.
Our international sales are all denominated and paid in U.S. dollars and as a result we believe we are not exposed to foreign exchange currency risk.
Internal Control over Financial Reporting
Overview
In connection with the audits of our financial statements for the years ended December 31, 2010 and 2011, and the review of our financial statements for the period ended June 30, 2012, both our independent registered public accounting firm and our management discovered several conditions that we deemed to be material weaknesses and significant deficiencies in our internal controls under the standards established by approximately $40,000.the Public Company Accounting Oversight Board, or PCAOB.
According to the PCAOB’s definitions, a deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A deficiency in design exists when (a) a control necessary to meet the control objective is missing or (b) an existing control is not properly designed so that, even if the control operates as designed, the control objective would not be met. A deficiency in operation exists when a properly designed control does not operate as designed or when the person performing the control does not possess the necessary authority or competence to perform the control effectively. A significant deficiency is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of a company’s financial reporting. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.
We are committed to maintaining effective internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. We believe that the actions we have taken to date and that we expect to take in the future, as set forth in greater detail below, to enhance the reliability and effectiveness of our internal control over financial reporting will substantially remediate our material weaknesses and significant deficiencies in our internal control over financial reporting. We also intend to continue to enhance our internal control over financial reporting following the completion of this offering. However, our independent registered public accounting firm has not evaluated the measures we have taken to address our material weaknesses, and will not be able to confirm to us that these material weaknesses have been remediated until our independent registered public accounting firm has completed its next audit of our financial statements. There can be no assurance that our internal control over financial reporting, as modified or remediated, will allow us to identify or avoid future material weaknesses or significant deficiencies. The material weaknesses described below are
primarily related to the lack of personnel with the appropriate skills and experience, particularly with respect to technical accounting matters, and the lack of policies and procedures related to the financial reporting and period closing processes.
Material Weaknesses
We noted several issues related to effective oversight by management primarily attributed to lack of significant prior audit experience and expertise relating to complex accounting issues (such as debt and equity accounting and valuation). A lack of sufficient controls over debt/equity accounting and recordkeeping of equity and debt holders’ transactions resulted in material adjustments.
We lack a comprehensive, consistent and supportable methodology to capture the cost of manufacturing our inventory, specifically as it relates to labor and overhead charges and inventory reserves. In addition, updates to our costing system were not performed timely to ensure accurate recordkeeping.
A lack of qualified accounting and finance resources as well as effective oversight by those in charge of governance resulted in insufficient controls over timely financial statement preparation and review as well as the inability to timely and accurately account for complex transactions. A lack of technical knowledge and expertise attributed to non-compliance with certain GAAP accounting disclosure requirements.
Improper revenue recognition as it relates to properly recording negotiated terms and conditions in customer agreements that deviate from standard terms and conditions and the related misapplication of the proper guidance related to the timing of revenue recognition for product sales characterized by multiple deliverables or additional elements.
In response to the identification of these material weaknesses, we (i) intend to hire additional finance and accounting personnel in addition to providing more assistance on equity accounting, or otherwise engage a third party finance specialist to perform that accounting function for us, (ii) are in the process of establishing a review process to effectively supervise the entries made by our finance personnel, and (iii) terminated, in 2010, one of our sales personnel who had contributed to the failure to communicate negotiated terms and conditions, revised our sales and revenue recognition policies and procedures and trained our personnel with respect to the revised policies and procedures, and amended our code of ethics and required all employees to certify compliance with this code.
Significant Deficiencies
We have noted that our design of monitoring controls used to assess the design and operating effectiveness of our internal controls is inadequate and constitutes a significant deficiency. We also do not have an adequate internal process to report deficiencies in internal control to management on a timely basis. We intend to address our significant deficiency in the design of monitoring controls by establishing better operating controls and involve our board of directors in this process, which will involve establishing formal procedures to communicate deficiencies in internal controls on a timely basis, and request that our board of directors more actively participate in guiding management as it relates to such matters.
Conclusion. Although we plan to take steps to substantially remediate, and have identified the means by which we intend to substantially remediate, the material weaknesses and significant deficiencies that have been identified to date, all as further described above, our remediation efforts may not be successful, or we may in the future have additional material weaknesses or significant deficiencies in our internal control over financial reporting. Failure to implement and maintain effective internal control over financial reporting could result in material misstatements in our financial statements. For more information, see the section titled “Risk Factors — We have identified material weaknesses and significant deficiencies in our internal controls, and we cannot
provide assurances that these weaknesses and deficiencies will be effectively remediated or that additional material weaknesses and significant deficiencies will not occur in the future. If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud, or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price,” included elsewhere in this prospectus above.
Overview
We design, develop, manufacture and market a fully integratedthe INFINITI molecular diagnostics system. The system calledincludes an extensive and expanding menu of genetic tests and a family of highly automated analyzers. Our tests provide reference laboratories, hospitals and specialty clinics with genetic test results in a broad range of markets, including personalized medicine, women’s health, oncology and infectious disease. Each of our genetic tests is performed on an INFINITI analyzer utilizing our high-margin and test-specific consumables, which include our proprietary BioFilmChip microarrays and our proprietary Intellipac Reagent Management Modules. Our INFINITI analyzers are capable of both mid- to high-volume testing and generating many different laboratory results from one patient sample at the INFINITI™ thatsame time, which is commonly referred to as multiplexing, while providing a high level of accuracy and reproducibility. Our INFINITI system is easy to use, as it eliminates the need for multiple, specialized instruments and automates many of the traditionally discrete processes of genetic testing performed by clinical laboratories. Genetic data is an important component of disease management and also can inform how patients are likely to respond to treatments. Our system is designed to run a broad menu of tests, the results of which may assist in detecting the predisposition to and presence of disease, monitoring disease progression and/or guiding appropriate therapy. We believe that the versatility of our system to run the broad menu of tests that we currently offer and are developing will facilitate the acceptance and rapid adoption of our system and reduce the need for multiple testing technologies, platforms and specialized technicians in the laboratory. Our system is cost-effective, easy to use, highly sensitive and designed to test for multiple biomarkers on the same sample simultaneously. We believe these attributes could significantly improve laboratory productivity, workflow and cost per reportable result over existing technologies and methods and could allow a broader range of laboratories, including those operated by smaller hospitals, to perform molecular diagnostics tests. Our system is designed to permit us to develop new and enhanced applications without modification to our platform. The INFINITI™ system is also capable of proteomic analysis.testing.
The INFINITI™ system consists of the INFINITI™ Analyzer and the consumable products used to run tests on our system, including the BioFilmChip™ Microarray and the Intellipac™ Reagent Management Module. The INFINITI™ system is designed to address the major areas of infectious disease, cancer, genetic disorders, personalized medicine (pharmacogenetics), cardiovascular disease/thrombophilia, women’s health, newborn screening and central nervous system disorders. As of June 30, 2008,2012, we offered 26 applications,50 tests for use on our INFINITI analyzers and had more than 15 additional tests in development. Our current and in-development tests are focused on the areas of personalized medicine (including pain management, mental health and cardiovascular health assessment), women’s health, oncology, infectious disease, genetic disorders, newborn screening and blood banking, which we planbelieve represent large and growing market opportunities in genetic testing. We believe the depth and breadth of our test menu is a significant competitive advantage that will allow laboratories to utilize laboratory space, labor and capital investment more efficiently and to conduct additional molecular diagnostic tests. The proprietary design of our INFINITI system allows us to introduce six additional applications bynew and enhanced tests to our genetic test menu without the end of the first quarter of 2009. As weneed to modify our INFINITI analyzers. We intend to increase the number of available applications, we expect that laboratories usingtests offered in each of our target market segments, which will further increase the utility of our INFINITI system will be able to broaden theirour customers. Our internal test development efforts are generally driven by our customers’ current and anticipated needs, our analysis and projections for the molecular diagnostics offerings without additional capital investment or operator training. Ourmarket, and our ability to leverage our core competencies such as automation and multiplexing. We have entered into, and expect to continue to enter into, collaborative relationships with leading offerings include: (i) tests designed to identify mutations in patients that may cause an increased sensitivity to Warfarin, marketed as Coumadin, the most-prescribed anticoagulantresearch and academic institutions for thromboembolic therapy in North America and Europe; (ii) primary screening and genotyping (risk profiling) tests for Human Papillomavirus (HPV), the primary cause of cervical cancer; (iii) a test designed to identify genetic mutations associated with an increased risk of developing cystic fibrosis, an inherited chronic disease that affects the lungs and digestive system; and (iv) a test designed to identify variants of CYP450 2D6, a gene estimated to be involved in the metabolism of as many as 20% of commonly prescribed drugs, and which is used to guide appropriate therapies. Additionally, we expect that our near-term offerings will include a test to detect the presence of four infections that are associated with the development of pelvic inflammatory disease, a pharmacogeneticadditional or enhanced tests to further increase the depth and breadth of our genetic test to identify gene mutations that affectmenu. Since the toxicity and efficacyinitial launch of the cancer drug Fluorouracil, a pharmacogenetic test to identify patients that may respond to certain lung cancer treatments and a test to detect the presence of certain types of nontuberculous mycobacteria.our INFINITI system in 2007 we have introduced more than five new or enhanced tests per year.
In February 2007, we received 510(k) clearance from the FDA for the commercial sale of the INFINITI™our INFINITI Analyzer. In addition, weWe have also received 510(k) clearance for fourour Warfarin sensitivity test, our CYP450 2C19 test, which is designed to determine the varied efficacy and toxicity of our tests, specifically a test for Warfarin sensitivitycertain highly prescribed drugs based on certain genetic variants, and our Factor II, Factor V and Factor II-V panel tests, which aid in the determination of an individual’s risk for the development of blood clots.
We intend to seek regulatory clearance or approval, as necessary, for our tests. For example:
we have also submitted
notifications notification to the FDA for 510(k) clearance for our uridine diphosphate glucuronosyltransferaseisoform 1A1, (UGT1A1)or UGT1A1, test, which helpsis designed to help determine the initial dosing of irinotecan, a leading cancer drug and our Warfarin Plus test for Warfarin sensitivity with enhanced ethnic characterizations. We have submitted a proposed clinical protocol to the FDA for our pre-investigational device exemption (pre-IDE) meeting to determine the clinical trial necessary to support a premarket approval (PMA) application to the FDA for our HPV screening test, and broad variety of cancers;
we intend to submit a 510(k) notification to the FDA for our cystic fibrosis and our human papillomavirus, or HPV, genotyping tests in 2013;
we are conducting studies in support of and are preparing to submit a pre-investigational device exemption, or pre-IDE, application for our CFTR and Flu A-sH1N1 tests;
we have initiated clinical studies to support future submissions to the FDA for clearance of several of our other tests, including our 2D6, 3A4, 3A5, ureaplasma urealyticum, mycoplasma genitalium, mycoplasma hominis (Urogen Quad), bacterial vaginosis, or BV, candida vaginitis, or CV, chlamydia, gonorrhea and KRAS-BRAF genetic tests; and
we are finalizing the protocol for a clinical trial necessary to support a premarket approval, or PMA, application to the FDA for our HPV-HR tests and intend to commence the clinical trial in 2013;
We obtained theConformité Européenne, or CE, mark for our INFINITI Analyzer in June 2008, our Factor II, Factor V, Factor II-V panel, MTHFR and FII-FV-MTHFR panel tests in August 2008, our HPV Quad test in October 2008 and our HPV genotyping testCFTR-31 assay in 2009. Our HPV primary screening test is designed to identify women at high risk for the developmentNovember 2008. In total, 22 of cervical cancer, and our HPV genotyping application is designed to identify 26 high and low risk types of HPV. Like other companies offering molecular tests on a commercial basis, most of the tests that we offer have not been cleared or approved for diagnostic use by the FDA. These molecular tests are available to laboratories on an RUO basis. As requiredCE marked, with the marking supported by FDA regulations, thesecompleted clinical and validation studies that demonstrated the analytical performance of each CE marked test. The CE mark facilitates the marketing and sale of our INFINITI Analyzer and CE marked tests must be labeled, “For Research Use Only. Not for use in diagnostic procedures.” Although many laboratories may use our products in their own laboratory-developed diagnostic tests, we are not permitted to market these products for diagnostic purposes.the European Union and the European Economic Area as well as other international markets. We intend to pursue FDAseek regulatory clearance or approval, as necessary, for those tests as required byour tests.
We believe that compared to traditional genetic testing methods, our INFINITI system can significantly improve laboratory productivity, workflow and throughput while reducing the FDA. In June 2008, the CE marking of conformity was affixed to the INFINITI™ Analyzer in accordance with the IVDD Directive. The CE marking allows the INFINITI™ Analyzer to be marketed in the European Economic Area.
Certain aspects of the methodcost per reportable result. We believe that these and design of the INFINITI™ system, including certain of the microarray and reagent management technologies used in our system, are covered by eight issued patents (including two in the U.S and six foreign counterparts) and 33 pending patent applications (including 11 in the U.S., 20 foreign counterparts and two Patent Cooperation Treaty applications). We have entered into several collaborative relationships with leading research and academic institutions for the development of additional tests, which we anticipate will allow us to significantly increase the breadthother attributes of our INFINITI system decrease the cost and complexity of genetic testing menu.
Asand reduce the need for specialized laboratory personnel, training, equipment and facilities. Our INFINITI system has been designed to enable a broad range of June 30, 2008, we had an installed base of 58 INFINITI™ Analyzers in reference laboratories, hospital laboratories and specialty clinics to start performing, or to more cost-effectively perform, molecular diagnostic tests, which we believe will facilitate the adoption of our INFINITI analyzers and the utilization of our genetic tests.
We experienced meaningful revenue growth in North America, including ARUP Laboratories, Cleveland Clinic, The Johns Hopkins Hospital, Louisiana State University Hospital Health Science Center, Montreal Heart Institute, New York Presbyterian Hospitalthe first six months of 2012, with revenue of $8.7 million during this period, $7.8 million of which was derived from microarray sales, as compared to revenue of $7.5 million and San Francisco General Hospital.$8.0 million for fiscal years 2010 and 2011, respectively, of which $3.9 million and $6.8 million was derived from microarray sales, respectively. We expect to continue to generate the substantial majority of our revenue through the sale of our genetic tests for the foreseeable future. As of June 30, 2012, we had 175 total INFINITI analyzers placed with customers.
Market opportunityOpportunity
Industry backgroundBackground
Nucleic acids, including deoxyribonucleic acid, or DNA, and ribonucleic acid, or RNA, often are referred to as the basic building blocks of life. GenomicsMolecular diagnostic testing is the study of living organisms’ DNA content and structure. Genomic research for the Human Genome Project and the genetic sequencing of other living organisms have generated a tremendous wealth of information reinforcing the understanding that each individual responds differently to drugs and disease progression. This information is being used to develop tests tomeasure or detect disease states, guide therapy and drug dosing and monitor disease progression. Furthermore, genetic research has facilitated diagnosis of diseases such as cystic fibrosis, cancer and cardiovascular disease. Proteomics is the study of proteins, their functions and their structures and how they interact within an organism. Proteins are one of the primary structural and functional components of the human body. While genes are typically associated with presence or absence of disease states, proteins often reflect the activity of a disease state.
In vitro diagnostic tests are used to detect the presence and quantity of certain substances in biological samples to assist in the diagnosis of diseases. Kalorama Information estimated that the
global market forin vitro diagnostic products was $42 billion in 2007. Molecular diagnostics tests, a new and expanding part of thein vitro diagnostics market, are used to detect the presence of genetic and protein biomarkers associated with a predisposition to, or the presence of, a particular disease or condition. By usingcondition, or other genetic variance such as drug response. The information provided by molecular diagnostics tests, healthcare providers arediagnostic testing may enable physicians to achieve better ablepatient outcomes and better contain health care costs through, for example, earlier diagnosis of disease, improved monitoring of disease progression and more personalized treatment. According to diagnose and monitor diseases, guide treatments and assist in managing chronic conditions. Currently, the clinical market for molecular diagnostics is primarily genetic testing.
Kalorama Information, estimated thatan independent market research firm, the U.S.global molecular diagnostics market was $3.2is expected to grow from an estimated $4.8 billion in 2007. Kalorama Information also has estimated that this market will grow from $3.22010 to $8.1 billion to $5.4 billion between 2007 and 2012,in 2015, which represents a compound annual growth rate of approximately 11%. Kalorama Information further states that, which we believe will exceed the majoritygrowth of the overall diagnostics market.
Current practices in developing and running molecular diagnostic tests are currently conducted using “home-brew” tests and are not included in these estimates. The molecular diagnostics market currently is made up of laboratory developed, or “home-brew” tests, commercially available kits and semi-automated systems. “Home-brew” tests typically entail many highlyinvolve manual and complex procedures andthat require significant expertise, time and expense to develop.
There are a numberexpense. We believe the resource and time constraints of trends that we believe will expandtraditional testing methods have limited the market forgrowth of the molecular diagnostics testing:market and that the recent availability of more automated and integrated testing methods will result in accelerated use of molecular diagnostic testing. Additionally, growing understanding of the utility of genetic information for the diagnosis and treatment of disease, as well the increase in identification of new biomarkers, may lead to increased growth in the molecular diagnostics market.
Our Target Markets
We believe there are additional factors that will continue to drive growth in the molecular diagnostics market segments we target including:
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Healthcare providers are able to better treat patients by optimizing potential efficacy while minimizing the potential for adverse side effects by conducting molecular diagnostic tests prior to prescribing drugs.
Many pharmaceutical researchers, companies, and pharmacy benefit companies are screening drugs for differences in efficacy and toxicity among individuals with varied genetic profiles.
Regulatory agencies have revised drug labels to improve safety and efficacy based on information provided by molecular diagnostic testing.
• | Pain Management. Pharmacogenomics is playing an integral role in the administration and management of pain medication, as gene mutations can be key factors in determining the most appropriate drug to determine efficacy and safety. |
More than 116 million Americans suffer from acute or chronic pain each year. Drugs are the “first line” of treatment for most forms of pain. The goal of successful pain management is to effectively control patient pain without causing excess side effects from the medication prescribed. However only 58% of patients taking prescription medication reported pain relief and fewer than 41% of patients taking over-the-counter pain medication reported relief.
In order to improve clinical outcomes physicians are using genetic markers to enhance pain management and optimize dosing strategy. Opioids are the most frequently prescribed class of pain management drugs in the United States. These drugs, including Hydrocodone, Codeine, Oxycodone, and Morphine, are often indicated for the relief of chronic and moderate to severe post-surgical pain, in addition to pain experienced by cancer patients. According to the IMS Health National Prescription Audit, hydrocodone alone accounted for more than 136.7 million prescriptions in 2011.
We believe key factors accounting for the rising use of these drugs include the expanding population of cancer patients and patients undergoing surgical, including orthopedic, procedures.
• | Mental Health. Mental health represents a major component of overall pharmaceutical sales. According to the Centers for Disease Control and Prevention, or CDC, as much as 11% of the U.S. population is taking antidepressants at a given time, while as many as 23% of women between the age of 40 and 59 are on psychiatric medication. Improving care for mental health patients by tailoring treatment options to their specific genetic profile may continue to drive the expansion of the molecular diagnostics industry. |
An increase in the diagnoses of autism and attention deficit hyperactivity disorder has further expanded the need for treatment to children and adolescents. Because of potential developmental issues that could result from psychiatric drug treatment for minors, doctors must take precautions in choosing medications for young patients.
One of the biggest challenges in treating depression is the lack of reliable efficacy and potential adverse effects of various therapeutic options. Approximately 40% of patients don’t respond to the first medication prescribed. The resulting trial and error process delays effective treatment for patients and increases healthcare costs.
• | Cancer and Companion Diagnostics. Because of the high cost of many cancer therapeutics, and the varied levels of efficacy and toxicity across different patients, tests to direct cancer treatment are becoming increasingly important. In addition, tests to diagnose or determine the predisposition to various forms of cancer are becoming more common. According to Kalorama, the world market for molecular tests in oncology is estimated at $150 million in 2010 and with annual growth of 15% will reach $300 million in 2015. We believe molecular diagnostic testing to determine a particular patient’s expected response to various cancer therapeutics will continue to drive expanded demand for molecular diagnostics. |
The FDA has required or recommended that molecular diagnostic tests be performed before the administration of certain drugs, including Herceptin and Erbitux.
Tests such as Colorectal KRAS-BRAF, KRAS, BRAF, BRAF XP, and EGFR have experienced meaningful clinical adoption due to their ability to improve patient outcomes and decrease costs. For example, Erbitux, a leading treatment for colorectal cancer, costs approximately $61,000 per course of treatment. There are approximately 28,700 colorectal cancer patients in the United States and KRAS mutations occur in up to 45% of colorectal carcinomas. The presence of KRAS mutations suggest that anti-EGFR therapies (Erbitux/Vectibix) will not be effective. If all of these patients had KRAS testing over $600 million in unnecessary treatment expense could be avoided.
• | Cardiovascular HealthAssessment. According to the World Health Organization, or WHO, cardiovascular diseases were responsible for 30% of global deaths in 2008. It is estimated that by 2030, 23.6 million people will die from some form of cardiovascular disease. Due to the increasing prevalence of cardiovascular diseases and the information generated by molecular diagnostic testing, risk assessment for and the treatment of cardiovascular diseases is an area of growth within molecular diagnostics. |
Based on recent research, it is now widely accepted that the efficacy and tolerability of two of the most commonly used drugs in the prevention of cardiovascular disease (Lipitor (atorvastatin) for cholesterol regulation and prevention of cardiovascular disease and Plavix (clopidogrel) for prevention of stent thrombosis and cardiovascular death following acute coronary syndrome) are heavily influenced by a patient’s genetics. Lipitor (atorvastatin) is the top selling drug of its class and was dispensed in more than 40.0 million prescriptions in the United States in 2011. Plavix (clopidogrel) was dispensed in more than 25.0 million prescriptions in the United States in 2010.
• | Women’s Health. We believe the women’s health diagnostics market will continue to grow and represent a substantial market opportunity. Non-molecular tests are commonly employed in this market, but the use of molecular diagnostics is expanding significantly due to increased applications, better performance and better clinical discriminatory capabilities. |
Key tests that have seen rapid adoption of molecular methodologies include HPV testing and sexually transmitted disease, or STD, testing. Current regulations from the U.S. Preventive Services Task Force recommend that molecular HPV tests be utilized in conjunction with cytology (Pap test) in standard 5 year intervals.
• | Infectious Diseases. According to the WHO, infectious diseases caused approximately 20% of all deaths in 2008. Within this group, HIV, tuberculosis, or TB, and respiratory infections were the top three contributors to overall mortality in adults aged 15-59, at 35%, 21% and 10%, respectively. |
Historically, many of these infections required 2 stages of testing: a rapid screening test to confirm the presence of a general infection, followed by a lengthy type-specific culture to assess other clinically significant attributes such as antimicrobial susceptibility. The new paradigm offered by molecular diagnostics, via multiplexing capabilities and gene specific differentiation, allows for simultaneous detection of each infection and the identification of subtypes and drug resistances, all within a clinically acceptable turnaround time.
• | Genetic Disorders. Genetic and inherited disease testing is a cornerstone of molecular diagnostic testing. |
We believe that growth in this area has been, and will continue to be, focused on large markets for testing such as Familial Mediterranean Fever, Thalassemia and sickle-cell anemia, where large-scale populations exhibiting these genetic traits provide an opportunity for high-volume testing.
The adaptability of molecular technologies to the detection of genetic disorders is aided by the ability to simultaneously identify multiple pertinent genetic markers to form a more complete diagnosis.
• | Newborn Screening. Many common newborn screening panels such as cystic fibrosis and various ethnically dependent ailments require the identification of multiple (often five or more) genetic markers which makes traditional testing impractical. Classic testing algorithms are limited in that they utilize subjective analysis of a newborn’s parental health history with little to no genetic evaluation. |
For example, because various Ashkenazi Jewish inherited disorders (such as Tay Sachs) are autosomal recessive, meaning not all parents who carry the necessary genes to produce the disease exhibit symptoms, a targeted genetic evaluation of the affected genes would inform the clinician if the newborn is at risk for developing the disease in question.
• | Blood Banking. As genetic testing products have become more |
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In addition to the large molecular diagnostics marketKey tests in this segment researchinclude blood typing/grouping and applied applications present additional opportunities for geneticinfectious disease screening (e.g., hepatitis B virus/hepatitis C virus, syphilis, and protein testing, including life sciences research, forensics (DNA fingerprinting), biodefense, food safety and environmental applications.HIV 1/2).
The limitationsLimitations of current testing methodsCurrent Testing Methods
Scientists have developed a variety of genomicgenetic analysis methods, including DNA sequencing, gene expression and genotyping, to measuredetect genetic biomarkers. These analytical methods are performed using various genomicgenetic testing technologies, the most common being real time polymerase chain reaction, or PCR,RT-PCR, which involves amplifying or generating billions of copies of, the DNA sequence in question and then detecting the DNA with the use of fluorescent dyes. These technologies are often practiced through “home-brew” tests and commercially available kits, which are largely manually operated and use discrete instrumentation and require results-interpretation techniques utilizing highly skilled labor.
These existing technologiestesting methods have a number of shortcomings thatdrawbacks, which we believe have significantly limited thetheir use, of molecular diagnostics testing, including:
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• | Limited testing menu. |
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• | Limited automation and throughput capability. While a number of companies offer systems that can perform molecular diagnostic tests, these systems tend to automate only certain steps in the testing process. Some of these systems require |
The challenges impacting
• | Specialized labor. Specialized laboratory technicians and in some cases specialized training are required to properly perform and evaluate the quality and accuracy of the results of most existing molecular diagnostics technologies. We believe that there is a labor shortage of specialized laboratory technicians in the clinical laboratory market, which, in addition to the cost of this labor, has limited the availability of molecular diagnostic testing and has restrained the growth of the market. |
• | Inaccurate results and challenges with reproducibility. The additional handling of samples required to operate manual or semi-automated systems can lead to an increased risk of sample contamination and human error. The lack of automation also can lead to problems related to reproducibility of results. In addition, many existing testing systems are not capable of simultaneous target and signal amplification (methods for increasing the detectability of genes) when running a sample, which limits the sensitivity and specificity of these systems and could result in the need for a larger sample size. |
These limitations have created athe need in the molecular diagnostics market for a fullyhighly integrated system to perform standardized,a large menu of automated, cost-effective and cost effectiveeasy to use tests with a high degree of accuracy and sensitivity.reproducibility.
Our solutionThe AutoGenomics Solution
The INFINITI™We believe our INFINITI system isaddresses many of the limitations of current molecular diagnostic technologies. Our INFINITI system has been designed to enable a fully integratedbroad range of reference laboratories, hospital laboratories and specialty clinics to start performing, or to more cost-effectively perform, molecular diagnosticsdiagnostic testing, which we believe will drive adoption and use of our INFINITI system that automatesas well as expand the discrete processespotential of geneticthe molecular diagnostic testing for clinical laboratories. market.
To use the INFINITI™our system, an operator only needs to load prepared test samples into the bench-top INFINITI™ Analyzer,an INFINITI analyzer, along with the specific BioFilmChip™ MicroarraysBioFilmChip and Intellipac™Intellipac Reagent Management Modules that support a broad menu of applications.Module, for the desired test. Once the INFINITI™ AnalyzerINFINITI analyzer is loaded and the tests aretest is initiated, no supervisionfurther action by the operator is required. After the test is completed, the system generates an electronic report that can be transmitted directly to a laboratory information system.
Our INFINITI system has severala number of key advantages, including:
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• | Ability to decentralize molecular diagnostics. We believe that medium-sized reference laboratories, hospital laboratories and specialty clinics are increasingly seeking to add or expand molecular diagnostics capabilities to treat patients more efficiently and provide a more comprehensive offering, lower the cost of providing healthcare, and participate in the value provided by diagnostic testing. We believe that this trend is being facilitated in part by new technologies like ours that are more automated, easier to use, more cost effective and require less bench space in a laboratory than traditional genetic testing methods. |
• | Broad menu of |
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• | Ability to multiplex. Many diseases and |
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• | Better workflow. Our broad offering of INFINITI analyzers combined with the integrated, “load and go” design of the INFINITI system is designed to address our target customers’ varied throughput and workflow requirements. We believe |
• | Increased accuracy of results. Human handling of samples is the most common cause of contamination and error in existing technologies. By |
Our strategyStrategy
Our objective is to become a leading provider of genetic tests to a broad array of customers within our target
market segments. We believe our INFINITI system will allow us to achieve this objective by facilitating molecular diagnostics products to hospitals,diagnostic testing by reference laboratories, hospital laboratories and specialty clinics. Our target molecular diagnostics market segments are infectious disease, cancer, genetic disorders, personalized medicine, cardiovascular disease/thrombophilia, women’s health, newborn screening and central nervous system disorders. To achieve our
objective, we intend to:
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• | Develop and launch new |
• | Target molecular diagnostic laboratories with high potential utilization of our INFINITI system.We believe that our INFINITI system’s automation, broad genetic test menu and family of analyzers designed to address various throughput requirements will generate demand from both larger reference laboratories seeking a more flexible and efficient molecular diagnostic platform and from smaller reference laboratories, hospital laboratories and specialty clinics for whom it has not previously been cost-effective to develop their own tests. We offer our family of INFINITI analyzers to our customers through direct sales and rentals, and through our domestic placement plans, in which the customer’s choice of our INFINITI analyzers is placed at the customer’s location at no direct cost to the customer. We believe that our targeted customer base will generate significant recurring demand for our high margin BioFilmChips and Intellipac Reagent Management Modules consumables. |
• | Expand our domestic sales force and international distribution of our products.We are marketing and selling the INFINITI system in the United States through our own sales and marketing organization, which, as of June 30, 2012, was comprised of 6 sales persons located in key metropolitan cities in the United States. We believe there is a meaningful opportunity to further penetrate existing markets and customers as well as enter new markets by adding to the size and scope of our US salesforce. We have established distributor relationships for the marketing of our INFINITI system in 22 countries outside the United States, including Brazil, Canada, China, Mexico and countries in Europe and the Middle East. We also plan to expand our global distribution networks to address increasing international demand in addition to driving increased utilization with our existing distributors. |
• | Pursue regulatory clearances, approvals and certifications for products and facilities, asnecessary. We have received FDA 510(k) clearance for our INFINITI Analyzer and five of our genetic tests and we have obtained a CE mark for our INFINITI Analyzer and 22 of our tests are CE marked, which are supported by completed clinical and validation studies that demonstrated the analytical performance of the respective test. We believe that most of the tests we submit to the FDA will require 510(k) clearance rather than the more time-consuming and costly process of obtaining a PMA. |
We intend to seek regulatory clearance or approval, as necessary, for our tests. Currently:
we have submitted notification to the FDA for 510(k) clearance for our UGT1A1 test which is designed to help determine the initial dosing of irinotecan, a leading drug for a broad variety of cancers;
we are finalizing the protocol for a clinical trial necessary to support a PMA application to the FDA for our HPV-HR tests and intend to commence the clinical trial in 2013;
we intend to submit a 510(k) notification to the FDA for our CF and our HPV genotyping tests in 2013;
we are conducting studies in support of and are preparing to submit a pre-IDE application for our CFTR and Flu A-sH1N1 tests; and
we have initiated clinical studies to support future submissions to the FDA for clearance of several of our other tests, including our 2D6, 3A4, 3A5, ureaplasma urealyticum, mycoplasma genitalium, mycoplasma hominis (Urogen Quad), bacterial vaginosis (BV), candida vaginitis (CV), chlamydia, gonorrhea and KRAS-BRAF genetic tests.
• | Align with key opinion leaders at leading institutions and increase scientific awareness of our products. |
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Our HPV opportunityProducts
Our INFINITI Analyzers
Our strategy is to becomeINFINITI system includes a key providerfamily of HPV testing products. Weanalyzers that we have developed two HPV tests, one for primary screeningand are marketing under the names INFINITI and INFINITI PLUS, and that we are developing and intend to market under the names INFINITI PLUS 96 and INFINITI HTS. These analyzers are the core of high-risk types of HPV and the other for genotyping, which are available for sale on an RUO basis. Our HPV- QUAD screening testour INFINITI system. Each model is designed to simultaneously detect the presence of high-risk types of HPV in four different patient samples on a single BioFilmChip™. Our HPV genotyping test is designed to identify 26 high and low risk HPV types. We believe our tests will offer several competitive advantages over existing tests such as full automation, low sample requirement, reducing the incidence of QNS (Quantity Not Sufficient) samples (not a sufficient amount of sample left after pap specimen processing for ancillary testing) and a high degree of accuracy and specificity. We submitted a proposed clinical protocol to the FDA for our pre-IDE meeting. At this meeting, we will seek to obtain the FDA’s input regarding the design of the clinical trial necessary to pursue PMA approval of the HPV-QUAD screening test. We believe that this PMA process will take two to three years to complete, although it could take longer dependingaddress customer-specific needs based on the definitive requirements imposed by the FDAcustomer’s productivity, workflow and approval is not assured. We intend to submit a 510(k) notification to the FDA for our HPV genotyping test in 2009.
HPVs are a group of over 100 types of common viruses, of which at least 13 are considered high-risk HPV types that are thought to cause cervical cancer. According to the U.S. Centers for Disease Controlthroughput requirements. Our INFINITI analyzers integrate and Prevention (CDC), there are more than 6.2 million new genital HPV infections per year in the U.S., and women have an 80% chance of acquiring HPV by the time they are 50. Even though only a small percentage of infected women will develop cervical cancer, worldwide it is still second only to breast cancer in incidence and the third most frequent cause of cancer death in women. Worldwide, there are approximately 470,000 new cases of invasive cervical cancer annually, leading to 300,000 deaths each year.
The primary cervical cancer screening method for the last 50 years is the Papanicolaou test (“Pap” test). The conventional Pap test involves obtaining a sample of cervical/vaginal cells and examining the sample under a microscope, while the newer liquid-based Pap test may improve accuracy by removing extraneous cells while preserving the sample cells. Pap results are classified as being normal, abnormal or equivocal (atypical squamous cells of undetermined significance, or ASC-US). ASC-US results are sent for HPV DNA testing or colposcopy. Abnormal or HPV positive results are recommended for colposcopy, and the cervix is examined for abnormalities. A biopsy may also be performed. While the Pap test is currently the standard of care for cervical cancer screening, the Pap test itself has a number of limitations, including: (1) false negative due to sampling errors, (2) inherently subjective nature of the test and (3) limited predictive value and inability to detect high-risk HPV types, the primary cause of cervical cancer. In 2001, the American
Society for Colposcopy and Cervical Pathology (ASCCP) 2001 Consensus Guidelines (published April 2002) recommended HPV DNA testing as an acceptable method for management of women with ASC-US. More recently, the American Cancer Society (ACS) (November 2002), the American College of Gynecologists (ACOG) (August 2003, September 2005), and ASCCP (February 2004, September 2006) updated their guidelines to support the use of a combination of the Pap test and HPV DNA testing as a primary screen for cervical cancer in women age 30 and older. Recent studies have concluded that molecular diagnostics tests for high-risk HPV types are more accurate than the Pap test in detecting cervical cancer.
The finding that cervical cancer primarily occurs in women infected with specific, “high-risk” types of HPV has led to the development of novel, non-cytology-based cervical cancer prevention strategies. HPV DNA testing is used to manage women over the age of 30 with cervical abnormalities detected through screening in order to avoid unnecessary colposcopy and excessive follow-up if the woman is HPV negative.
We believe that over the past several years, the growth of high-risk HPV testing in the U.S. has been driven by: (1) an increasing body of clinical data that highlight the strong negative predictive value of high-risk HPV testing, (2) high risk HPV testing’s inclusion in professional guidelines (ASCCP, ACS, ACOG), (3) increased consumer awareness through direct-to-consumer advertising initiated by a leading provider of HPV DNA testing products and the approval of HPV vaccines and (4) favorable reimbursement coverage. A leading company in the market has estimated that the U.S. HPV testing market in 2007 was approximately $400 million, and that the potential market size may exceed one billion dollars by 2010.
Our products
INFINITI™ Analyzer
The INFINITI™ Analyzer, the centerpiece of the INFINITI™ system, is a bench top instrument that integrates and automatesautomate the discrete processes of sample handling, reagent management, hybridization, detection, and results analysis of genesand reporting in a self-contained system. To avoid contaminationThey have been designed to operate on a “load and go” basis, which means that to run a genetic test, an operator loads prepared samples into the INFINITI analyzer along with the BioFilmChip microarrays and the Intellipac Reagent Management Modules specific to that test. Once an INFINITI analyzer is loaded and the tests are initiated, no supervision is required. From the perspective of samples or reagents, disposable pipette tips are used for each step inthe operator, the test eliminating pumps, plumbing and tubing and resulting in minimal biohazardous liquid waste. The INFINITI™ Analyzer is controlled by the embedded Qmatic™ scheduling software. The software allows the INFINITI™ Analyzer to operate different phases of a testprotocols are identical for several samples concurrently and controls all of our genetic tests, which eliminates the robotic functions of the INFINITI™ Analyzer, assay process protocol, detection system, result analysis and report generation.need to repeatedly train operators when additional tests are added. After the test is completed, the INFINITI™ AnalyzerINFINITI analyzer generates an electronic report that can be transmitted directly to a laboratory information system.
Many of our INFINITI™ Analyzer’s features have been specifically designed for the clinical environment. The INFINITI™ Analyzer has been designed to operate on a “load Our BioFilmChips and go” basis. To run an application, an operator only needs to load prepared test samples into the INFINITI™ Analyzer, along with the specific BioFilmChips™ and Intellipac™Intellipac Reagent Management Modules that supportare test-specific, but are not analyzer-specific so each of our INFINITI analyzers use substantially the same consumables.
The following table illustrates the test capabilities of our different INFINITI analyzers:
Analyzer | Capacity per run | Patient results * | ||
INFINITI | 24 samples | up to 96 per day | ||
INFINITI PLUS | 48 samples | up to 192 per day | ||
INFINITI PLUS 96 (in beta testing) | 96 samples | up to 288 per day | ||
INFINITI HTS (in beta testing) | 384 samples | up to 1152 per day |
* | numbers presented are based on average time to complete an HPV-HR Quad test run |
Our Tests
In developing our menu of genetic tests, we are focused on a broad menurange of applications. Oncemarkets, with a particular emphasis on the INFINITI™ Analyzer is loadedareas of personalized medicine (including pain management, mental health and thecardiovascular health assessment), women’s health, oncology, infectious disease, genetic disorders, newborn screening and blood banking, which we believe represent large and growing market opportunities in genetic testing. We believe that by offering a wide variety of tests are initiated, no supervision is required. Our system optimizes usefor each of laboratory spacethese markets, each of which can be run on all of our INFINITI analyzers, we will provide significant value to reference and simplifies operator interfacehospital laboratories and results analysis from raw data. From the perspective of the operator, the test protocols are identical, which eliminates the needspecialty clinics in these areas by allowing them to repeatedly train operators whenconsolidate multiple testing platforms, expand their testing capabilities, increase workflow and reduce costs, and limit additional applications are added.investment in equipment, personnel and training.
Selected Key Tests in our Focus Market Segments
• | HPV.We have developed four HPV tests, which are designed for screening and/or genotyping and each of which addresses a different segment of the HPV testing market. Our HPV genetic test portfolio includes our HPV-HR Quad and HPV-HR Hex tests, designed to screen for and genotype 14 high-risk types of HPV simultaneously, our HPV Quad test, designed to screen for 13 high-risk and two low-risk types of HPV, and our HPV Genotyping test, designed to identify 26 high-and low-risk types of HPV. Importantly, our HPV tests identify and separately report on the type of HPV present, as opposed to reporting just on the existence of HPV generally, which assists in determining whether the HPV is a new, repeated or persistent infection. Our HPV-HR Quad, HPV-HR Hex and HPV Quad tests are designed to allow a laboratory to test samples from four to six different patients simultaneously on a single BioFilmChip. We believe our tests offer several competitive advantages over existing HPV screening and genotyping tests, such as the consolidation of multiple testing steps required in screening and genotyping, increased automation, reduction of sample requirements and enhanced accuracy and reproducibility. We plan to seek a PMA for our HPV-HR tests and 510(k) clearance for our HPV Genotyping test. Our HPV-HR Quad, HPV Quad and HPV Genotyping tests have been CE marked in accordance with applicable law. |
• | Other STDs.We intend to capitalize on the significant market opportunity in the area of STD testing by providing solutions to address some of the inadequacies and inefficiencies of many current testing methods. Our panels are designed to screen for multiple STDs in a single sample and are well suited to test for these infections in a cost-effective manner. We have launched a variety of panels consisting of tests that our customers use to identify numerous organisms associated with STDs. |
• | Breast Cancer. Breast cancer is the second most-common form of cancer in women. An estimated 230,000 women were diagnosed with, and approximately 40,000 women died of, breast cancer in 2011, the latest year for which data is available. We have developed tests such as our CHEK-2 and the Breast Cancer Panel-AJ tests, which are designed to determine individuals at greater risk for breast cancer, and our CYP450 2D6T test, which is designed to determine if a woman will benefit from tamoxifen, a frequently prescribed drug for the prevention of breast cancer recurrence. We believe that these tests could play an important role in improving the screening, early diagnosis and effective treatment of certain individuals with, or potentially at risk of developing, breast cancer. |
• | Colorectal Cancer.The American Cancer Society estimated that, in 2012, there will be over 100,000 new cases of colon cancer and over 40,000 new cases of rectal cancer, and that these diseases will cause more than 50,000 deaths, making it the second leading cause of cancer-related deaths in the United States. Anti-EGFR drugs have emerged as prevalent anticancer therapeutics as they help neutralize EGFR over-activity that has been linked to several cancers, including colorectal cancer. However, certain genetic mutations are associated with poor response to anti-EGFR therapies. We have developed KRAS and KRAS-BRAF tests, which enable laboratories to identify these mutations. We believe that these tests could assist in reducing healthcare costs while providing better patient outcomes. |
• | Personalized Medicine.We offer 21 tests that may be used by laboratories in the area of personalized medicine. One of our leading personalized medicine offerings is our CYP450 2C19 panel test, which is designed to enable laboratories to identify certain gene variants that affect the metabolism and efficacy of the anticoagulant drug Plavix (clopidogrel). Plavix is the most commonly prescribed anti-platelet drug in the United States, with more than 28 million total prescriptions filled in the United States in 2011, including more than 8 million new prescriptions, based on data from the IMS Health National Prescription Audit. As of March 2010, the FDA now requires the clopidogrel label to include language that informs doctors that patients with CYP450 2C19 mutations have a diminished response to the drug, and thus, such patients may be susceptible to a heart attack, stroke or cardiovascular death due to the ineffectiveness of the drug. This labeling requirement has increased, and future FDA requirements may increase, the demand for genetic tests such as ours. Our other leading tests in this area currently include our CYP450 2C19 Plus, Warfarin and CYP450 2D6I tests, which are designed to enable laboratories to identify certain gene variants associated with responsiveness to certain medications for psychiatric disorders, the oral anticoagulant Warfarin and certain antidepressants and cancer drugs, respectively. Warfarin is the most commonly prescribed anticoagulant in the United States, with more than 33 million total prescriptions filled in the United States in 2011, including more than 15 million new prescriptions, based on data from the IMS Health National Prescription Audit. We believe that our tests could improve patient care and reduce healthcare costs. |
• | Infectious Disease. Infectious disease is a significant category of the molecular diagnostics market. This market segment continues to increase due to the greater necessity for multiplexed tests that can not only identify the presence of an infection but also provide guidance on therapy, namely subtyping to assist in patient management. Our Multidrug Resistance Tuberculosis (MDR-TB) test is one such application. Tuberculosis is the second most deadly infectious disease in the world and resulted in the death of 1.4 million people in 2010. Our MDR-TB product is designed to enable laboratories to identifyMycobacterium tuberculosis infections (as opposed to nontuberculous mycobacterium infections) while simultaneously determining resistance to the three front-line treatments: rifampin, isoniazid and pyrazinamide. |
• | Genetic Disorders.The global genetic disorders testing market is expected to reach $2.2 billion by 2017. A key driver in the rapid adoption of molecular diagnostics in genetic and inherited diseases testing is the ability to multiplex multiple markers into a single test. One such test is our Familial Mediterranean Fever (FMF) panel. FMF is an autoinflammatory disease mutation that is carried by significant portions of populations of selected Mediterranean countries. Some countries, such as Turkey, have started testing broad segments of their populations to identify recessive carriers of the mutation and to better inform these individuals’ reproductive choices. FMF disease can cause recurrent fever and renal failure and is often misdiagnosed. In the United States, as many as 1 in 249 are carriers of this disease. The development of this disease has been attributed to mutations in the MEFV gene; as many as 65% of all cases of FMF are attributed to 5 mutations, with the remainder caused by ethnically specific genetic variations. Our FMF panel allows laboratories to simultaneously identify 13 common MEFV mutations, covering the five most common variations as well as eight other variations spanning 14 ethnicities. |
• | Newborn Screening.Neonatal screening programs are increasingly available across the United States and internationally. However, traditional methods for newborn screening allow the testing of only one |
gene of a particular disease at a time, increasing the burden of testing and adversely affecting patient care by delaying the delivery of critical information. In some cases diagnosis is being performed via subjective evaluation of parental medical histories due to a lack of practical genetic evaluation techniques. As an example, our Ashkenazi Jewish Panel is capable of simultaneously detecting 31 genetic variants that account for eight diseases commonly found among those of Ashkenazi Jewish descent, which greatly facilitates newborn screening by shortening the testing period for these eight diseases from days to hours. |
• | Blood Banking. Blood banking is a rapidly growing market segment where molecular diagnostic technologies are increasingly utilized to optimize current testing algorithms. We have several tests for blood typing and infectious disease screening currently in development that are intended to take advantage of our multiplexed automation capabilities take advantage of our key strength of multiplexed automation. |
INFINITI™ applicationsOur Current Test Menu
As of June 30, 2008,2012, we offered 26 applications, of which four had been cleared by the FDA and 22 were offered on an RUO basis. We plan to introduce six additional applications by the end of the first quarter of 2009. We have targeted several market segments and plan to increase the number applications offered in each segment, thus increasing the utility of our system to customers. We believe the depth and breadth of our application menu is a strong competitive advantage that will allow laboratories to more efficiently utilize laboratory space, labor and capital investment. Each of our applications is sold as a kit that includes BioFilmChips™ and Intellipac™ Reagent Management Modules specific to the application and a buffer solution used to prepare patient samples for testing.
We are developing the following applications:
Of50 genetic tests for use with our applications released for sale listed above, we believe we are the only company currently selling the following tests in the U.S. on an RUO basis:family of INFINITI analyzers:
Product (1) | Application | Market Segments | ||||||||||||||||||
Pain Management (4 tests) | Mental Health (9 tests) | Cardiovascular risk assessment (15 tests) | Other Personalized medicine (21 tests) | Women’s health (14 tests) | Oncology (21 tests) | Infectious disease (14 tests) | Genetic disorders (6 tests) | Newborn screening (4 tests) | ||||||||||||
5-FU (Fluorouracil) | Metabolism of leading cancer drug/toxicity assessment | ¿ | ¿ | |||||||||||||||||
ApoE | Drug metabolism | ¿ | ¿ | ¿ | ||||||||||||||||
Ashkenazi Jewish Panel | Diseases more prevalent in the Ashkenazi Jewish population | ¿ | ¿ | |||||||||||||||||
Bacterial Vaginosis | Bacterial infection - Sexually transmitted disease | ¿ | ¿ | |||||||||||||||||
BRAF | KRAS and BRAF amino acid changes - Metastatic Colorectal Cancer | ¿ | ¿ | |||||||||||||||||
BRAF XP | KRAS and BRAF amino acid changes - Metastatic Colorectal Cancer | ¿ | ¿ | |||||||||||||||||
Breast Cancer Panel - AJ | Breast cancer risk | ¿ | ¿ | ¿ | ||||||||||||||||
Candida Vaginitis | Fungal infection - Sexually transmitted disease | ¿ | ¿ | |||||||||||||||||
CFTR-15 | Cystic fibrosis gene mutation | ¿ | ¿ | |||||||||||||||||
CFTR-31 | Cystic fibrosis gene mutation | ¿ | ¿ | |||||||||||||||||
CHEK-2 | Familial breast cancer risk | ¿ | ¿ | ¿ | ||||||||||||||||
CODX2 | Drug metabolism | ¿ | ¿ | ¿ | ¿ | |||||||||||||||
CT-NG Quad | Gonorrhea, chlamydia | ¿ | ¿ | |||||||||||||||||
CYP450 2C19 (2) | Drug metabolism | ¿ | ¿ | ¿ | ||||||||||||||||
CYP450 2C19 Plus | Drug metabolism | ¿ | ¿ | ¿ | ||||||||||||||||
CYP450 2C19 QUAD (2) | Drug metabolism | ¿ | ¿ | ¿ | ||||||||||||||||
CYP450 2C9 - VKORC1 | Sensitivity to Warfarin | ¿ | ¿ | ¿ | ||||||||||||||||
CYP450 2D6I | Drug metabolism | ¿ | ¿ | ¿ | ¿ | |||||||||||||||
CYP450 2D6T | Efficacy of leading breast cancer drug | ¿ | ¿ | ¿ |
Warfarin XP;
Product (1) | Application | Market Segments | ||||||||||||||||||
Pain Management (4 tests) | Mental Health (9 tests) | Cardiovascular risk assessment (15 tests) | Other Personalized medicine (21 tests) | Women’s health (14 tests) | Oncology (21 tests) | Infectious disease (14 tests) | Genetic disorders (6 tests) | Newborn screening (4 tests) | ||||||||||||
CYP450 3A4 | Drug metabolism | ¿ | ¿ | ¿ | ¿ | |||||||||||||||
CYP450 3A5 | Drug metabolism | ¿ | ¿ | ¿ | ¿ | |||||||||||||||
EGFR | Lung cancer efficacy | ¿ | ¿ | |||||||||||||||||
Factor II (FII) (2) | Increased risk of blood clots | ¿ | ||||||||||||||||||
Factor II Plus | Increased risk of blood clots | ¿ | ||||||||||||||||||
Factor II Plus - V Panel | Increased risk of blood clots | ¿ | ||||||||||||||||||
Factor II/V Panel (2) | Increased risk of blood clots | ¿ | ||||||||||||||||||
Factor V (FV) (2) | Increased risk of blood clots | ¿ | ||||||||||||||||||
Factor V Genotyping | Increased risk of blood clots | ¿ | ||||||||||||||||||
Familial Mediterranean Fever Panel | Familial Mediterranean Fever | ¿ | ¿ | |||||||||||||||||
FII - FV - MTHFR Panel | Increased risk of blood clots | ¿ | ||||||||||||||||||
FII Plus - FV - MTHFR Panel | Increased risk of blood clots | ¿ | ||||||||||||||||||
Flu A-sH1N1 | Flu A-sH1N1 | ¿ | ||||||||||||||||||
HPV - HR HEX | Cervical cancer risk | ¿ | ¿ | ¿ | ||||||||||||||||
HPV - HR Quad | Cervical cancer risk | ¿ | ¿ | ¿ | ||||||||||||||||
HPV Genotyping | Cervical cancer risk | ¿ | ¿ | ¿ | ||||||||||||||||
HPV Quad | Cervical cancer risk | ¿ | ¿ | ¿ | ||||||||||||||||
KRAS | KRAS amino acid changes | ¿ | ¿ | |||||||||||||||||
KRAS-BRAF | KRAS and BRAF amino acid changes - Metastatic Colorectal Cancer | ¿ | ¿ | |||||||||||||||||
Leuko Quad | Gonorrhea, chlamydia, trichomonas vaginalis | ¿ | ¿ | |||||||||||||||||
MDR-1 | Drug metabolism | ¿ | ¿ | |||||||||||||||||
MDR-TB | Drug resistance to leading treatments for tuberculosis | ¿ | ||||||||||||||||||
MTHFR | Increased risk of blood clots | ¿ | ¿ | ¿ | ||||||||||||||||
NAT-2 | Bladder and other types of cancer risk | ¿ | ¿ | |||||||||||||||||
NTM | Nontuberculous mycobacterium infection | ¿ |
MDR-TB;
Product (1) | Application | Market Segments | ||||||||||||||||||
Pain Management (4 tests) | Mental Health (9 tests) | Cardiovascular risk assessment (15 tests) | Other Personalized medicine (21 tests) | Women’s health (14 tests) | Oncology (21 tests) | Infectious disease (14 tests) | Genetic disorders (6 tests) | Newborn screening (4 tests) | ||||||||||||
Respiratory Virus Panel | Respiratory virus infection | ¿ | ||||||||||||||||||
STD-6 Quad | Gonorrhea, chlamydia, trichomonas and others | ¿ | ¿ | |||||||||||||||||
TAMX3 | Drug metabolism | ¿ | ¿ | |||||||||||||||||
UGT1A1 | Initial dosing of leading cancer drug | ¿ | ¿ | |||||||||||||||||
Urogen Quad | Ureaplasma urealyticum, mycoplasma genitalium, mycoplasma hominis | ¿ | ¿ | |||||||||||||||||
Warfarin Assay (2) | Sensitivity to Warfarin | ¿ | ¿ |
NAT-2;
CYP450 3A4;
CYP450 3A5;
CYP450 2D6T; and
MDR1.
(1) | Unless otherwise indicated, the tests listed in this table have not been cleared or approved for diagnostic use by the FDA and are sold on an RUO basis. |
(2) | We have received 510(k) clearance for our Warfarin test, our CYP450 2C19 test and our FII, FV, and FII-FV Panel tests. |
Descriptions of our testsOur Tests
The following is a description of our tests that are available for sale. Unless otherwise indicated, the tests described below have not been cleared or approved for diagnostic use by the FDA and are sold on an RUO basis.
HPV. 5-FU (Fluorouracil). Our HPV-QUAD screeningFluorouracil, or 5-FU, test is designed to simultaneouslydetect and identify point mutations in the Dihydropyrimidine Dehyrogenase, MTHFR and Thymidylate Synthase genes that affect the toxicity and efficacy of 5-FU, a leading chemotherapy drug. 5-FU is given as a treatment for several types of cancer, including colon, rectal, breast, stomach and pancreatic cancers.
ApoE. Our ApoE test is designed to identify 2 mutations on the apolipoprotein E gene that affects the function of ApoE.
Ashkenazi Jewish Panel. Our Ashkenazi Jewish Panel test is designed to detect 31 genetic mutations associated with susceptibility to eight genetic diseases that occur more frequently in the Ashkenazi Jewish population, including Tay-Sachs disease, Canavan disease, Familial Dysautonomia, Gaucher’s disease, Fanconi Anemia, Niemann-Pick disease and Bloom Syndrome.
Bacterial Vaginosis Panel. Our Bacterial Vaginosis Panel is designed to detect the presence of the organisms that can cause six sexually transmitted bacterial infections: Bacteroides fragilis, Gardnerella vaginalis, Mobiluncus mulieris, Mobiluncus curtisii, Atopobium vaginae and Prevotella bivia.
BRAF Panel/BRAF XP. Our BRAF and BRAF XP Panels are designed to identify select variants in regions important for BRAF activity, which we believe could assist in developing proper therapeutic treatment of certain cancers.
Breast Cancer Panel-AJ. Our Breast Cancer Panel-AJ test is designed to identify three genetic mutations common in the Ashkenazi Jewish population in the breast cancer 1, or BRCA1, and breast cancer 2, or BRCA2, genes that are associated with an increased risk of developing breast cancer.
Candida Vaginitis Panel. Our Candida Vaginitis Panel is designed to detect the presence of the organisms that can cause five sexually transmitted fungal infections: Candida albicans, Candida parapsilosis, Candida tropicalis, Candida glabrata and Candida krusei.
CFTR-31. Our CFTR-31 test is designed to detect the presence of 31 mutations in the cystic fibrosis transmembrane conductance regulator, or CFTR, gene which are associated with an increased risk of developing cystic fibrosis.
CFTR-15. Our CFTR-15 test is designed to detect the presence of 15 mutations in the cystic fibrosis transmembrane conductance regulator, or CFTR, gene which are associated with an increased risk of developing cystic fibrosis. This panel of variants are targeted for the international market.
CHEK-2.Our CHEK-2 test is designed to identify select variants of the CHEK-2 gene that are associated with an increased risk of developing breast cancer. Mutations in the CHEK-2 gene also have been associated with other hereditary and somatic (not inherited) cancers, including prostate, lung, colon, kidney, thyroid and ovarian cancers.
CODX2. Our Codeine test is designed to identify select variants of the CYP450 2D6 and UGT2B7 genes, which determine an individual’s ability to metabolize codeine. Certain individuals exhibiting these variants transform codeine into morphine, potentially resulting in toxicity to nursing infants whose mothers have been prescribed the drug.
CT-NG Quad. Our CT-NG Quad test is designed to detect the presence of Chlamydia trachomatis and Neisseria gonorrhea in four different patient samples simultaneously on a single BioFilmChip.
CYP2C19 Panel / CYP2C19 QUAD.Our CYP2C19 single test Panel and four test Panel are designed to identify select variants of the CYP450 2C19 gene that affect the metabolism and efficacy of the anticoagulant drug Plavix (clopidogrel).
CYP450 2C19 Plus. Our CYP450 2C19 Plus test is designed to identify select variants of the CYP450 2C19 gene that affect the efficacy of many drugs, including diazepam (an antiepileptic drug) and pantoprazole (a proton pump inhibitor).
CYP450 2C9-VKORC1. Our CYP450 2C9-VKORC1 test is designed to identify select variants of the CYP450 2C9 and VKORC1 genes that affect the metabolism of warfarin. The test is designed to detect expanded numbers of CYP450 2C9/VKORC1 variants found in certain ethnic groups as compared to our Warfarin test.
CYP450 2D6I. Our CYP450 2D6I test is designed to identify select variants of the CYP450 2D6 gene that affect the efficacy of many drugs, including the antidepressants Paroxetine and Fluoxetine, and the cancer drug Tamoxifen.
CYP450 2D6T.Our CYP450 2D6T test is designed to identify select variants of the CYP450 2D6 gene that affect the efficacy of Tamoxifen, a breast cancer drug.
CYP450 3A4 / CYP450 3A5. Our CYP450 3A4 and CYP450 3A5 tests are designed to identify select variants of the CYP450 3A4 and CYP450 3A5 genes that affect the metabolism of many drugs, including most calcium channel blockers, most benzodiazepines and human immunodeficiency virus, or HIV, protease inhibitors. The presence of these variants may be used to determine the cause of amplified side effects to a drug and unresponsiveness to the therapeutic effects of a drug.
EGFR. Our EGFR test is designed to identify receptors that may indicate whether cancer patients will respond to drugs that inhibit EGFR expression, such as Tarceva and Gefitinib.
Factor II (FII) / Factor V (FV) / FII/V Panel. Our Factor II, Factor V and FII-V Panel tests are designed to identify select variants of the Factor II and Factor V genes associated with an increased risk of developing blood clots. Each of these tests received 510(k) clearance from the FDA in February 2007.
Factor II Plus / Factor II Plus–V Panel / FII-FV-MTHFR Panel / FII Plus-FV-MTHFR Panel. Our Factor II Plus, Factor II Plus-V Panel, FII-FV-MTHFR Panel, and FII Plus-FV-MTHFR Panel thrombophilia tests are designed to identify select variants of the Factor II, Factor V and Methylenetetrahydrofolate reductase, or MTHFR, genes associated with an increased risk of developing blood clots.
Factor V Genotyping. Our Factor V genotyping test is designed to detect 6 select variants of the Factor V gene common to multiple ethnicities.
Familial Mediterranean Fever Panel. Our Familial Mediterranean Fever, or FMF, panel is designed to detect 13 genetic mutations in the MEFV gene, with intent to cover the most prominent disease-causing mutations in all afflicted ethnicities.
Flu A-sH1N1.Our Flu A-sH1N1 test is designed to detect the presence of Flu A and 2009 H1N1, common respiratory viruses found in the human respiratory tract.
HPV HR Hex. Our HPV HR Hex test is designed to screen six different patient samples for 14 types of HPV simultaneously on a single BioFilmChip.
HPV-HR Quad. Our HPV–HR Quad test is designed to genotype 14 high-risk types of HPV in four different patient samples simultaneously on a single BioFilmChip™BioFilmChip.
HPV Genotyping. Our HPV genotypingGenotyping test is designed to identify 26 high and low risklow-risk HPV types. These tests are designed totypes and help identify women at high risk for the development of cervical disease and cervical cancer.
RVPHPV Quad Screening. Our HPV Quad Screening test is designed to screen four different patient samples for 13 high-risk and two low-risk types of HPV simultaneously on a single BioFilmChip.
KRAS. Our KRAS test is designed to identify select mutations of the KRAS gene in colorectal cancer patients, who may not benefit from anti-EGFR therapies, such as Cetuximab and Panitumumab.
KRAS-BRAF. Our RVPKRAS-BRAF test is designed to identify select mutations of the BRAF gene and the KRAS gene in metastatic colorectal cancer patients who have been found to not respond to certain anti-EGFR therapies, such as Cetuximab and Panitumumab.
Leuko Quad. Our Leuko Quad test is designed to detect Chlamydia trachomatis, Neisseria gonorrhea and Trichomonas vaginalis in four patient samples simultaneously on a single BioFilmChip.
MDR-1. Our MDR-1 test is designed to identify select variants of the presence of 24 common respiratory viruses foundMDR-1 gene, which is helpful in predicting how certain drugs will penetrate through different pharmacological barriers in the human respiratory tract. Anti-viral therapies are available for some but not all of these respiratory viruses. Many of the symptomsbody and signs of respiratory virus infections are similarhow new anti-cancer or anti-parasite agents will interact with MDR-1 and overlap, and a fast and accurate diagnosis is critical for timely and proper anti-viral treatment, quarantines or other intervention. Respiratory virus testing may also minimize the chances of inappropriate administration of antibiotics.potential liver toxicity.
MDR-TB. Our multidrug-resistant tuberculosis, (MDR-TB)or MDR-TB, test is designed to detect the presence of tuberculosis and assessesassess drug resistance to the tuberculosis treatments Rifampin, Isoniazidrifampin, isoniazid and Pyrazinamide. Over 13,000 new cases of tuberculosis were recorded in the U.S. in 2007. Poor compliance with treatment protocols by patients has led to strains of MDR-TB. Currently available assays to determine tuberculosis drug resistance require a laboratory to grow a culture and perform drug susceptibility testing, which takes between two and eight weeks. The prolonged testing time associated with existing technologies imposes significant costs from additional hospital stays and quarantines and increases the likelihood that medications will be given inappropriately.pyrazinamide.
STD-6 QUADMTHFR. Our sexually transmitted disease (STD) -6 QUAD test is designed to detect the presence of chlamydia, gonorrhea, trichomonas vaginalis, ureaplasma ureatyticum, mycoplasma hominis and mycoplasma in four different patient samples on a single BioFilmChip™. Chlamydia is the most frequently reported bacterial STD in the U.S. In 2006, approximately 1 million chlamydia infections were reported to the CDC in the U.S. Under-reporting is substantial because most people with chlamydia are not aware of their infections and do not seek testing. The CDC estimates that more than 700,000 persons in the U.S. are infected with gonorrhea each year.
CHEK-2. Our CHEK-2MTHFR Panel thrombophilia test is designed to identify patients withselect variants of the CHEK-2Methylenetetrahydrofolate reductase, or MTHFR, gene that are associated with an increased risk of developing breast cancer. The CHEK-2 gene belongs to a class of genes known as tumor suppressor genes. Like many other tumor suppressor genes, CHEK-2 regulates the cell division cycle by keeping cells from growing and dividing too rapidly or in an uncontrolled way. A specific mutation in the CHEK-2 gene is associated with a moderately increased risk of breast cancer, particularly in European populations. Mutations in the CHEK-2 gene have also been found in other hereditary and somatic (not inherited) cancers, including prostate, lung, colon, kidney, thyroid and ovarian cancers.blood clots.
NAT-2.Our N-acetyltransferase 2, (NAT-2)or NAT-2, test is designed to identify patients with select variants of the NAT-2 gene thatwhich are associated with an increased risk of developing bladder and other types of cancer. The NAT-2 gene
NTM. Our nontuberculous mycobacterium, or NTM, test is involveddesigned to detect the presence of 12 of the most common pathogenic NTMs from a single sample.
Respiratory Virus Panel. Our Respiratory Virus Panel test is designed to detect the presence of 24 common respiratory viruses found in the metabolism of several compounds relevant in pharmacology and toxicology, including certain chemicals known to be bladder and colorectal carcinogens. Identification of variants of the NAT-2 gene may also be used by physicians to reduce the risk of hepatotoxicity.human respiratory tract.
BCP-AJSTD-6 QUAD. Our BCP-AJSTD-6 QUAD test is designed to detect the presence of six common microorganisms that cause sexually transmitted microorganisms (Chlamydia trachomatis, Neisseria gonorrhea, Trichomonas vaginalis, Ureaplasma urealyticum, Mycoplasma hominis and Mycoplasma genitalium) in four different patient samples simultaneously on a single BioFilmChip.
TAMX3. Our TAMX3 test is designed to identify patients with three genetic mutations common in the Ashkenazi Jewish population in the breast cancer 1 (BRCA1) and breast cancer 2 (BRCA2) genes that are associated with an increased risk of developing breast cancer. Researchers have found that approximately 2.3%select variants of the Ashkenazi Jewish population have an altered BRCA1 or BRCA2 geneCYP450 2D6, CYP450 3A5 and that approximately 12%SULT1A1 genes, which affect the metabolism of breast cancers incertain drugs, including the Ashkenazi Jewish population are attributable to mutations in the BRCA1 or BRCA2 genes.cancer drug Tamoxifen.
UGT1A1. Our UGT1A1 test is designed to identify patients with a select variant of the UGT1A1 gene that affects the toxicity of Irinotecan, a leading cancer drug. UGT1A1 is an enzyme located in the liver that metabolizes Irinotecan. The UGT1A1 *28 genotype increases risk of Irinotecan related toxicity due to a higher exposure in the liver to SN-38 Glucuronide, an inactive metabolite of Irinotecan. Approximately 10% of the North American population is at a higher risk of a toxic reaction to Irinotecan, including severe side effects such as diarrhea and neutropenia, because they carry two copies of the UGT1A1 *28 genotype.
CPY450 2D6TUrogen Quad. Our CYP450 2D6T test is designed to identify patients with select variants of the CYP450 2D6 gene that affect the efficacy of Tamoxifen, a breast cancer drug. Our CYP450 2D6T test detects the presence of additional variants that affect the efficacy of Tamoxifen as compared to our CYP450 2D6 test. Tamoxifen has been used for more than 30 years to treat early stage and metastatic breast cancer. Tamoxifen is also used as an adjuvant therapy after primary treatment to prevent breast cancer from returning and as a preventative treatment to reduce the risk of breast cancer in women who are at increased risk of developing breast cancer. The FDA is considering the need to relabel the drug Tamoxifen to recommend that genetic testing be performed for specific mutations in the CYP450 2D6 gene because these mutations affect the efficacy of the drug.
CFTR-31. Our CFTR-31Urogen Quad test is designed to detect the presence of 31 mutationsUreaplasma urealyticum, Mycoplasma hominis and Mycoplasma genitalium in the cystic fibrosis transmembrane conductance regulator (CFTR) gene which are associated with an increased risk of developing cystic fibrosis. Cystic fibrosis is an inherited chronic disease that affects the lungs and digestive system of about 30,000 children and adults in the U.S. and 70,000 worldwide, according to the Cystic Fibrosis Foundation. According to the American Lung Association, more than 10 million Americans are symptomless carriers of the defective cystic fibrosis gene. As of July 1, 2008, newborn cystic fibrosis screening is required by rule or law in 42 states in the U.S. and the District of Columbia. According to the CDC there are over 4 million births annually in the U.S.four patient samples simultaneously on a single BioFilmChip.
Ashkenazi Jewish PanelWarfarin Assay.Our Ashkenazi Jewish PanelWarfarin test is designed to detect 31 genetic mutations associated with susceptibility to eight genetic diseases that occur more frequently in the Ashkenazi Jewish population, including Tay-Sachs disease, Canavan disease, familial dysautonomia, Gaucher’s disease, Fanconi Anemia, Niemann-Pick disease and Bloom Syndrome.
Factor II / Factor V / FII-V Panel. Our Factor II, Factor V and FII-V panel tests received 510(k) clearance from the FDA in February 2007. The tests are designed to identify patients with select variants of the Factor II and Factor V genes associated with an increased risk of developing blood clots. Factor II and Factor V play important roles in the coagulation cascade. The Factor II (Prothrombin) mutation is the second most common genetic defect for inherited thrombosis, and the Factor V (Leiden) mutation is the most common.
MTHFR / FII-FV-MTHFR Panel / FII Plus-FV-MTHFR Panel. Our thrombophilia tests are designed to identify patients with select variants of the Factor II, Factor V and Methylenetetrahydrofolate reductase (MTHFR) genes associated with an increased risk of developing blood clots. MTHFR is a metabolic enzyme involved in the conversion of homocysteine. Reduced levels of MTHFR activity lead to elevated blood concentrations of homocysteine, referred to as hyperhomo-cysteinemia, which is a recognized risk factor for cerebrovascular, peripheral vascular and coronary heart disease.
Warfarin. Our Warfarin test received 510(k) clearance from the FDA in January 2008. The test is designed to identify patients with select variants of the CYP450 2C9 and Vitamin K epoxide reductase, (VKORC1) genes that affect the metabolism of the oral anticoagulant Warfarin. The test detects three CYP450 2C9/VKORC1 variants. Warfarin, which is marketed as Coumadin, is the most widely prescribed anticoagulant for thromboembolic therapy in North America and Europe. Individuals metabolize Warfarin differently, and if its administration is not managed carefully, life threatening side effects may occur. According to the FDA, Warfarin is the second most common drug implicated in emergency room visits for adverse drug events. Doctors are more safely able to prescribe Warfarin through the detection of certain CYP450 2C9/VKORC1 variants.
Warfarin Plus and Warfarin XP. Our Warfarin Plus and Warfarin XP tests are designed to identify patients with select variants of the CYP450 2C9 andor VKORC1, genes that affect the metabolism of the oral anticoagulant Warfarin.warfarin. This test received 510(k) clearance from the FDA in January 2008.
Tests In Development
We have a demonstrated track record of successfully developing genetic tests to address current and anticipated customer needs. We are currently developing more than 15 genetic tests for use on our family of INFINITI analyzers. Historically, we have introduced greater than five new or enhanced tests per year. Our Warfarin Plus and Warfarin XP tests are designed to detect expanded numbersunder development include the following:
Product in Development | Application | Market Segments | ||||||||||||||||||
Pain Management | Mental Health | Cardiovascular risk assessment | Other Personalized medicine | Women’s health | Oncology | Infectious disease | Genetic disorders | Newborn screening | ||||||||||||
Alpha-1-antitrypsin | Alpha-1-antitrypsin deficiency | ¿ | ¿ | |||||||||||||||||
ALS | Lou Gehrig’s Disease | ¿ | ||||||||||||||||||
APO-E QUAD | Drug metabolism; 4 patient format | ¿ | ¿ | ¿ | ||||||||||||||||
C. diff | Clostridium difficile, which can cause intestinal disease | ¿ | ||||||||||||||||||
Carbamazepine | Management of anti-epilepsy drug | ¿ | ¿ | ¿ | ||||||||||||||||
HSV 1/2 | Detects Herpes Simplex Virus | ¿ | ¿ | |||||||||||||||||
IL-28B | HCV anti-viral response | ¿ | ¿ | |||||||||||||||||
MRSA-HAI | Hospital acquired infection | ¿ | ||||||||||||||||||
PIK3CA | PIK3CA gene, which is linked to ovarian cancer | ¿ | ||||||||||||||||||
Resolve | Detects bacterial, yeast and trichomonas causes of vaginosis/ vaginitis | ¿ | ¿ | |||||||||||||||||
RVP—10 | Respiratory virus infection | ¿ | ||||||||||||||||||
TB-MDR-8 | Drug resistance tuberculosis; 8 patient format | ¿ | ||||||||||||||||||
Thalassemia | Genetic Blood Disorder | ¿ | ||||||||||||||||||
TPMT | Thiopurine metabolism | ¿ | ¿ | |||||||||||||||||
Urogen Plus QUAD | Ureaplasma urealyticum, Ureaplasma parvum, Mycoplasma genitalium, Mycoplasma hominis | ¿ | ¿ | |||||||||||||||||
Warfarin Resistance Panel | Warfarin Resistance Panel | ¿ | ¿ |
Descriptions of CYP450 2C9/VKORC1 variants foundOur Tests in certain ethnic groups as compared to our Warfarin test.Development
CYP450 2D6. Our CYP450 2D6 test is designed to identify patients with select variants of the CYP450 2D6 gene that affect the metabolism of many drugs, including the antidepressants Paroxetine and Fluoxetine and the cancer drug Tamoxifen. The presence of these variants may be used by a doctor to determine the cause of amplified side effects to a drug and unresponsiveness to the therapeutic effects of a drug. The presence of these variants may also be used to rule out other causes of poor response to drugs. CYP450 2D6 is estimated to be involved in the metabolism of as many as 20% of commonly prescribed drugs.
CYP450 2C19. Our CYP450 2C19 test is designed to identify patients with select variants of the CYP450 2C19 gene that affect the metabolism of many drugs, including Diazepam (an antiepileptic drug) and Pantoprazole (a proton pump inhibitor). The presence of these variants may be used by a doctor to determine the cause of amplified side effects to a drug and unresponsiveness to the therapeutic effects of a drug.
MDR1. Our MDR1 test is designed to identify patients with select variants of the MDR1 gene that affect the transport of hydrophobic drugs and xenobiotics in the bowel, kidney, liver and the blood-brain barrier. Drugs interacting with this protein may be useful for the reversal of cancer drug resistance, or for increasing the absorption or the brain entry of various pharmacological agents. The presence of select variants of MDR1 may be used to help predict how the agents will penetrate through different pharmacological barriers, how new anti-cancer or anti-parasite agents will interact with MDRI and potential liver toxicity.
CYP450 3A4 / CYP450 3A5. Our CYP450 3A4 and CYP450 3A5 tests are designed to identify patients with select variants of the CYP450 3A4 and CYP450 3A5 genes that affect the metabolism of many drugs, including most calcium channel blockers, most benzodiazepines and HIV protease inhibitors. The presence of these variants may be used by a doctor to determine the cause of amplified side effects to a drug and unresponsiveness to the therapeutic effects of a drug. Among the CYP450s, the subfamily CYP450 3A is responsible for the metabolism of approximately 60% of the currently known therapeutic drugs.
Tests we are developing for future sale
The following is a description of tests that we are developing for future sales.
5-FUAlpha-1-antitrypsin. We are developing a Fluorouracil (5-FU) test. We expect thisour alpha-1-antitrypsin (AAT) test will detectto identify 2 mutations on the SERPINA1 gene that confer AAT deficiency, causing COPD and identify point mutations in the Dihydropyrimidine Dehyrogenase, MTHFR and Thymidylate Synthase genes that affect the toxicity and efficacy of 5-FU, a leading chemotherapy drug. 5-FU is given as a treatment for several types of cancer, including colon, rectal, breast, stomach and pancreatic cancers. Testing may help physicians to determine if a patient is at risk of developing severe side effects after administration of 5-FU and estimate efficacy of the treatment.liver disease.
ALS. We are developing anour amyotrophic lateral sclerosis, (ALS) test. We expect thisor ALS, test willto identify patients withselect genetic mutationsvariants associated with the development of the inherited form of ALS. ALS, which is often referred to as “Lou Gehrig’s Disease,” is a progressive neurodegenerative disease that affects nerve cells in the brain and the spinal cord. At the late stages of the disease, patients are paralyzed.
Alpha ApoE QUAD. We are developing our ApoE QUAD test to identify 2 mutations on the apolipoprotein E gene that affects the function of ApoE in four patient samples simultaneously on a single BioFilmChip.
C. diff. We are developing our C. diff. test to detect the presence of Clostridium difficile, or C. diff., which is a bacterium that can cause symptoms ranging from diarrhea to life-threatening inflammation of the colon.
Carbamazepine. We are developing our carbamazepine test to identify a select variant of the human leukocyte antigen, or HLA, gene that is associated with an increased risk of serious dermal toxicities to carbamazepine in individuals with Asian ancestry. Carbamazepine is a drug used to treat epilepsy, bipolar disorder and neuropathic pain.
HSV1/2. We are developing our HSV1/2 test to detect and differentiate the herpes simplex virus 1 and 2, which cause cold sores and genital ulcers, respectively.
IL-28B. We are developing our IL-28B test to identify a mutation in the interleukin-28 gene, which can predict HCV anti-viral response.
MRSA-HAI. We are developing our MRSA-HAI test to detect the presence of certain microorganisms that may be associated with hospital acquired infections, or HAIs, including MRSA.
PIK3CA. We are developing our PIK3CA test to identify a select variant of the PIK3CA gene which is linked to gynecological malignancy, including ovarian cancer.
Resolve. We are developing our Resolve test to detect and differentiate causes for bacterial vaginosis, candida vaginitis, and trichomoniasis in a single assay.
RVP-10. We are developing our RVP-10 test to detect the presence of 10 common respiratory viruses found in the human respiratory tract.
TB-MDR-8. We are developing our TB-MDR-8 test to detect the presence of tuberculosis and assess drug resistance to the tuberculosis treatments rifampin, isoniazid and pyrazinamide in eight patient samples simultaneously on a single BioFilmChip.
Thalassemia. We are developing an alpha thalassemia test. We expect thisour Thalassemia test willto identify patients with select variants of the alphabeta globin genes. Alphagenes associated with beta thalassemia. Beta thalassemia is a group of blood disorders that affect the production of normal hemoglobin and causes different forms of anemia. The severity and type of anemia depends upon the number of alpha globin genes that are affected.
CarbamazepineTPMT. We are developing a Carbamazepine test. We expect thisour TPMT test willto identify patients with a select variant ofmutations in the human leukocyte antigen (HLA)TPMT gene that is associated with an increased riskaffect the metabolism of serious dermal toxicities to Carbamazepine in individuals with Asian ancestry, including South Asian Indians. Carbamazepine is a drug used to treat epilepsy, bipolar disorder and neuropathic pain. The FDA recently recommended that screening for this allele should be performed before starting treatment with Carbamazepine in patients with Asian ancestry.thiopurine drugs.
EGFRUrogen Plus QUAD. We are developing an Epidermal Growth Factor Receptor (EGFR) test. We expect thisour Urogen Plus Quad test will identify cancer patients who may respond to drugs that inhibit EGFR expression, including Tarcevadetect Ureaplasma urealyticum, Ureaplasma parvum, Mycoplasma hominis and Gefitinib. EGFR is often over-expressedMycoplasma genitalium in lung and other types of malignancies with epithelial origins. Genotyping within exons 18 to 21 of the EGFR providesfour patient samples simultaneously on a tool to predict the response to treatment with pharmacologic agents which target the function of the EGFR by preventing the transduction of the proliferation signal.single BioFilmChip.
NTM. We are developing a nontuberculous mycobacterium (NTM) test. We expect this test will detect the presence of common NTMs. Identification of these mycobacteria species is critical in determining appropriate therapy for the condition. We expect that our NTM test will be able to detect the presence of twelve of the most common pathogenic NTMs from a single sample.
Pelvic Inflammatory Disease Panel. We are developing a Pelvic Inflammatory Disease Panel test. We expect this test will detect the presence of chlamydia, gonorrhea, trichomonas vaginalis, ureaplasma ureatyticum, mycoplasma hominis and mycoplasma genitalium. Pelvic inflammatory disease (PID) can damage the fallopian tubes and tissues in and near the uterus and ovaries and possibly lead to infertility, ectopic pregnancy (a pregnancy in the fallopian tube or elsewhere outside of the uterus), abscess formation and chronic pelvic pain. The CDC estimates that each year more than 1 million women experience an episode of acute PID and that more than 100,000 women become infertile each year as a result of PID.
Plavix Panel. We are developing a Plavix Panel test. We expect this test will identify patients with select variants of the CYP450 2C9 and CYP450 2C19 genes that affect the metabolism and efficacy of the drug Plavix. Plavix prevents blood components called platelets from sticking together and forming a clot.
Warfarin Resistance Panel. We are developing aour Warfarin Resistance Panel. We expect thisPanel to identify with a single test will identifyselect variants of the CYP450 2C9, VKORC1, Factor II and Factor V genes that play a role in resistance to Warfarin.warfarin.
MRSA-HAI. WeThe development of the tests described above are developingsubject to a MRSA-HAI test. We expect this testnumber of factors, some of which are beyond our control, including factors impacting the cost of development, changes in customer demand and the results of our research and development activities. For these or other reasons, we may decide to cease development of any of these tests at any time. As a result, we cannot assure you that we will detectdevelop the presence of certain hospital acquired infections (HAIs), including methicillin-resistant staphylococcus aureus (MRSA). Molecular diagnostics tests for HAIs that can be completed on-site indescribed above on a relatively short time period permit hospitals to screen incoming patients for these diseases and thereby improve patient welfare and reduce the significant costs associated with HAIs. According to the CDC, in U.S. hospitals alone, HAIs account for an estimated 1.7 million infections and 99,000 associated deaths each year.timely basis or at all.
Our technologyTechnology
The INFINITI™Our INFINITI system uses four key technological innovations that integrate and automate the discrete processes of geneticsample handling, reagent management, hybridization, detection and protein testing for clinical laboratories inresults analysis of genes into a fully integrated, self-contained molecular diagnostics system. These four innovations are: (1) the INFINITI™ Analyzer;our INFINITI analyzers; (2) the BiofilmChip™;our BioFilmChip microarrays; (3) the Intellipac™our Intellipac Reagent Management Module; and (4) theour multiplexing assay format.test format (the ability to generate many different laboratory results from one patient sample at one time).
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microscope with two lasers, a thermal stringency station and a temperature cycler for denaturing nucleic acids | ||||
for allele-specific primer |
The INFINITI™ Analyzer hardware in each of our INFINITI analyzers is controlled by the Qmatic™our proprietary QMatic scheduling software, which is embedded within the on-board computer. The Qmatic™QMatic software has a schedule manager that is designed to control all operations of the INFINITI™ Analyzer,INFINITI analyzer, including assaytest protocol, fluid handling, robotics, optical detection, and results analysis. This proprietary scheduling software gives the INFINITI™ Analyzer flexibility. Some key features include: (1) processing of 24 microarraysmultiple patient samples simultaneously; (2) running multiple samples and multiple applicationstests at the same time; (3) assaytest protocol monitoring; and (4) multiplexing different patient samples on the single microarray for increased throughput and reduced cost.
Assays
Tests are processed automatically and read by the built-in confocal microscope. Results are analyzed and presented in numerical and graphical format. The data generated is analyzed and formatted as a result report. The electronic results report can be reviewed via the liquid crystal display, or LCD, screen or can be transmitted directly to a laboratory information system.
INFINITI Analyzer functional layout
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BioFilmChip. Each of the emulsion layers has a unique formulation designed to address a specific function necessary for the film to act as the base of the microarray. The first layer, the surface preparation layer, smoothes the film surface. The second optical blocking layer blocks any intrinsic fluorescence, | ||||||||||||
allowing us to raise the gain of the detection system and giving our system greater sensitivity. The third layer is the linking layer that allows us to attach biochemical sensors. The fourth layer is the surfactant layer that breaks the surface tension so the sample is spread evenly on the chip. | ||||||||||||
microarrays are printed with | BioFilm cross-sectional view | |||||||||||
Microarray assembly Components | Microarray | Microarray magazine |
Intellipac™ Reagent Management Module
The Intellipac™ Reagent Management Module holds the reagent needed to conduct specific applications. The reagent module is designed to communicate all relevant information about an assay to the INFINITI™ Analyzer without any intervention from the operator, saving time and preventing errors. Information saved on the module includes: reagent identification; expiration dates; lot number; amount of reagent remaining for future tests; specific instructions for assay processing; and the time last used and on what instrument. This is accomplished by a read write memory chip embedded in the module. The instrument opens the reagent module and breaks the seal, reads all the needed information and prompts the operator for further action if needed.
Our proprietary Intellipac Reagent Management Modules hold the reagent needed to run our specific genetic tests. The |
Intellipac Reagent module |
Microarray Test Methods
The BioFilmChip has a set of unique universal immobilized capture probes, or zip codes. Specific zip codes are immobilized at each predetermined spot to the microarray. A target gene-specific detection primer is hybridized (the reaction of complementary DNA sequences) to the PCR amplicon of the sample. (PCR, or Polymerase Chain Reaction, is an enzymatic reaction that makes millions of copies of DNA. The PCR-copied products are known as PCR amplicons.) The hybridized detection primer is designed to extend in the presence of a fluorescence precursor to produce a fluorescent extension product that hybridizes to the microarray (the process increases the signal so that the detection system can read it). The detection primer has two complementary parts: one target specific and the other immobilized capture probe specific. The capture probe specific part has no sequence homology with the target. After hybridization and washing of the excess unbound probes, the chip is scanned for fluorescence and the data is analyzed. Once multiplexed PCR is complete, the amplicons are subjected to the detection primer extension reaction, which proceeds for several extension cycling steps. At the beginning of each cycle, a primer anneals to the amplicon and is extended. During extension, a fluorescence dye-labeled nucleotide is incorporated. At the end of a cycle, the extended primer is denatured from its target, which is then available for another cycle in which a new primer anneals. Thus, multiple dye-labeled probes are generated, which will hybridize to the microarray. Where certain systems only use target or signal amplification, we believe our combined target and signal amplification technologies can increase the sensitivity and specificity over these widely-used stand-alone amplification methods. For example, we have conducted internal studies that have demonstrated that our system has achieved sensitivity to the level of detection of 10 copies ofmycobacterium tuberculosis and five copies of HPV, which we believe is more sensitive than many other commercially available tests.
Schematic of the microarray test process (Figure 1)
This schematic illustrates the microarray test process. In the microarray test process, first, PCR is used to make millions of copies of the sample DNA. The sample copies then react (hybridize) with the detection primer specific to the genetic variant being tested. (See 1, Detection Primer Hybridization above). Then, each hybridized sample copy and detection primer go through an extension process, which incorporates a fluorescence dye-labeled nucleotide into the sample. (See 2, Detection Primer Extension above). The resulting product is referred to as a dye-labeled probe. The dye-labeled probe then binds to a specific site on the microarray that corresponds to its detection primer tag (or zip code). The INFINITI analyzer scans for presence of the dye-labeled probe at the appropriate site to determine whether the genetic variant being tested for is present in the sample DNA.
The 3’ ends of the detection primers contain sequences complementary to the amplicon sequence being analyzed. Extension of the primers occurs only when the 3’ end of a particular primer precisely matches its
complementary amplicon sequence. The requirement for perfect matching is intended to confer specificity on the reaction and makes the discrimination between wild type and mutant alleles, (or variants)or variants, possible. It is important to emphasize that the detection primer extension process involves labeling of complementary probes. However, no amplification of the amplicon occurs during this step. The hybridization module is where the extended detection primers are applied to the microarray, which is positioned in a sealed hybridization chamber maintained at a specific temperature. During this step, anti-zip codes that are part of the extended detection primers target and hybridize to complementary immobilized zip code oligonucleotides spotted on the microarray. Only those spots where labeled primers have hybridized to their complementary zip codes are labeled with a fluorescent molecule and are therefore detected by the optics module. Genotypes specific to each sample are then assigned.
Sample multiplexing assay formatMultiple Patient Microarray
AOur proprietary multi patient array, or MPA, technology is designed to test up to eight patient samples on a single microarray. This significantly enhances throughput by up to 300% while reducing cost per sample multiplexing assay format developed by us allows multipleup to 75% as compared to our single patient microarrays. We are also developing an application to produce an MPA that permits samples from up to ten patients to be processed simultaneously on a single microarray. Our proprietary QUAD format increases our system throughput by over 300% and reduces
Schematic of MPA (Figure 2)
This schematic illustrates the costMPA technology. Patient samples are first individually processed as described in Figure 1 above. During this process, each patient sample is assigned a separate set of our tests by approximately 70%. Special capture probes creating multipledetection primer tags. The detection primer tags correspond to one of four separate zones are attached on the microarray. Each assaymicroarray (one zone for each patient sample). After the dye-labeled probes bind to the specific reagentsite on the microarray that corresponds to its detection primer tag, the INFINITI Analyzers scan for the presence of the dye-labeled probes at the appropriate sites to determine whether the genetic variant being tested for is then designed with the compliment probe topresent in each of the zones. After the assay protocol, the instrument decodes the data and processes it as an individual sample result.
patient samples.
Microarray scanning and result interpretation
The optics module in the INFINITI™ Analyzerour INFINITI analyzers is a lightproof assembly comprised of a three-axis electromechanical stage, camera and laser and a photomultiplier tube. Using an excitation wavelength from the laser light source, the camera takes micron-level pictures of reference fluorescent dye spots on the BioFilmChip™.BioFilmChip. The integrated software uses that data to calculate the location of the spots on the specific microarray, and the optics module scans those calculated locations. The optics module scans and analyzes the microspots on the microarray. TheWe have demonstrated capability to increase the number of spots on a BioFilmChip™ can varyBioFilmChip to up to 1,024.
Images of low- to medium-density spotted microarrays
Research and developmentDevelopment
Our research and development efforts are focusedfocus on developing enhancements to the INFINITI™ Analyzer, developing additional applications,genetic tests and INFINITI analyzers, improving or enhancing current applicationstests and supporting clinical studies and trials for key applications.certain genetic tests. We spent $1.8$3.6 million, $2.3$2.8 million, $2.6$1.3 million and $0.7$1.0 million on research and development in the nine months ended December 31, 2005, the years ended December 31, 20062010 and 20072011 and the quartersix months ended March 31, 2008,June 30, 2011 and 2012, respectively.
Developing new applications is our primary research and development focus. Developing We believe that developing a broad menu of applicationstests should increase the value of our system, drive additional placements and increase consumable sales. We plan to introduce six additional applications by the end of the first quarter of 2009. We plan to address the areas of women’s health, cancer, personalized medicine (including pain management, mental health and cardiac risk assessment), infectious disease, cancers, genetic disorders, newborn screening and personalized medicine.blood banking. We also focus our research and development efforts on improving existing applicationstests as new genomicgenetic research becomes available. For example, we recently conducted various studies to detect alleles involved with Warfarinwarfarin metabolism that are more common among certain ethnic groups. This resulted in ourthe development of our CYP450 2C9 / VKORC1 test, which detects Warfarin XP test with enhancedsensitivity amongst diverse ethnic characterizations.
Our researchgroups. We also have conducted, and development efforts also include conductingintend to conduct, clinical studies and trials to support our FDA 510(k) clearance and PMAsother regulatory clearances or approvals, as necessary, and to explore opportunities to enhance the INFINITI™ Analyzer. Apart from internal development, we expect to gain access to intellectual property and specific applications through collaborating with clinical researchers in academic and private settings.INFINITI analyzer. We have entered into, strategic partnershipsand expect to continue to enter into collaborative relationships with leading scientificresearch and academic institutions for the development of additional applications.or enhanced tests to further increase the depth and breadth of our genetic test menu. Where appropriate, we enter into royalty agreements with our collaborative partners to license intellectual property for use in our applications.tests.
Customers, Sales and marketingMarketing
Our sales and marketing strategy is to focus on key customers and customermarket segments to quickly establish a large installed base.base of customers that provide genetic analysis services for clinical information to guide and manage therapy and medical treatment. We focus our sales efforts on both clinical laboratories seeking a more flexible and efficient molecular diagnostic platform, and from smaller reference laboratories, specialty clinics and hospital laboratories and specialty clinics for whom it has previously not been cost-effective for them to develop their own tests. Our marketing efforts emphasize the workflow efficiency, low cost, ease of use, bench-top convenience, and high quality and consistent results of our system, as well as the potential for versatility afforded by a broad genetic test menu on a single system. As part of this strategy, we target key opinion leaders and clinical research laboratories, including ARUP Laboratories, Cleveland Clinic, The Johns Hopkins Hospital, Louisiana State University Hospital Health Science Center, Montreal Heart Institute, New York Presbyterian Hospital and San Francisco General Hospital, to increase awareness of our system, to demonstrate its benefits relative to existing technologies and to accelerate its adoption in the molecular diagnostics market. We believe our system’s advantages over existing technologies and the adoption of our product by key opinion leaders will generate demand from hospitals and smaller reference laboratories for whom it is uneconomical to develop their own tests and who would prefer to offer molecular diagnostics tests in house. Our goal is to place a large base of INFINITI™ AnalyzersINFINITI analyzers in the market to generate sales of our BioFilmChips™high-margin testing consumables, including our BioFilmChips and Intellipac™Intellipac Reagent Management Modules.
WeIn the United States, we offer the INFINITI™ Analyzerour family of INFINITI analyzers for placement with customers through direct salesales, monthly rental plans and a Reagent Access Plan whereour domestic placement plan. Under the domestic placement plan, an INFINITI™ AnalyzerINFINITI analyzer is placed at the customer’s location at no direct cost to the customer in returnto generate significant recurring demand for a commitment byour high-margin testing consumables, including our test-specific BioFilmChips and Intellipac Reagent Management Modules. In the event that certain consumable sales thresholds are not met we have the right to reclaim our INFINITI analyzer from the customer, to purchase a minimum volume of test applications.which we may exercise at our discretion. To execute our marketing strategy, we have established a direct sales force, which, as of 18June 30, 2012, was comprised of 6 sales persons located in key metropolitan cities in the U.S.United States. To supplement our sales and marketing effort, we maintain a customer support team that is comprised of training specialists, hotline staff, field service engineers and applicationtest specialists. Our technical service line is staffed by experienced molecular biologists orand engineers who are well trained on the functioning of the INFINITI™ Analyzer and the applicationsINFINITI system and are able to rapidly provide assistance rapidly to the customer.domestic customers. We also have assigned product managers who focus on the major molecular diagnostics categories of infectious disease, cancer, genetic disorders and pharmacogenetics to develop product specific strategies to identify market opportunities and to position the product against competitors to maximize market penetration.
Our INFINITI analyzer is offered on a direct sale basis internationally through our network of distributors. We have established distributor relationships for the marketing of our INFINITI system in 22 countries outside the United States, including Canada, China, Mexico, and countries in Europe and the Middle East. We plan to expand our global distribution networks to increase international sales, with an emphasis on additional countries in Europe, Asia, the Middle East and South America.
Our consumables sales are made primarily pursuant to standard purchase orders that may be manufactured, scheduled, rescheduled or canceled on relatively short notice. Thus, we do not have a significant backlog. We have derived, and expect to continue to derive, a significant portion of our revenue from a few major customers. For fiscal year 2010 we had two customers, CDK and Bostwick Laboratories, and for fiscal year 2011 we had three customers, Adelaide Integrated Bioscience Laboratories, or AIB, Bostwick Laboratories and Natural Molecular Testing Corporation, or NMTC, that each represented between 12% and 14% of our revenue in each year. For the six months ended June 30, 2012, we had two customers, AIB and NMTC, that represented 15% and 46% of our revenue, respectively. Our continued business relationship with these customers, and the amount of purchases and timing of payment by these customers, may be impacted by several factors beyond our control, including product offerings by our competitors, pricing pressures or the financial health of these customers. The loss of any of these customers, or a significant decline in sales to or a delay in collection of payments from any of these customers, could materially adversely affect our business, financial condition and results of operations.
Our distributor agreements allow our distributors to purchase our products from us at a discount to market price and to resell them to customers in the territories covered by the respective agreements. Under these distributor agreements, the distributors generally are responsible for all customer sales, support and service activities relating to our products in the applicable countries. The distributor agreements generally also provide
the distributors with the exclusive right to sell products in the applicable country or countries, so long as they
meet minimum purchase requirements. For those distributor agreements that do not include minimum purchase requirements, the distributor is required to use best efforts to meet specified sales objectives. Our distributor agreements are generally for between three and five year terms and either provide for automatic renewal or require the parties to negotiate extensions in good faith. Either party generally may terminate the distributor agreements (subject to applicable notice and cure periods) if the other party materially breaches the agreement. We also may terminate the distributor agreements in the event that (i) minimum purchase requirements (if applicable) are not met, (ii) in the event the distributor experiences certain insolvency or bankruptcy events or (iii) upon other specified events. Under certain of the distributor agreements, the distributor may terminate the agreement after a specified notice period has expired if it does not have appropriate regulatory approvals to market and sell our products.
To increase company and product awareness, we attend major trade shows for the diagnostic industry and actively participate in scientific abstract presentations by key customers. We also collaborate with research partners in preparing publications for leading journals, advertise our products and sponsor molecular diagnostics events. We furtherIn addition, we conduct webinarsonline seminars and grand, or teaching, rounds to promote the utility of our products to our potential customers.
We focus our development efforts on applications with established reimbursement rates from third-party payors such as private insurance plans, managed care organizations, and Medicare
and Medicaid. In the U.S., the American Medical Association assigns specific Current Procedural Terminology (CPT) codes, which are necessary for the reimbursement of diagnostic tests for third-party payors. Once the CPT code is established, the Centers for Medicare and Medicaid Services establish reimbursement payment levels and coverage rules under Medicaid and Medicare, and private payors establish rates and coverage rules independently. Each of the tests performed is covered by established CPT codes and are therefore approved for reimbursement by Medicare and Medicaid as well as most third-party payors.
We currently have distributors Our system also has been discussed in Asia, Canada, the European Union and Switzerland. We plan to expand our distribution networks in those locations to increase international sales.several published peer review articles.
Manufacturing
We operate within a 33,400an approximately 125,000 square foot building in Carlsbad,Vista, California, that houses our research and development, manufacturing and warehousing operations and our administrative offices. The facility is located conveniently inoffices, under a major industrial center between San Diego and Orange County.lease that expires on July 31, 2025.
We manufacture INFINITI™ Analyzers, BioFilmChips™our family of INFINITI analyzers, BioFilmChips and Intellipac™Intellipac Reagent Management Modules.Modules in-house at our Vista facility. We have implemented a fully integrated enterprise resource planning software system developed specifically for medical manufacturing companies. Although we believe our manufacturing facility is sufficient for our current and foreseeable requirements, we may need to expand for our growing business. If we are not able to expand our facilities on terms acceptable to use, our business could be materially adversely affected. We have relationships with vendors who are sources of raw materials and components for our product offerings, including reagents, and oligonucleotides used for microarray spotting.spotting and film coating for our microarrays. Film coating capacity is becoming less available in the marketplace as film vendors move away from analog formats and focus increasingly on digital formats. However,formats; however, we believe we have sufficient coating capacity for the foreseeable future, and we are in the process of developing the ability to coat film in-house.
We areOur Vista facility is registered with the FDA as a Medical Device Manufacturing Establishment andEstablishment. We have established a quality system that we believe is in compliance with the FDA’s Quality Systems Regulations and we have obtained ISO 13485.13485:2003 certification for our Vista facility. We manufacture all of our products at the Vista facility under established quality system guidelines. Our quality system covers all phases of product design and development, the manufacturing operations from purchasing to shipping, product distribution, installation and servicing.
Competition
We primarily face competition in the genomicmolecular testing markets primarily from laboratory developed testsLDTs and products developed by public and private companies such as Abbott Laboratories Inc., Becton, Dickinson and Company, Celera, Inc., Cepheid, Inc., Gen-Probe,GenMark Diagnostics, Inc., Hologic, Inc., Innogenetics NV, and its recently acquired subsidiary, Gen-Probe Incorporated, Luminex Corporation, Nanosphere, Inc., Osmetech plc, Qiagen NV,N.V., Roche Diagnostics,Holding Ltd. and Sequenom, Inc. and Third Wave Technologies, Inc. We believe that the INFINITI™INFINITI system competes with products offered by these companies primarily on the following factors: (1) numberbasis of applications; (2) cost-effectiveness; (3)test menu, cost-effectiveness, ease of use; (4) bench top design; (5)use, accuracy of results; (6) clinical validationsresults, throughput and multiplexing capability and, with respect to some of our tests, FDA clearance; (7) throughput;clearance. We believe that only two of the competitors listed above currently offer on a commercial basis self-contained, integrated systems for molecular diagnostic testing, and (8) multiplexing capability.neither of these two competitive systems allow for mutliplexing.
Many of our competitors have substantiallysignificantly greater financial, technical, research and other resources and larger, more established marketing, sales and distribution services organizations than we do. Many of our
competitors also offer broader product lines outside of the molecular research use or diagnostic testing market, and many have greater brand recognition than we do. Moreover, our competitors may make rapid technological developments
that may result in our technologies and products becoming obsolete before we recover the expenses incurred to develop them or before they generate significant revenue. Our success will depend, in part, on our ability to establish successful marketing, sales and distribution efforts.
Intellectual propertyProperty and trade secretsTrade Secrets
We have eightAs of June 30, 2012, we had 13 issued patents, (including twoincluding seven in the U.SUnited States and six foreign counterparts)counterparts, and 33four pending patent applications (including 11 in the U.S., 20 foreign counterpartsUnited States. Our issued patents expire between 2018 and two Patent Cooperation Treaty applications).2023. Our patent and patent applications cover certain of the technologies relating to the method and design of the BioFilmChip™BioFilmChip and its film technology, the design of the INFINITI™ Analyzer,INFINITI analyzer, the Intellipac™Intellipac Reagent Management Module, and the system’s chemistry methods, system robotics and signal enhancements.
In addition to our own applicationgenetic test development efforts, we are currently using, and intend to use in the future, to use, certain applicationstests and biomarkers in the INFINITI™INFINITI system that have been developed by third parties. While a significant amount of intellectual property in the genomic field of genetics is already in the public domain, someone of our applications requiretests requires, and some of the future applicationstests developed by us, or by third parties on our behalf for use in our system, may require, that we license the right to use certain intellectual property from third parties and pay customary royalties or make one time payments. We currently license certain patents used in our UGT1A1 test. The license requires that we pay $75,000 and a royalty equal to six percent of net sales of our tests that incorporate the patented technology from the Mayo Foundation for Medical Education and Research, or Mayo Laboratories. The patents covered by the license expire between July 5, 2015 and May 28, 2024. The license expires when the last patent covered by the license expires. The license is terminable by us upon 90 days notice or by the licensor upon certain bankruptcy or liquidation events involving us, or 30 days after licensor’s written notice of our failure to observe a material obligation of the license. We have granted a license to one of our patents relating to oligonucleotides of CYP450 1A1, CYP450 3A4, CYP450 2D6 and NAT-2 to Mayo Laboratories. The license requires the licensee to pay, among other amounts, a royalty equal to six percent of net sales of any products that incorporate the patented technology. The license is terminable by the licensee upon 30 days notice or by us upon the licensee’s failure to cure a payment default within 45 days or its failure to cure a material breach of the license other than a payment default within 90 days.
Government regulationRegulation
The healthcare industry, and thus our business, is subject to extensive federal, state, local and foreign regulation. Some of the pertinent laws have not been definitively interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of subjective interpretations. In addition, these laws and their interpretations are subject to change.
Both federal and state governmental agencies continue to subject the healthcare industry to intense regulatory scrutiny, including heightened civil and criminal enforcement efforts. As indicated by work plans and reports issued by these agencies, the federal government will continue to scrutinize, among other things, the billing practices of healthcare providers and the marketing ofin vitro diagnostic healthcare products. The federal government also has increased funding in recent years to fight healthcare fraud, and various agencies, such as the U.S. Department of Justice, the Office of Inspector General of the Department of Health and Human Services, or OIG, and state Medicaid fraud control units, are coordinating their enforcement efforts.
We believe that we have structured our business operations and relationships with our customers to comply with applicable legal requirements. However, it is possible that governmental entities or other third parties could interpret these laws differently and assert otherwise. We discuss below the statutes and regulations that are most relevant to our business and most frequently cited in enforcement actions.
U.S. Food and Drug Administration regulationRegulation
The federalFederal Food, Drug and Cosmetic Act, (FFDCA)or FFDCA, includes within the definition of a medical device any instrument, apparatus, implement, machine, contrivance, implant,in vitro reagent, or other similar or related article, including a component part, or accessory, intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of
disease, in man or other animals. Ourin vitro diagnostic products are considered by the FDA to be medical devices. Among other things, pursuant to the FFDCA and its implementing regulations, the FDA regulates the research, testing, manufacturing, safety, labeling, storage,
recordkeeping, premarketpre-market clearance or approval, marketing and promotion, and sales and distribution of medical devices in the U.S.United States to ensure that medical products distributed domestically are safe and effective for their intended uses. In addition, the FDA regulates the export of medical devices manufactured in the U.S.United States to international markets.
FDA’s premarket clearancePre-Market Clearance and approval requirementsApproval Requirements
Unless an exemption applies, each medical device that we wish to market in the U.S.United States must first receive either clearance of a 510(k) pre-market notification or approval of a PMA approval, from the FDA pursuant to the FFDCA.FDA. The FDA’s 510(k) clearance process usually takes from three to twelve months, but it can take significantly longer and clearance is never guaranteed. The process of obtaining PMA approval is much more costly, lengthy and uncertain. It generally takes from one to three years or even longer and approval is not guaranteed. Our INFINITI™INFINITI Analyzer, as well as our Factor II, Factor V, and Factor II-V panelPanel tests are covered byreceived 510(k) clearances granted in February 2007. Our Warfarin test is covered by areceived 510(k) clearance granted in January 2008.2008 and our CYP2C19 test received 510(k) clearance in October 2010.
The FDA decides whetherWhether a device must undergo either the 510(k) clearance or PMA approval process is based upon statutory criteria. These criteria include the level of risk that the agency determines is associated with the device and a determination whether the product is a type of device that is similar to devices that are already legally marketed. Devices deemed to pose relatively less risk are placed in either Class I or II, which requires the manufacturer to submit a pre-market notification requesting 510(k) clearance, unless an exemption applies. The premarketpre-market notification must demonstrate that the proposed device is “substantially equivalent” in intended use and in safety and effectiveness to a legally marketed “predicate device” that is either in Class I or Class II or is a Class III device that was in commercial distribution before May 28, 1976, for which the FDA has not yet called for submission of a PMA application. We believe that most of our applicationstests are Class II devices for which the 510(k) clearance standard is required,available, and we believe our HPV screeningHPV-HR Quad test is a Class III device subject tofor which the more stringent PMA requirements.requirements are applicable.
Class I devices are those for which safety and effectiveness can be assured by adherence to the FDA’s general regulatory controls for medical devices, which include compliance with the applicable portions of the FDA’s Quality System Regulations, facility registration and product listing, reporting of adverse medical events, and appropriate, truthful and non-misleading labeling, advertising, and promotional materials, (General Controls).or General Controls. Many Class I (and certain Class II) devices are exempt from premarketpre-market regulation, however, some Class I devices require premarketpre-market clearance by the FDA through the 510(k) premarketpre-market notification process described below.
Class II devices are subject to the FDA’s General Controls, and any other special controls as deemed necessary by the FDA to ensureestablish the safety and effectiveness of the device. PremarketPre-market review and clearance by the FDA for Class II devices is generally accomplished through the 510(k) premarketpre-market notification procedure. Pursuant to the Medical Device User Fee and Modernization Act of 2002 (MDUFMA), as of October 2002, unless a specific exemption applies, 510(k) premarketpre-market notification submissions are subject to user fees. Certain Class II devices are exempt from this premarket review process.fees, unless a specific exemption applies.
Class III devices are those devices which are deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, have a new intended use, or use advanced
technology that is not substantially equivalent to that of a legally marketed device. The safety and effectiveness of Class III devices cannot be assured solely by the General Controls and the other requirements described above.“predicate device”. These devices are required to undergo the PMA approval process in which the manufacturer must provedemonstrate the safety and effectiveness of the device to the FDA’s satisfaction. These devices almost always require formal clinical trials to demonstrate safety and effectiveness. A PMA application must provide extensive preclinical and clinical trial data and also information about the device and its components regarding, among other things, device design, manufacturing and labeling. PremarketPre-market approval applications (and supplemental premarketpre-market approval applications) are subject to significantly higher user fees under MDUFMA than are 510(k) premarketpre-market notifications. After approval of a PMA, a new PMA or PMA supplement is required in the event of a modification to the device, its labeling or its manufacturing process.
Medical devices can be marketed only for the indications for which they are cleared or approved. After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or could require a PMA approval. The FDA requires each manufacturer to make this determination in the first instance, but the FDA can review any decision. If the FDA disagrees with a manufacturer’s decision not to pursue a new 510(k) clearance or a PMA approval, the agency may retroactively require the manufacturer to pursue 510(k) clearance or PMA approval. The FDA also can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or PMA approval is obtained. We have made modifications to our 510(k) cleared system and tests, but have determined that, in our view, based on FDA guidance as to when to submit a 510(k) notification for changes to a cleared device, new 510(k) clearances or PMA approvals are not required. We cannot assure you that the FDA would agree with any of our decisions not to pursue 510(k) clearance or PMA approval. If the FDA requires us to pursue 510(k) clearance or PMA approval for any modification, we also may be required to cease marketing and/or recall the modified device until we obtain a new 510(k) clearance or PMA approval.
A clinical trial may be required in support of a 510(k) submission and generally is required for a PMA application. These trials generally require an effective Investigational Device Exemption, (IDE)or IDE, from the FDA for a specified number of patients, unless the product is exempt from IDE requirements or deemed a nonsignificantnon significant risk device eligible for more abbreviated IDE requirements. The IDE application must be supported by appropriate data, such as animal and laboratory testing results. Clinical trials may begin 30 days after the submission of the IDE application unless the clinical trial is placed on clinical hold by the FDA andor the appropriate institutional review boards at the clinical trial sites.Insites place the trial on clinical hold. In the future, we expect to submit additional 510(k) notifications or PMA applications in order to market new claims, uses or products.
Pre-clearance or pre-approval use
In order to market our devices forin vitro clinical diagnostic applications, clearance of a 510(k) or approval of a PMA is required. We believe that most of our applications are subject to the 510(k) process. Before we can submit a medical device for 510(k) clearance, we may have to perform a method comparison study at clinical sites to ensure that end-users can perform the test successfully. Method comparison studies typically require several months to complete and, although they may be conducted in a clinical environment, they are not typically regulated as clinical trials. A few of our applications, such as the HPV-QUAD screening assay, may require a PMA. PMA tests are typically more complex than 510(k) notifications and must generally be
supported by clinical trials to demonstrate the clinical utility of the device under intended conditions of use. These trials are longer and more complex and may take a year or more to complete.
Clinical investigations ofin vitro diagnostic tests, including our products and product candidates, typically are exempt from the IDE requirements. Thus, we do not need FDA’s prior approval to conduct clinical trials on our products, provided the testing is non-invasive, does not require an invasive sampling procedure that presents a significant risk, and does not intentionally introduce energy into the subject.subject and is not used as a diagnostic procedure without confirmation of the diagnosis by another, medically established diagnostic device or procedure. Our devices that are undergoing clinical testing to support FDA clearance or approval can not be used for clinical diagnosis unless the diagnosis is confirmed by another medically established test or procedure.
WeThe vast majority of the tests that we currently sell, products thatwhich together represent 87%, 92% and 95% of our net revenue for 2010, 2011 and the first six months of 2012, respectively, have not been cleared or approved for clinical use by the FDA. These tests are labeled “For Research Use Only. Not for use in diagnostic procedures.” as required by FDA to clinical laboratories to use for research purposes.regulations. We are not permitted to market these products forin vitro diagnostic use, and must establish distribution controls to assure that these products are not used for diagnostic purposes. We therefore market these products to laboratories for research or investigational use in the collection of research data. As required by FDA regulations, the assays are labeled, “For Research Use Only. Not for use in diagnostic procedures.” In some cases, laboratories certified under CLIA may use our products in their own laboratory-developed clinical tests when no FDA regulated analyte specific reagents orin vitro diagnostic products are available pursuant to guidelines recently issued by the College of American Pathologists. These guidelines have not been adopted or approved by FDA. While we believe that the sale of our products that have not been cleared or approved by the FDA for research purposes complies with FDA’s laws and regulations, the FDA may determine otherwise. If the FDA disagrees with the marketing of these products, we may be subject to a variety of enforcement actions ranging from public warning letters, fines, injunctions, consent decrees and civil penalties to suspension or delayed issuance of approvals, seizure or recall of our products, total or partial shutdown of production, withdrawal of approvals or clearances already granted, and criminal prosecution. In June 2011 the FDA issued a Draft Guidance entitled “Commercially Distributed In Vitro Diagnostic Products Labeled for Research Use only or Investigatinoal Use Only: Frequently Asked Questions,” which, if enforced, would limit our marketing of RUO tests to general discovery laboratories and would require us to halt sales to clinical laboratories that validate and use our RUO tests as LDTs.
Pervasive and continuingContinuing FDA regulationRegulation
After a device is placed on the market, regardless of the classification or premarketpre-market pathway, it remains subject to significant regulatory requirements apply.requirements. Even if regulatory approval or clearance of a medical device is granted, the FDA may impose limitations or restrictions on the uses and indications for which the device may be labeled and promoted. Medical devices may be marketed only for the uses and indications for which they are cleared or approved. FDA regulations prohibit a manufacturer from promoting a device for an unapproved, or “off-label” use. Manufacturers that sell products to laboratories for research or investigational use in the collection of research data are similarly prohibited from promoting such products for clinical or diagnostic applications.tests. While we have policies in place to restrict the promotion of our products sold on an RUO basis, we can notcannot assure you that the FDA would agree that our practices do not constitute the promotion of these products for a clinical or diagnostic use without clearance or approval.
Device manufacturers must establish registration and device listings with the FDA. Our manufacturing processes and those of our suppliers are required to comply with the applicable portions of the Quality Systems Regulations, which cover the methods and documentation of the design, testing, production, processes, controls, quality assurance, labeling, packaging and shipping of our products. Domestic facility records and manufacturing processes are subject to periodic unscheduled inspections by the FDA. ForeignThe FDA also may inspect foreign facilities whichthat export products to the U.S., may also be inspected by the FDA.United States.
We are required to report to the FDA if our products cause or contribute to a death or serious injury or malfunction in a way that would likely cause or contribute to death or serious injury were the malfunction to recur. We are also subject to correction and removal reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FFDCA that may present a risk to health. We have never submitted a medical device report for our products, nor conducted a recall or FDA-reportable correction or removal. The FDA and authorities in other countries can require the recall of products in the event of material defects or deficiencies in design or manufacturing. The FDA can also withdraw or limit our product approvals or clearances in the event of serious, unanticipated health or safety concerns.
The FDA has broad regulatory and enforcement powers. If the FDA determines that we have failed to comply with applicable regulatory requirements, it can impose a variety of enforcement actions ranging from public warning letters, fines, injunctions, consent decrees and civil penalties to suspension or delayed issuance of approvals, seizure or recall of our products, total or partial shutdown of production, withdrawal of approvals or clearances already granted, and criminal prosecution. The FDA can also require us to repair, replace or refund the cost of devices that we manufactured or distributed. In the event that one of our suppliers fails to maintain compliance with our quality requirements or FDA’s applicable regulatory requirements, we may have to qualify a new supplier and could experience manufacturing bottlenecks or delays as a result. Furthermore, the regulation and enforcement ofin vitro reagents and equipment by the FDA is an evolving area whichthat is subject to change. While we believe that we are in compliance with the current regulatory requirements and policies of the FDA, the FDA may impose more rigorous regulations or policies that may expose us to enforcement actions or require a change in our business practices. If any of these events were to occur, it could materially adversely affect us.
Fraud and abuse lawsAbuse Laws
Because of the significant federal funding involved in Medicare and Medicaid, Congress and the states have enacted, and actively enforce, a number of laws whose purpose is to eliminate fraud and abuse in federal healthcare programs. Our business is subject to compliance with these laws.laws, which include the following:
Anti-Kickback Statutes and federal false claims actFederal False Claims Act
The federal healthcare programsprogram’s Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either
the referral of an individual, or the furnishing or arranging for a good or service, for which payment may be made under a federal healthcare program, such as Medicare or Medicaid. The definition of “remuneration” has been broadly interpreted to include anything of value, including, for example, gifts, discounts, the furnishing of free supplies, equipment or services, credit arrangements, payments of cash and waivers of payments. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. In addition, some kickback allegations have been claimed to violate the Federal False Claims Act, discussed in more detail below.
The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Recognizing that the Anti-Kickback Statute is broad and may technically prohibit many innocuous or beneficial arrangements, Congress authorized the Office of Inspector General of the United States Department of Health and Human Services, or OIG to issue a series of regulations, known as “safe harbors.” These safe harbors set forth requirements that, if met in their entirety, will assure healthcare providers and other parties that they will not be prosecuted under the Anti-Kickback Statute. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal, or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable safe harbor may result in increased scrutiny by government enforcement authorities, such as the OIG.
Many states have adopted laws similar to the Anti-Kickback Statute. Some of these state prohibitions apply to referral of patients for healthcare items or services reimbursed by any payer,payor, not only the Medicare and Medicaid programs, and do not contain identical safe harbors.
Government officials have focused their enforcement efforts on marketing of healthcare services and products, among other activities, and have brought cases against numerous pharmaceutical and medical device companies, and certain sales and marketing personnel for allegedly offering unlawful inducements to potential or existing customers in an attempt to procure their business.
Another development affecting the healthcare industry is the increased use of the federal civil False Claims Act and, in particular, actions brought pursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions. The False Claims Act imposes liability on any person or entity who, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal healthcare program. The qui tam provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the defendant has submitted a false claim to the federal government, and to share in any monetary recovery. In recent years, the number of suits brought by private individuals has increased dramatically. In addition, various states have enacted false claim laws analogous to the False Claims Act. Many of these state laws apply where a claim is submitted to any third-party payor and not merely a federal healthcare program.
When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties of between $5,500 to $11,000 for each separate false claim. There are many potential bases for liability under the False Claims Act. Liability arises, primarily, when an entity knowingly submits, or causes another to submit, a false claim for reimbursement to the federal government. The False Claims Act has been used to assert liability on the basis of inadequate care, kickbacks and other improper referrals, improper use of Medicare numbers when detailing the provider of services, and allegations as to misrepresentations with respect to the services rendered. Our future activities relating to the reporting of discount and rebate information and other information affecting federal, state and third-partythird party reimbursement of our products, and the sale and marketing of our products, may be subject to scrutiny under these laws. We are unable to predict whether we would be subject to actions under the False Claims Act or a similar state law, or the impact of such actions. However, the costs of defending such claims, as well as any sanctions imposed, could significantly adversely affect our financial performance.
HIPAA and other fraudOther Fraud and privacy regulationsPrivacy Regulations
Among other things, the Health Insurance Portability and Accountability Act of 1996 (as amended by the Health Information Technology for Economic and Clinical Health Act), or HIPAA, created two new federal crimes: healthcare fraud and false statements relating to healthcare matters. The HIPAA healthcare fraud statute prohibits, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment and/or exclusion from government-sponsored programs. The HIPAA false statements statute prohibits, among other things, knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines and/or imprisonment.
In addition to creating two new federal healthcare crimes, regulations implementing HIPAA also establish uniform standards governing the conduct of certain electronic healthcare transactions and protecting the security and privacy of individually identifiable health information maintained or transmitted by healthcare providers, health plans and healthcare clearinghouses, which are referred to as “covered entities.” Three standards have been promulgated under HIPAA’s regulations: the Standards for Privacy of Individually Identifiable Health Information, which restrict the use and disclosure of certain individually identifiable health information; the Standards for Electronic Transactions, which establish standards for common healthcare transactions, such as claims information, plan eligibility, payment information and the use of electronic signatures; and the Security Standards, which require covered entities to implement and maintain certain security measures to safeguard certain electronic health information. Although we are not a covered entity, and, therefore, not directly subject to these standards, we expect that our customers generally will be covered entities and may ask us to contractually comply with certain aspects of these standards. Recent amendments to HIPAA make its requirements applicable to such business associates of covered entities. While the government intended this legislation to reduce administrative expenses and burdens for the healthcare industry, our compliance with certain provisions of these standards entails significant costs for us.us, and our failure to comply could lead to enforcement action that could have a material adverse effect on our business. If we or our operations are found to be in violation of HIPAA or its implementing regulations, we may be subject to penalties, including civil and criminal penalties, damages, and fines.
In addition to federal regulations issued under HIPAA, some states have enacted privacy and security statutes or regulations that, in some cases, are more stringent than those issued under HIPAA. In those cases, it may be necessary to modify our planned operations and procedures to comply with the more stringent state laws. If we fail to comply with applicable state laws and regulations, we could be subject to additional sanctions.
Third-party coverageThird Party Coverage and reimbursementReimbursement
Our primary customers are clinical laboratories that bill many different payerpayor groups. The majority of reimbursement dollars for traditional laboratory services are provided by health maintenance organizations, (“HMOs”)or HMOs, and other managed care plans, as well as government healthcare programs, such as Medicare and Medicaid. HMOs and other managed care plans typically contract with a limited number of clinical laboratories and then designate the laboratory or laboratories to be used for tests ordered by participating physicians.
There are a number of factors that influence coverage and reimbursement for diagnostic tests. In the United States, the American Medical Association assigns specific Current Procedural Terminology, or CPT codes, which are necessary for reimbursement of diagnostic tests. Once the CPT code is established, the Centers for Medicare and Medicaid Services establish reimbursement payment levels and coverage rules under Medicaid and Medicare, and private payors establish rates and coverage rules independently.
The design of our products and the potential market for their use may be directly or indirectly affected by U.S.United States and other government regulations governing coverage and reimbursement for diagnostic testing services.may affect directly or indirectly the design of our products and the potential market for their use. The availability of third-party reimbursement for our products and services may be limited or uncertain. Third-party payers
payors may deny coverage if they determine that the prescribed product or service has not received appropriate FDA or other government regulatory clearances, is not used in accordance with cost-effective treatment methods as determined by the payer,payor, or is deemed by the third-party payerpayor to be experimental, unnecessary or inappropriate. Furthermore, third-party payerspayors are increasingly challenging the prices charged for healthcare products and services.
Foreign regulationRegulation
In order for us to market our products in other countries, we must obtain regulatory approvals or registrations and comply with extensive safety and quality regulations in other countries. These regulations, including the requirements for approvals or clearanceregistrations and the time required for regulatory review, if required, vary from country to country. Failure to obtain required regulatory approval or registration in any foreign country in which we plan to market our products may harm our ability to generate revenue and harm our business.
Many foreign countries in which we market or may market our products have regulatory bodies and restrictions similar to those of the FDA. International sales are subject to foreign government regulation, the requirements of which vary substantially from country to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval and the requirements may differ.
The primary regulatory environmentEuropean Countries. In the EEA, a medical device can only be placed on the market if it is in Europe isconformity with the essential requirements set out in the European Medical Devices Directives (Directive 93/42/EEC on Medical Devices, Directive 90/385/EEC on Active Implantable Medical Devices and the IVDD Directive).Invitro diagnostic medical devices that comply with the requirements of the European Union, which consistsIVDD Directive are entitled to bear the CE conformity mark, indicating that the device meets minimum standards of 25performance, safety and quality (i.e., the essential requirements), and can be commercially distributed throughout the EEA and other countries encompassing most ofoutside the major countries in Europe. The European Union requiresEEA that manufacturers of in vitro diagnostic products obtain the right to affixhave accepted the CE marking to their products before selling them in member countriesas an acceptable certification of the European Union. The CE marking is an international symbolefficiency and safety of conformity with applicable European medical device and in vitro diagnostic directives. In order to obtain the right to affix the CE marking to products, a manufacturer must conform with the applicable Medical Device Directive and In-Vitro Diagnostic Directive.devices. For certain classes of devices, certification by a recognized European Notified Body may be required to permit the manufacturer to affix the CE marking on its products and commercially distribute those products throughout the European Union.EEA.
In June 2008, theThe CE marking of conformity was affixed to the INFINITI™ Analyzer in accordance with the IVDD Directive.Directive in June 2008. We also have CE marked 22 of our tests. The CE marking allows the INFINITI™ Analyzer to be marketed in the EEA. Our tests that are not CE marked are offered to European Economic Area.laboratories on an RUO basis to conduct research projects and other pre-market activities. We are working with our European distributors to prioritize and fulfill requirements to affix CE marking as required by applicable law. We cannot assure you that we will be able to obtain necessary foreign government approvals or successfully comply with foreign regulations. Our failure to do so could hurt our business, results of operations and financial condition.
Corporate Headquarters
Our corporate offices are located at 2251 Rutherford Road, Carlsbad,2980 Scott Street, Vista, California, 92008 in approximately 33,400125,000 square feet occupied under a lease commencingthat commenced on February 15, 2005 that expires February 15, 2010 with two consecutive three year options to extend the lease.1, 2009 and will expire on December 31, 2029. This location is used for manufacturing,facility houses our research and development, manufacturing and administration.warehousing operations and our administrative offices.
Employees
As of June 30, 2008,2012, we had 10386 full-time and two part-time employees. None of our employees isare represented by a labor union and we consider our employee relations to be good.
Legal proceedings
OGT matter
In November 2005, Oxford Gene Technology IP Ltd, or OGT, of Oxford, England, approached us with respect to licensing one of OGT’s U.S. patents. In a series of written exchanges and other communications between representatives of OGT and us, we asserted our position of invalidity and non-applicability of the relevant claims of the OGT patent on the basis of, among other things, analysis of prior art and the prosecution history of the patent. Without substantive written rebuttal to our assertion, OGT maintained that we should license the technology covered by the relevant patent claims and offered licensing terms requiring substantial upfront payment and escalating licensing fees.
On July 23, 2007, we filed a complaint for declaratory judgment against OGT in the U.S. District Court, Central District of California, requesting a judicial ruling that OGT’s asserted claims are invalid and not infringed by us. The District Court dismissed the complaint on jurisdictional grounds. On February 12, 2008, we appealed the dismissal to the U.S. Court of Appeals for the Federal Circuit, which appeal is currently pending.
On August 31, 2007, we filed a request for reexamination of the relevant patent claims, which has been joined with a request for reexamination filed by two other parties. On July 17, 2008, the U.S. Patent and Trademark Office, or USPTO, rejected the patent claims in the joined reexamination request. OGT now has the opportunity to amend its claims and/or re-argue the grounds for rejection, and the USPTO should issue a final office action in response to any such amendments or arguments. The OGT patent expires in May 2009.
We will vigorously defend any further claim by OGT that it is entitled to fees or payments from us based on its patent. In the event that the USPTO allows OGT’s patent claims, and OGT successfully asserts those claims against us, the outcome of that lawsuit could have a negative impact on our financial position, cash flows, and results of operations.
Other mattersProceedings
We are from time to time subject to various other claims and legal actions during the ordinary course of business. We believe that there are currently no other claims or legal actions that would, in management’s judgment based on information currently available, have a material adverse effect on our results of operations or financial condition.
The following table sets forth information about our directors and executive officers as of July 21, 2008:June 30, 2012. The biographies for Mr. Kureshy and our other directors, below, include information on the directors’ experience, qualifications, attributes or skills that have led our board to conclude that they should serve on our board.
Name | Age | Position | ||||
Fareed Kureshy | 69 | Founder, Chairman, President and Chief Executive Officer | ||||
and Director | ||||||
Thomas V. Hennessey, Jr. | 64 | Chief Operating Officer, Chief Financial Officer, Secretary and Director | ||||
| 51 | Chief Scientific Officer | ||||
Shailendra Singh, Ph.D. | 73 | Co-Founder, Vice President, System Development | ||||
Ramanath Vairavan | 64 | Co-Founder, Senior Vice President, Sales and Marketing | ||||
Stephen Allison | 67 | Director | ||||
Charles Birmingham | 61 | Director | ||||
William H. Davidson, D.B.A. | 60 | Director | ||||
Laurence M. Demers, Ph.D. | 74 | Director | ||||
| 62 | Director | ||||
| ||||||
| ||||||
| ||||||
Eugene J. Zurlo | 75 | Director |
Executive officersOfficers
Fareed Kureshy: Mr. Kureshy, the Company’s Founder, has been Chairman, President and Chief Executive Officer of AutoGenomics since its founding in April 1999. Mr. Kureshy has over 30 years of entrepreneurial leadership experience in the healthcare industry. Mr. Kureshy served as President and Chief Executive Officer of Sequenom, Inc. from 1996 to 1998,1997, and as President of Behring Diagnostics, Inc. and PB Diagnostics Systems, Inc. from 19911992 to 1996, where he set up the infrastructure to design, develop, manufacture and market platform technologies in the areas of chemistry, immunoassays and DNA analysis. Mr. Kureshy also spent 12 years at Abbott Laboratories from 1976 to 1987 where he held various management positions. Mr. Kureshy holds undergraduate degrees in physics, chemistry and mathematics from Karachi University, an undergraduate degree in engineering from Northrop University and has completed graduate engineering studies. He was awarded an M.B.A. from Southern Methodist University. Our board of directors has determined that Mr. Kureshy brings to the board knowledge of our business and his historical understanding of our operations combined with his extensive entrepreneurial leadership, operations, strategic planning and marketing experience in the healthcare industry in which we operate.
Thomas V. Hennessey, Jr.: Mr. Hennessey joined AutoGenomics in January 2008 as Chief Operating Officer and Chief Financial Officer. Mr. HennesseyOfficer and has served as a director of AutoGenomics since 2001. Mr. Hennessey served as AutoGenomics’ Chief Financial Officer in his capacity as an independent contractor in December 2007 and in his capacity as a non-employee director from January 2007 through November 2007. Mr. Hennessey has 3035 years of experience in the medical and technology industries. Mr. Hennessey was an independent consultant to AutoGenomics from January 2003 until December 2007. From 2001 until 2003, he was Chief Operating Officer and Chief Financial Officer of Photovac, Inc. He has also served as Chief Operating Officer and Chief Financial Officer for several public and private start-up companies, including Behring Diagnostics, Inc., Autoimmune, Inc., Medical Diagnostics, Inc., Cambridge Heart, Inc. and Sonamed Corporation. Mr. Hennessey received a S.B. and a S.M. degree in mechanical engineering from MITMassachusetts Institute of Technology and an M.B.A. from Harvard Business School. Our board of directors had determined that Mr. Hennessey brings to the board his knowledge of our operations as well as management and financial experience, having served as Chief Operating Officer and Chief Financial Officer for several public and private start-up companies in the medical and technology industries in which we operate.
Nanibhushan Dattagupta,Patrick Dillon, Ph.D.: Dr. DattaguptaDillon joined AutoGenomics in 2006 as Chief Scientific Officer. From November 2005 until April 2006, he was an independent consultant to AutoGenomics. From 1998 until November 2005, Dr. Dattagupta was the PresidentJanuary 2009 and became our Chief Scientific Officer in December 2011. Prior to that he served as our Vice President of Applied Gene Technologies Inc. Dr. DattaguptaR&D Chemistry. He has over 3520 years of research and management experience in pharmaceutical researchrelated to the discovery, development and development, clinical diagnosticscommercialization of bioscience related products and therapeutic drugs.technologies. Dr. DattaguptaDillon has held senior executive positions at Bayer AG, Gen-ProbeHuman Genome Sciences, Inc. (NASDAQ: GPRO), Chugai Biopharmaceuticals, Inc.Nanogen, Invitrogen, and Applied Gene TechnologiesArtisOptimus, Inc. Dr. DattaguptaDillon is also an inventor or co-inventor of 5956 U.S. issued U.S. patents and numerous issuedpending U.S. and pending patents internationally.international patents. He is an author or co-author of 5725 scientific publications in peer reviewedpeer-reviewed journals. HeDr. Dillon received a B.S., an M.S. in Biology from the University of Illinois and a Ph.D. in chemistryImmunology from Calcutta University.Rush University in Chicago.
Shailendra Singh, Ph.D.: Dr. Singh has been Vice President, System Development of AutoGenomics since its founding in April 1999. Dr. Singh has 3234 years of experience in software engineering, systems development and integration, the last 27 years having29 of which have been spent in the healthcare industry and participating in the invention and development of eight medical instruments. Dr. Singh has held the position of Vice President of Systems Development at Sequenom, Inc., PB Diagnostics Systems, Inc. and Behring Diagnostics, Inc. Dr. Singh received a B.S. in electrical engineering, an M.E. in electrical engineering and a Ph.D. in electrical engineering from Southern Methodist University.
Ramanath Vairavan: Mr. Vairavan ishas been Senior Vice President, Sales and Marketing of AutoGenomics since January 2007 and has been an executive officer of AutoGenomics since its founding in April 1999. Mr. Vairavan has over 30 years of experience in the healthcare industry in the areas of research, product development, manufacturing, sales, marketing and business development. He began his career with Hoechst AG / Behring Diagnostics, Inc. where he held various management positions in research, development, operations, international sales and marketing in the U.S.,United States, Singapore and Germany. Mr. Vairavan received a B.S.B. Tech. in chemical engineering andfrom University of Madras, India, an M.S. in biomedical engineering from Washington University and an M.B.A. from Fairleigh Dickinson University.
Directors
Stephen Allison: Mr. Allison joined our board of directors in April 2011. Mr. Allison has over 25 years of experience advising and working for organizations in the healthcare and technology sectors and is currently an independent business consultant. From 2006 to 2007, Mr. Allison was Vice President, Chief Financial Officer of Gensym Corporation, a leading provider of software and services for mission-critical solutions in real time. Prior to Gensym, he was CFO for Webhire, Inc. from 2000 - 2003, PRI Automation from 1997 to 2000 and Helix Technology from 1995 to 1997. From 1991 until 1995, Mr. Allison was Vice President, Finance for Behring Diagnostics, Inc. an international company engaged in the development, manufacture and sale of immunoassay systems. Mr. Allison holds a B.A. degree in Economics from Columbia University and an M.B.A. from the Amos Tuck School of Business Administration at Dartmouth College. Our board of directors has determined that Mr. Allison brings to our board his knowledge of public accounting, his public company management experience, having served as chief financial officer of several public companies, and knowledge of the healthcare sectors in which we operate.
Charles Birmingham: Mr. Birmingham joined our board of directors in August 2012. He has over 30 years of experience in leading growth-oriented companies in the health care services area. Since October 2010 he has served as Vice President of Corporate Development of CareMore Medical Enterprises and General Manager of CareMore Touch. From February 2010 to October 2010 Mr. Birmingham was a Principal at White Branch Partners, where he provided consulting services to health care and early-stage companies. From October 2009 to February 2010 Mr. Birmingham was a board member and Vice President of Operations at Initiate Healthcare, and was the Executive Vice President and Chief Operating Officer of its predecessor-by-acquisition, Accenx Technologies, from 2007 to October 2009. Mr. Birmingham was a Senior Consultant at XLHealth Corporation from 2006 to 2007 and at PacifiCare Health Systems from 2004 to 2006. From 1987 to 1994 Mr. Birmingham was the co-founder and Senior Vice President of Operations of First Mental Health, Inc. Mr. Birmingham is a board member of National Healthcare Services, a health system-based venture capital fund that specializes in
health care technology. Mr. Birmingham holds a B.S. in psychology from St. Joseph’s University and an M.B.A from Vanderbilt University. Our board of directors has determined that Mr. Birmingham brings to our board an extensive knowledge of the healthcare industry in general and the reimbursement environment in which our customers operate.
William H. Davidson, D.B.A.: Dr. Davidson has served as a director of AutoGenomics since February 2007.November 2006. Dr. Davidson has been Chairman of MESA Research Group, a strategy consulting firm, since 1984 and is1982. From 1985 to 1998, Dr. Davidson served as a former tenured professor of management at the Marshall Business School at USC. Hethe University of Southern California. From 1996 to 1998, he was a partner at Deloitte & Touche in its management consulting unit from 1996 to 1997. He is currentlyunit. Dr. Davidson has in the past served on four public company boards, including Broadcast International, a communication software company where he served as non-executive chairman from 2005 to 2009 and as a member of Broadcast International, Inc.,its compensation and governance and nominating committees, and more than a communications softwaredozen private company and serves on the compensation committee of that company. He is also non-executive chairman of Castle Arch Real Estate Company, a land development company, and serves on that company’s compensation committee.boards. Dr. Davidson holds bothan A.B. in economics from Harvard College and an M.B.A. in management and a D.B.A. in managementInternational Management of Technology from Harvard Business School. Our board of directors has determined that, as the Chairman of MESA Research Group since 1984 and a former partner of Deloitte & Touche LLP in its management consulting unit, Dr. Davidson contributes to our board his experience in the area of strategic management, including international business and organization development and maximizing leadership effectiveness. Dr. Davidson also brings to the board public company directorial and governance experience having served on the board of directors and board committees of public companies which will be important experience for our board following this offering.
Laurence M. Demers, Ph.D.: Dr. Demers, DABCC, FACB, has served as a director of AutoGenomics since March 2008. Dr. Demers, DABCC, FACBHe is a Distinguished Professor Emeritus of Pathology and Medicine at the M. S. Hershey Medical Center of The Pennsylvania State University, director of the Core Endocrine Laboratory in the Pennsylvania State University Hospital and Director of the Pennsylvania State Clinical Research Center Core Laboratory.where he has taught since 1973. Dr. Demers is a diplomat of the American Board of Clinical Chemistry, a fellow of the National Academy of Clinical Biochemistry,
a past president of the American Association for Clinical Chemistry as well as a past president of the National Academy of Clinical Biochemistry, and the founding director of Clinical Chemistry at the M.S. Hershey Medical Center, where he has practiced fora director of the past 33 years.Core Endocrine Laboratory in the Pennsylvania State University Hospital and a former director of the Pennsylvania State Clinical Research Center Core Laboratory. His primary research interests have been in the areas of biochemical endocrinology,molecular diagnostics, laboratory automation, thyroid disease, metabolic bone disease and breast cancer. Dr. Demers has had extensive experience as principleprincipal investigator of clinical trials for both the pharmaceutical andin vitrodiagnostic industry. Dr. Demers holds an A.B. in biology from Merrimack College and a Ph.D. in biochemistry from State University of New York.
Eric S. Kentor: Mr. Kentor has Dr. Demers recently served as a directorChairman of AutoGenomics since March 2008. Mr. Kentor has over 20 years experience advisingthe Board of Trustees of Merrimack College, North Andover, MA from 2007-2010 and working for organizationswas awarded an honorary Doctor of Science by Merrimack College in the healthcare sector and has served as an independent business consultant since 2002. From 1995 until 2001, Mr. Kentor was Sr. Vice President, General Counsel and Corporate Secretary of MiniMed Inc., where he also served as an original and permanent member of MiniMed’s Executive Management Committee. From 1994 to 1995, he was Vice President of Legal Services for Health Net and also served as Executive Counsel of Health Net’s parent corporation, Health Net, Inc. From 1987 until 1994, Mr. Kentor practiced with the national law firm of McDermott, Will & Emery LLP, where he was elected partner in 1992. Mr. Kentor has served on the boards of directors of both private and public companies, and is currently a member of the2011. Our board of directors has determined that Dr. Demers brings to our board his scientific knowledge and understanding of Endocare, Inc. (NASDAQ: ENDO), a specialty medical device company. Mr. Kentor is also a memberour product offerings and knowledge of the pharmaceutical industry and the diagnostic industry in which we operate.
Donald E. Pogorzelski: Mr. Pogorzelski joined our board of directors of the Boys and Girls Club of the West Valley.in August 2011. Mr. Kentor holds a B.A. in political science from UCLA and received a J.D. from the UCLA School of Law.
Randall R. Lunn: Mr. LunnPogorzelski has served as a director of AutoGenomics since January 2000. Mr. Lunn has nearlyover 30 years of experience in the venture capital industry.medical diagnostics industry, with the last 23 years at Genzyme Corporation. Mr. LunnPogorzelski joined Genzyme in 1988 in a domestic sales and marketing role in the Diagnostics Division when annual revenue was a founderapproximately $4 million. As president in 1986, he assumed global leadership of the division and managing directorbecame an Officer of Palomar Ventures Management, LLC, a venture capital firm focusing on early stage information technology companies, from 1999the Corporation in 2001. Revenue when the business was sold in February 2011 to Junelongtime partner Sekisui Chemical approximated $175 million. Mr. Pogorzelski began his career in diagnostics with Abbott Laboratories in 1976 and experienced several assignments of increasing responsibility prior to leaving Abbott to join Genzyme in Boston at the start of 1988. He was elected to the New England Baptist Hospital Board of Trustees in February 2007 and since July 2007 has been a retired managing directoris currently serving in the capacity of that firm. From 1990Vice-Chair. He was elected to 1999, Mr. Lunn was Managing Partnerthe Wentworth Institute of U.S. Operations for Techno Venture Management, an international venture capital firm. From 1982 to 1990, Mr. Lunn was a founder and general partner of Fairfield Venture Partners. Mr. Lunn began his venture capital career in 1979 as a founder of Harrison Capital, the venture arm of Texaco. He currently serves on the boards of directors of the following Palomar Ventures-backed companies: Akonix Systems, Inc., Continuous Computing Corporation, DATAllegro, Inc. and Newport Imaging Corporation. Mr. Lunn holds a B.A., a B.E. and an M.B.A. from Dartmouth College and currently serves on theTechnology Board of OverseersTrustees in 2007 and received an Honorary Degree of Dartmouth’s Thayer SchoolDoctor of Engineering.
Joseph P. Sullivan:Engineering Technology from Wentworth in 2006. Mr. Sullivan has served as a director of AutoGenomics since November 2004. Mr. Sullivan has been Chairman of the Board of Advisors of RAND Health since 2001Pogorzelski earned his undergraduate degree at Loyola University, Chicago and Chairman of the Board of Advisors of the UCLA Medical Center since 2007. He serves on the boards of directors of two public companies, Amylin Pharmaceuticals, Inc. (NASDAQ: AMLN) and HCP, Inc. (NYSE: HCP). He has previously served as Chief Executive Officer of two healthcare companies, American Health Properties, Inc. and Protocare, Inc. Mr. Sullivan was an investment banker with Goldman, Sachs & Co. for 20 years and holds a J.D.his M.B.A. from the University of Minnesota Law School and an M.B.A. from Harvard Business School.
Thomas R. Testman: Mr. Testman has served as a director of AutoGenomics since March 2001. Mr. Testman retired as a managing partner of Ernst & Young LLP after over 30 years of service, during which time his responsibilities among others have included managing the regional and
national healthcare and management consulting practices. He has also managed area audit and tax practices. Mr. Testman has previously served on several public boards of directors, including MiniMed, Inc., ChromaVision Medical Systems, Inc., Specialty Laboratories, Inc. and Amylin Pharmaceuticals, Inc. (NASDAQ: AMLN). He currently serves on the board of Endocare, Inc. (NASDAQ: ENDO), a specialty medical device company. He also is on theChicago. Our board of directors has determined that Mr. Pogorzelski brings to our board his extensive knowledge of several other private healthcare companies. Mr. Testman received an M.B.A. from Trinity University.marketing and the market environment in the medical diagnostics industry and sectors in which we operate.
Eugene J. Zurlo: Mr. Zurlo has served as a director of AutoGenomics since January 2005. Mr. Zurlo has over 4050 years of experience in the healthcare industry as a manager, executive and investor. Mr. Zurlo has been managing director of Zurlo Investment Trust, an active investor in real estate, pharmaceutical and early-stage healthcare companies, since 1997, is founder and Chairman of Alpine Biologics, Inc.2000 and is a director of private companies Penny Creek Associates LLC and Plasma Technologies, LLCLLC. He was founder of Hemasure, Inc. and BriteAge Corporation. Previously, he wasserved in the positions of Chairman from 1996 to 1997 and President and Chief Executive Officer and founder offrom 1993 to 1996. Prior to Hemasure, Inc., and before thatMr. Zurlo held senior executive positions at Millipore Corporation, (NYSE: MIL),where he served as Senior Vice President of Operations, Baxter International, Inc. (NYSE: BAX), where he served as Senior Vice President of several divisions, including Laboratory Diagnostics, and the New York Blood Center.Center, where he served as Chief Operating Officer. He holds a B.S. in pharmacy from Fordham University and an M.S. in pharmacy administrationeconomics from Long Island University. Our board of directors has determined that Mr. Zurlo contributes to our board extensive management and operations experience, as well as scientific knowledge and knowledge of the healthcare industry and diagnostic industry in which we operate.
Corporate governanceGovernance and board compositionBoard Composition
Our board of directors is composed of nine directors.eight directors with one vacancy. All directors hold office until the next annual meeting of stockholders and until their successors havea successor has been duly elected and qualified. A resolution of the board of directors may change the authorized number of directorsdirectors; however, our certificate of incorporation and may staggerbylaws currently limit the membership of the board intonumber to not more than one class.15 nor fewer than five directors. Our board of directors has determined that each of our non-employee directors areis independent within the meaning of NASDAQ rules.
Board structureStructure and committees compositionCommittees Composition
Our board of directors will directdirects the management of our business and affairs, as provided by Delaware law, and conductconducts its business through meetings of the board of directors and standing committees. Our board of directors currently has an audit committee, compensation committee and nominating committee. Our board of directors may establish other committees to facilitate the management of our business. The membership and function of each of the committees are described below.
Audit Committee. The audit committee of our board of directors consists of Thomas R. TestmanStephen Allison (Chairman), Joseph P. SullivanDonald E. Pogorzelski and Randall R. Lunn.Eugene J. Zurlo. The audit committee, which is composed solely of independent directors, has sole authority for hiring the company’s independent auditors, oversees the results and scope of the audit and other services provided by our independent auditors, oversees our audit and control functions and reviews all related persons transactions. Our board of directors has determined each member of our audit committeethat Mr. Allison qualifies as an “audit committee financial expert” as defined by the rules under the Securities Exchange Act of 1934.Act. The background and experience of each of our audit committee members are set forth above.
Compensation Committee. The compensation committee of our board of directors consists of Eric S. KentorLaurence M. Demers (Chairman), William H. Davidson and Eugene J. Zurlo and William H. Davidson.Zurlo. The compensation committee, comprised solely of independent directors, oversees our compensation plans and is
responsible for setting the compensation of our chief executive officer. Such oversight includes reviewing and, as it deems appropriate, recommending to our board of directors policies, practices and procedures relating to the compensation of our directors, officers and other managerial employees and the establishment and administration of our employee benefit plans and exercising authority under our equity incentive plans.
Nominating and Corporate Governance Committee. The nominating and corporate governance committee of our board of directors consists of Fareed Kureshy, William H. Davidson (Chairman), Laurence M. Demers, and Thomas R. Testman.Fareed Kureshy. The nominating and corporate governance committee is responsible for recruiting and retaining qualified persons to serve on our board of directors, including proposing such individuals to the board of directors for nomination for election as directors, evaluating the performance, size and composition of the board of directors and overseeing our corporate governance programs and compliance activities. The nominating and corporate governance committee considers written suggestions from stockholders, including potential nominees for election as directors.
Code of business conductBusiness Conduct and ethicsEthics
WePrior to completing this offering, we will adopt a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. The code of business conduct and ethics will be available on our website at www.autogenomics.com. Information contained in or that can be accessed through our website is not incorporated by reference into this prospectus and should not be considered to be part of this prospectus. Any amendments to the code, or any waivers of its requirements with respect to our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions will be promptly disclosed on our website.
Compensation committee interlocksCommittee Interlocks and insider participationInsider Participation
Except as set forth below, noneNone of the members of our compensation committee has at any time during our last completed fiscal year been one of our officers or employees. None of our executive officers currently serves, or during our last completed fiscal year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers on our board of directors or compensation committee. Mr. Hennessey served as a member of our compensation committee from July 2002 through March 2008.
Director compensationCompensation
The non-employee members of our board of directors are reimbursed for travel, lodging and other reasonable expenses incurred in attending board of directors or committee meetings. We do not currently provide any cash compensation to our non-employee directors. From time to time, we have granted stock options to our non-employee directors as compensation for their services, although there has been no formal policy in place with respect to such awards.
Following the completion of this offering, we will provide cash compensation in the form of an annual retainer of $35,000 for each non-employee director. We will also pay an additional annual retainer of $10,000 to the lead non-employee director, $10,000 to the chairman of our audit committee, $7,500 to each other non-employee member of our audit committee, $7,000 to the chairmenchairman of our compensation committee, $5,000 to each other non-employee member of our compensation committee, $5,000 to the chairman of our nominating and corporate governance committee and $3,000 to each other non-employee member of our nominating and corporate governance committee. In lieu of receiving this cash compensation, the directors will be able to
elect to receive deferredrestricted stock units with an equal value.value on their date of grant. We will continue to reimburse our non-employee directors for their reasonable expenses incurred in attending meetings of our board of directors and committees of the board of directors.
Following the completion of this offering, any non-employee director who is first elected to the board of directors will be granted 10,000eligible to receive a restricted stock units on the dateunit covering 10,000 shares of our common stock in connection with his or her initial election to the board of directors. In addition, on the date of each annual meeting of our stockholders following this offering, each non-employee director will be eligible to receive 5,000a restricted stock units.unit covering 5,000 shares of our common stock.
The initial restricted stock units granted to non-employee directors described above will vest one year after they were granted, subject to the director’s continuing service on our board of directors on that date. The annual restricted stock units granted to non-employee directors described above will vest one year after they were granted, subject to the director’s continuing service on our board of directors on that date. The terms of these restricted stock units are described in more detail under “—“Executive Compensation — Employee Plans—Plans — 2008 Equity Incentive Award Plan.”
The following table summarizes the compensation received by our non-employee directors during the year ended December 31, 2007.2011.
Name (1) | Option awards ($) | |||
Stephen Allison | 21,800 | |||
William H. Davidson | 21,800 | |||
| 21,800 | |||
| 0 | |||
| 21,800 | |||
Thomas R. Testman (2) | 0 | |||
Donald E Pogorzelski (3) | 0 | |||
Eugene J. Zurlo | 21,800 |
(1) | Mr. Birmingham is not represented in the above table as he was not a member of our board of directors during fiscal year 2011. |
(2) | Mr. Kentor and Mr. Lunn resigned from the board of directors, effective February 2011 and October 2011, respectively. Mr. Testman resigned from the board of directors effective May 23, 2011; however, the Company has retained his services as a consultant. Mr. Kentor and Mr. Testman were not provided option grants in our fiscal year 2011 due to their having left their positions as directors during the year and prior to the date that annual option grants were approved by our compensation committee. |
(3) | Mr. Pogorzelski joined our board of directors in August 2011 and as a result was not provided an option grant during our fiscal year 2011. |
(4) | Represents the |
The aggregate number of shares subject to stock options outstanding at the end of fiscal year 2011 for each individual that was a non-employee director during fiscal year 2011 is as follows:
Name (1) | Shares underlying options outstanding December 31, 2011 | |||
Stephen Allison | 25,000 | |||
William H. Davidson | 195,000 | |||
| 105,000 | |||
| — | |||
| 110,000 | |||
Donald E. Pogorzelski (3) | — | |||
Thomas R. Testman (4) | 160,000 | |||
Eugene J. Zurlo | 80,000 |
(1) | Mr. Birmingham is not represented in the above table as he was not a member of our board of directors during fiscal year 2011. |
(2) | Mr. Kentor and Mr. Lunn resigned from the board of directors, effective February 2011 and October 2011, respectively. Mr. Kentor’s outstanding stock options expired without exercise prior to December 31, 2011 and Mr. Lunn’s stock options expired without exercise in January 2012. |
(3) | Mr. Pogorzelski joined our board of directors in August 2011 and as a result was not provided a stock option grant during our fiscal year 2011. |
(4) | Mr. Testman resigned from our board of directors effective May 23, 2011; however, the Company has retained his services as a consultant and as a result his stock option grants have remained outstanding pursuant to their terms. |
Summary Compensation Table
The following table summarizes the compensation that we paid to our named executive officers during the year ended December 31, 2011.
Name and principal position | Year | Salary ($) | Option awards ($) (1) | Other compensation ($) (2) | Total ($) | |||||||||||||||
Fareed Kureshy | 2011 | 201,923 | 55,650 | 13,430 | 271,003 | |||||||||||||||
President and Chief Executive Officer | ||||||||||||||||||||
Shailendra Singh, Ph.D. | 2011 | 126,923 | 34,980 | 11,258 | 173,161 | |||||||||||||||
Vice President, System Development | ||||||||||||||||||||
Nanibhushan Dattagupta, Ph.D. | 2011 | 115,385 | 31,800 | 5,505 | 152,690 | |||||||||||||||
Former Chief Scientific Officer (3) | ||||||||||||||||||||
Ramanath Vairavan | 2011 | 121,154 | 39,750 | 13,430 | 174,334 | |||||||||||||||
Senior Vice President, Sales and Marketing |
(1) | Represents the grant date fair value for 2011 of |
Name | Date of grant | Number of shares underlying options | Grant date fair value for options awarded in 2007 ($) | |||
William H. Davidson | 3/1/07 | 20,000 | 6,200 | |||
4/10/07 | 20,000 | 6,000 | ||||
Richard D. Hamill | 11/13/2007 | 20,000 | 6,000 | |||
Douglas S. Harrington | 2/6/2007 | 20,000 | 6,000 | |||
3/1/2007 | 20,000 | 6,200 | ||||
Joseph P. Sullivan | 2/6/2007 | 20,000 | 6,000 | |||
3/1/2007 | 20,000 | 6,200 | ||||
Thomas R. Testman | 2/6/2007 | 20,000 | 6,000 | |||
3/1/2007 | 20,000 | 6,200 | ||||
Eugene J. Zurlo | 2/6/2007 | 20,000 | 6,000 | |||
3/1/2007 | 20,000 | 6,200 |
(3) | Dr. Dattagupta passed away in December 2011. |
Executive compensationBase Salary and Bonuses
Compensation discussionOur compensation committee of our board of directors reviews and analysis
In this section we summarizerecommends to our plansboard of directors the base salary and programs for compensatingbonus compensation of our named executive officers. Our board of directors, without our named executive officers who are named in the Summary Compensation Table that appears below. These “named executive officers” consist of our Chief Executive Officerpresent, ratifies and President, our Chief Financial Officer, and our three other most highly paid executive officers as determined by totalapproves all compensation for the year ended December 31, 2007. These individuals are: Fareed Kureshy, President and Chief Executive Officer; Thomas V. Hennessey, Jr., Chief Operating Officer and Chief Financial Officer; Nanibhushan Dattagupta, Ph.D., Chief Scientific Officer; Shailendra Singh, Ph.D., Vice President, System Development; and Ramanath Vairavan, Senior Vice President, Sales and Marketing.
Overview
We recognize that our ability to excel depends on the integrity, knowledge, imagination, skill, diversity and teamwork of our employees. To this end, we strive to create an environment of mutual respect, encouragement and teamwork — an environment that rewards commitment and performance and that is responsive to the needs of our employees. The objectives of our compensation and benefits programs for our employees generally, andmatters for our named executive officers specifically, are to:
attract, engage and retain the workforce that helps ensure our future success;
motivate and inspire employee behavior that fosters a high-performance culture;
support a cost-effective and flexible business model;
reinforce key business objectives; and
align employee interests with stockholder interests.
Each of our compensation elements fulfills one or more of these objectives. These elements consist of (1) base salary, (2) annual cash bonus, (3) long-term equity incentives, (4) health and welfare benefits and other compensation and (5) post-termination benefits. Each of these components aligns the interests of our named executive officers with the interests of our stockholders in different ways, whether through focusing on short-term and long-term performance goals, promoting an ownership mentality toward one’s job, linking individual performance to our overall performance or by ensuring healthy employees. This mix of compensation is intended to ensure that total compensation reflects our overall success or failure and to motivate executive officers to meet appropriate performance measures. In determining each element of compensation for any given year, our board of directors and our compensation committee consider each element individually and then review the resulting total compensation and determine whether it is reasonable and competitive. We have no pre-established policy or target for the allocation between either cash and non-cash or short-term and long-term incentive compensation. Each of these compensation elements is described in more detail below.
Compensation Determination Process
Historically our board of directors has developed, reviewed and approved each of the elements of the executive compensation program of our company as a whole and for our named executive officers individually. Our compensation committee has had primary authority to grant stock options to our employees and consultants, although the full board of directors has retained this authority with respect to directors. Following the completion of this offering, our compensation
committee will assume responsibility for the oversight of our compensation programs and policies, including with respect to our named executive officers. The full board of directors will continue to administer our compensation programs and policies with respect to directors.
Compensation for our named executive officers has historically been highly individualized, resulted from arm’s length negotiations and been based on a variety of informal factors including in addition to the factors listed above, our financial condition and available resources, our need for that particular position to be filled and the compensation levels of our other executive officers, each as of the time of the applicable compensation decision. In years past,As an early commercial-stage company, we have historically operated with limited cash resources. Consequently, our full board of directors reviewedand compensation committee have been limited in the performance of allability to consider significant increases in cash compensation for our named executive officers, generally on an annual basis, and based on this review and the factors described above, set the executive compensation package for each named executive officer for the coming year. However, there was no predetermined time of year for such review. Upon consummation of this offering, the compensation committee will take on the responsibility for this annual review and decision-making process.officers.
The compensation committee and the board of directors hold executive sessions that are not attended by any members of management or non-independent directors, as needed from time to time. The compensation committee and the board of directors discuss our chief executive officer’s compensation package with him, but make decisions with respect to his compensation without him present.
TheOur board of directors and our compensation committee havehas not historically reviewedundertaken a formal review of relevant market compensation data in setting named executive officer compensation. Instead, our board of directors and our compensation committee rely primarily upon the judgment of their members in making compensation decisions, after reviewing our performance and financial condition and carefully evaluating a named executive officer’s performance during the year against established goals, leadership qualities, operational performance, business responsibilities, career with us, current compensation arrangements and long-term potential to enhance stockholder value. Following completion of this offering, we anticipate that our compensation committee will determine executive compensation, at least in part, by reference to the compensation informationTo date, base salary and bonuses for the executives of a peer group of comparable companies, although no such peer group currently exists. We also anticipate that our compensation committee may make adjustments in executive compensation levels in the future as a result of this more formal market comparison process.
Our chief executive officer, with the assistance and support of the human resources department and our other executive officers, aids the board of directors by providing recommendations regarding the compensation of all of our named executive officers other than himself. The board of directorshave been determined and our compensation committee also,paid on occasion, meet with our chief executive officer to obtain recommendations with respect to our compensation programs and practices generally. Thea discretionary basis in those instances where the compensation committee and the board of directors consider, butdesire to reward outstanding performance during the fiscal year by our named executive officers. Bonuses are not bound to accept,based upon the chief executive officer’s recommendations with respect toachievement of specified performance goals.
In 2011, our named executive officer compensation.officers took substantially reduced salaries, and no bonuses, as an economic concession during a period of significant financial constraint due to the withdrawal of our planned initial public offering in 2010 and general economic conditions. Similarly, no cash bonuses were awarded to our named
executive officers in 2011. We strive to achieve an appropriate mix between equity incentive awardsexpect base salary and cash payments in order to meet our objectives. Any apportionment goal is not applied rigidly and does not control our compensation decisions, and our compensation committee does not have any policiesbonuses for allocating compensation between long-term and short-term compensation or cash and non-cash compensation. Our mix of compensation elements is designed to reward recent results and motivate long-term performance through a combination of cash and equity incentive awards. We
believe the most important indicator of whether our compensation objectives are being met is our ability to motivate our named executive officers to deliver superior performance and retain them to continue their careers with us on a cost-effective basis.
The compensation levels of the named executive officers reflect to a significant degree the varying roles and responsibilities of such executives. Asincrease in 2012 as a result of the compensation committee’slessening of economic constraints and the boardachievement of director’s assessmentsignificant financial performance by the company during the last quarter of our chief executive officer’s2011 and president and chief operating officer’s roles and responsibilities within our company, there are significant compensation differentials between these named executive officers and our other named executive officers.
We do not have a formal policy to adjust or recover awards or payments if the relevant performance measures upon which they are based are restated or are otherwise adjusted in a manner that would otherwise reduce the size of the initial payment or award.
Base Salaries
In general, base salaries for our named executive officers are initially established through arm’s length negotiation at the time the executive is hired, taking into account such executive’s qualifications, experience and prior salary. Base salaries of our named executive officers are approved and reviewed annually by our compensation committee and our board of directors and adjustments to base salaries are based on the scope of an executive’s responsibilities, individual contribution, prior experience and sustained performance.2012 year. Decisions regarding salary increases in future periods may take into account the executive officer’s current salary, equity ownership, and the amounts paid to an executive officer’s peers inside our company by conducting an internal analysis, which compares the pay of each executive officer to other members of the management team. Base salaries are also reviewed in the case of promotions or other significant changes in responsibility. No formulaic base salary increases are provided to our named executive officers. This strategy is consistent with our intent of offering compensation that is both cost-effective, competitive and contingent on the achievement of performance objectives.
In April 1999, in connectionconsistent with the formation of our company, the board of directors set Mr. Kureshy’s annual base salary at $240,000. This base salary was not adjusted until January 2007, at which time it was increased to $300,000. Mr. Kureshy’s base salary was further adjusted in January 2008 to $350,000. Each of these increases was based on the board of directors’ assessment of the factors discussed above and the desire to reward Mr. Kureshy for his long service and extraordinary performance since the founding of the company.
Also during 2007, Mr. Vairavan’s base salary was increased from $150,000 (his base salary during 2006) to $175,000. This base salary was approved by our board of directors based on its consideration of the factors listed above and negotiations with Mr. Vairavan.
Dr. Dattagupta and Mr. Singh did not receive an increase to their base salaries during 2007.
The actual base salaries paid to all of our named executive officers for 2007 are set forth in the “Summary Compensation Table” below.
In early 2008, the board of directors reviewed the base salaries for all of the named executive officers employed by us at that time and set the base salaries to be in effect during 2008. The 2008 base salaries for our named executive officers are as follows:
Named Executive Officer | 2008 base salary ($) | Increase from 2007 base salary (%) | ||
Fareed Kureshy | 350,000 | 17% | ||
Thomas V. Hennessy, Jr. (1) | 250,000 | — | ||
Nanibhushan Dattagupta, Ph.D. | 200,000 | 11% | ||
Shailendra Singh, Ph.D. | 220,000 | 10% | ||
Ramanath Vairavan | 200,000 | 14% |
The base salary increases for our named executive officers from 2007 to 2008 were based on the board of directors’ review and subjective assessment of each named executive officer’s performance and the board’s consideration of the internal pay equity among our named executive officers.financial resources.
Annual Bonuses
In addition to base salaries, our compensation committee and board of directors have the authority to award annual cash bonuses to our named executive officers. To date, such bonuses have been paid on a discretionary basis in cases where the compensation committee and the board of directors desire to reward outstanding performance by our named executive officers. Bonuses are not based upon the achievement of specified performance goals.
For 2007, our board of directors approved the following bonuses paid in shares of our common stock for those named executive officers who are also founders of the company: Mr. Kureshy, 95,000 shares; Dr. Singh, 70,000 shares; and Mr. Vairavan, 35,000 shares. In addition, we also made tax gross-up payments to these officers to compensate them for the estimated taxes payable on the stock bonuses. These bonuses were awarded in order to reward these officers for their length of service and the board’s subjective assessment of their extraordinary efforts since the founding of the company in 1999. Based on this assessment, the board of directors determined that additional compensation was appropriate for these officers. In making its determination, the board of directors did not follow any guidelines, nor are there such standing guidelines regarding the exercise of discretion in awarding annual cash bonuses.
Long-Term Equity Incentives
The goals of our long-term, equity-based incentive awards are to align the interests of our named executive officers with the interests of our stockholders. Because vesting is based on continued employment, our equity-based incentives also encourage the retention of our named executive officers through the vesting period of the awards. In determining the size of the long-term equity incentives to be awarded to our named executive officers, we take into account a number of internal factors, such as the relative job scope, the value of existing long-term incentive awards, individual performance history, prior contributions to us, and the size of prior grants.grants, competitive considerations and our limited cash resources. Our compensation committee does not refer to formal competitive market data in determining long-term equity incentive awards. Based upon these factors, the compensation committee
determines the size of the long-term equity incentives at levels it considers appropriate to create a meaningful opportunity for reward predicated on the creation of long-term stockholder value. We have not granted any equity awards other than stock options to date.
To reward and retain our named executive officers in a manner that best aligns employees’ interests with stockholders’ interests, we use stock options as the primary incentive vehicles for long-term compensation. We believe that stock options are an effective tool for meeting our compensation goal of increasing long-term stockholder value by tying the value of the stock options to our future performance. Because employees are able to profit from stock options only if our stock price increases relative to the stock option’s exercise price, we believe stock options provide meaningful incentives to employees to achieve increases in the value of our stock over time.
We use stock options to compensate our named executive officers both in the form of initial grants in connection with the commencement of employment and additional or “refresher” grants. To date there has been no set program for the award of additional or “refresher” grants, and the compensation committee retains discretion to make stock option awards to employees at any time, including in connection with the promotion of an employee, to reward an employee, for retention purposes or for other circumstances recommended by management or the compensation committee.
The exercise price of each stock option grant is the fair market value of our common stock on the grant date, as determined by our board of directors. For 2007, the determination of the appropriate fair market value was made by the board of directors. Stock option awards to our named executive officers typically vest over a four-year period as follows: 25% of the shares underlying the option vest on each of the first four anniversaries of the vesting commencement date established at the time of grant. For new hire awards, the vesting commencement date is typically the new employee’s date of hire. For awards to existing employees or service providers the vesting commencement date is typically the same as the grant date. Some of the option awards granted to our named executive officers in the past were fully vested on the date of grant. Such awards were granted by ourThe board of directors granted these awards in consideration of such officers’the officer’s past service to our company. For a description of certain accelerated vesting provisions applicable to our stock options, see “—Equity Incentive Plans—2008 Equity Incentive Award Plan” and “—2000 Equity Incentive Plan” below. We do not have any security ownership requirements for our named executive officers.
Messrs. HennessyIn 2011, we granted Mr. Kureshy, Mr. Singh, Mr. Vairavan and Dattagupta received option grants during 2007, as set forth below under “—Grant of Plan-Based Awards.” Mr. Hennessey’s awards were issued to him as consideration for his services as a member of our board of directors and were consistent with the option grants made to all of our non-employee directors. The board grantedlate Dr. Dattagupta options to purchase an aggregate of 25,00052,500, 33,000, 37,500 and 30,000 shares of our common stock, to Dr. Dattaguptarespectively, all at an exercise price per share of $1.73 under our 2008 Equity Incentive Award Plan, as further described below under “— Employee Plans — 2008 Equity Incentive Award Plan.” The compensation committee granted these awards based on its subjective review of each executive’s performance during the previous year, its review and consideration of the foregoing factors.named
executive officers’ respective unvested equity holdings, its desire to reward the executives for service to the company and its determination that such awards were advisable in order to continue to retain and incentivize such officers.
As a privately-ownedprivately owned company, there has been no active market for our common stock. Accordingly, we have had no program, plan or practice pertaining to the timing of stock option grants to named executive officers coinciding with the release of material non-public information.
Retirement Savings
All of our full-timeOur employees, including our named executive officers, are eligible to participate in our 401(k) plan. Pursuant to our 401(k) plan, employees may elect to reduce their currenteligible compensation by up to the statutorily prescribed annual limit of $15,500$17,000 in 20072012 (additional elective deferrals not to exceed $5,500 are available to those employees 50 years of age or older) and to have the
amount of this reduction contributed to our 401(k) plan. We do not currently make matching or profit-sharingprofit sharing contributions under our 401(k) plan.
Perquisites, Health and Welfare Benefits and Other Compensation
The establishment of competitive benefit packages for our employees is an important factor in attracting and retaining highly qualified personnel.
Health and Welfare Benefits
Our named executive officers are eligible to participate in all of our employee benefit plans, including our medical, dental, vision, group life, and disability insurance plans, in each case on the same basis as other employees. We believe that these health and welfare benefits help ensure that we have a productive and focused workforce through reliable and competitive health and other benefits.
Perquisites
We do not provide significant perquisites or personal benefits to our named executive officers.
Post Termination and Change in Control Benefits
We do not currently have any employment or severance agreements with our named executive officers.
As described above, we routinely grant our named executive officers stock options under our equity incentive plans. For a description of the change in control provisions in such equity incentive plans applicable to these stock options, see “—Employee Plans—Plans — 2008 Equity Incentive Award Plan” and “— Employee Plans — 2000 Equity Incentive Plan” below.
Tax Deductibility of Executive Compensation
The compensation committee and our board of directors have considered the potential future effects of Section 162(m) of the Internal Revenue Code on the compensation paid to our executive officers. Section 162(m) disallows a tax deduction for any publicly held corporation for individual compensation exceeding $1.0 million in any taxable year for our President and Chief Executive Officer and each of the other named executive officers (other than our Chief Financial Officer), unless compensation is performance based. As we are not currently publicly-traded,publicly traded, our board of directors has not previously taken the deductibility limit imposed by Section 162(m) into consideration in setting compensation. Our compensation committee, however, has adopted a policy that, where reasonably practicable, we will seek to qualify the variable compensation paid to our executive officers for an exemption from the deductibility limitations of Section 162(m).
In approving the amount and form of compensation for our executive officers, the compensation committee will continue to consider all elements of the cost to our company of providing such compensation, including the potential impact of Section 162(m).
Accounting for Stock-Based Compensation
We account for stock-based payments in accordance with the requirements of SFAS No. 123R,Share-Based Payment.
Summary compensation table
The following table summarizes the compensation that we paid to our Chief Executive Officer, Chief Financial Officer and each of our three other most highly compensated executive officers during the year ended December 31, 2007. We refer to these officers in this prospectus as our named executive officers.
Name and principal position | Year | Salary ($) | Bonus ($)(1) | Option awards ($) (2) | All other compensation ($) (3) | Total ($) | ||||||
Fareed Kureshy | 2007 | 300,000 | 23,750 | 445 | 9,932 | 334,127 | ||||||
President and Chief Executive Officer | ||||||||||||
Thomas V. Hennessey, Jr. | 2007 | 16,667 | — | 15,885 | — | 32,552 | ||||||
Chief Operating Officer and Chief Financial Officer (4) | ||||||||||||
Nanibhushan Dattagupta, Ph.D. | 2007 | 180,000 | — | 8,637 | 5,012 | 193,649 | ||||||
Chief Scientific Officer | ||||||||||||
Shailendra Singh, Ph.D. | 2007 | 200,000 | 17,500 | 119 | 7,387 | 225,006 | ||||||
Vice President, System Development | ||||||||||||
Ramanath Vairavan | 2007 | 174,038 | 8,750 | — | 9,248 | 192,036 | ||||||
Senior Vice President, Sales and Marketing |
Grants of plan based awardsOutstanding Stock Options at Fiscal Year End
The following table shows information regarding grants of equity awards during the year endedstock options outstanding on December 31, 20072011 to each of our named executive officers.
Name | Grant date | All other stock awards: number of shares of stock (#) (1) | All other option awards; number of securities underlying options (#) (2) | Exercise or base price of option awards ($/Sh) | Grant date fair value of stock and option awards (3) | |||||
Fareed Kureshy | 12/30/2007 | 95,000 | — | — | — | |||||
Thomas V. Hennessey, Jr. (4) | 2/6/2007 | — | 20,000 | 0.50 | 0.30 | |||||
3/1/2007 | 20,000 | 0.50 | 0.31 | |||||||
Nanibhushan Dattagupta. Ph.D. | 3/21/2007 | — | 5,000 | 0.50 | 0.32 | |||||
6/1/2007 | 20,000 | 0.50 | 0.33 | |||||||
Shailendra Singh, Ph.D. | 12/30/2007 | 70,000 | — | — | — | |||||
Ramanath Vairavan | 12/30/2007 | 35,000 | — | — | — |
Name | Number of securities underlying option awards (exercisable) (1) | Number of securities underlying option awards (unexercisable) | Option exercise price ($) | Option expiration date | ||||||||||||||||
Fareed Kureshy | 172,852 | — | (8 | ) | 0.125 | 3/31/2013 | ||||||||||||||
75,000 | — | 0.250 | 10/16/2013 | |||||||||||||||||
300,000 | — | (3 | )(4) | 0.710 | 1/11/2018 | |||||||||||||||
300,000 | — | (5 | ) | 2.740 | 2/23/2020 | |||||||||||||||
26,200 | — | (6 | ) | 2.010 | 9/29/2020 | |||||||||||||||
52,500 | — | (7 | ) | 1.730 | 8/03/2021 | |||||||||||||||
Shailendra Singh, Ph.D. | 40,000 | — | 0.125 | 1/30/2012 | ||||||||||||||||
138,000 | — | (8 | ) | 0.125 | 3/31/2013 | |||||||||||||||
20,000 | — | 0.250 | 10/16/2013 | |||||||||||||||||
13,500 | 4,500 | 2.630 | 5/27/2019 | |||||||||||||||||
5,000 | 5,000 | 2.740 | 3/30/2020 | |||||||||||||||||
16,500 | — | (6 | ) | 2.010 | 9/29/2020 | |||||||||||||||
33,000 | — | (7 | ) | 1.730 | 8/03/2021 | |||||||||||||||
Nanibhushan Dattagupta, Ph.D. (2) | 75,000 | — | 0.500 | 6/29/2012 | ||||||||||||||||
5,000 | — | 0.500 | 6/29/2012 | |||||||||||||||||
20,000 | — | 0.500 | 6/29/2012 | |||||||||||||||||
25,000 | — | 2.750 | 6/29/2012 | |||||||||||||||||
52,500 | 17,500 | 2.630 | 12/29/2012 | |||||||||||||||||
10,000 | 10,000 | 2.740 | 12/29/2012 | |||||||||||||||||
15,000 | — | (6 | ) | 2.010 | 12/29/2012 | |||||||||||||||
30,000 | — | (7 | ) | 1.730 | 12/29/2012 | |||||||||||||||
Ramanath Vairavan | 42,750 | — | (8 | ) | 0.125 | 3/31/2013 | ||||||||||||||
26,250 | 8,750 | 2.630 | 5/27/2019 | |||||||||||||||||
5,000 | 5,000 | 2.740 | 3/30/2020 | |||||||||||||||||
19,000 | — | (5 | ) | 2.010 | 9/29/2020 | |||||||||||||||
520,000 | — | (4 | )(8) | 0.125 | 12/23/2020 | |||||||||||||||
37,500 | — | (7 | ) | 1.730 | 8/03/2021 |
(1) |
Except |
(2) | Dr. Dattagupta passed away in December 2011. The referenced options ceased vesting on December 28, 2011 and are held by his estate. |
(3) |
Outstanding stock options at fiscal year end
The following table shows grants of stock options outstanding on December 31, 2007, the last day of our fiscal year, to each of our named executive officers.
Number of securities underlying unexercised options (#) exercisable | Option awards (1) | ||||||
Name | Option exercise price ($) | Option expiration date | |||||
Fareed Kureshy | 172,852 | (2) | 0.125 | 3/31/2013 | |||
75,000 | 0.25 | 10/16/2013 | |||||
Thomas V. Hennessey, Jr. | — | — | — | ||||
Nanibhushan Dattagupta, Ph.D. | 75,000 | 0.50 | 8/16/16 | ||||
5,000 | 0.50 | 3/21/2017 | |||||
20,000 | 0.50 | 6/1/17 | |||||
Shailendra Singh, Ph.D. | 40,000 | 0.125 | 1/30/2012 | ||||
138,000 | (2) | 0.125 | 3/31/2013 | ||||
20,000 | 0.25 | 10/16/2013 | |||||
Ramanath Vairavan | 520,000 | 0.125 | 12/13/2010 | ||||
42,750 | (2) | 0.125 | 3/31/2013 |
(4) | The options were not granted under our 2000 Equity Incentive Plan or our 2008 Equity Incentive Award Plan. The terms of these options are substantially the same as those for our 2000 Equity Incentive Plan. |
(5) | All of the |
(6) | All of the |
(7) | All of |
(8) | The option was fully vested at grant. |
Option exercises tableRisk Assessment of Compensation Program
The following table showsIn June 2010, management assessed our compensation program for the numberpurpose of options exercisedreviewing and considering any risks presented by our named executive officers duringcompensation policies and practices that are reasonably likely to have a material adverse effect on us.
As part of that assessment, management reviewed the year ending December 31, 2007.primary elements of our compensation program, including base salary, short-term incentive compensation and long-term incentive compensation. Management’s risk assessment included a review of the overall design of each primary element of our compensation program, and an analysis of the various design features, controls and approval rights in place with respect to compensation paid to management and other employees that mitigate potential risks to us that could arise from our compensation program.
Following the assessment, management determined that our compensation policies and practices did not create risks that were reasonably likely to have a material adverse effect on us and reported the results of the assessment to our compensation committee.
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Employee plansPlans
2008 Equity Incentive Award Plan
Our board of directors has adopted, and we expect our stockholders to approve prior to the completion of this offering,have approved, a 2008 Equity Incentive Award Plan, or the “2008 Plan.”
The 2008 Plan became effective upon its approval by our stockholders on November 2, 2008. The purpose of the 2008 Plan is to promote the success and enhance the value of our company by continuing to link the personal interests of participants to those of our stockholders and by providing participants with an incentive for outstanding performance.
A summary of the principal provisions of the 2008 Plan is set forth below. This summary is qualified in its entirety by reference to the 2008 Plan itself. The form of the 2008 Plan is filed as an exhibit to the registration statement of which this prospectus is a part.
Shares Available for Awards. We havereserved initially reserved 2,000,000 shares of our common stock for issuance under the 2008 Plan. In addition, theThe number of shares initially reserved under the 2008 Plan will be increased by (1) the number of shares of common stock available for issuance and not subject to optionsawards granted under our existing stock option plan2000 Equity Incentive Plan as of the effective date of the 2008 Plan and (2) the number of shares of common stock related to optionsawards granted under our existing stock option plan2000 Equity Incentive Plan on or before the effective date of the 2008 Plan that are repurchased, forfeited, expired or are cancelled on or after the effective date of the 2008 Plan. The totalAs of June 30, 2012, the aggregate number of shares describedavailable for issuance under the 2008 Plan as a result of grants that were repurchased, forfeited, expired, or cancelled in clauses (1) and (2)the 2000 Plan was 1,553,392 shares. The maximum number of shares of common stock that may be added to the share reserve under the 2008 Plan pursuant to the preceding sentence shalltwo sentences will not exceed 6,600,000 shares of our common stock.shares. The 2008 Plan contains an “evergreen provision” that allows formandates an annual increase in the number of shares available for issuance under the 2008 Plan on January 1 of each year, during the ten-year term of the 2008 Plan, beginning on the first January 1 following the completion of this offering. The annual increase in the number of shares shall be equal to the leastlesser of:
3.5% of our outstanding common stock on the applicable January 1st of the applicable year;
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1,500,000 shares; and
a lesser number of shares as determined by our board of directors.
As of June 30, 2012, options to purchase 2,824,918 shares of our common stock had been issued under the 2008 Plan, 5,500 of the options granted had been exercised and 457,883 of the options granted had been forfeited, resulting in 2,361,535 options outstanding.
The 2008 Plan also provides for an aggregate limit on the number of shares of common stock that may be issued under the 2008 Plan over the course of its ten-year term of 23,600,000 shares, subject to changes in our capital structure as set forth in the 2008 Plan.
To the extent that an award terminates, expires, lapses for any reason or is settled in cash, any shares of common stock subject to the award will again be available for the grant of an award pursuant to the 2008 Plan. Any shares of common stock tendered or withheld to satisfy the grant or exercise price or tax withholding obligation with respect to any award and any shares forfeited by a participant or repurchased by us will be available for subsequent grant under the 2008 Plan. For purposes of calculating the number of shares available for issuance under the 2008 Plan, to the extent that a stock appreciation right is settled in common stock, the full number of shares subject to such stock appreciation right will be counted, regardless of the actual number of shares issued upon settlement.
Administration. The compensation committee of our board of directors administers the 2008 Plan (except with respect to any award granted to non-employee directors, which must beis administered by our full board of directors). Following the completion of this offering, to administer the 2008 Plan, our compensation committee must consist of at least two members of our board of directors, each of whom is a “non-employee director” for purposes of Rule 16b-3 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and, with respect to awards that are intended to constitutebe performance-based compensation under
Section 162(m) of the Internal Revenue Code,awards, an “outside director” for purposes of Section 162(m). of the Internal Revenue Code. Subject to the terms and conditions of the 2008 Plan, our compensation committee has the authority to select the persons to whom awards are to be made, to determine (1) the type or types of awards to be granted to each person, (2) the number of awards to grant, (3) the number of shares to be subject to such awards and (4) the terms and conditions of such awards, and to make all other determinations and decisions and to take all other actions necessary or advisable for the administration of the 2008 Plan. Our compensation committee is also authorized to establish, adopt amend or revise rules relating to administration of the 2008 Plan, subject to certain restrictions. Our board of directors may at any time revert to itself the authority to administer the 2008 Plan. Our fullThe board of directors will administerand any committee exercising discretion under the 2008 Plan with respectfrom time to awardstime are referred to non-employee directors.in this section as the plan administrator.
Eligibility. Options, stock appreciation rights, or SARs, restricted stock and other awards under the 2008 Plan may be granted to individuals who are our officers or employees or are the officers or employees of any of our subsidiariesparent or subsidiary companies, if any, on the date of grant. Such awards may also be granted to our non-employee directors and consultants but only employees may be granted incentive stock options, or ISOs. As of June 30, 2008,2012, there were sevenfive non-employee directors and 103approximately 86 employees who are eligible for awards under the 2008 Plan. AllCertain individuals who are consultants covered by active consulting agreements wouldare also be eligible for awards.
Awards. The 2008 Plan provides that the plan administrator may grant or issue stock options, SARs, restricted stock, restricted stock units, dividend equivalents, performance share awards, performance stock units, stock payments deferred stock,and performance bonus awards, performance-based awards and other stock-based awards, or any combination thereof. The plan administrator will consider each award grant subjectively, considering factors such as the individual performance of the recipient and the anticipated contribution of the recipient to the attainment of our long-term goals.
TheAt such time after the offering date when the Company is subject to the requirements of Section 162(m) of the Internal Revenue Code, the maximum number of shares of our common stock whichthat may be subject to awards granted to any one participant during any calendar year is 2,000,000 shares and the maximum amount that may be paid to a participant in cash during any calendar year with respect to one or more cash-based performance awards payable in cash is $2,000,000.
Awards under the 2008 Plan will be evidenced by a written award agreement that sets forth the terms, conditions and limitations for each award, as determined by the plan administrator.
• | Stock Options. Stock options, including incentive stock options, as defined under Section 422 of the Internal Revenue Code, and nonqualified stock options, may be granted pursuant to the 2008 Plan. The option exercise price of all incentive stock options granted pursuant to the plan will not be less than 100% of the fair market value of our common stock on the date of grant. No incentive stock option may be granted to a grantee who owns more than 10% of the total combined voting power of all classes of our capital stock on the date of grant unless the exercise price is at least 110% of the fair market value at the time of grant. |
Notwithstanding whether an option is designated as an incentive stock option, to the extent that the aggregate fair market value of the shares with respect to which such option (and other options designated as incentive stock options) is exercisable for the first time by any optionee during any calendar year exceeds $100,000, such excess will be treated as a nonqualified stock option.
The plan administrator will determine the methods of payment of the exercise price of an option, including, without limitation, cash, shares of our common stock with a fair market value on the date of delivery equal to the exercise price of the option or exercised portion
thereof (including shares issuable upon exercise of the option) or other property acceptable to the plan administrator (including the delivery of a notice that the participant has placed a market sell order with a broker with respect to shares then issuable upon exercise of the option, and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to us in satisfaction of the option exercise price, provided that payment of such proceeds is then made to us not later than settlement of such sale). However, no participant who is a director or an executive officer of our company within the meaning of Section 13(k) of the Exchange Act will be permitted to pay the exercise price of an option in any method whichthat would violate Section 13(k) of the Exchange Act.
Stock options shall vest and may be exercised as determined by the plan administrator, but in no event may incentive stock options be exercised after the tenth anniversary of the date of grant. However, in the case of an incentive stock option granted to a person who owns more than 10% of the total combined voting power of all classes of our capital stock on the date of grant, such term will not exceed 5 years.
• | Restricted Stock. Eligible employees, consultants and directors may be issued restricted stock in such amounts and on such terms and conditions as determined by the plan administrator. Restricted stock will be evidenced by a written restricted stock agreement, which will contain restrictions on transferability and other such restrictions as the plan administrator may determine, including, without limitation, limitations on the right to vote restricted stock or the right to receive dividends on the restricted stock. These restrictions may lapse separately or in combination at such times, pursuant to such circumstances, in such installments, or otherwise, as the plan administrator determines at the time of grant of the award or thereafter. Typically, restricted stock may be repurchased by us at the original purchase price or forfeited for no consideration if the conditions or restrictions are not met. |
• | Stock Appreciation Rights. A stock appreciation right, or a SAR, is the right to receive payment of an amount equal to the excess of the fair market value of a share of our common stock on the date of exercise of the SAR over the per share exercise price of the |
• | Restricted Stock Units. Restricted stock units may be granted to any |
restricted stock units will become fully vested and nonforfeitable, and may specify such conditions to vesting as it deems appropriate. At the time of grant, the plan administrator will specify the |
• | Dividend Equivalents. Dividend equivalents are rights to receive the equivalent value (in cash or our common stock) of dividends paid on our common stock. They represent the value of the |
dividends per share paid by us, calculated with reference to the number of shares that are subject to any award held by the |
• | Stock Payments. Stock payments include payments in the form of our common stock or options or other rights to purchase our common stock, in each case made in lieu of all or any portion of the compensation that would otherwise be paid to the participant. The number of shares will be determined by the plan administrator and may be based upon specific performance criteria determined appropriate by the plan |
• | Performance Bonus Awards. Any |
Qualified Performance-Based AwardsCompensation. The plan administrator may grant awards to employees who are or may be “covered employees,” as defined in Section 162(m) of the Internal Revenue Code, that are intended to be “qualified performance-based awardscompensation” within the meaning of Section 162(m) of the Internal Revenue Code in order to preserve the deductibility of these awards for federal income tax purposes. Participants are only entitled to receive payment for a“qualified performance-based awardcompensation” for any given performance period to the extent that pre-established performance goals set by the plan administrator for the period are satisfied. These pre-established performance goals must be based on one or more of the following performance criteria: net earnings (either before or after interest, taxes, depreciation and amortization), sales or revenue, net income (either before or after taxes), operating earnings, cash flow (including, but not limited to, operating cash flow and free cash flow), return on net assets, return on stockholders’ equity, return on assets, return on capital, return on sales, gross or net profit margin, working capital, earnings per share and price per share. These performance criteria may be measured in absolute terms or as compared to performance in an earlier period or as compared to any incremental increase or as compared to results of a peer group, industry index or other companies.group. With regard to a particular performance period, the plan administrator will have the discretion to select the length of the performance period, the type of performance-based awards to be granted, and the goals that will be used to measure the performance for the period. In determining the actual size of an individual performance-based award for a performance period, the plan administrator may reduce or eliminate (but not increase) the award.award to take into account additional factors the plan administrator deems relevant to the performance for the period. Generally, a participant will have to be employed by ourus or a parent or subsidiary company onof ours, if any, throughout the date the performance-based award is paidperformance period to be eligible for a performance-based award for any period.
Adjustments. If there is any stock dividend, stock split, combination or exchange of shares, merger, consolidation or other distribution (other than normal cash dividends) of our assets to stockholders, or any other change affecting the shares of our common stock or the share price of our common stock other than an equity restructuring (as defined in the 2008 Plan), the plan administrator will make such proportionateequitable adjustments, if any, as the plan administrator in its discretion may deem appropriate to reflect such change with respect to (1) the
aggregate number and type of shares that may be issued under the 2008 Plan (including, but not limited to, adjustments of the number of shares available under the plan and the maximum number of
shares which may be subject to one or more awards to a participant pursuant to the plan during any calendar year), (2) the terms and conditions of any outstanding awards (including, without limitation, any applicable performance targets or criteria with respect thereto), and (3) the grant or exercise price per share for any outstanding awards under the plan. If there is any equity restructuring, (1) the number and type of securities subject to each outstanding award and the grant or exercise price per share for each outstanding award, if applicable, will be proportionately adjusted, and (2) the plan administrator will make proportionate adjustments to reflect such equity restructuring with respect to the aggregate number and type of shares that may be issued under the 2008 Plan (including, but not limited to, adjustments of the number of shares available under the plan and the maximum number of shares which may be subject to one or more awards to a participant pursuant to the plan during any calendar year). Adjustments in the event of an equity restructuring will not be discretionary. Any adjustment affecting an award intended as “qualified performance-based compensation” will be made consistent with the requirements of Section 162(m) of the Internal Revenue Code. The plan administrator also has the authority under the 2008 Plan to take certain other actions with respect to outstanding awards in the event of a corporate transaction, including provision for the cash-out, termination, assumption or substitution of such awards.
Repricing. The plan administrator may, without stockholder approval, (1) amend any award to reduce the per share exercise price of such an award below the per share exercise price as of the date the award is granted and (2) grant an award in exchange for, or in connection with, the cancellation or surrender of an award having a higher per share exercise price.
Corporate Transactions. In the event of a change of control where the acquirer does not continue, convert, assume or replace awards granted under the 2008 Plan, awards issued under the 2008 Plan will be subject to accelerated vesting such that 100% of the awards will become vested and exercisable or payable, as applicable, immediately prior to a change of control. Under the 2008 Plan, a change of control is generally defined as:
a transaction or series of related transactions (other than an offering of our stock to the general public through a registration statement filed with the U.S. Securities and Exchange Commission, or SEC) whereby any person or entity or related group of persons or entities (other than us, our subsidiaries, if any, an employee benefit plan maintained by us or any of our subsidiaries, if any, or a person or entity that, prior to such transaction, directly or indirectly controls, is controlled by, or is under common control with, us) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of more than 50% of the total combined voting power of our securities outstanding immediately after such acquisition;
during any two-year period, individuals who, at the beginning of such period, constitute our board of directors together with any new director(s) whose election by our board of directors or nomination for election by our stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of our board of directors;
our consummation (whether we are directly or indirectly involved through one or more intermediaries) of (x) a merger, consolidation, reorganization, or business combination, (y) the sale exchange or transferother disposition of all or substantially all of our assets in any single transaction or series of transactions or (z) the acquisition of assets or stock of another entity, in each case other than a transaction:
which results in our voting securities outstanding immediately before such transaction continuing to represent (either by remaining outstanding or by being converted into voting securities of the company or the person that, as a result of the transaction, controls, directly or indirectly, the company or owns, directly or indirectly, all or substantially all of the company’s assets or otherwise succeeds to our business (the “successor entity”)), directly or indirectly, at least a majority of the combined voting power of the successor entity’s outstanding voting securities immediately after the transaction; and
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after which no person or group beneficially owns voting securities representing 50% or more of the combined voting power of the successor entity (but no person or group will be treated as beneficially owning 50% or more of combined voting power of the successor entity solely as a result of the voting power held in the company prior to the transaction).
Amendment and Termination of the 2008 Plan. Our board of directors may terminate, amend or modify the 2008 Plan. However, stockholder approval of any amendment to the 2008 Plan will be obtained to the extent necessary and desirable to comply with any applicable law, regulation or stock exchange rule, or for any amendment to the 2008 Plan that increases the number of shares available under the 2008 Plan. If not terminated earlier by the board of directors, the 2008 Plan will terminate in 2018.
Securities Laws and Federal Income Tax Consequences
Securities Laws. The 2008 Plan is intended to conform to all provisions of the Securities Act of 1933, as amended, or the Securities Act, and the Exchange Act and any and all regulations and rules promulgated by the SEC thereunder, including, without limitation, Rule 16b-3. The 2008 Plan will be administered, and awards will be granted and may be exercised, only in such a manner as to conform to such laws, rules and regulations.
Federal Income Tax Consequences. The federal income tax consequences of the 2008 Plan under current federal income tax law are summarized in the following discussion which deals with the general tax principles applicable to the 2008 Plan and is intended for general information only. The following discussion of federal income tax consequences does not purport to be a complete analysis of all of the potential tax effects of the 2008 Plan. It is based upon laws, regulations, rulings and decisions now in effect, all of which are subject to change. Foreign, state and local tax laws, and estate and gift tax considerations are not discussed, and may vary depending on individual circumstances and from locality to locality.
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2000 Equity Incentive Plan
Our board of directors initially adopted our 2000 Equity Incentive Plan, or the “2000 Plan,” on December 13, 2000. We terminated the 2000 Plan in connection with the approval of the 2008 Plan, and, therefore, we will not make any further awards of options common stock or stock purchase rights under the 2000 Plan. Outstanding stock options granted under the 2000 Plan will continue to be governed by the 2000 Plan until they are exercised, expire or otherwise terminate.
The purpose of the 2000 Plan was to further our growth, development and financial success by providing incentives to certain key persons by assisting them in acquiring shares of common stock so that they may benefit directly from our growth, development and financial success.
A summary of the principal provisions of the 2000 Plan is set forth below. This summary is qualified in its entirety by reference to the 2000 Plan itself. The 2000 Plan has been filed as an exhibit to the registration statement of which this prospectus is a part.
Shares Available for Awards. Subject to certain adjustments set forth in the plan,2000 Plan, the maximum number of shares of our common stock that could have been issued or awarded under the 2000 Plan was 6,600,000 shares. As of March 31, 2008,June 30, 2012, options to purchase 6,291,3231,678,477 shares of our common stock were outstanding and stock purchase rights of 320,000 shares of our common stock had been issued pursuant to stock purchase rights under the 2000 Plan. As of March 31, 2008, 2,465,668 of the options granted had been exercised and 949,250 had been forfeited, resulting in 2,876,405 options outstanding.
To the extent that an award expires, terminates or is not exercised, any shares of common stock subject to such award that have not been issued will again be available for the grant of an award pursuant to the 2008 Plan. Any shares of our common stock acquired by a participant pursuant the 2000 Plan that are reacquired by us will also again be available for the grant of an award pursuant to the 2008 Plan.
Administration. Either the board of directors or a committee of the board of directors will administer the 2000 Plan. The board of directors and any committee exercising discretion under the 2000 Plan from time to time are referred to in this section as the plan administrator. Subject to the terms of the 2000 Plan, the plan administrator had express authority to determine the eligible persons who will receive awards, the number of shares of common stock to be covered by each award and the terms and conditions of awards. The plan administrator has broad discretion to prescribe, amend and rescind rules relating to the 2000 Plan and its administration, to interpret the 2000 Plan and the terms of all award agreements, to determine the rights and obligations of participants of the 2000 Plan, to authorize the amendment of the terms of any outstanding awards under the plan.
Eligibility. Stock options and stock purchase rights under the 2000 Plan were granted to individuals who were then our employees, consultants, advisors and members of our board of directors andor who were employees, consultants, advisors or members of the board of directors of our subsidiaries.subsidiaries, if any. Only employees may be granted ISOs.
Awards. The 2000 Plan provides for the grant of stock options and stock purchase rights. The options and stock purchase rights are evidenced by option agreements and restricted stock purchase agreements, respectively, which set forth the terms, conditions and limitations for each award, as determined by the plan administrator. Such terms and conditions include certain rights of repurchase, rights of first offer, rights of first refusal and call rights in our favor.
Subject to certain adjustments set forth in the plan, the maximum number of shares of common stock that maycould be subject to awards granted to any one participant pursuant to the 2000 Plan iswas 800,000 shares.
• | Stock Options. Stock options, including incentive stock options, as defined under Section 422 of the Internal Revenue Code, and nonqualified stock options, could be granted pursuant to the 2000 Plan. The option exercise price of all stock options granted pursuant to the plan |
Notwithstanding whether an option is designated as an incentive stock option, to the extent that the aggregate fair market value of the shares with respect to which such option is exercisable for the first time by any optionee during any calendar year exceeds $100,000, such excess will be treated as a nonqualified stock option.
The plan administrator will determine the methods of payment of the exercise price of an option, including, without limitation, cash or other consideration acceptable to the plan administrator.
Stock options may be exercised as determined by the plan administrator, but in no eventoptions were granted that could be exercised after the tenth anniversary of the date of grant. However, in the case of anaccordance with tax rules governing incentive tax options, no incentive stock optionoptions were granted to a person who ownsowned more than 10% of the total combined voting power of all classes of our capital stock on the date of grant suchwith a term will not exceedexceeding five years.
• | Stock Purchase Rights. Stock purchase rights could have been granted pursuant to the 2000 Plan. The exercise price of a stock purchase right granted pursuant to the plan could not have been less than 85% of the fair market value of our common stock on the date of grant or atthe time the participant purchases shares of common stock pursuant thereto, and the exercise price of any stock purchase right granted pursuant to the plan to any person who owns stock possessing more than 10% of the total combined voting power of all classes of our stock must have been not less than 100% of the fair market value on the date of grant or at the time the participant purchases shares of common stock pursuant thereto. |
Adjustments. If the outstanding shares of our common stock are increased, decreased or exchanged for different securities through a stock split, stock dividend, recapitalization, reorganization or similar capital adjustment other than in connection with a merger or consolidation (as described in the 2000 Plan), appropriate adjustments will be made in (1) the aggregate number of shares of common stock covered by the plan and/or the kind of shares subject to the plan, (2) the number and kind of shares of stock which may be purchased pursuant to the exercise of outstanding awards granted under the plan and (3) the exercise price or purchase price of outstanding awards granted under the plan.
Corporate Transactions. Except as otherwise provided in any option agreement between the participant and us, in the event of a corporate transaction (as defined in the 2000 Plan) involving our company in which options are not assumed or substituted with an equivalent option by the successor,surviving corporation or its parent or subsidiary, if any, such options will become exercisable in full immediately prior to the consummation of such corporate transaction and will terminate upon the consummation of such corporate transaction to the extent not exercised prior to such consummation. At least ten days prior to the
consummation of any corporate transaction, we will
give each participant written notice that states whether (1) the outstanding options will be expressly assumed or substituted with equivalent options, or (2) such participant will have the right to exercise such awards immediately prior to such consummation of the corporate transaction. Any shares of our common stock issued pursuant to any stock purchase right pursuant to the 2000 Plan shall, except as otherwise provided in the applicable restricted stock purchase agreement, become fully vested upon the consummation of a corporate transaction (as defined in the 2000 Plan).
The 2000 Plan defines a corporate transaction as any of the following stockholder approved transactions to which our company is a party:
a merger or consolidation in which our company is not the surviving entity;
the sale, transfer or other disposition of all or substantially all of the assets of our company (including the capital stock of our company’s subsidiary corporations)corporations, if any) in connection with the complete liquidation or dissolution of our company;
any merger in which our company is the surviving entity but in which the shares of our company’s capital stock outstanding immediately prior to such transaction are converted into the right to receive cash, debt securities and/or equity securities of another corporation; or
the sale by the holders of more than 90% of the outstanding shares of our company’s capital stock in a single transaction or a series of related transactions.
Amendment and Termination of the 2000 Plan. Our board of directors may amend or modify the 2000 Plan. The 2000 Plan was terminated in connection with our adoption of the 2008 Plan and as of the effective date of the 2008 Plan, no further awards will be granted under the 2000 Plan.
Securities Laws and Federal Income Taxes. TheOptions issued outside of the 2000 Plan is designedand the 2008 Plan
We have issued options to comply with applicable securities laws in the same manner as described above in the descriptionpurchase our common stock to certain of our directors, executive officers and key employees that are not subject to either the 2008 Plan under the heading “Securities Laws and Federal Income Taxes – Securities Laws.” The general federal tax consequences of awards underor the 2000 PlanPlan. The terms of these options are substantially the same as those described above inissued under the description2000 Plan. As of June 30, 2012, there were outstanding options to purchase 1,406,750 shares of our common stock that were not issued under either the 2008 Plan underor the heading “Securities Laws and Federal Income Taxes – General Federal Tax Consequences.”2000 Plan.
2008 Employee Stock Purchase Plan
In July 2008, ourOur board of directors adopted, and our stockholders have approved, our 2008 Employee Stock Purchase Plan, or the Purchase Plan, which will be submitted to our stockholders for their approval within twelve months from the date our board of directors approved such Purchase Plan. The compensation committee of the board of directors will administeradministers the Purchase Plan. The Purchase Plan will beis designed to allow our eligible employees and the eligible employees of our participatingdesignated subsidiaries, if any, to purchase shares of common stock with accumulated payroll deductions. The Purchase Plan will become effective immediately upon consummation of this offering,on the date prior to the date on which the registration statement filed with respect to the Purchase Plan becomes effective, but we expect that the first offering period under the Purchase Plan will not commence until the first May 15 or November 15 following the date on which the registration statement filed by us with respect the Purchase Plan becomes effective. We intend tohave initially reservereserved a total of 250,000 shares of our common stock for issuance under the Purchase Plan. The Purchase Plan will containcontains an “evergreen provision” that allows formandates an annual increase in the number of shares available for issuance under the Purchase Plan on January 1 of each year, during the ten-year term of the
Purchase Plan, beginning on the first January 1 following the completion of this offering.offering and continuing through, and including, January 1, 2018. The annual increase shall be equal to the leastlesser of:
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1% of our outstanding common stock on January 1st of the applicable year;
200,000 shares; and
a lesser number of shares determined by our board of directors.
The Purchase Plan shall also provideprovides for an aggregate limit on the number of shares of common stock whichthat may be issued under the Purchase Plan over the course of its ten-year term.term of 2,250,000 shares. The material terms of the Purchase Plan are summarized below. The Purchase Plan shall behas been filed as an exhibit to the registration statement of which this prospectus is a part.
The Purchase Plan will have consecutive six-month offering periods. Under the Purchase Plan, purchases will be made on the last day of each offering period. We expect the first offering period under the Purchase Plan will commence on the dayfirst May 15 or November 15 following the date on which our stock begins trading, which offering period may be less than six months.the registration statement filed by us with respect to the Purchase Plan becomes effective. A new six-month offering period will commence on each May 15 and November 15 thereafter during the term of the Purchase Plan. Our compensation committee or board of directors may change the frequency and duration of offering periods under the Purchase Plan.
Individuals scheduled to work more than 20 hours per week for moregreater than five calendar months per year, may join an offering period on the first day of the offering period to the extent such individual does not, immediately after any rights under the Purchase Plan are granted, own (directly or through attribution) stock possessing 5% or more of the total combined voting power or value of all classes of our common or other stock.stock of ours or a parent or subsidiary of ours, if any. As of June 30, 2008,2012, substantially all of our 103approximately 86 employees would have been eligible to participate in the Purchase Plan if it were in effect.
Participants may contribute up to 20% of their cash earnings through payroll deductions, and the accumulated deductions will be applied to the purchase of shares on each purchase date. TheUnless otherwise designated by the compensation committee, the purchase price per share will be equal to 85% of the fair market value per share on the first day of the offering period or, if lower, 85% of the fair market value per share on the purchase date. In each calendar year, no employee is permitted to purchase more thanshares under the Purchase Plan at a rate in excess of $25,000 worth of shares, atbased on the fair market value per share determined as of the first day of the offering period.period, for each year such a purchase right is outstanding.
In the event there is a specified type of change in our capital structure, such as a stock dividend or stock split, the compensation committee may make appropriate adjustments to (a) the number and type of shares that may be issued under the Purchase Plan, including the maximum number of shares by which the share reserve may increase automatically each year, (b) the class(es) and number of shares and price per share of stock subject to outstanding rights and (c) the purchase price with respect to any outstanding rights.
In the event of certain significant corporate transactions and other events or a proposed salechange in control (as defined in the Purchase Plan), the compensation committee may provide for (a) the replacement or termination of outstanding rights in exchange for cash or other rights or property, (b) the assumption or substitution of outstanding rights by the successor or survivor corporation or parent or subsidiary thereof, if any, (c) the adjustment in the number and type of shares of stock subject to outstanding rights or in the terms and conditions of outstanding rights and rights which may be granted in the future, (d) the use of participants’ accumulated payroll deductions to purchase stock on a new purchase date prior to the next purchase date and termination of any rights under ongoing offering periods or (e) the termination of all outstanding rights.
Under the Purchase Plan, a change in control has the same definition as given to such term in the 2008 Plan.
The compensation committee may amend, suspend or substantially allterminate the Purchase Plan. However, stockholder approval of our assets, or our merger with or into another company,any amendment to the outstandingPurchase Plan will be obtained for any amendment which changes the aggregate number of shares that may be sold pursuant to rights under the Purchase Plan, willchanges the corporations or classes of corporations whose employees are eligible to participate in the Purchase Plan or changes the Purchase Plan in any manner that would cause the Purchase Plan to no longer be assumed or an equivalent right substituted by“employee stock purchase plan” within the successor company or its parent. If the successor company or its parent refuses to assume the outstanding rights or substitute an equivalent right, then all outstanding purchase rights will automatically be exercised prior to the effective datemeaning of Section 423(b) of the transaction. The purchase price will be equal to 85% of the market value per share on the first day of the offering period in which an acquisition occurs or, if lower, 85% of the fair market value per share on the date the purchase rights are exercised.
Internal Revenue Code. The Purchase Plan will terminate no later than the tenth anniversary of the Purchase Plan’s initial adoption by our board of directors.
Securities Laws and Federal Income Taxes. The Purchase Plan shall be designed to comply with various securities and federal income tax laws in the same manner as described above in the description of the 2008 Plan under the heading “Securities Laws and Federal Income Taxes.”
401(k) Plan
We provide a basic savings plan, or 401(k) plan, which is intended to qualify under Section 401(k)401(a) of the Internal Revenue Code so thatCode. Pre-tax contributions toby our 401(k) plan by employees or any contributions by us to the 401(k) plan, and the investment earnings thereon, are not taxable to employees until withdrawn from our 401(k) plan. Roth contributions by our employees to the 401(k) plan are made on an after-tax basis and neither the investment earnings thereon, nor the withdrawals, subject to certain holding requirements, are taxable to employees. If our 401(k)401(a) plan qualifies under Section 401(k) of the Internal Revenue Code, contributions by us, if any, will be deductible by us when made.
All of ourOur full-time employees are eligible to participate in our 401(k) plan. Pursuant to our 401(k) plan, employees may elect to reduce their currenteligible compensation by up to the statutorily prescribed annual limit of $15,500$17,000 in 20082012 and to have the amount of this reduction contributed to our 401(k) plan. Participants thatwho are 50 years or older can also may make “catch-up” contributions, which in calendar year 20082012 may be up to an additional $5,000$5,500 above the statutory limit. Under the 401(k) plan, each participant is fully vested in his or her elective deferred salary contributions when contributed. Participant contributions are held and invested, pursuant to the participant’s instructions, by the plan’s trustee. We have the ability to make matching or profit sharing contributions to our 401(k) plan in our discretion. We have not historically made such contributions, and do not currently make matching or profit-sharing contributions under our 401(k) plan.have any plans to do so in the immediate future. The 401(k) Plan currentlyplan does not offer the ability to invest in our securities.
Indemnification of directorsDirectors and officersOfficers and limitationLimitation of liabilityLiability
We intend to reincorporate as a Delaware corporation prior to the completion of this offering. Upon completion of the reincorporation, we will beare subject to the Delaware General Corporate Law, or DGCL. Section 145 of the DGCL authorizes a corporation’s board of directors to grant indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities, including reimbursement for expenses incurred, arising under the Securities Act. As described below, we intend upon the closing of this offering to indemnify our directors, officers and other employees to the fullest extent permitted by the DGCL.
Certificate of Incorporation and Bylaws
Upon the closingOur certificate of this offering, ourincorporation and bylaws will require us to indemnify our directors, officers and employees and other persons serving at our request as a director, officer employee or agent of another entity to the fullest extent permitted by the DGCL. We will beare required to advance expenses, as incurred, to the covered persons in connection with defending a legal proceeding if we have received an undertaking by that person to repay all such amounts if it is determined that he or she is not entitled to be indemnified by us.
Our certificate of incorporation and bylaws will eliminateeliminates the personal liability of our directors for monetary damages for breach of fiduciary duty as a director, except for liability for:
any breach of the director’s duty of loyalty to the corporation or its stockholders;
acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
unlawful payments of dividends or unlawful stock repurchases, redemptions or other distributions, as provided in Section 174 of the DGCL; or
any transaction from which the director derived an improper personal benefit.
Indemnification Agreements
Prior to the completion of this offering, we will executeWe have entered into indemnification agreements with each of our directors and each of our executive officers. These agreements will provide indemnification to our directors and seniorexecutive officers under certain circumstances for acts or omissions which may not be covered by directors’ and officers’ liability insurance, and may, in some cases, be broader than the specific indemnification provisions contained under the DGCL.
Indemnification for Securities Act Liability
Insofar as indemnification for liabilities arising under the Securities Act may be permitted for directors, officers or persons controlling us pursuant to the foregoing, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
Insurance Policies
We maintain an insurance policy covering our directors and officers with respect to certain liabilities, including liabilities arising under the Securities Act or otherwise.
Principal stockholdersStockholders
The following table sets forth information with respect to the beneficial ownership of our common stock as of July 21, 2008:June 30, 2012:
each person or group of affiliated persons known by us to own beneficially of more than 5% of our outstanding common stock;
each of our directors;
each of our named executive officers; and
all of our executive officers and directors as a group.
We have determined beneficial ownership in accordance with the rules of the SEC. Except as otherwise indicated in the footnotes below, all of the shares reflected in the table are shares of common stock and we believe, based on the information furnished to us, that all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to applicable community property laws.
Percentage ownership calculations are based on 24,882,75926,297,227 shares outstanding as of July 21, 2008,June 30, 2012, which assumes the conversion of all outstanding series of convertible preferred stock into common stock. Each outstanding share of convertible preferred stock is convertible into one share of common stock, with the exception of shares of Series A Convertible Preferred Stock, which are convertible into two shares of common stock. In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we have deemed outstanding shares of common stock subject to options or warrants held by that person that are exercisable within 60 days of July 21, 2008.June 30, 2012. We have not deemed these shares outstanding for the purpose of computing the percentage ownership of any other person. Beneficial ownership representing less than one percent is denoted with an asterisk “*.”
Unless otherwise indicated below, the address for each of the beneficial owners in the table below is c/o AutoGenomics, Inc., 2251 Rutherford Road, Carlsbad,2980 Scott Street, Vista, California, 92008.92081.
Shares beneficially owned | ||||
Name and address of beneficial owner | Number | Percent | ||
5% stockholders (other than directors and executive officers) | ||||
A R Properties(1) | 1,626,734 | 6.47% | ||
Executive officers and directors | ||||
Fareed Kureshy(2) | 3,591,082 | 14.12% | ||
Shailendra Singh, Ph.D(3) | 1,868,000 | 7.45% | ||
Ramanath Vairavan(4) | 677,750 | 2.66% | ||
Thomas V. Hennessey, Jr.(5) | 540,336 | 2.16% | ||
William H. Davidson, D.B.A.(6) | 292,273 | 1.17% | ||
Eugene J. Zurlo(7) | 274,364 | 1.10% | ||
Thomas R. Testman(8) | 190,230 | * | ||
Randall R. Lunn(9) | 190,228 | * | ||
Joseph P. Sullivan(10) | 163,636 | * | ||
Nanibhushan Dattagupta, Ph.D(11) | 125,000 | * | ||
Eric S. Kentor(12) | 43,420 | * | ||
Laurence M. Demers, Ph.D.(13) | 30,000 | * | ||
All executive officers and directors as a group (12 persons) | 7,986,319 | 29.87% |
Shares beneficially owned | ||||||||
Name and address of beneficial owner | Number | Percent | ||||||
5% stockholders (other than directors and named executive officers) | ||||||||
Dennis A. Repp (1) | 2,326,853 | 8.59 | % | |||||
Named executive officers and directors | ||||||||
Fareed Kureshy (2) | 3,819,782 | 14.11 | % | |||||
Shailendra Singh, Ph.D. (3) | 1,936,000 | 7.30 | % | |||||
Nanibhushan Dattagupta, Ph.D. (4) | 85,000 | * | ||||||
Ramanath Vairavan (5) | 765,500 | 2.84 | % | |||||
Stephen Allison (6) | 95,000 | * | ||||||
Charles Birmingham (7) | 27,389 | * | ||||||
William H. Davidson, D.B.A. (8) | 489,119 | 1.84 | % | |||||
Laurence M. Demers, Ph.D (9) | 352,101 | 1.33 | % | |||||
Thomas V. Hennessey, Jr. (10) | 582,346 | 2.20 | % | |||||
Donald E. Pogorzelski (11) | 578,047 | 2.16 | % | |||||
Eugene J. Zurlo (12) | 421,047 | 1.59 | % | |||||
All executive officers and directors as a group (12 persons) | 11,588,184 | 38.06 | % |
* | Represents less than 1% of the outstanding shares of common stock. |
(1) | Includes |
Preferred Stock convertible into 17,893 shares of common |
(2) | Includes options to purchase 776,552 shares of common stock and 4,915 shares of Series A Convertible Preferred Stock convertible into |
(3) | Includes options to purchase 226,000 shares of common stock. |
(4) | Dr. Dattagupta passed away in December 2011. Consists of options to purchase shares of common stock held by his estate. |
(5) | Includes options to purchase 650,500 shares of common stock. |
(6) | Includes warrants exercisable for 10,000 shares of common stock and options to purchase |
Consists of 27,274 shares of Series B Convertible Preferred Stock convertible into 27,389 shares of common stock held by ABHV Partnership, of which Mr. Birmingham is a partner. Mr. Birmingham disclaims beneficial ownership of the shares held by ABHV Partners. |
(8) | Includes 10,000 shares of Series A Convertible Preferred Stock convertible into 20,000 shares of common stock, 86,364 shares of Series C Convertible Preferred Stock convertible into 86,730 shares of common stock, options to purchase |
(9) | Includes 58,763 shares of Series E Convertible Preferred Stock convertible into 59,756 shares of common stock, options to purchase |
(10) | Includes (i) warrants to purchase 10,000 shares of common stock, options to purchase 186,900 shares of common stock, and (ii) 44,668 shares of Series A Convertible Preferred Stock convertible into 89,336 shares of common stock, 26,000 shares of Series C Convertible Preferred Stock |
(11) | Includes warrants exercisable for 504,091 shares of |
(12) | Includes warrants exercisable for 45,387 shares of common stock |
Certain relationshipsRelationships and related persons transactionsRelated Persons Transactions
In addition to the director and executive compensation arrangements discussed above in “Management,“Management” and “Executive Compensation,” we have been a party to the following transactions since January 1, 2005,2009, in which any director, executive officer or holder of more than 5% of any class of our voting stock, or any member of the immediate family of or entities affiliated with any of them, had or will have a material interest.
Preferred stock financingsWarrant Issuances
In July 2005,As of June 30, 2011 we issued and sold to investors an aggregate of 2,105,210 shares of Series B Convertible Preferred Stock at a purchase price of $2.75 per share, for aggregate consideration of $5,789,328. As consideration for its services in connection with the issuance, we issued an additional 19,287 shares of Series B Convertible Preferred Stock to an investor. Upon completion of this offering, these shares will convert into 2,124,497 shares of common stock.
In July, August and December 2006 and February and March 2007, we issued and sold to investors an aggregate of 6,349,635 shares of Series C Convertible Preferred Stock at a purchase price of $2.75 per share, for aggregate consideration of $17,461,496. As consideration for his services in connection with the issuance, we issued an additional 50,000 shares of Series C Convertible Preferred Stock to one of our directors. Upon completion of this offering, these shares will convert into 6,399,635 shares of common stock.
The participants in these common stock and preferred stock financings included the following directors, executive officers and holders of more than 5% of our capital stock. The following table presents the number of shares issued to these related parties in these financings:
Participants(1) | Series B convertible preferred stock | Series C convertible preferred stock | ||
5% Stockholders (other than directors and executive officers) | ||||
A R Properties | 72,728 | 563,636 | ||
Executive Officers and Directors | ||||
Thomas V. Hennessey, Jr.,Chief Operating Officer and Chief Financial Officer | — | 20,000 | ||
William H. Davidson, D.B.A.,Director | — | 86,364 | ||
Randall R. Lunn,Director | 18,200 | — | ||
Joseph P. Sullivan, Director | 30,000 | 18,182 | ||
Thomas R. Testman,Director | — | 18,182 | ||
Eugene J. Zurlo,Director | 36,364 | — |
Warrant issuances
From January 1, 2005 to July 21, 2008, we issuedhad outstanding warrants to purchase an aggregate of 250,0008,426,675 shares of our common stock 213,818 shares of our Series B Convertible Preferred Stock and 450,363381,300 shares of our Series C Convertible Preferred Stock.
These warrants were issued in connection with promissory note financings and in connection with services rendered to us. The participants in these warrant issuances included the following directors, executive officers and holders of more than 5% of our capital stock. The following table presents the number of shares issued to these related parties in these financings:
Participants(1) | Warrants to purchase common stock | Warrants to purchase Series B convertible preferred stock | Warrants to purchase Series C convertible preferred stock | |||
5% Stockholders (other than directors and executive officers) | ||||||
A R Properties | 150,000 | 91,272 | 21,818 | |||
Executive Officers and Directors | ||||||
Thomas V. Hennessey, Jr.,Chief Operating Officer and Chief Financial Officer | — | — | 6,000 | |||
William H. Davidson, D.B.A.,Director | 60,000 | — | 20,909 | |||
Joseph P. Sullivan,Director | — | — | 5,454 | |||
Thomas R. Testman,Director | — | — | 5,454 |
Participants (1) | Warrants to purchase common stock | |||
5% Stockholders (other than directors and executive officers) | ||||
Dennis A. Repp | 785,380 | (2) | ||
Directors and Executive Officers | ||||
Stephen Allison, Director | 10,000 | (3) | ||
William H. Davidson, D.B.A., Director | 138,400 | (4) | ||
Laurence M. Demers, Ph.D, Director | 177,345 | (5) | ||
Thomas V. Hennessey, Jr., COO and CFO | 10,000 | (6) | ||
Donald E Pogorzelski, Director | 504,091 | (7) | ||
Eugene J. Zurlo, Director | 45,387 | (8) |
(1) | Additional detail regarding these stockholders and their equity holdings is provided in “Principal |
(2) | In March 2009 and in December 2009, we issued warrants to purchase 284,000 shares of our common stock at an exercise price of $7.00 per share and 26,980 shares of our common stock at an exercise price of $4.00 per share, respectively, to A R Properties in connection with our promissory notes financings. In December 2009, we issued a warrant to purchase 71,000 shares of our common stock at an exercise price of $4.00 per share to A R Properties in connection with our promissory notes financings. In exchange for A R Properties’ agreement to extend the maturity date of a promissory note, we amended this warrant to have an exercise price of $3.00 per share. In January 2010, we issued a warrant to purchase 100,000 shares of our common stock at an exercise price of $2.74 per share to Mr. Repp as consideration for services performed for us. In February 2010, we issued a warrant to purchase 28,400 shares of our common stock at an exercise price of $4.00 per share to A R Properties in connection with our promissory notes financings. In March 2010, we issued a warrant to purchase 37,500 shares of our common stock at an exercise price of $5.00 per share to A R Properties in connection with our promissory notes financings. In April 2010, in exchange for A R Properties’ agreement to extend the maturity date of a promissory note, we cancelled the March 2009 warrant to purchase 284,000 shares of our common stock and replaced it with a new warrant to purchase 284,000 shares of our common stock at an exercise price of $5.00 per share. In January 2011 and May 2011, we issued warrants to A R Properties in connection with our promissory notes financings to purchase 30,000 shares of our common stock and 60,000 shares of our common stock, each at an exercise price of $3.00 per share, respectively. In August 2011, we issued a warrant to purchase 10,000 shares of our common stock at an exercise price of $1.73 per share as consideration for services provided to us. In November 2011 and March 2012, we issued warrants to A R Properties in connection with our promissory notes financings to purchase 62,500 shares of our common stock and 75,000 shares of our common stock, each at an exercise price of $1.73 per share, respectively. See “Promissory Notes Financings” below. |
(3) | In May 2012, we issued a warrant to Mr. Allison to purchase 10,000 shares of common stock at an exercise price of $1.73 in connection with his service as Chairman of the Audit Committee of the Board of Directors of AutoGenomics, Inc. |
(4) | In September 2008, we issued a warrant to purchase 14,200 shares of our common stock at an exercise price of $7.00 per share to Dr. Davidson in connection with our promissory notes financings. In December 2009, we cancelled this warrant and replaced it with a warrant to purchase 28,400 shares of our common stock at an exercise price of $7.00 per share. In December 2010 we issued a warrant to purchase 30,000 shares of our common stock at an exercise price of $3.00 per share to Dr. Davidson in connection with our promissory notes financings. In August 2011, we issued a warrant to purchase 70,000 shares of our common stock at an exercise price of $1.73 per share to Dr. Davidson as consideration for services provided to us and in connection with his service on our board of directors. In May 2012, we issued a warrant to Dr. Davidson to purchase 10,000 shares of common stock at an exercise price of $1.73 in connection with his service as chairman of the governance committee of our board of directors. See “Promissory Notes Financings” below. |
(5) | In March 2009, we issued a warrant to purchase 14,200 shares of our common stock at an exercise price of $7.00 per share to Dr. Demers in connection with our promissory notes financings. In April 2010, in exchange for Dr. Demers’ agreement to extend the maturity date of a promissory note, we cancelled this warrant and replaced it with a warrant to purchase 14,200 shares of our common stock at an exercise price of $5.00 per share. In December 2010, we issued to Dr. Demers a warrant to purchase 30,000 shares of our common stock at an exercise price of $3.00 per share in connection with our promissory notes financings. In August 2011, we issued a warrant to purchase 10,000 shares of our common stock at an exercise price of $1.73 per share to Dr. Demers in connection with his service on our board of directors. In November 2011, in connection with our sale of Series E Convertible Preferred Stock, we issued to Dr. Demers a warrant to purchase 88,145 shares of our common stock at an exercise price of $2.75 per share. In December 2011, we issued a warrant to purchase 25,000 shares of our common stock at an exercise price of $1.73 per share to Dr. Demers in connection with our promissory notes financings. In May 2012, we issued a warrant to Dr. Demers to purchase 10,000 shares of common stock at an exercise price of $1.73 in connection with his service as chairman of the compensation committee of our board of directors. See “Promissory Notes Financings” below. |
(6) | In January 2012, we issued to Mr. Hennessey a warrant to purchase 10,000 shares of our common stock at an exercise price of $1.73 per share in connection with our promissory notes financings. See “Promissory Notes Financings” below. |
(7) | In November 2011, in connection with our sale of Series E Convertible Preferred Stock, we issued to Mr. Pogorzelski a warrant to purchase 109,091 shares of our common stock at an exercise price of $2.75 per share. In January and March 2012, we issued warrants to purchase 125,000 shares and 270,000 shares of our common stock, respectively, each at an exercise price of $1.73 per share to Mr. Pogorzelski in connection with our promissory notes financings. See “Promissory Notes Financings” below. |
(8) | In March 2009, we issued a warrant to purchase 14,200 shares of our common stock at an exercise price of $7.00 per share to Mr. Zurlo, as trustee of the Zurlo Investment Trust, in connection with our promissory notes financings. In April 2010, in exchange for Mr. Zurlo’s agreement, as trustee of the Zurlo Investment Trust, to extend the maturity date of a promissory note, we cancelled this warrant and we replaced it with a warrant to purchase 14,200 shares of our common stock at an exercise price of $5.00 per share. See “Promissory Notes Financings” below. In November 2011, in connection with our sale of Series E Convertible Preferred Stock, we issued to Mr. Zurlo, as trustee of the Zurlo Investment Trust, a warrant to purchase 31,187 shares of our common stock at an exercise price of $2.75 per share. |
Stock option issuancesPromissory Notes Financings
From January 1, 2005As of June 30, 2012, we had an aggregate of $24.3 million in principal and accrued interest outstanding under promissory notes. These promissory notes bear a weighted average annual interest rate of 6.8%, with the principal and accrued interest balances generally due two years after the date of issuance. We may elect to July 21, 2008,prepay the notes at any time without penalty. In the private placements, we granted optionsalso issued warrants to purchase an aggregate of 1,215,0007,013,340 shares of our common stock with a weighted average exercise price of $2.34 per share. The
warrants become exercisable one year after issuance and have terms of five years. Dennis A. Repp, William Davidson, Laurence M. Demers, Thomas V. Hennessey, Jr., Donald E. Pogorzelski and Eugene J. Zurlo participated in the financings and purchased $2,245,000, $200,000, $200,000, $20,000, $1,250,000 and $50,000 aggregate principal amount of notes and received warrants to purchase 675,380, 58,400, 69,200, 10,000, 395,000 and 14,200 shares of our common stock, respectively. In December 2009, we cancelled warrants to purchase 14,200 shares issued in 2008 and reissued warrants to purchase 28,400 to William H. Davidson. In addition, in April 2010, we extended to April 2012 the maturity dates of notes with aggregate principal amounts of $1,000,000, $50,000, and $50,000 held by Mr. Repp, Dr. Demers, and Mr. Zurlo, respectively. In connection with those extensions, we cancelled warrants and issued new warrants to purchase 284,000, 14,200, and 14,200 shares of our common stock to our currenteach of these individuals, respectively. Each of the new warrants has an exercise price of $5.00 per share and expires six and one-half years after the issuance date of the original warrants. As of June 30, 2012, there was an aggregate of $321,482, $10,510, $3,008, $1,164, $42,712 and $0 of accrued interest outstanding under the notes issued to these persons, respectively. For each additional day that these notes remain outstanding, we are required to pay approximately $0.16 of additional interest under each $1,000 principal amount of the notes. None of these notes are subject to any redemption premium. Our directors, and executive officers with exercise prices ranging from $0.50and holders of more than 5% of our common stock that participated in the private placements and the extensions, cancellations and reissuances described above received warrants to $2.75.purchase a number of shares of our common stock in the same proportion to their respective note investments as all other investors participating in the same private placement, extension, cancellation or reissuance.
Indemnification agreementsAgreements
We expect to enterhave entered into indemnification agreements with each of our directors and executive officers, prior to the completion of the offering, as described in “Management—“Executive Compensation — Indemnification of Directors and Officers and Limitation of liability and indemnification.Liability.”
Series C Registration rights agreementRights Agreement
We have entered into a registration rights agreement with the holders of our Series C Convertible Preferred Stock and warrants to purchase our Series C Convertible Preferred Stock, including certain of our directors and beneficial owners of more than 5% of our outstanding common stock, as described in “Shares eligibleEligible for future sale—Future Sale — Registration rights agreement.Rights.”
Review, approvalApproval or ratificationRatification of transactionsTransactions with related personsRelated Persons
Pursuant to its written charter, our audit committee must review and approve all related person transactions, which includes any transactions with an executive officer, director, beneficial owner of more than 5% of our outstanding common stock, or any of such persons’ immediate family members in which the amount involved exceeds $120,000, and in which any such persons had or will have a direct or indirect material interest. For a discussion of the composition and responsibilities of our audit committee see “Management—“Management — Board Structure and Committees Composition — Audit Committee.” In determining whether to approve a related person transaction, theour audit committee will consider a number ofsuch matters as it deems appropriate under the circumstances. After considering these factors, includingour audit committee will decide whether the related person transaction is on termsin our best interests and conditions no less favorable to us than may reasonably be expected in arm’s-length transactions with unrelated parties.will approve or reject the transaction accordingly.
Description of capital stockCapital Stock
We intend to reincorporate as a Delaware corporation prior to the completion of this offering. The following is a description of our capital stock, after giving effect to the automatic conversion of our outstanding preferred stock in connection with the completion of this offering, and the material provisions of our certificate of incorporation and bylaws, in each case, upon the closing of the reincorporation and this offering and the application of the use of proceeds of the offering.bylaws. The following is only a summary and is qualified by the provisions of our certificate of incorporation bylaws and other agreements,bylaws, copies of which are available as set forth under “Where You Can Find More Information.”
Upon the closing of this offering, ourOur authorized capital stock will consistconsists of 220 million shares of common stock, par value $0.01 per share, and 30 million shares of preferred stock, par value $0.01 per share.
Common stockStock
As of March 31, 2008,June 30, 2012, there were 7,285,6688,037,081 shares of common stock outstanding, held of record by 39396 stockholders. The number of shares of common stock outstanding as of March 31, 2008June 30, 2012 does not include (i) 17,968,31418,260,146 shares of common stock issuable upon the conversion of outstanding shares of convertible preferred stock, (including shares of preferred stock issuable upon the exercise of outstanding warrants to purchase preferred stock), (ii) 250,0008,426,675 shares of common stock issuable upon the exercise of outstanding warrants to purchase common stock, (iii) 382,914 shares of common stock issued upon conversion of shares of convertible preferred stock that are issuable upon the exercise of outstanding warrants to purchase preferred stock and (iii) 3,176,405(iv) 5,446,762 shares of common stock issuable upon the exercise of outstanding options to purchase common stock. After giving effect to our certificate of incorporation and our bylaws, theThe holders of our common stock will beare entitled to the following rights:
Voting Rights
Each share of our common stock entitles its holder to one vote per share on all matters to be voted upon by the stockholders. There is no cumulative voting, which means that a holder or group of holders of more than 50% of the shares of our common stock can elect all of our directors.
Dividend Rights
The holders of our common stock are entitled to receive dividends when and as declared by our board of directors from legally available sources, subject to any restrictions in our certificate of incorporation or prior rights of the holders of our preferred stock. See “Dividend Policy.”
Liquidation Rights
In the event of our liquidation or dissolution, the holders of our common stock are entitled to share ratably in the assets available for distribution after the payment of all of our debts and other liabilities, subject to the prior rights of the holders of our preferred stock.
Other Matters
The holders of our common stock have no subscription, redemption or conversion privileges. There are no sinking fund provisions applicable to our common stock. After the offering, ourOur common stock does not entitle its holder to preemptive rights. All of the outstanding shares of our common stock are fully paid and nonassessable. The rights, preferences and privileges of the holders of our common stock are subject to the rights of the holders of shares of any series of preferred stock whichthat we may issue in the future.
Preferred stockStock
OurAs discussed under “Prospectus Summary — The Offering,” effective immediately prior to the completion of this offering, each outstanding share of our Series A Convertible Preferred Stock will convert into two shares of our common stock, each outstanding share of our Series B, Series C and Series E Convertible Preferred Stock
will convert into 1.0042 shares of our common stock, and each outstanding share of our Series D Convertible Preferred Stock will convert into 1.0169 shares of our common stock. Effective upon the completion of this offering, each warrant exercisable for preferred stock will become exercisable for a number of shares of common stock based on the same conversion ratios.
Following completion of this offering our board of directors, has the authority to issue preferred stock in onewithout further vote or more classes or series and toaction by our stockholders, may fix the designations, powers, preferences and rights, and the qualifications, limitations or restrictions thereof including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any class or series, without further vote or action byof up to an aggregate of 13.4 million shares of our preferred stock, and may authorize the stockholders.issuance of the same. The issuance of our preferred stock may have the effect of delaying, deferring, or preventing a change in control of our company without further action by the stockholders and may adversely affect the voting and other rights, including the right to dividends and to payments upon liquidation, of the holders of our common stock. At present,Upon the completion of this offering, no shares of our preferred stock will be outstanding, and we have no present plans to issue any shares of the preferred stock.
Provisions of our certificateOur Certificate of incorporationIncorporation and bylawsBylaws and Delaware law that may haveLaw That May Have an anti-takeover effectAnti-Takeover Effect
Certificate of Incorporation and Bylaws
Certain provisions of Delaware law, our certificate of incorporation and our bylaws may be deemed to have an anti-takeover effect and may delay, deter or prevent a tender offer or takeover attempt that a stockholder might consider to be in its best interests, including attempts that might result in a premium being paid over the market price for the shares held by stockholders.
Our certificate of incorporation and bylaws contain provisions that could have the effect of discouraging potential acquisition proposals or tender offers or delaying or preventing a change of control of our company. In particular, our certificate of incorporation and bylaws, as applicable, among other things:
provide that special meetings of the stockholders may be called only by the chairman of our board, chief executive officer or board of directors pursuant to a resolution adopted by a majority of the total number of authorized directorsmembers of our board;board of directors;
provide that any action required or permitted to be taken by the stockholders of our company must be effected at a duly called annual or special meeting of the stockholders and the taking of action by written consent of the stockholders in lieu of a meeting of the stockholders is specifically denied;
establish procedures with respect to stockholder proposals and stockholder nominations, including requiring that advance written notice of a stockholder proposal or director nomination generally must be received at our principal executive offices not less than 90 nor more than 120 days prior to the first anniversary date of the mailing of our proxy statement released to stockholders in connection with the previous year’s annual meeting of stockholders;
do not include any provision for cumulative voting in the election of directors or for any other matters. Under cumulative voting, a minority stockholder holding a sufficient number of shares may be able to ensure the election of one or more directors. The absence of cumulative voting may have the effect of limiting the ability of minority stockholders to effect changes in the board of directors and, as a result, may have the effect of deterring a hostile takeover or delaying or preventing changes in control or management of our company;
provide that the exact number of directors on our board may be fixed from time to time exclusively by resolution of our board of directors within a range of five to 15 directors and that newly-created directorships and vacancies on our board of directors may be filled by a majority of directors in office, although less than a quorum;
provide that the board of directors may determine the number of committee members on each board committee at any time, and may remove any individual board committee member at any time for any reason. Any vacancy or newly-created committee memberships may be filled by our board of directors;
provide that a director may be removed from office by the affirmative vote of at least 66 2/3% of the total voting power of the outstanding shares entitled to vote generally in the election of directors, voting together as a single class;
provide that the directors on our board may be divided into three classes and thatof directors has the term ofpower to alter, amend or repeal the directors in each class be staggered, such that only the directors of one class are up for election in each annual meeting;bylaws without stockholder approval;
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require that the stockholders may alter, amend or repeal our bylaws only with the vote of holders of 66 2/3% of the voting power of the outstanding shares entitled to vote generally in the election of directors; and
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require that the vote of holders of 66 2/3% of the voting power of the outstanding shares entitled to vote generally in the election of directors is required to amend various provisions of our certificate of incorporation, including provisions relating to:
the number of directors on our board of directors;
the election, qualification and term of office of our directors;
filling vacancies on our board of directors;
removal of members of our board of directors; and
amendments to our certificate of incorporation and bylaws; andincorporation.
provide that our board of directors has the power to alter, amend or repeal the bylaws without stockholder approval.
Following the completion of this offering, ourOur certificate of incorporation will authorizeauthorizes our board of directors, without further vote or action by the stockholders, to issue, after giving effect to the completion of this offering and the automatic conversion of all of our shares of outstanding Series A, Series B, Series C, Series D and Series E Convertible Preferred Stock into shares of common stock, up to an additional 13.4 million shares of preferred stock, par value $0.01 per share, in one or more classes or series, and to fix or alter:
the number of shares constituting any class or series;
the designations, powers and preferences of each class or series;
the relative, participating, optional and other special rights of each class or series; and
any qualifications, limitations or restrictions on each class or series.
The above provisions are intended to promote continuity and stability in the composition of our board of directors and in the policies formulated by the board and to discourage certain types of transactions that may involve an actual or threatened change of control. These provisions are expected to reduce our vulnerability to unsolicited acquisition attempts as well as discourage certain tactics that may be used in proxy fights. Such provisions, however, could discourage others from making tender offers for our shares and, as a consequence, may inhibit fluctuations in the market price of our common stock that could result from actual or rumored takeover attempts. These provisions also could operate to prevent changes in our management.
Delaware Takeover Statute
We are subject to the provisions of Section 203 of the Delaware General Corporation Law, or the DGCL. Subject to certain exceptions, Section 203 prohibits a Delaware corporation from engaging, under certain circumstances, in a “business combination” with an “interested stockholder” for a period of three years following the date that the stockholder became an interested stockholder, unless:
prior to the date of the business combination, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;
on consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock of the interested stockholder) those shares owned:
by persons who are directors and also officers, and
by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
at or subsequent to such time, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder.
A “business combination” includes:
any merger or consolidation involving the corporation and the interested stockholder;
any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;
subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;
any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or
the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.
Subject to various exceptions, an “interested stockholder” is an entity or person who, together with affiliates and associates, owns (or within three years from the date of determination, did own) 15% or more of the corporation’s outstanding voting stock. This statute could delay, defer or prohibit a merger or other takeover or a change of control of our company. We also anticipate that this statute may discourage business combinations or other attempts that might result in a premium over the market price for the shares of common stock held by our stockholders.
NASDAQ
We intend to apply to list our common stock on the NASDAQ Global Market under the symbol AGMX.“AGMX.”
Transfer agentAgent and registrarRegistrar
The transfer agent and registrar for our common stock is .
Shares eligibleEligible for future saleFuture Sale
Prior to this offering, there has been no public market for our common stock, and a significant public market for our common stock may not develop or be sustained after this offering. Future sales of significant amounts of our common stock, including shares of our outstanding common stock and shares of our common stock issued upon exercise of outstanding options, in the public market after this offering could adversely affect the prevailing market price of our common stock and could impair our future ability to raise capital through the sale of our equity securities.
Sale of restricted sharesRestricted Shares and lock-up agreementsLock-Up Agreements
Upon the closing of this offering, shares of common stock will be outstanding assuming no exercise of the underwriters’ over-allotmentoverallotment option and no exercise of currently outstanding options.options or warrants. Of these shares, the shares of common stock sold in this offering, plus any additional shares sold upon exercise of the underwriters’ over-allotmentoverallotment option, will be freely tradable without restriction under the Securities Act, unless they are held by our affiliates, as that term is defined in Rule 144 under the Securities Act and the rules and regulations promulgated thereunder.
The remaining shares of common stock held by existing stockholders are restricted securities as that term is defined in Rule 144 under the Securities Act or are subject to the contractual restrictions described below. Of these remaining securities:
shares may be sold as of the date of this prospectus;
additional shares may be sold beginning 90 days after the date of this prospectus; and
additional shares may be sold upon expiration of the lock-up period described below, although a portion of those shares will be subject to volume limitations pursuant to Rule 144.
Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or 701 under the Securities Act, which rules are summarized below.
Lock-up agreementsLock-Up Agreements
Our officers, directors and other stockholders owning sharesapproximately % of our common stock on an as-converted basis have agreed, subject to certain exceptions, not to offer, pledge, announce the intention to sell, sell, contract to sell, transfer or dispose of, directly or indirectly, any shares of our common stock, or any securities convertible into or exercisable or exchangeable for shares of our common stock, for a period of 180 days after the date of this prospectus, without the prior written consent of J.P. Morgan SecuritiesLeerink & Swann, Inc., which Unless FINRA eliminates the current prohibition on publishing research reports on emerging growth companies within certain periods before and after the expiration of this period of restriction, this 180-day period will be automatically extended if: (1) during the last 17 days of the 180-day restricted period the company issues an earnings release or announces material news or a material event; or (2) prior to the expiration of the 180-day restricted period, the company announces that it will release earnings results during the 16-day15-day period following the last day of the 180-day period, in which case the restrictions describedimposed in the preceding paragraphlock-up agreements will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the announcement of the material news or material event. J.P. Morgan SecuritiesLeerink & Swann, Inc. currently does not anticipate shortening or waiving any of the lock-up agreements or other contractual obligations restricting the sale of securities
and does not have any pre-established conditions for such modifications or waivers. However, J.P. Morgan Securitieswaivers; however, Leerink & Swann, Inc. may, in its sole discretion, at any time, and without notice, release for sale in the public market all or any portion of the shares subject to the lock-up agreement. See “Underwriting—Lock-Up Agreements.”
Rule 144
In general, under Rule 144 as currently in effect, once we have been subject to public company reporting requirements for at least 90 days, a person who is not one of our affiliates and who is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than an affiliate, is entitled to sell those shares without complying with the manner of sale, volume limitation or notice provisions of Rule 144, subject to our compliance with the public information requirements of Rule 144. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then that person is entitled to sell those shares without complying with any of the requirements of Rule 144.
In general, under Rule 144 as currently in effect, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell upon expiration of the lock-up agreements described above, within any three-month period, a number of shares that does not exceed the greater of:
1% of the number of shares of common stock then outstanding, which will equal approximately shares immediately after this offering; or
the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale.
Such sales by affiliates may commence beginning 90 days after the date of this prospectus, subject to continued availability of current public information about us. Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain manner of sale provisions and notice requirements.
Rule 701
Rule 701 generally allows a stockholder who purchased shares of our common stock pursuant to a written compensatory plan or contract and who is not deemed to have been an affiliate of our company during the immediately preceding 90 days to sell these shares in reliance upon Rule 144, but without being required to comply with the public information or holding period provisions of Rule 144. Rule 701 also permits affiliates of our company to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. All holders of Rule 701 shares, however, are required to wait until 90 days after the date of this prospectus before selling such shares pursuant to Rule 701.
Options
In addition to the shares of common stock outstanding immediately after this offering, as of March 31, 2008,June 30, 2012, there were outstanding options to purchase 3,176,4055,446,762 shares of our outstanding common stock. As soon as practicable upon completion of this offering, we intend to file a registration statement on Form S-8 under the Securities Act covering shares of our
common stock issued or reserved for issuance under our stock plans and other eligible shares of our common stock. Accordingly, shares of our common stock registered under such registration statement will be available for sale in the open market upon exercise of related options by the holders, subject to vesting restrictions with us, contractual lock-up restrictions, and/or market stand-off provisions applicable to each option agreement that prohibit the sale or other disposition of the shares of common stock underlying the options for a period of 180 days after the date of this prospectus without the prior written consent from us or our underwriters.
Registration rights agreementRights
We have entered into a registration rights agreement with the holders of our Series C Convertible Preferred Stock and warrants to purchase our Series C Convertible Preferred Stock. Pursuant to the agreement, these holders are entitled to cause us to register the shares of common stock or other securities issuable upon
conversion or exercise of such preferred stock and warrants (referred to as “registrable securities”), subject to the terms and conditions of the agreement. Pursuant to the lock-up agreements described above, holders of approximately 98%a majority of the registrable securities have agreed, on behalf of all such holders, not to exercise their registration rights until 180 days after the completion of this offering. However, following this 180-day period, subject to certain limitations, these holders will be entitled to cause us to include their registrable securities in certain registrations by us of our common stock under the Securities Act. If, in connection with any underwritten registration of our common stock, the managing underwriter in its judgment imposes a limitation on the number of shares to be registered, the number of a holder’s registrable securities to be included in the registration may be limited on a pro rata basis. In addition, at any time after we become eligible to register securities for resale on Form S-3, subject to certain limitations, the holders will be entitled to cause us to prepare and file a Form S-3 for their registrable securities. In the event that a holder causes us to file a Form S-3, we will be obligated to maintain its effectiveness for a period of 180 days, subject to certain exceptions. However, notwithstanding the provisions described above, we will not be required to effect a registration to the extent that all of a holder’s registrable securities may be sold under Rule 144 during any 90-day period.
Pursuant to the terms of certain of the warrants we issued in our March 2010 private placement, we will be required to prepare and file a registration statement for the resale of the warrants and the shares of common stock issuable upon exercise of the warrants as soon as is practicable following the later of (a) the first anniversary of the closing dates of the private placement and (b) the date when we are required to comply with the periodic reporting requirements under the Exchange Act. We will be required to maintain the effectiveness of this registration statement for a period of up to 180 days. If we intend to file a registration statement on our behalf after the later of the times referenced in (a) and (b) above, the investors in the private placement will have the right, subject to certain limitations, to cause us to include in the registration the warrants and shares of common stock issuable upon exercise of the warrants. These registration rights will terminate as to any investor when all of such investor’s warrants and shares of common stock underlying the warrants may be sold pursuant to Rule 144 under the Securities Act during any 90-day period.
Material United States federal income tax consequencesFederal Income Tax Consequences to non-U.S. holdersNon-U.S. Holders
The following is a summary of the material U.S. federal income tax consequences to non-U.S. holders (as defined below) of the acquisition, ownership and disposition of our common stock issued for cash pursuant to this offering. This discussionsummary is not a complete analysis of all of the potential U.S. federal income tax consequences relating thereto,to the acquisition, ownership and disposition of our common stock, nor does it address any U.S. federal estate andor gift tax consequences or any tax consequences arising under any state, local or foreign tax laws, or under the unearned income Medicare contribution tax pursuant to the Health Care and Education Reconciliation Act of 2010 or any other U.S. federal tax laws. This discussion is based on the Internal Revenue Code of 1986, as amended, or the Code, Treasury Regulations promulgated thereunder, judicial decisions, and published rulings and administrative pronouncementsprocedures of the Internal Revenue Service, or IRS, all as in effect as of the date of this offering. These authorities may change, possibly retroactively, resulting in U.S. federal income tax consequences different from those discussedsummarized below. No ruling has been or will be sought from the IRS with respect to the matters discussedsummarized below, and there can be no assurance that the IRS will not take a contrary position regarding the tax consequences of the acquisition, ownership or disposition of our common stock, or that any such contrary position would not be sustained by a court.
This discussionsummary is limited to non-U.S. holders who purchase our common stock issued pursuant to this offering for cash and who hold our common stock as a “capital asset” within the meaning of Section 1221 of the Code (generally, property held for investment). This discussionsummary does not address all of the U.S. federal income tax consequences that may be relevant to a particular holder in light of suchthe holder’s particular circumstances. This discussion also does not consider any specific facts or circumstances that may be relevant to holders subject to specialSpecial rules under the U.S. federal income tax laws, which are not addressed in this summary, may apply to certain non-U.S. holders, including without limitation,foreign governments or entities they control; U.S. expatriates or former long-term residents of the United States; partnerships, or other pass-through entities, real estate investment trusts, regulated investment companies,or beneficial owners of interests in those entities; “controlled foreign corporations,”corporations” and their shareholders; “passive foreign investment companies,”companies” and their shareholders; corporations that accumulate earnings to avoid U.S. federal income tax,tax; banks; financial institutions,institutions; insurance companies,companies; brokers, dealers or traders in securities, commodities or currencies,currencies; tax-exempt organizations,pension funds or other tax-exempt organizations; tax-qualified retirement plans,plans; persons subject to the alternative minimum tax,tax; persons that own, or have owned, actually or constructively, more than 5% of our common stock,stock; and persons holding our common stock as part of a hedging or conversion transaction, or straddle, or a constructive sale, or other risk reduction strategy.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING AND DISPOSING OF OUR COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER ANY STATE, LOCAL OR FOREIGN TAX LAWS AND ANY OTHER U.S. FEDERAL TAX LAWS. PROSPECTIVE INVESTORS SHOULD ALSO CONSULT THEIR TAX ADVISORS REGARDING THE POTENTIAL IMPACT OF ANY APPLICABLE INCOME TAX TREATY.
Definition of non-U.S. holderNon-U.S. Holder
For purposes of this discussion, a non-U.S. holder is any“non-U.S. holder” means a beneficial owner of our common stock that is, not a “U.S. person” or a partnership (or other entity treated as a partnership) for U.S. federal income tax purposes. A U.S. person is any of the following:purposes:
an individual citizen or resident of the U.S.;a nonresident alien individual;
a foreign corporation (or otheran entity treated as a foreign corporation for U.S. federal income tax purposes) created or organized under the laws of the U.S., any state thereof or the District of Columbia;;
an estate the income of which is subject to U.S. federal income tax regardless of its source;a foreign estate; or
a trust (1) whose administration is subject toforeign trust.
In the primary supervisioncase of a holder that is classified as a partnership for U.S. court and which has one or more U.S. persons who havefederal income tax purposes, the authority to control all substantial decisionstax treatment of a partner in that partnership generally will depend upon the status of the trust, or (2) that has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.partner and the activities of the partner and the partnership.
Distributions on our common stockOur Common Stock
If we make cash or other property distributions (other than certain stock distributions) on our common stock, suchor effect one of certain redemptions that are treated as distributions on our common stock, those distributions or redemptions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts not treated as dividends for U.S. federal income tax purposes will be allocated ratably among the shareholder’s shares of common stock with respect to which the distribution is paid, will constitute a return of capital, and will first be applied against and reduce a holder’sshareholder’s adjusted tax basis in thethose shares of common stock, but not below zero. AnyDistributions in excess of our current and accumulated earnings and profits and in excess of the shareholder’s tax basis in its shares will be treated asconstitute capital gain realized on the sale or other disposition of the common stock and will be treated as described under “—Gain on Disposition of Our Common Stock” below. A non-U.S. holder’s adjusted tax basis in a share of common stock is generally the purchase price of the share, reduced by the amount of any distributions constituting a return of capital with respect to that share.
DividendsAny dividends paid to a non-U.S. holder of our common stock generally will be subject to U.S. federal withholding tax at a rate of 30% of the gross amount of the dividends, or such lower rate as is specified by an applicable income tax treaty. To receive the benefit of a reduced treaty rate, a non-U.S. holder must furnish to us or our paying agent a valid IRS Form W-8BEN (or other applicable successor form) certifying suchunder penalties of perjury the holder’s qualification for the reduced rate. This certification must be provided to us or our paying agent prior to the payment of dividends and must be updated periodically. Non-U.S. holders that do not timely provide us or our paying agent with the required certification, but that qualify for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS.
If a non-U.S. holder holds our common stock in connection with the conduct of a trade or business in the U.S., and dividends paid on the common stock are effectively connected with suchthe holder’s U.S. trade or business (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base maintained by the non-U.S. holder in the United States, as defined under the applicable treaty), the non-U.S. holder will be exempt from U.S. federal withholding tax.tax on the dividends. To claim the exemption, the non-U.S. holder must furnish to us or our paying agent a properly executed IRS Form W-8ECI (or other applicable successor form). prior to the payment of the dividends.
Any dividends paid on our common stock that are effectively connected with a non-U.S. holder’s U.S. trade or business (or(and if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base maintained by the non-U.S. holder in the U.S.), as defined under the applicable treaty) generally will be subject to U.S. federal income tax on a net income basis at the regular graduated U.S. federal income tax rates in the same mannergenerally applicable to U.S. persons or at such lower rate as if such holder were a resident of the U.S., unlessmay be specified by an applicable income tax treaty provides otherwise.treaty. A non-U.S. holder that is a foreign corporation also may be subject to an additional branch profits tax equal to 30% (or such lower rate as is specified by an applicable income tax treaty) of a portion of its effectively connected earnings and profits for the taxable year. Non-U.S. holders should consult any applicable income tax treaties that may provideyear, as adjusted for different rules.certain items.
A non-U.S. holder who claims the benefit of an applicable income tax treaty generally will be required to satisfy applicable certification and other requirements prior to the distribution date. Non-U.S. holders should consult their tax advisors regarding their entitlement to benefits under a relevant income tax treaty.
Gain on dispositionDisposition of our common stockOur Common Stock
Subject to the discussion below regarding backup withholding and foreign accounts, a non-U.S. holder generally will not be subject to U.S. federal income tax on any gain realized upon the sale, exchange or other taxable disposition of our common stock, unless:
the gain is effectively connected with the non-U.S. holder’s conduct of a trade or business in the U.S., orUnited States, and, if required by an applicable income tax treaty, is attributable to a permanent establishment or fixed base, as defined under the applicable treaty, maintained by the non-U.S. holder in the U.S.;United States;
the non-U.S. holder is a nonresident alien individual present in the U.S.United States for 183 days or more during the taxable year of the sale, exchange or other taxable disposition, and certain other requirements are met; or
our common stock constitutes a “U.S.“United States real property interest” by reason of our status as a U.S.United States real property holding corporation, or USRPHC, for U.S. federal income tax purposes at any time within the shorter of the five-year period preceding the disposition or the non-U.S. holder’s holding period for our common stock, and, in the case where shares of our common stock has ceased to beare regularly traded on an established securities market, prior to the beginningnon-U.S. holder has owned, directly or indirectly, more than 5% of our common stock at any time within the shorter of the calendar year in whichfive-year period preceding the saledisposition or other disposition occurs. The determination of whether we are a USRPHC dependsthe non-U.S. holder’s holding period for our common stock. There can be no assurance that our common stock will be treated as regularly traded on the fairan established securities market value of our U.S. real property interests relative to the fair market value of our other trade or business assets and our foreign real property interests.for this purpose.
We believe we are not currently, and we do not anticipate becoming, a USRPHC for U.S. federal income tax purposes.
Unless an applicable Generally, we would be a USRPHC if the fair market value of our U.S. real property interests were to equal or exceed fifty percent of the sum of the fair market values of our worldwide real property interests and other assets used or held for use in a trade or business, all as determined for U.S. federal income tax treaty provides otherwise, gainpurposes.
Gain described in the first or third bullet point above will be subject to U.S. federal income tax on a net income basis at the regular graduated U.S. federal income tax rates in the same mannergenerally applicable to U.S. persons or at such lower rate as if such holder were a resident of the U.S.is specified by an applicable income tax treaty. A Non-U.S.non-U.S. holder that is a foreign corporation also may be subject to an additional branch profits tax on gain described in the first bullet point equal to 30% (or such lower rate as is specified by an applicable income tax treaty) of a portion of its effectively connected earnings and profits for the taxable year. Non-U.S. holders should consult any applicable income tax treaties that may provideyear, as adjusted for different rules.certain items.
Gain described in the second bullet point above will be subject to U.S. federal income tax at a flat 30% rate (or such lower rate as is specified by an applicable income tax treaty), but may be offset by U.S. source capital losses (even though the individual is not considered a resident of the U.S.)United States) provided that the non-U.S. holder has timely filed U.S. federal income tax returns with respect to suchthose losses.
The gross proceeds from transactions that generate gains described in the third bullet point above will generally be subject to a 10% withholding tax, which a non-U.S. holder may claim as a credit against the non-U.S. holder’s federal income tax liability.
Information reportingReporting and backup withholdingBackup Withholding
We must report annually to the IRS and to each non-U.S. holder the amount of dividends and other distributions on our common stock paid to suchthe non-U.S. holder and the amount of tax, if any, tax withheld with respect to those distributions. TheseThe IRS may make this information reporting requirements apply even if no withholding was required because the distributions were effectively connected with the holder’s conduct of a U.S. trade or business, or withholding was reduced or eliminated by an applicable income tax treaty. This information also may be made available under a specific treaty or agreement withto the tax authorities in the country in which the non-U.S. holder resides or is established. Backup withholding, currently at a 28% rate, however, generally will not apply to distributions toresident.
In addition, a non-U.S. holder may be subject to information reporting requirements and backup withholding with respect to dividends paid on, and the proceeds of disposition of, shares of our common stock, providedunless, generally, the non-U.S. holder furnishes to us or our paying agent the required certification as to its non-U.S. status, such as by providing a validcertifies under penalties of perjury (usually on IRS Form W-8BENW-8BEN) that the non-U.S. holder is not a U.S. person or otherwise establishes an exemption. The backup withholding rate is 28% and is scheduled to increase to 31% in 2013. Additional rules relating to information reporting requirements and backup withholding with respect to payments of the proceeds from the disposition of shares of our common stock are as follows:
If the proceeds are paid to or through the U.S. office of a broker, the proceeds generally will be subject to backup withholding and information reporting, unless the non-U.S. holder certifies under penalties of perjury (usually on IRS Form W-8ECI,W-8BEN) that the non-U.S. holder is not a U.S. person or otherwise establishes an exemption.
If the proceeds are paid to or through a non-U.S. office of a broker that is not a U.S. person and is not a foreign person with certain other requirements are met. Notwithstanding the
foregoing,specified U.S. connections, which we refer to below as a “U.S.-related person,” information reporting and backup withholding may apply if either wegenerally will not apply.
If the proceeds are paid to or our paying agent has actual knowledge, or reason to know,through a non-U.S. office of a broker that the holder is a U.S. person or a U.S.-related person, the proceeds generally will be subject to information reporting (but not to backup withholding), unless the non-U.S. holder certifies under penalties of perjury (usually on IRS Form W-8BEN) that the non-U.S. holder is not an exempt recipient.a U.S. person.
Backup withholding is not an additionala tax. Any amounts withheld from a non-U.S. holder under the backup withholding rules may be allowed as a refund or a credit against athe non-U.S. holder’s U.S. federal income tax liability, provided that the non-U.S. holder timely furnishes the required information is timely furnished to the IRS.
Foreign Accounts
Legislation enacted in 2010 will impose withholding taxes on certain types of payments made to “foreign financial institutions” and other non-U.S. entities after December 31, 2013 unless those institutions and entities meet additional certification, information reporting and other requirements. The legislation will generally impose a 30% withholding tax on dividends on, or gross proceeds from the sale or other disposition of, our common stock paid to a foreign financial institution unless the foreign financial institution enters into an agreement with the U.S. Treasury to, among other things, (i) undertake to identify accounts held by certain U.S. persons (including certain equity and debt holders of such institution) or by U.S.-owned foreign entities, (ii) annually report certain information about such accounts, and (iii) withhold 30% on payments to account holders whose actions prevent it from complying with these reporting and other requirements. In addition, subject to certain exceptions, the legislation will impose a 30% withholding tax on the same types of payments to an entity that is not a foreign financial institution unless the entity certifies that it does not have any substantial U.S. owners (which generally include any U.S. persons who directly or indirectly own more than 10% of the entity) or furnishes identifying information regarding each such substantial U.S. owner. Under currently proposed regulations, these withholding taxes would be imposed on dividends paid on our common stock after December 31, 2013, and on gross proceeds from sales or other dispositions of our common stock after December 31, 2014. We will not pay any additional amounts to non-U.S. holders in respect of any amounts withheld. Prospective investors should consult their tax advisors regarding this legislation.
We are offering the shares of common stock described in this prospectus through a number of underwriters. J.P. Morgan Securities Inc. is acting as sole book-running manager of the offering and as representative of the underwriters. We have entered into an underwriting agreement with the underwriters. Subject to the terms and conditions of theset forth in an underwriting agreement dated the date of this prospectus among us and the underwriters named below, we have agreed to sell to the underwriters, and each underwriter has severally agreed to purchase at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus,from us, the number of shares of common stock listed next to its name in the following table:table. Leerink Swann LLC is acting as the sole book-running manager for the offering and as the representative of the underwriters.
Name | Number of | |
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Stephens Inc. | ||
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Total | ||
The underwriters are committed to purchase all the shares of common sharesstock offered by us if they purchase any shares. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may also be increased or the offering may be terminated. The underwriters are not obligated to purchase the shares of our common stock covered by the underwriters’ over-allotment option described below.
The underwriters are offering our shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, and other conditions contained in the underwriting agreement, such as the receipt by the underwriters of officer’s certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.
Discounts and Commissions
The underwriters propose initially to offer the commonour shares directly to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $ per share. Any such dealers may resell shares to certain other brokers or dealers at a discount of up to $ per share from the initial public offering price. After the initial public offering of theour shares, the public offering price and other selling terms may be changed by the underwriters. representatives.
The representative has advised us thatfollowing table shows the public offering price, underwriting discounts and commissions and proceeds before expenses to us. The information assumes either no exercise or full exercise by the underwriters do not intend to confirm discretionary sales in excess of 5%their over-allotment option.
Per Share | Without Option | With Option | ||||||||||
Public offering price | $ | $ | $ | |||||||||
Underwriting discounts and commissions | $ | $ | $ | |||||||||
Proceeds, before expenses, to us | $ | $ | $ |
The total estimated expenses of the common shares offered in this offering.offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding underwriting discounts and commissions, are approximately $ million and are payable by us.
TheOver-Allotment Option
We have granted the underwriters have an option to buypurchase up to additional shares of our common stock from us to cover sales of shares byat the underwriters which exceed the number of shares specified in the table above.public offering price, less underwriting discounts and commissions. The underwriters havemay exercise this option for 30 days from the date of this prospectus solely to exercise this over-allotment option.cover sales of shares of common stock by the underwriters in excess of the total number of shares set forth in the table above. If any shares are purchased with
pursuant to this over-allotment option, the underwriters will purchase the additional shares in approximately the same proportion as shown in the table above. If any of these additional shares of common stock are purchased, the underwriters will offer the additional shares on the same terms as those on which the shares are being offered.
Initial Public Offering Pricing
Prior to this offering, there has been no public market for our common stock. The underwriting fee is equal to theinitial public offering price per sharewill be negotiated between us and the underwriters. Among the factors considered in these negotiations are:
the prospects for our company and the industry in which we operate;
our past and present financial and operating performance;
financial and operating information and market valuations of publicly traded companies engaged in activities similar to ours;
the prevailing conditions of U.S. securities markets at the time of this offering; and
other factors deemed relevant.
The estimated initial public offering price range set forth on the cover of this preliminary prospectus is subject to change as a result of market conditions and other factors.
Lock-Up Agreements
We, our officers and directors and holders of substantially all of our outstanding stock, options and warrants have entered into lock-up agreements with the underwriters. Under these agreements, we and these other individuals have agreed, subject to specified exceptions, not to sell or transfer any common stock or securities convertible into, or exchangeable or exercisable for, our common stock, during a period ending 180 days after the date of this prospectus, without first obtaining the written consent of Leerink Swann LLC. Specifically, we and these other individuals have agreed not to:
offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of any shares of our common stock (including any shares issued in this offering or other issuer-directed shares), or any options or warrants to purchase any shares of our common stock, or any other securities convertible into, exchangeable for or that represent the right to receive shares of our common stock; or
engage in any hedging or other transactions, including, without limitation, any short sale or any purchase, sale or grant of any right (including without limitation any put or call option), or exercise any registration rights, with respect to any shares of our common stock or with respect to any security that includes, relates to, or derives any significant part of its value from shares of our common stock;
whether any such transaction described above is to be settled by delivery of common stock lessor other securities, in cash or otherwise. In addition, we have agreed with the amount paidunderwriters not to file a registration statement under the Securities Act relating to the offering of any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock, or publicly disclose the intention to file such a registration statement.
The restrictions described above, applicable to us, do not apply to:
the sale of shares of common stock to the underwriters pursuant to the underwriting agreement;
the issuance by us of shares of common stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date of this prospectus of which the underwriters have been advised in writing or that is described in this prospectus;
the grant by us of stock options or other stock-based awards, or the issuance of shares of our common stock upon exercise thereof, to eligible participants pursuant to employee benefit or equity incentive plans described in this prospectus, provided that, prior to the grant of any such stock options or other stock-based awards that vest within the restricted period, each recipient of such grant shall sign and deliver a lock-up agreement agreeing to be subject to the restrictions on transfer described above;
• | the issuance of shares of our common stock (or options, warrants or convertible securities relating to shares of our common stock) in connection withbona fide mergers or acquisitions, joint ventures, commercial relationships or other strategic transactions; and |
the filing by us of a registration statement on Form S-8 or any successor form thereto with respect to the registration of securities to be offered under any employee benefit or equity incentive plans described in this prospectus.
The restrictions described above, applicable to our officers and directors and holders of substantially all of our outstanding stock, options and warrants, do not apply to transfers:
representing repurchases of securities by us pursuant to pre-existing contractual arrangements that provide for such repurchases upon the separation from service of any such security holder;
to which Leerink Swan LLC has previously consented in writing;
representing a bona fide gift;
upon death by will or intestacy;
to any such security holder’s immediate family or to any trust for the benefit of such security holder or the immediate family of such security holder;
to any affiliate, limited partner, general partner, limited liability company member, stockholder or wholly-owned subsidiary of any such security holder; or
by operation of law, including a merger or a qualified domestic order;
provided that in the case of each of the preceding six types of transactions, each transferee signs and delivers a lock-up agreement agreeing to be subject to the restrictions on transfer described above and no public report, including but not limited to a report pursuant to Rule 144 of the Securities Act, or pursuant to Section 16 of the Exchange Act, is required or is voluntarily made during the lock-up period (other than, in the case of a disposition for no value, required reports on Form 5).
The initial 180-day lock-up period is subject to extension if (1) during the last 17 days of the initial period we release earnings results or announce material news or a material event or (2) prior to the expiration of the initial period, we announce that we will release earnings results during the 15-day period following the last day of the initial period, in which case the restrictions imposed in the lock-up agreements will continue to apply until the expiration of the 18-day period beginning on the date of release of the earnings results or the announcement of the material news or material event, as applicable, unless Leerink Swann LLC waives, in writing, such extension. The foregoing automatic extension will not apply if FINRA amends or repeals NASD Rule 2711(f)(4), or otherwise provides written interpretive guidance regarding such rule, in each case, to eliminate the prohibition of any broker, dealer, or member of a national securities association from publishing or distributing any research report, with respect to the securities of an “emerging growth company” (as defined in the JOBS Act) prior to or after the expiration of any agreement between the broker, dealer, or member of a national securities association and the emerging growth company or its stockholders that restricts or prohibits the sale of securities held by the emerging growth company or its stockholders after the initial public offering date.
Indemnification
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that the underwriters may be required to make for these liabilities.
The NASDAQ Global Market Listing
We intend to apply to list our common stock on the NASDAQ Global Market under the symbol “AGMX.”
Price Stabilization, Short Positions and Penalty Bids
In order to facilitate the offering of our common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of our common stock. In connection with the offering, the underwriters may purchase and sell our common stock in the open market. These transactions may include short sales, purchases on the open market to cover positions created by short sales and stabilizing transactions. Short sales involve the sale by the underwriters to us per shareof a greater number of shares of common stock. The underwriting fee is $ per share. The following table showsstock than they are required to purchase in the per share and total underwriting discounts and commissions to be paid to the underwriters assuming both no exercise and full exercise ofoffering. “Covered” short sales are sales made in an amount not greater than the underwriters’ option to purchase additional shares.shares of common stock in the offering. The underwriters may close out any covered short position by either exercising their over-allotment option or purchasing shares of common stock in the open market. In determining the source of shares of common stock to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. “Naked” short sales are sales in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares of common stock in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of shares of common stock made by the underwriters in the open market prior to the completion of the offering.
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We estimateSimilar to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the total expensesopen market.
The underwriters have advised us that, pursuant to Regulation M of the Securities Act, they may also engage in other activities that stabilize, maintain or otherwise affect the price of our common stock, including the imposition of penalty bids. This means that if the representatives of the underwriters purchase common stock in the open market in stabilizing transactions or to cover short sales, the representatives can require the underwriters that sold those shares as part of this offering including registration, filing and listing fees, printing fees and legal and accounting expenses, but excludingto repay the underwriting discountsdiscount received by them.
The underwriters do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered.
The underwriters make no representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor the underwriters make any representation that the underwriters will engage in these transactions or that these transactions, once commenced, will not be discontinued at any time without notice.
Electronic Offer, Sale and commissions, will be approximately$ .Distribution of Shares
A prospectus in electronic format may be made available on the web siteswebsites maintained by one or more underwriters or selling group members, if any, participating in the offering. The underwriters may agree to allocate a number of shares of common stock to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the representativerepresentatives to underwriters and selling group members that may make Internet distributions on the same basis as other allocations.
Subject to certain limited exceptions, we have agreed that we will Other than the prospectus in electronic format, the information on the underwriters’ websites and any information contained in any other website maintained by the underwriters is not offer, sell, contract to sell, pledgepart of this prospectus or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement underof which this prospectus forms a part.
Notice to Prospective Investors in the Securities Act relatingEuropean Economic Area
In relation to any shareseach member state of our common stock or securities convertible into or exchangeable or exercisable for any sharesthe European Economic Area that has implemented the Prospectus Directive, each of our common stock, or publicly disclose the intentionwhich we refer to make any offer, sale, pledge, disposition or filing, without the prior written consent of J.P. Morgan Securities Inc. foras a period of 180 days afterrelevant member state, with effect from and including the date of this prospectus. Notwithstandingon which the foregoing, if (1) during the last 17 days of the 180-day restricted period, we issue an earnings release or material news or a material event relating to our company occurs; or (2) prior to the expiration of the 180-day restricted period, we announceProspectus Directive is implemented in that we will release earnings results during the 16-day period beginning on the last day of the 180-day period, the restrictions described above shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings releaserelevant member state, or the occurrencerelevant implementation date, an offer of the material news or material event.
We, our directors and executive officers, and certain of our significant stockholders have entered into lock-up agreements with the underwriters prior to the commencement of this offering pursuant to which we and each of these persons or entities, with limited exceptions, for a period of 180 days after the date ofsecurities described in this prospectus may not withoutbe made to the public in that relevant member state other than:
to legal entities that are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;
to any legal entity that has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts;
to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining the prior written consent of J.P. Morgan Securities Inc., (1) offer, pledge, announcerepresentatives for any such offer; or
in any other circumstances that do not require the intentionpublication of a prospectus pursuant to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock (including, without limitation, common stock which may be deemed to be beneficially owned by such directors, executive officers, managers and members in accordance with the rules and regulationsArticle 3 of the SEC andProspectus Directive;
provided that no such offer of securities which may be issued upon exercise ofshall require us or any underwriter to publish a stock option or warrant) or (2) enter into any swap or other agreement that transfers, in whole or in part, anyprospectus pursuant to Article 3 of the economic consequencesProspectus Directive.
For the purposes of ownershipthis provision, the expression an “offer of the common stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of common stock or such other securities, in cash or otherwise. Notwithstanding the foregoing, if (1) during the
last 17 days of the 180-day restricted period, we issue an earnings release or material news or a material event relating to our company occurs; or (2) priorshares to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period, the restrictions described above shall continuepublic” in relation to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933.
We intend to apply to list our common stock on the NASDAQ Global Market under the symbol AGMX.
In connection with this offering, the underwriters may engage in stabilizing transactions, which involves making bids for, purchasing and sellingany shares of common stock in any relevant member state means the open marketcommunication in any form and by any means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase or subscribe for the shares, as the same may be varied in that member state by any measure implementing the Prospectus Directive in that member state and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each relevant member state.
Notice to Prospective Investors in Hong Kong
The securities may not be offered or sold by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), or (ii) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), and no advertisement, invitation or document relating to the securities may be issued or may be in the possession of any person for the purpose of preventingissue (in each case whether in Hong Kong or retarding a decline inelsewhere), which is directed at, or the market pricecontents of the common stock while this offering is in progress. These stabilizing transactions may include making short sales of the common stock, which involves the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this offering, and purchasing shares of common stock on the open market to cover positions created by short sales. Short sales may be “covered” shorts, which are short positions in an amount not greater than the underwriters’ over-allotment option referred to above, or may be “naked” shorts, which are short positions in excess of that amount. The underwriters may close out any covered short position either by exercising their over-allotment option, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market compared to the price at which the underwriters may purchase shares through the over-allotment option. A naked short position is more likely to be createdaccessed or read by, the public in Hong Kong (except if permitted to do so under the underwriterslaws of Hong Kong) other than with respect to securities which are concerned that there mayor are intended to be downward pressure ondisposed of only to persons outside Hong Kong or only to “professional investors” within the price of the common stock in the open market that could adversely affect investors who purchase in this offering. To the extent that the underwriters create a naked short position, they will purchase shares in the open market to cover the position.
The underwriters have advised us that, pursuant to Regulation Mmeaning of the Securities Actand Futures Ordinance (Cap. 571, Laws of 1933, they may also engageHong Kong) and any rules made thereunder.
Notice to Prospective Investors in other activities that stabilize, maintain or otherwise affect the price of the common stock, including the imposition of penalty bids. Singapore
This means that if the representative of the underwriters purchase common stock in the open market in stabilizing transactions or to cover short sales, the representative can require the underwriters that sold those shares as part of this offering to repay the underwriting discount received by them.
These activities may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock, and,document has not been registered as a result,prospectus with the priceMonetary Authority of Singapore. Accordingly, this document and any other document or material in connection with the common stock may be higher than the price that otherwise might exist in the open market. If the underwriters commence these activities, they may discontinue them at any time. The underwriters may carry out these transactions on the NASDAQ Global Market, in the over-the-counter marketoffer or otherwise.
Prior to this offering, there has been no public marketsale, or invitation for our common stock. The initial public offering price will be determined by negotiations between us and the representative of the underwriters. In determining the initial public offering price, we and the representative of the underwriters expect to consider a number of factors including:
the information set forth in this prospectus and otherwise available to the representative;
our prospects and the history and prospects for the industry in which we compete;
an assessment of our management;
our prospects for future earnings;
the general conditionsubscription or purchase, of the securities markets atmay not be circulated or distributed, nor may the timesecurities be offered or sold, or be made the subject of this offering;
an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the recent market pricesSecurities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person, or any person pursuant to Section 275(1A), and demandin accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Where the securities are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest in that trust shall not be transferable for publicly traded common stock of generally comparable companies; and
other factors deemed relevant by the underwriters and us.
Neither we nor the underwriters can assure investors6 months after that an active trading market will develop for our common shares,corporation or that trust has acquired the shares will tradesecurities under Section 275 except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the public market atconditions, specified in Section 275 of the SFA; (2) where no consideration is given for the transfer; or above the initial public offering price.(3) by operation of law.
CertainOther Relationships
From time to time, certain of the underwriters and their affiliates have provided, in the past to us and our affiliates and may provide from time to time in the future, certain commercial banking, financialvarious advisory, investment and commercial banking and other services forto us and such affiliates in the ordinary course of their business, for which they have received and may continue to receive customary fees and commissions. In addition, from time to time, certain of the underwriters and their affiliates may effect transactions for their own account or the account of customers, and hold on behalf of themselves or their customers, long or short positions in our debt or equity securities or loans, and may do so in the future.
The validity of the shares of common stock offered by us under this prospectus will be passed upon for us by Latham & WatkinsBingham McCutchen LLP, Los Angeles,Costa Mesa, California. As of the date of this prospectus, an investment partnership that includes certain Bingham McCutchen LLP attorneys holds 54,415 shares of our preferred stock that will be converted into an aggregate of 88,915 shares of our common stock upon the completion of this offering. This investment partnership also holds $50,000.00 in aggregate principal amount of our outstanding subordinated promissory notes and warrants for the purchase of 14,200 shares of our common stock. The underwriters are represented by Davis Polk & Wardwell, Menlo Park,Cooley LLP, San Diego, California.
Ernst & YoungMarcum LLP, independent registered public accounting firm, has audited our financial statements at December 31, 2007 and 2006, and for each of the two years in the period ended December 31, 2007, and for the nine month period endedyears ending December 31, 2005,2010 and 2011, as set forth in their report.report (which contains an explanatory paragraph describing conditions that raise substantial doubt about our ability to continue as a going concern as described in Note 1 to our financial statements included in this prospectus). We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & YoungMarcum LLP’s report, given on their authority as experts in accounting and auditing.
Where you can find more informationYou Can Find More Information
We have filed with the SEC a registration statement on Form S-1 (including the exhibits, schedules and amendments to the registration statement) under the Securities Act with respect to the shares of common stock offered by this prospectus. This prospectus does not contain all of the information set forth in the registration statement. For further information about us and the new shares of common stock to be sold in this offering, we refer you to the registration statement. Statements contained in this prospectus as to the contents of any contract, agreement or other document to which we make reference are not necessarily complete. In each instance, we refer you to the copy of such contract, agreement or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by the more complete description of the matter involved.
Upon completion of this offering, we will become subject to the reporting and information requirements of the Securities Exchange Act, of 1934, as amended, and, as a result, will file periodic and current reports, proxy statements, and other information with the SEC. You may read and copy this information at the Public Reference Room of the SEC located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. Copies of all or any part of the registration statement may be obtained from the SEC’s offices upon payment of fees prescribed by the SEC. The SEC maintains an Internet site that contains periodic and current reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of the SEC’s website is http://www.sec.gov.
Index to financial statementsFinancial Statements
Report of independent registered public accounting firmREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The To the Audit Committee of the
Board of Directors and Stockholders
of AutoGenomics, Inc.
We have audited the accompanying balance sheets of AutoGenomics, Inc. (the “Company”) as of December 31, 20062010 and 2007,2011, and the related statements of operations and comprehensive loss, changes in convertible preferred stock and stockholders’ deficit and cash flows for the years ended December 31, 2006 and 2007, and nine months ended December 31, 2005.then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the Standardsstandards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. WeThe Company is not required to have, nor were notwe engaged to perform, an audit of the Company’sits internal control over financial reporting. Our auditsaudit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, andas well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AutoGenomics, Inc. at, as of December 31, 20062010 and 2007,2011, and the results of its operations and its cash flows for the years then ended December 31, 2006 and 2007, and nine months ended December 31, 2005, in conformity with accounting principles generally accepted in the United States.States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, effective January 1, 2006, AutoGenomics, Inc., changedthe Company does not have sufficient working capital to fund its method of accounting for share-based payments in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment.
ERNST & YOUNG LLP
San Diego, California
July 22, 2008, except for Note 11
planned operations through December 31, 2012 without additional financing, which raises substantial doubt about its ability to continue as to which the date is , 2008
The foregoing report is in the form that will be signed upon the completion of the restatement of the capital accountsa going concern. Management’s plans regarding those matters are also described in Note 111. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The unaudited pro forma balance sheet information contained in the financial statements, which is the responsibility of management, is presented for purposes of additional analysis and is not a required part of the financial statements. Such information has not been subjected to the auditing procedures applied in the audit of the financial statements.statements, and, accordingly, we do not express an opinion or provide any assurance on it.
/s/ ERNST & YOUNGMarcum LLP
July 22, 2008Marcum LLP
IRVINE, CALIFORNIA
September 26, 2012
Balance sheetsSheets
December 31, | June 30, 2012 | Pro-forma June 30, 2012 | ||||||||||||||||||||||||||
December 31, | March 31, 2008 | Pro Forma March 31, 2008 | 2010 | 2011 | ||||||||||||||||||||||||
2006 | 2007 | (unaudited) | ||||||||||||||||||||||||||
(Unaudited) | (in thousands, except per share and par value amounts) | |||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||||||
Cash and cash equivalents | $ 5,407,621 | $ 2,614,837 | $ 9,279,839 | $ 9,279,839 | $ | 129 | $ | 61 | $ | 309 | $ | 309 | ||||||||||||||||
Accounts receivable | 422,493 | 870,370 | 514,091 | 514,091 | ||||||||||||||||||||||||
Accounts receivable (net of allowance of $38, $52, and $88 at December 31, 2010 and 2011 and June 30, 2012, respectively) | 1,262 | 1,865 | 2,961 | 2,961 | ||||||||||||||||||||||||
Inventory, net | 1,045,725 | 1,934,770 | 2,640,668 | 2,640,668 | 2,124 | 1,743 | 1,888 | 1,888 | ||||||||||||||||||||
Prepaid and other current assets | 42,759 | 51,534 | 183,738 | 183,738 | 44 | 80 | 382 | 382 | ||||||||||||||||||||
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Total current assets | 6,918,598 | 5,471,511 | 12,618,336 | 12,618,336 | 3,559 | 3,749 | 5,540 | 5,540 | ||||||||||||||||||||
Property and equipment, net | 891,688 | 1,279,051 | 1,390,855 | 1,390,855 | ||||||||||||||||||||||||
Property, equipment and improvements, net | 1,684 | 1,417 | 1,333 | 1,333 | ||||||||||||||||||||||||
Intangible assets, net | 63,750 | 175,716 | 164,916 | 164,916 | 46 | 14 | — | — | ||||||||||||||||||||
Other long-term assets | 55,000 | 55,393 | 36,000 | 36,000 | 635 | 232 | 242 | 242 | ||||||||||||||||||||
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Total assets | $ 7,929,036 | $ 6,981,671 | $ 14,210,107 | $ 14,210,107 | $ | 5,924 | $ | 5,412 | $ | 7,115 | $ | 7,115 | ||||||||||||||||
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Liabilities and stockholders’ deficit | ||||||||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||||||
Accounts payable | $ 326,837 | $ 517,692 | $ 813,673 | $ 813,673 | $ | 7,162 | $ | 9,183 | $ | 8,925 | $ | 8,925 | ||||||||||||||||
Accrued expenses | 1,161,047 | 1,282,247 | 953,737 | 953,737 | 1,389 | 1,215 | 1,276 | 1,276 | ||||||||||||||||||||
Current portion, capital lease obligation | 2,140 | 1,743 | 1,176 | 1,176 | ||||||||||||||||||||||||
Notes payable | — | 1,000,000 | — | — | ||||||||||||||||||||||||
Related party notes, current portion, net | 366 | 2,401 | 3,944 | 3,944 | ||||||||||||||||||||||||
Senior promissory notes, net | — | 4,407 | 2,304 | 2,304 | ||||||||||||||||||||||||
Subordinated promissory notes, current portion, net | 5,744 | 16,707 | 18,244 | 18,244 | ||||||||||||||||||||||||
Preferred stock warrant liabilities | 354 | 412 | 272 | 272 | ||||||||||||||||||||||||
Common stock warrant liabilities | 718 | 215 | 61 | 61 | ||||||||||||||||||||||||
Other current liabilities | 397 | 527 | 519 | 519 | ||||||||||||||||||||||||
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Total current liabilities | 1,490,024 | 2,801,682 | 1,768,586 | 1,768,586 | 16,130 | 35,067 | 35,545 | 35,545 | ||||||||||||||||||||
Deferred rent | 187,332 | 108,739 | 87,586 | 87,586 | ||||||||||||||||||||||||
Capital lease obligation, net of current portion | 1,744 | — | — | — | ||||||||||||||||||||||||
Preferred stock warrant liabilities | 1,052,186 | 912,901 | 1,085,404 | 1,085,404 | ||||||||||||||||||||||||
Commitments and contingencies | ||||||||||||||||||||||||||||
Convertible preferred stock, $0.01 par value; 20,000,000 shares authorized: | ||||||||||||||||||||||||||||
Series A convertible preferred stock, 1,589,600 shares authorized; 1,550,383, 1,552,282 and 1,554,982 shares issued and outstanding at December 31, 2006 and 2007 and March 31, 2008 (unaudited), respectively; liquidation preference of $4,913,742 at March 31, 2008 (unaudited); 0 shares issued and outstanding, pro forma (unaudited) | 4,899,210 | 4,905,210 | 4,913,742 | — | ||||||||||||||||||||||||
Series B convertible preferred stock, 4,515,858 shares authorized; 4,302,040, 4,302,040 and 4,302,040 shares issued and outstanding at December 31, 2006 and 2007, and March 31, 2008 (unaudited), respectively; liquidation preference of $11,830,611 at March 31, 2008 (unaudited); 0 shares issued and outstanding, pro forma (unaudited) | 11,830,611 | 11,830,611 | 11,830,611 | — | ||||||||||||||||||||||||
Series C convertible preferred stock, 6,850,000 shares authorized; 4,045,643, 6,399,635 and 6,405,089 shares issued and outstanding at December 31, 2006 and 2007, and March 31, 2008 (unaudited), respectively; liquidation preference of $17,614,000 at March 31, 2008 (unaudited); 0 shares issued and outstanding, pro forma (unaudited) | 11,125,513 | 17,599,002 | 17,614,000 | — | ||||||||||||||||||||||||
Series D convertible preferred stock, 3,450,000 shares authorized; 0, 0, and 3,423,258 shares issued and outstanding at December 31, 2006 and 2007, and March 31, 2008 (unaudited), respectively; liquidation preference of $11,125,589 at March 31, 2008 (unaudited); 0 shares issued and outstanding, pro forma (unaudited) | — | — | 11,125,589 | — | ||||||||||||||||||||||||
Deferred rent and other long-term liabilities | 1,976 | 2,252 | 2,389 | 2,389 | ||||||||||||||||||||||||
Related party notes, long-term portion, net | 1,653 | — | — | — | ||||||||||||||||||||||||
Subordinated promissory notes, long term portion, net | 11,016 | — | — | — | ||||||||||||||||||||||||
Commitments and contingencies: | ||||||||||||||||||||||||||||
Convertible preferred stock, $0.01 par value; 30,000,000 shares authorized: | ||||||||||||||||||||||||||||
Series C Convertible Preferred Stock, 6,850,000 shares authorized; 6,414,689 shares issued and outstanding at December 31, 2010 and 6,417,680 shares issued and outstanding at December 31, 2011 and June 30, 2012; liquidation preference in the aggregate of $17,640 at December 31, 2010 and $17,647 at December 31, 2011 and June 30, 2012; 0 shares issued and outstanding, pro forma (unaudited) | 17,640 | 17,647 | 17,647 | — | ||||||||||||||||||||||||
Series A Convertible Preferred Stock, 1,589,600 shares authorized; 1,579,227 shares issued and outstanding at December 31, 2010 and 2011 and June 30, 2012; liquidation preference in the aggregate of $4,990 at December 31, 2010 and 2011 and June 30, 2012; 0 shares issued and outstanding, pro forma (unaudited) | 4,990 | 4,990 | 4,990 | — | ||||||||||||||||||||||||
Series B Convertible Preferred Stock, 4,515,858 shares authorized; 4,468,369 shares issued and outstanding at December 31, 2010 and 2011 and June 30, 2012; liquidation preference in the aggregate of $12,288 at December 31, 2010 and 2011 and June 30, 2012; 0 shares issued and outstanding, pro forma (unaudited) | 12,288 | 12,288 | 12,288 | — | ||||||||||||||||||||||||
Series D Convertible Preferred Stock, 3,423,258 shares authorized; 3,423,258 shares issued and outstanding at December 31, 2010 and 2011 and June 30, 2012; liquidation preference in the aggregate of $11,126 at December 31, 2010 and 2011 and June 30, 2012; 0 shares issued and outstanding, pro forma (unaudited) | 11,126 | 11,126 | 11,126 | — | ||||||||||||||||||||||||
Series E Convertible Preferred Stock, 5,500,000 shares authorized; 0 shares issued and outstanding of December 31, 2010 and 685,555 shares issued and outstanding at December 31, 2011 and June 30, 2012; liquidation preference in the aggregate of $1,885 at December 31, 2011 and June 30, 2012; 0 shares issued and outstanding, pro forma (unaudited) | — | 1,292 | 1,292 | — | ||||||||||||||||||||||||
Stockholders’ deficit: | ||||||||||||||||||||||||||||
Common stock, $0.01 par value, 50,000,000 shares authorized; 6,139,438, 7,245,668 and 7,285,668 shares issued and outstanding at December 31, 2006 and 2007, and March 31, 2008 (unaudited), respectively; 24,526,019 issued and outstanding, pro forma (unaudited) | 61,394 | 72,456 | 72,856 | 245,260 | ||||||||||||||||||||||||
Additional paid-in capital | (949,554 | ) | (186,784 | ) | (19,096 | ) | 45,292,442 | |||||||||||||||||||||
Common stock, $0.01 par value, 220,000,000 shares authorized; 7,974,831, 7,987,081 and, 8,037,081 shares issued and outstanding at December 31, 2010 and 2011 and June 30, 2012, respectively; 26,297,227 issued and outstanding, pro forma (unaudited) | 80 | 80 | 80 | 262 | ||||||||||||||||||||||||
Additional paid-in-capital | 12,646 | 14,288 | 14,917 | 62,078 | ||||||||||||||||||||||||
Accumulated deficit | (21,769,424 | ) | (31,062,146 | ) | (34,269,171 | ) | (34,269,171 | ) | (83,621 | ) | (93,618 | ) | (93,159 | ) | (93,159 | ) | ||||||||||||
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Total stockholders’ deficit | (22,657,584 | ) | (31,176,474 | ) | (34,215,411 | ) | 11,268,531 | (70,895 | ) | (79,250 | ) | (78,162 | ) | (30,819 | ) | |||||||||||||
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Total liabilities and stockholders’ deficit | $ 7,929,036 | $ 6,981,671 | $ 14,210,107 | $ 14,210,107 | $ | 5,924 | $ | 5,412 | $ | 7,115 | $ | 7,115 | ||||||||||||||||
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See accompanying notes.notes to financial statements.
Statements of operationsOperations and Comprehensive Income/(Loss)
Nine months ended December 31, 2005 | Years ended December 31, | Three months ended March 31, | |||||||||||||
2006 | 2007 | 2007 | 2008 | ||||||||||||
(Unaudited) | |||||||||||||||
Product sales | $ 311,068 | $ 499,961 | $ 1,606,631 | $ 141,045 | $ 185,161 | ||||||||||
Cost of sales | 1,005,184 | 2,078,846 | 3,654,519 | 600,017 | 952,547 | ||||||||||
Gross loss | (694,116 | ) | (1,578,885 | ) | (2,047,888 | ) | (458,972 | ) | (767,386 | ) | |||||
Operating expenses: | |||||||||||||||
Research and development | 1,796,733 | 2,296,165 | 2,565,926 | 652,869 | 667,028 | ||||||||||
General and administrative | 826,567 | 1,474,902 | 2,423,077 | 482,049 | 666,705 | ||||||||||
Sales and marketing | 670,486 | 975,019 | 2,685,432 | 553,183 | 866,557 | ||||||||||
Total operating expenses | 3,293,786 | 4,746,086 | 7,674,435 | 1,688,101 | 2,200,290 | ||||||||||
Loss from operations | (3,987,902 | ) | (6,324,971 | ) | (9,722,323 | ) | (2,147,073 | ) | (2,967,676 | ) | |||||
Interest income | 65,765 | 70,316 | 283,692 | 95,852 | 52,177 | ||||||||||
Interest expense | (370 | ) | (235,029 | ) | (1,206 | ) | (347 | ) | (101,640 | ) | |||||
Other income/(expense), net | 244 | 412 | 8,210 | 183 | (9,203 | ) | |||||||||
Change in fair value of warrant liabilities | 32,776 | 75,916 | 138,905 | 32,742 | (180,683 | ) | |||||||||
Net loss | (3,889,487 | ) | (6,413,356 | ) | (9,292,722 | ) | (2,018,643 | ) | (3,207,025 | ) | |||||
Accretion to liquidation value of preferred stock | (447,108 | ) | (817,823 | ) | (74,451 | ) | (76,332 | ) | 94,824 | ||||||
Net loss attributable to common stockholders | $(4,336,595 | ) | $(7,231,179 | ) | $(9,367,173 | ) | $(2,094,975 | ) | $(3,112,201 | ) | |||||
Basic and diluted net loss per share attributable to common stockholders | $ (0.76 | ) | $ (1.19 | ) | $ (1.40 | ) | $ (0.34 | ) | $ (0.43 | ) | |||||
Shares used to compute basic and diluted net loss per share attributable to common stockholders | 5,708,755 | 6,065,728 | 6,671,063 | 6,167,771 | 7,276,657 | ||||||||||
Years ended December 31, | Six months ended June 30, | |||||||||||||||
2010 | 2011 | 2011 | 2012 | |||||||||||||
(unaudited) | ||||||||||||||||
(in thousands except per share amounts) | ||||||||||||||||
Net revenue | $ | 7,504 | $ | 8,005 | $ | 3,495 | $ | 8,693 | ||||||||
Cost of sales | 7,666 | 6,019 | 2,800 | 3,390 | ||||||||||||
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Gross profit/(loss) | (162 | ) | 1,986 | 695 | 5,303 | |||||||||||
Operating expenses | ||||||||||||||||
Research and development | 3,560 | 2,768 | 1,345 | 1,112 | ||||||||||||
General and administrative | 5,376 | 3,360 | 1,509 | 1,496 | ||||||||||||
Sales and marketing | 4,717 | 2,672 | 1,286 | 954 | ||||||||||||
Impairment of film coating equipment | 981 | — | — | — | ||||||||||||
Initial public offering costs — terminated offering | 1,752 | — | — | — | ||||||||||||
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Total operating expenses | 16,386 | 8,800 | 4,140 | 3,562 | ||||||||||||
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Income/(loss) from operations | (16,548 | ) | (6,814 | ) | (3,445 | ) | 1,741 | |||||||||
Interest expense, net | (4,109 | ) | (3,626 | ) | (2,132 | ) | (1,579 | ) | ||||||||
Other income/(expense), net | 36 | (2 | ) | (2 | ) | 3 | ||||||||||
Change in fair value of warrant liabilities | 926 | 445 | 515 | 294 | ||||||||||||
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Net income/(loss) | $ | (19,695 | ) | $ | (9,997 | ) | $ | (5,064 | ) | $ | 459 | |||||
Net income/(loss) per share attributable to common stockholders | ||||||||||||||||
Basic | $ | (2.52 | ) | $ | (1.25 | ) | $ | (0.63 | ) | $ | 0.06 | |||||
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Diluted | $ | 0.02 | ||||||||||||||
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Shares used to compute net income/(loss) per share attributable to common stockholders | ||||||||||||||||
Basic | 7,823,355 | 7,979,527 | 7,978,984 | 8,028,070 | ||||||||||||
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Diluted | 26,288,216 | |||||||||||||||
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See accompanying notes.notes to financial statements.
Statements of convertible preferred stockConvertible Preferred Stock and stockholders’ deficitStockholders’ Deficit
(in thousands, except for share and per share data)
Series A preferred stock | Series B preferred stock | Series C preferred stock | Series D preferred stock | Common stock | Additional paid-in capital | Accumulated deficit | Total stockholders’ deficit | |||||||||||||||||||||
Shares | Issued amount | Shares | Issued amount | Issuable amount | Shares | Issued Amount | Shares | Issued amount | Shares | Issued amount | ||||||||||||||||||
Balance at March 31, 2005 | 1,550,383 | $ 4,899,210 | 2,177,543 | $ 5,988,243 | $ 4,355,453 | — | $ — | — | $ — | 5,667,900 | $ 56,679 | $ 47,407 | $(11,466,581) | $(11,362,495) | ||||||||||||||
Issuance of common stock upon exercise of stock options | — | — | — | — | — | — | — | — | — | 134,500 | 1,345 | 53,468 | — | 54,813 | ||||||||||||||
Stock-based compensation related to issuance of stock options to consultants | — | — | — | — | — | — | — | — | — | — | — | 40,513 | — | 40,513 | ||||||||||||||
Issuance of Series B convertible preferred stock at $2.75 per share, net of issuance costs of $4,278 | — | — | 2,105,210 | 5,785,050 | — | — | — | — | — | — | — | — | — | — | ||||||||||||||
Issuance of Series B convertible preferred stock in consideration for Series B financing services | — | — | 19,287 | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||
Issuance of Series B convertible preferred stock issuable at $2.75 per share | — | — | — | — | (4,355,453) | — | — | — | — | — | — | — | — | — | ||||||||||||||
Beneficial conversion related to issuance of Series C warrants in conjunction with convertible debt | — | — | — | — | — | — | — | — | — | — | — | 39,898 | — | 39,898 | ||||||||||||||
Issuance of common stock warrants in connection with the sale of Series B convertible preferred stock | — | — | — | (30,576) | — | — | — | — | — | — | — | 30,576 | — | 30,576 | ||||||||||||||
Issuance of Series B warrants in connection with the sale of Series B convertible preferred stock | — | — | — | (359,214) | — | — | — | — | — | — | — | — | — | — | ||||||||||||||
Accretion to liquidation value of convertible preferred stock | — | — | — | 447,108 | — | — | — | — | — | — | — | (447,108) | — | (447,108) | ||||||||||||||
Net loss and comprehensive loss | — | — | — | — | — | — | — | — | — | — | — | — | (3,889,487) | (3,889,487) | ||||||||||||||
Balance at December 31, 2005 | 1,550,383 | $ 4,899,210 | 4,302,040 | $11,830,611 | $ — | — | $ — | — | $ — | 5,802,400 | $ 58,024 | $ (235,246) | $(15,356,068) | $(15,533,290) | ||||||||||||||
Series A Convertible Preferred Stock | Series B Convertible Preferred Stock | Series C Convertible Preferred Stock | Series D Convertible Preferred Stock | Series E Convertible Preferred Stock | Common Stock | Additional paid-in capital | Accumulated Deficit | Total Stockholders’ Deficit | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Issued Amount | Shares | Issued Amount | Shares | Issued Amount | Shares | Issued Amount | Shares | Issued Amount | Shares | Issued Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at January 1, 2010 | 1,579,227 | $ | 4,990 | 4,302,040 | $ | 11,831 | 6,411,089 | $ | 17,630 | 3,423,258 | $ | 11,126 | — | $ | — | 7,748,931 | $ | 78 | $ | 6,459 | $ | (63,926 | ) | $ | (57,389 | ) | ||||||||||||||||||||||||||||||||||||
Issuance of common stock for exercise of stock options | — | — | — | — | — | — | — | — | — | — | 225,900 | 2 | 172 | — | 174 | |||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation related to issuance of stock options to employees | — | — | — | — | — | — | — | — | — | — | — | — | 2,763 | — | 2,763 | |||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation related to issuance of stock options to consultants | — | — | — | — | — | — | — | — | — | — | — | — | 5 | — | 5 | |||||||||||||||||||||||||||||||||||||||||||||||
Issuance of stock in connection with the exercise of warrants | — | — | 166,329 | 457 | 3,600 | 10 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock warrants in connection with subordinated notes | — | — | — | — | — | — | — | — | — | — | — | — | 3,082 | — | 3,082 | |||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock warrants in lieu of services | — | — | — | — | — | — | — | — | — | — | — | — | 165 | — | 165 | |||||||||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | — | (19,695 | ) | (19,695 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2010 | 1,579,227 | $ | 4,990 | 4,468,369 | $ | 12,288 | 6,414,689 | $ | 17,640 | 3,423,258 | $ | 11,126 | — | $ | — | 7,974,831 | $ | 80 | $ | 12,646 | $ | (83,621 | ) | $ | (70,895 | ) | ||||||||||||||||||||||||||||||||||||
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Issuance of common stock for exercise of stock options | — | — | — | — | — | — | — | — | — | — | 12,250 | — | 6 | — | 6 | |||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation related to issuance of stock options to employees | — | — | — | — | — | — | — | — | — | — | — | — | 1,577 | — | 1,577 | |||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation related to issuance of stock options to consultants | — | — | — | — | — | — | — | — | — | — | — | — | 113 | — | 113 | |||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Series E convertible preferred stock at $2.75 per share in conjunction with conversion of debt, net of issuance costs of $12,186 and fair value of common stock warrants of $593,526 | — | — | — | — | — | — | — | — | 685,555 | 1,292 | — | — | 594 | — | 594 | |||||||||||||||||||||||||||||||||||||||||||||||
Issuance of stock in connection with the exercise of warrants | — | — | — | — | 2,991 | 7 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
Modification of common stock warrants in connection with subordinated notes | (648 | ) | (648 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | — | (9,997 | ) | (9,997 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2011 | 1,579,227 | $ | 4,990 | 4,468,369 | $ | 12,288 | 6,417,680 | $ | 17,647 | 3,423,258 | $ | 11,126 | 685,555 | $ | 1,292 | 7,987,081 | $ | 80 | $ | 14,288 | $ | (93,618 | ) | $ | (79,250 | ) | ||||||||||||||||||||||||||||||||||||
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See accompanying notes.notes to financial statements.
Statements of convertible preferred stockConvertible Preferred Stock and stockholders’ deficit — Stockholders’ Deficit
(in thousands, except for share and per share data)
(continued)
Series A preferred stock | Series B preferred stock | Series C preferred stock | Series D preferred stock | Common stock | Additional paid-in capital | Accumulated deficit | Total stockholders’ deficit | ||||||||||||||||||||||||||||||||||
Shares | Issued amount | Shares | Issued amount | Issuable amount | Shares | Issued amount | Shares | Issued amount | Shares | Issued amount | |||||||||||||||||||||||||||||||
Balance at December 31, 2005 | 1,550,383 | $ | 4,899,210 | 4,302,040 | $ | 11,830,611 | $ | — | — | $ | — | — | $ | — | 5,802,400 | $ | 58,024 | $ | (235,246 | ) | $ | (15,356,068 | ) | $ | (15,533,290 | ) | |||||||||||||||
Issuance of common stock upon exercise of stock options | — | — | — | — | — | — | — | — | — | 337,038 | 3,370 | 46,260 | — | 49,630 | |||||||||||||||||||||||||||
Employee stock-based compensation | — | — | — | — | — | — | — | — | — | — | — | 10,186 | — | 10,186 | |||||||||||||||||||||||||||
Stock-based compensation related to issuance of stock options to consultants | — | — | — | — | — | — | — | — | — | — | — | 12,217 | — | 12,217 | |||||||||||||||||||||||||||
Issuance of Series C convertible preferred stock at $2.75 per share, net of issuance costs of $92,818 | — | — | — | — | — | 3,133,825 | 8,525,201 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Issuance of Series C convertible preferred stock in conjunction with conversion of debt and related accrued interest | — | — | — | — | — | 861,818 | 2,455,200 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Beneficial conversion feature related to issuance of Series C warrants in conjunction with convertible debt | — | — | — | — | — | — | — | — | — | — | — | 34,852 | — | 34,852 | |||||||||||||||||||||||||||
Issuance of shares of Series C convertible preferred stock in consideration for Series C financing services | — | — | — | — | — | 50,000 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Issuance of preferred stock warrants in connection with Series C preferred stock financing | — | — | — | — | — | — | (672,711 | ) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
Accretion to liquidation value of convertible preferred stock | — | — | — | — | — | — | 817,823 | — | — | — | — | (817,823 | ) | — | (817,823 | ) | |||||||||||||||||||||||||
Net loss and comprehensive loss | — | — | — | — | — | — | — | — | — | — | — | — | (6,413,356 | ) | (6,413,356 | ) | |||||||||||||||||||||||||
Balance at December 31, 2006 | 1,550,383 | $ | 4,899,210 | 4,302,040 | $ | 11,830,611 | $ | — | 4,045,643 | $ | 11,125,513 | — | $ | — | 6,139,438 | $ | 61,394 | $ | (949,554 | ) | $ | (21,769,424 | ) | $ | (22,657,584 | ) | |||||||||||||||
Series A Convertible Preferred Stock | Series B Convertible Preferred Stock | Series C Convertible Preferred Stock | Series D Convertible Preferred Stock | Series E Convertible Preferred Stock | Common Stock | Additional paid-in capital | Accumulated Deficit | Total Stockholders’ Deficit | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Issued Amount | Shares | Issued Amount | Shares | Issued Amount | Shares | Issued Amount | Shares | Issued Amount | Shares | Issued Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for exercise of stock options | — | — | — | — | — | — | — | — | — | — | 50,000 | — | 12 | — | 12 | |||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation related to issuance of stock options to employees | — | — | — | — | — | — | — | — | — | — | — | — | 386 | — | 386 | |||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock warrants in connection with subordinated notes | — | — | — | — | — | — | — | — | — | — | 231 | 231 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | — | — | — | — | — | 459 | 459 | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2012 (unaudited) | 1,579,227 | $ | 4,990 | 4,468,369 | $ | 12,288 | 6,417,680 | $ | 17,647 | 3,423,258 | $ | 11,126 | 685,555 | $ | 1,292 | 8,037,081 | $ | 80 | $ | 14,917 | $ | (93,159 | ) | $ | (78,162 | ) | ||||||||||||||||||||||||||||||||||||
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See accompanying notes.notes to financial statements.
Statements of convertible preferred stock and stockholders’ deficit — (continued)Cash Flows
Series A preferred stock | Series B preferred stock | Series C preferred stock | Series D preferred stock | Common stock | Additional paid-in capital | Accumulated deficit | Total stockholders’ deficit | ||||||||||||||||||||||||||
Shares | Issued amount | Shares | Issued amount | Issuable amount | Shares | Issued amount | Shares | Issued amount | Shares | Issued amount | |||||||||||||||||||||||
Balance at December 31, 2006 | 1,550,383 | $ 4,899,210 | 4,302,040 | $11,830,611 | $ — | 4,045,643 | $11,125,513 | — | $ — | 6,139,438 | $ 61,394 | $ (949,554 | ) | $(21,769,424 | ) | $(22,657,584 | ) | ||||||||||||||||
Issuance of common stock upon exercise of stock options | — | — | — | — | — | — | — | — | — | 906,230 | 9,062 | 228,092 | — | 237,154 | |||||||||||||||||||
Employee stock-based compensation | — | — | — | — | — | — | — | — | — | — | — | 131,716 | — | 131,716 | |||||||||||||||||||
Stock-based compensation related to issuance of stock options to consultants | — | — | — | — | — | — | — | — | — | — | — | 5,649 | — | 5,649 | |||||||||||||||||||
Issuance of Series C convertible preferred stock at $2.75 per share, net of issuance costs of $30,456 | — | — | — | — | — | 2,353,992 | 6,443,022 | — | — | — | — | — | — | — | |||||||||||||||||||
Issuance of Series A preferred stock upon exercise of warrants | 1,899 | 7,501 | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||
Reclassification of warrant liability upon exercise of warrants | — | 380 | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||
Issuance of common stock in exchange for accrued compensation | — | — | — | — | — | — | — | — | 200,000 | 2,000 | 425,899 | — | 427,899 | ||||||||||||||||||||
Issuance of common stock warrants in connection with the sale of Series C convertible preferred stock | — | — | — | — | — | — | (45,865 | ) | — | — | — | — | 45,865 | — | 45,865 | ||||||||||||||||||
Accretion to liquidation value of convertible preferred stock | — | (1,881 | ) | — | — | — | — | 76,332 | — | — | — | — | (74,451 | ) | — | (74,451 | ) | ||||||||||||||||
Net loss and comprehensive loss | — | (9,292,722 | ) | (9,292,722 | ) | ||||||||||||||||||||||||||||
Balance at December 31, 2007 | 1,552,282 | $ 4,905,210 | 4,302,040 | $11,830,611 | $ — | 6,399,635 | $17,599,002 | — | $ — | 7,245,668 | $ 72,456 | $ (186,784 | ) | $(31,062,146 | ) | $(31,176,474 | ) | ||||||||||||||||
Years ended December 31, | Six months ended June 30, | |||||||||||||||
2010 | 2011 | 2011 | 2012 | |||||||||||||
(unaudited) | ||||||||||||||||
(in thousands) | ||||||||||||||||
Operating activities | ||||||||||||||||
Net income/(loss) | $ | (19,695 | ) | $ | (9,997 | ) | $ | (5,064 | ) | $ | 459 | |||||
Adjustments to reconcile to changes in cash and cash equivalents: | ||||||||||||||||
Depreciation and amortization | 823 | 675 | 373 | 338 | ||||||||||||
Amortization of debt discount/premium | 2,322 | 1,592 | 1,142 | 674 | ||||||||||||
Amortization of deferred financing costs | 365 | 403 | 212 | 60 | ||||||||||||
Impairment of film coating equipment | 981 | — | — | — | ||||||||||||
Provision for doubtful accounts | (345 | ) | 14 | (5 | ) | 36 | ||||||||||
Reserve for excess and obsolete inventory | 314 | (16 | ) | (47 | ) | 89 | ||||||||||
Employee and nonemployee stock-based compensation | 2,933 | 1,690 | 554 | 386 | ||||||||||||
Change in fair value of stock warrant liabilities | (926 | ) | (445 | ) | (515 | ) | (294 | ) | ||||||||
Non-cash interest expense | 1,447 | 1,611 | 773 | 840 | ||||||||||||
Deferred rent | 715 | 311 | 115 | 153 | ||||||||||||
Changes in operating assets/liabilities | ||||||||||||||||
Accounts receivable | (405 | ) | (617 | ) | 88 | (1,132 | ) | |||||||||
Inventory | 1,379 | 25 | (78 | ) | (384 | ) | ||||||||||
Prepaid and other current assets | (657 | ) | (36 | ) | (48 | ) | (372 | ) | ||||||||
Accounts payable | 5,720 | 2,021 | 1,245 | (258 | ) | |||||||||||
Other current liabilities and accrued expenses | (1,857 | ) | (77 | ) | 137 | 37 | ||||||||||
Other long term liabilities | 150 | — | — | — | ||||||||||||
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Cash provided by/(used in) operating activities | (6,736 | ) | (2,846 | ) | (1,118 | ) | 632 | |||||||||
Investing activities | ||||||||||||||||
Purchase of property and equipment | (260 | ) | (5 | ) | — | (89 | ) | |||||||||
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Cash used in Investing Activities | (260 | ) | (5 | ) | — | (89 | ) | |||||||||
Financing activities | ||||||||||||||||
Proceeds from the issuance of common stock | 174 | 6 | 5 | 12 | ||||||||||||
Proceeds from the issuance of Series B preferred stock | 457 | — | — | — | ||||||||||||
Proceeds from the issuance of Series C preferred stock | 10 | 7 | 7 | — | ||||||||||||
Proceeds from the issuance of Series E preferred stock | — | 1,595 | — | — | ||||||||||||
Proceeds from issuance of promissory notes | 6,075 | 1,175 | 1,000 | 1,670 | ||||||||||||
Payment of promissory notes and accrued interest | (213 | ) | — | — | (1,977 | ) | ||||||||||
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Net cash provided by/(used in) financing activities | 6,503 | 2,783 | 1,012 | (295 | ) | |||||||||||
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Increase/(decrease) in cash and cash equivalents | (493 | ) | (68 | ) | (106 | ) | 248 | |||||||||
Cash and cash equivalents at the beginning of the period | 622 | 129 | 129 | 61 | ||||||||||||
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Cash and cash equivalents at the end of the period | $ | 129 | $ | 61 | $ | 23 | $ | 309 | ||||||||
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Supplemental disclosure of cash flow information: | ||||||||||||||||
Interest paid | $ | 20 | $ | 11 | $ | 6 | $ | 280 | ||||||||
Income taxes paid | $ | 9 | $ | 29 | $ | — | $ | — | ||||||||
Non-cash investing and financing activities | ||||||||||||||||
Property and equipment acquired and included in accounts payable | $ | 60 | $ | — | $ | — | $ | — | ||||||||
Change in classification of domestic placement plan analyzers | $ | 48 | $ | 372 | $ | 271 | $ | 150 | ||||||||
Modifications to warrants and notes payable | $ | 1,369 | $ | 905 | $ | — | $ | 85 | ||||||||
Issuance of common stock warrants in connection with notes payable | $ | 1,713 | $ | 257 | $ | 198 | $ | 316 | ||||||||
Surrender of notes payable and related interest in exchange for Series E preferred stock | $ | — | $ | 290 | $ | — | $ | — | ||||||||
Issuance of common stock warrants in connection with issuance of Series E preferred stock | $ | — | $ | 594 | $ | — | $ | — |
See accompanying notes.notes to financial statements.
Statements of convertible preferred stock and stockholders’ deficit — (continued)
Series A preferred stock | Series B preferred stock | Series C preferred stock | Series D preferred stock | Common stock | Additional paid-in capital | Accumulated deficit | Total stockholders’ deficit | |||||||||||||||||||||||||||
Shares | Issued amount | Shares | Issued amount | Issuable amount | Shares | Issued amount | Shares | Issued amount | Shares | Issued amount | ||||||||||||||||||||||||
Balance at December 31, 2007 | 1,552,282 | $ 4,905,210 | 4,302,040 | $11,830,611 | $ — | 6,399,635 | $17,599,002 | — | $ — | 7,245,668 | $ 72,456 | $ (186,784 | ) | $(31,062,146 | ) | $(31,176,474 | ) | |||||||||||||||||
Issuance of common stock upon exercise of stock options (unaudited) | — | — | — | — | — | — | — | — | — | 40,000 | 400 | 12,100 | — | 12,500 | ||||||||||||||||||||
Employee stock-based compensation (unaudited) | — | — | — | — | — | — | — | — | — | — | — | 49,917 | — | 49,917 | ||||||||||||||||||||
Stock-based compensation related to issuance of stock options to consultants (unaudited) | — | — | — | — | — | — | — | — | — | — | — | 10,847 | — | 10,847 | ||||||||||||||||||||
Issuance of Series D convertible preferred stock at $3.25 in conjunction with conversion of debt and related accrued interest, net of issuance costs of $17,740 (unaudited) | — | — | — | — | — | — | — | 3,423,258 | 11,209,100 | — | — | — | — | — | ||||||||||||||||||||
Issuance of preferred stock upon exercise of warrants (unaudited) | 2,700 | 10,665 | — | — | — | 5,454 | 15,998 | — | — | — | — | — | — | — | ||||||||||||||||||||
Reclassification of warrant liability upon exercise of warrants (unaudited) | — | 540 | — | — | — | — | 7,640 | — | — | — | — | — | — | — | ||||||||||||||||||||
Accretion to liquidation value of convertible preferred stock (unaudited) | — | (2,673 | ) | — | — | — | — | (8,640 | ) | — | (83,511 | ) | — | — | 94,824 | — | 94,824 | |||||||||||||||||
Net loss and comprehensive loss (unaudited) | — | — | — | — | — | — | — | — | — | — | — | — | (3,207,025 | ) | (3,207,025 | ) | ||||||||||||||||||
Balance at March 31, 2008 (unaudited) | 1,554,982 | $ 4,913,742 | 4,302,040 | $11,830,611 | $ — | 6,405,089 | $17,614,000 | 3,423,258 | $11,125,589 | 7,285,668 | $ 72,856 | $ (19,096 | ) | $(34,269,171 | ) | $(34,215,411 | ) | |||||||||||||||||
See accompanying notes.
Statements of cash flows
Nine months ended December 31, 2005 | Year ended December 31, | Three months ended March 31, | ||||||||||||||||||
2006 | 2007 | 2007 | 2008 | |||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Operating Activities | ||||||||||||||||||||
Net loss | $ | (3,889,487 | ) | $ | (6,413,356 | ) | $ | (9,292,722 | ) | $ | (2,018,643 | ) | $ | (3,207,025 | ) | |||||
Adjustments to reconcile net loss to cash used in operating activities: | ||||||||||||||||||||
Amortization and depreciation | 37,605 | 199,422 | 420,882 | 81,193 | 133,994 | |||||||||||||||
Reserve for excess and obsolete inventory | 36,241 | 25,382 | 55,960 | — | 19,851 | |||||||||||||||
Employee stock-based compensation | — | 10,186 | 131,716 | 43,702 | 49,917 | |||||||||||||||
Non-employee stock-based compensation | 40,513 | 12,217 | 5,649 | 1,054 | 10,847 | |||||||||||||||
Non-cash employee compensation | — | — | 427,899 | — | — | |||||||||||||||
Revaluation of warrants to fair value | (32,776 | ) | (75,916 | ) | (138,905 | ) | (32,742 | ) | 180,683 | |||||||||||
Non-cash interest expense | — | 234,700 | — | — | 101,251 | |||||||||||||||
Changes in operating assets/liabilities | ||||||||||||||||||||
Accounts receivable | (138,183 | ) | (284,310 | ) | (447,877 | ) | 93,083 | 356,279 | ||||||||||||
Prepaid and other assets | (50,563 | ) | 64,755 | (9,168 | ) | (39,656 | ) | (112,811 | ) | |||||||||||
Inventory | (1,131,579 | ) | 482,755 | (834,146 | ) | (440,888 | ) | (725,749 | ) | |||||||||||
Accounts payable | 9,224 | 41,542 | 190,855 | 282,080 | 295,981 | |||||||||||||||
Other current liabilities | 165,322 | (185,390 | ) | 107,140 | (39,949 | ) | (331,519 | ) | ||||||||||||
Deferred Rent | 168,421 | 48,728 | (64,533 | ) | (15,128 | ) | (18,144 | ) | ||||||||||||
Cash used in operating activities | (4,785,262 | ) | (5,839,285 | ) | (9,447,250 | ) | (2,085,894 | ) | (3,246,445 | ) | ||||||||||
Investing Activities | ||||||||||||||||||||
Purchase of property and equipment | (140,948 | ) | (715,099 | ) | (890,004 | ) | (238,058 | ) | (234,998 | ) | ||||||||||
Purchase of licenses | — | (75,000 | ) | (141,066 | ) | — | — | |||||||||||||
Cash used in investing activities | (140,948 | ) | (790,099 | ) | (1,031,070 | ) | (238,058 | ) | (234,998 | ) | ||||||||||
Financing Activities | ||||||||||||||||||||
Payments on capital leases | (11,074 | ) | (3,603 | ) | (2,141 | ) | (516 | ) | (567 | ) | ||||||||||
Proceeds of exercise of common stock options | 54,813 | 49,630 | 237,154 | 56,250 | 12,500 | |||||||||||||||
Proceeds of exercise of warrants | — | — | 7,501 | — | 26,663 | |||||||||||||||
Proceeds from sale of Series B preferred stock, net | 1,429,597 | — | — | — | — | |||||||||||||||
Proceeds from sale of Series B preferred stock issuable | — | — | — | — | — | |||||||||||||||
Proceeds from sale of Series C preferred stock, net | — | 8,525,201 | 6,443,022 | 6,443,022 | — | |||||||||||||||
Proceeds from sale of Series D preferred stock, net | — | — | — | — | (17,740 | ) | ||||||||||||||
Proceeds from issuance of promissory notes | 1,265,000 | 1,105,000 | 1,000,000 | — | 10,125,589 | |||||||||||||||
Net cash provided by financing activities | 2,738,336 | 9,676,228 | 7,685,536 | 6,498,756 | 10,146,445 | |||||||||||||||
Increase/(decrease) in cash and cash equivalents | (2,187,874 | ) | 3,046,844 | (2,792,784 | ) | 4,174,804 | 6,665,002 | |||||||||||||
Cash at the beginning of the period | 4,548,651 | 2,360,777 | 5,407,621 | 5,407,621 | 2,614,837 | |||||||||||||||
Cash at the end of the period | $ | 2,360,777 | $ | 5,407,621 | $ | 2,614,837 | $ | 9,582,425 | $ | 9,279,839 | ||||||||||
Supplement disclosures of cash flow information: | ||||||||||||||||||||
Cash paid for interest | $ | 370 | $ | 329 | $ | 1,206 | $ | 347 | $ | 389 | ||||||||||
Cash paid for taxes | $ | 800 | $ | 800 | $ | — | $ | — | $ | 1,600 | ||||||||||
Supplement disclosures of non cash investing and financing information: | ||||||||||||||||||||
Accretion to liquidation value of preferred stock | $ | 447,108 | $ | 817,823 | $ | 74,451 | $ | 76,332 | $ | (94,824) | ||||||||||
Valuation of preferred stock warrants issued (including beneficial conversion feature) | $ | 439,010 | $ | 742,415 | $ | — | $ | — | $ | — | ||||||||||
Valuation of common stock warrants issued | $ | 30,576 | $ | — | $ | 45,865 | $ | 45,865 | $ | — | ||||||||||
Conversion of promissory notes to preferred stock | $ | — | $ | 2,370,000 | $ | — | $ | — | $ | 11,125,589 | ||||||||||
See accompanying notes.
Notes to financial statementsFinancial Statements
1. Organization, Liquidity and Management’s Plan, and Summary of Significant Accounting Policies
(Information as of March 31, 2008June 30, 2012 and thereafter and for the threesix months ended June 30, 2011 and 2012 is unaudited)
March 31, 2007 and 2008 is unaudited)
1. Organization and summary of significant accounting policies
Organization and business
AutoGenomics, Inc., or the Company, incorporated in California and commenced its operations on April 7, 1999. In October 2008, the Company reincorporated in Delaware. The Company designs, develops, manufactures and markets a fully integrated molecular diagnostics system called the INFINITI system that includes its highly automated bench-top INFINITI Analyzer, which has the versatility to run a large menu of genetic tests. The Company markets its products in the United States and internationally.
Liquidity and management’s plan
As of June 30, 2012, the Company did not have sufficient working capital to fund its planned operations through December 31, 2012 without additional financing. The Company is engagedcurrently in default on approximately $14.8 million in principal amount of its outstanding promissory notes. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the manufacturingnormal course of business. A successful transition to attaining profitable operations is dependent upon achieving a level of positive cash flows adequate to support the Company’s cost structure. Until that time, the Company may need to raise additional financing. While the Company actively seeks additional financing to fund its development efforts, to commercialize its technologies and marketingto fund its other business activities, there is no assurance such financing will be available to the Company when needed or that such financing would be available under favorable terms. If the Company is unable to obtain sufficient funding, it may be required to significantly curtail its planned operations, which may have a material, adverse impact on its ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of a fully automatedrecorded asset amounts and integrated solutionclassification of liabilities that might be necessary should the Company be forced to take any such actions.
Unaudited interim financial statements
The financial statements as of June 30, 2012 and for the rapidly growing molecular diagnostics industry and shipped its first products in 2005.
Basis of presentation
The Company changed its fiscal year-end from March 31 to December 31 effective for the fiscal period ending December 31, 2005.
The accompanying balance sheet as of March 31, 2008, the statements of operations and cash flows for the threesix months ended March 31, 2007June 30, 2011 and 2008, and the statement of convertible preferred stock and stockholders’ deficit for the three months ended March 31, 20082012 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annualaudited financial statements and, in the opinion of management, reflectinclude all adjustments, which include onlyconsisting of normal recurring adjustments, considered necessary for a fair statement ofto state fairly the Company’s financial position as of March 31, 2008 andinformation set forth therein, in accordance with generally accepted accounting principles, or GAAP.
The results of operations and cash flows for the three monthsaudited years ended MarchDecember 31, 20072010 and 2008. The financial data2011 and other information disclosed in these notes to the financial statements related to the three month periods are unaudited. The results of the three monthsunaudited interim period ended March 31, 2008June 30, 2012 are not necessarily indicative of the results towhich may be expected for the year ending December 31, 2008 orreported for any other interim period or for any future year.the year ending December 31, 2012.
Unaudited Pro Forma Balance Sheet Information
The unaudited pro forma stockholders’ deficit information in the accompanying balance sheet assumes the conversion of all outstanding shares of convertible preferred stock into 18,260,146 shares of common stock in connection with the completion of the offering referred to in this prospectus, which in turn assumes a completed offering that results in proceeds to the Company of greater than $25 million. There can be no assurance that this offering will be completed.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United StatesGAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made to the accompanying notes to the financial statements. The Company’s critical accounting policies that involve significant judgment and estimates include revenue recognition, accounts receivable regarding the same, inventory reserve, warranty reserve, stock-based compensation, valuation of debt and equity instruments, valuation of deferred taxes, and useful lives of property and equipment, including the potential impairment of capital assets. Actual results could differ from those estimates.estimates and assumptions.
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Concentration of credit risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents and accounts receivable. The Company limits its exposure to credit loss by placing its cash with high credit qualitycredit-quality financial institutions. At times, such deposits may be in excess of insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents.
The Company makes judgments as to its ability to collect outstanding receivables and provides allowance for a portion of receivables when collection becomes doubtful. Provisions are made
AutoGenomics, Inc.
Notes to financial statements — (continued)
(Information as of March 31, 2008 and thereafter and for the three months ended
March 31, 2007 and 2008 is unaudited)
based upon a specific review of significant outstanding invoices. If the Company’s future ability to collect outstanding receivables or if the financial condition of customers were to deteriorate, resulting in impairment of their ability to make payments, an increase in the provision for doubtful accounts may be required. Through March 31, 2008, the Company has not recorded a provision for doubtful accounts and has not written off any uncollectible accounts receivable.
For the nine monthsyears ended December 31, 20052010 and 2011 and the six months ended June 30, 2011 and 2012, two customers, three customers, one customer and two customers accounted for 80%27%, 39%, 16%, and 20%, respectively,61% of product sales. For the year endedsales, respectively.
As of December 31, 2006,2010 and 2011 and June 30, 2012, one customer, three customers and two customers accounted for 42%22%, 40%70% and 10%, respectively,67% of product sales. Foraccounts receivable, respectively.
Sales outside the year ended December 31, 2007, one customerUnited States accounted for 21% of product sales. In addition, product sales to foreign countries accounted for 20%52%, 82%22%, 42% and 30%, respectively,7% of product sales for the nine months ended December 31, 2005 and the years ended December 31, 20062010 and 2007.
As of December 31, 2006, two customers accounted for 48%2011 and 46%, respectively, of accounts receivable. As of December 31, 2007, three customers accounted for 39%, 13%the six months ended June 30, 2011 and 12%, respectively, of accounts receivable.2012, respectively.
Fair value of financial instruments
The carrying amounts shown for the Company’s cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued expenses approximate their fair value due to the short-term nature of these items. The carrying amount of thecommon stock and convertible preferred stock warrant liabilities represents their respective fair valuevalues (see Note 5).
The carrying value of the notes payable approximates fair value principally because of their short-term nature. Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The current accounting guidance for fair value measurements defines a three-level valuation hierarchy for disclosures as follows:
Level I — Unadjusted quoted prices in active markets for identical assets or liabilities;
Level II — Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data; and
Level III — Unobservable inputs that are supported by little or no market activity, which requires the Company to develop its own assumptions.
The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s financial instruments consist of Level I assets and Level III liabilities. Level I assets include money market funds. Level III liabilities consist of the convertible preferred and common stock warrant liabilities. The fair values of the outstanding convertible preferred and common stock warrants are measured using a Black-Scholes valuation model. The Company determined that using alternative valuation models, such as a Monte Carlo simulation model, would result inInventoryde minimus differences.
A company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that otherwise would not be recognized at inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If the use of fair value is elected, any upfront costs and fees related to the item such as debt issuance costs must be recognized in earnings and cannot be deferred. The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. Unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings and any changes in fair value are recognized in earnings. The Company has elected not to apply the fair value option to its financial assets and liabilities.
Segment
The Company’s business is considered as operating in one segment based upon the Company’s organizational structure, the way in which the operations are managed and evaluated and the manner in which the Company records its financial information. All of the Company’s assets are located, and all of its sales originate, in the United States.
Accounts receivable and allowance for doubtful accounts
The Company performs ongoing credit evaluations of its customers. Accounts receivable are recorded at invoiced amounts, net of the Company’s estimated allowances for doubtful accounts. The allowance for doubtful accounts is based on an assessment of the Company’s ability to collect on customer accounts receivable. The Company regularly reviews the allowance by considering certain factors such as historical experience, industry data, credit quality, age of accounts receivable balances and current economic conditions that may affect a customer’s ability to pay. In cases where the Company is aware of circumstances that may impair a customer’s ability to meet their financial obligations, the Company records a specific allowance against amounts due from the customer and thereby reduces the net recognized receivable to the amount the Company reasonably believes will be collected. The Company writes-off accounts receivable against the allowance when it determines the balance is uncollectible and no longer actively pursues collection of the receivable.
The following table summarizes the activity in the allowance for doubtful accounts during the years ended December 31, 2010 and 2011 and the six months ended June 30, 2012:
Balance at beginning of period | Charged to costs and expenses | Allowance reductions/ write-offs | Balance at end of period | |||||||||||||
(in thousands) | ||||||||||||||||
For the year ended December 31, 2010 | $ | 382 | $ | 38 | $ | (382 | ) | $ | 38 | |||||||
For the year ended December 31, 2011 | $ | 38 | $ | 38 | $ | (24 | ) | $ | 52 | |||||||
For the six months ended June 30, 2012 (unaudited) | $ | 52 | $ | 36 | $ | — | $ | 88 |
Inventory, net
The Company reports its inventories net of its reserve for slow-moving and obsolete parts. Inventories are statedvalued at the lower of cost (first-in, first-out) or market value using the first-in first-out method and include direct labor, materials, and manufacturing overhead. The Company periodically reviews inventory for evidence of slow-moving or obsolete parts, and the estimated reserve is based on management’s reviews of inventories on hand, compared to estimatedestimates of future usage and sales, shelf-life assumptions, and assumptions about the likelihood of obsolescence. Inventory costs related to excess capacity are not capitalized as the recoverability of such costs is not certain.
Deferred offering costs
Deferred offering costs, which consist of direct incremental legal and accounting fees relating to planned financing activities, are capitalized. The deferred offering costs will be offset against the Company’s initial public offering proceeds upon the consummation of the offering. In the event the offering is terminated, deferred offering costs will be expensed. No amounts were deferred as of December 31, 2011 and June 30, 2012. The Company terminated a planned initial public offering in 2010, and accordingly wrote-off $1.8 million of offering costs and recorded them as expenses.
Property, equipment and equipmentimprovements
Equipment, which consists ofProperty, equipment and improvements includes manufacturing, laboratory, office and computer equipment,hardware and software, and is stated at cost and depreciated over the estimated useful lives of the assets (three to seven years) using the straight-line method. Leasehold improvements are stated at cost and amortized over the lesser of the expected remaining lease term or the remaining useful life of the asset.
Equipment placed with customers under the Company’s “domestic placement plan” is recorded at the Company’s cost to manufacture and the related depreciation expense is charged to cost of sales over the equipment’s expected life of three years while in service.
Long-lived assets
In accordance with Statement of Financial Accounting Standards, or SFAS, No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, theThe Company periodically re-evaluates the original assumptions and rationale utilized in the establishment of the carrying value and estimated lives of all of its long-lived assets including property and equipment. The determinants
AutoGenomics, Inc.
Notes to financial statements — (continued)
(Information as of March 31, 2008 and thereafter and for the three months ended
March 31, 2007 and 2008 is unaudited)
used for this evaluation include management’s estimate of theeach such asset’s ability to generate positive income from operations and positive cash flow in future periods as well as the strategic significance of thesuch assets to the Company’s business objective.objectives. Included in operating costs in 2010 is an impairment loss of $1.0 million related to film coating equipment acquired in 2008. The Company has not recognized any impairment losses through March 31, 2008.fair value of assets is estimated using discounted cash flows based on unobservable inputs.
Intangible assets
Intangible assets are comprised of acquired licenses or sublicenses to technology covered by patents owned by third parties, and are amortized over the expected useful lives of these assets, generally five years. SFAS No. 142 requires purchasedNo conditions of impairment of these intangible assets other than goodwillwere noted as of December 31, 2010 and 2011 and June 30, 2012.
Warranty reserves
The Company provides a standard twelve month warranty on all INFINITI analyzers sold domestically. The cost of warranties is recognized in cost of sales at the time revenue is earned based on the estimated cost to repair over its warranty period. Cost of sales reflects not only estimated warranty expense for equipment sold in the current period, but also any changes in estimated warranty expense for the portion of the aggregate installed base that is under warranty. Estimated warranty expense is based on a variety of inputs, including historical performance in the customers’ environment, historical costs incurred in servicing equipment and projected
equipment reliability and service costs. Should actual service rates or costs differ from our estimates, which are based on historical data and projections of future costs, revisions to the estimated warranty liability would be amortized over their useful lives unlessrequired. The Company reviews these lives were determined to be indefinite.inputs, at a minimum, on an annual basis. The liability for warranties is included in accrued expenses in the accompanying balance sheets.
Convertible preferred stock warrantsPromissory notes
The Company has issued promissory notes pursuant to a number of private placements since 1999. The promissory note agreements permit the Company to issue up to $4.0 million of senior debt. At times these promissory notes were issued with separate warrants to purchase the Company’s common stock. These warrants are treated as equity instruments. The fair value of such warrants was determined using the Black-Scholes valuation model and was allocated as a debt discount using the relative fair value allocation method. The discount has been amortized using the effective interest method over the term of the related notes payable.
Common stock and convertible preferred stock warrant liabilities
The Company has issued a freestanding warrantswarrant to purchase shares of its convertible preferred stock.common stock that includes a provision that provides for the adjustment of the exercise price upon the occurrence of certain events. The Company follows Financial Accounting Standards Board, or FASB, Staff Position, or FSP, No. 150-5, Issuer’s Accounting under FASB Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares That Are Redeemable, an interpretation of SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. In accordance with FSP No. 150-5, freestanding warrants for shares that are redeemable should behas classified as liabilities on the balance sheet at fair value. These warrants should then be re-measured at each balance sheet date and any change in fair value should be recognized as a component of other income or expense.
The Company classifies the fair value of warrants to purchase shares of its convertible preferred stockthis warrant as a liability.liability on the balance sheet. The Company will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the warrants,this warrant or its exercise, at which time the liability will be reclassified into stockholders’ deficit.
Revenue recognition The Company records any change in fair value as a component of other income or expense.
The Company deriveshas issued freestanding warrants to purchase shares of its revenuesconvertible preferred stock. The Company has classified the fair value of these warrants as liabilities on the balance sheet as they correspond to the treatment of the preferred stock as temporary equity. The Company will continue to adjust the liability for changes in fair value until the earlier of the expiration of the warrants or their exercise, at which time the liability will be reclassified into stockholders’ deficit. The Company records any change in fair value as a component of other income or expense.
Revenue recognition
The Company’s revenue is primarily derived from sales of its INFINITI™ AnalyzerINFINITI analyzers and consumables (BioFilmChips™ Microarray and Intellipac™the BioFilmChip, Intellipac Reagent Management Modules). All significant obligationsModule, and various disposable items consumed by the diagnostic testing process, collectively referred to as consumables. The INFINITI analyzers and all consumables are offered through direct sale in domestic markets and through distributors in international markets. The INFINITI analyzers are also available to domestic customers through the Company’s domestic placement plan. In such arrangements, customers receive an analyzer at no direct cost in return for a commitment to purchase minimum quantities of consumables based on an agreed to pricing schedule over the contract period, which is usually two years, and which may be extended at the option of the customer or the Company. The Company reserves the option to cancel the arrangement and repossess the analyzer if minimum quantities of consumables are completed atnot purchased.
Revenue is recognized when persuasive evidence of an arrangement exists, the timeprice to the buyer is fixed or determinable, collectability is reasonably assured and risk of loss transfers, which is normally upon shipment. For sales that include customer specific acceptance criteria, revenue is recognized when the acceptance criteria have been met. Credit is extended based upon the evaluation of the customer’s financial condition. Collectability is assessed based on a number of factors, including payment history and the creditworthiness of a customer. If it is determined that collection is not reasonably assured, revenue is not recognized until collection becomes reasonably assured, which is generally upon receipt of cash. The Company does not request collateral from its customers. The Company recognizes revenue when the products have been shipped and the title and risk of loss have been transferred.
In instances where final acceptance of the product or system is required, revenue is deferred until all the acceptance criteria have been met. The rights granted in the domestic placement plan in exchange for a minimum annual purchase commitment constitutes a leasing arrangement. When a customer enters into a domestic placement plan agreement, the lease revenue is dependent on purchases of consumables, which is not measurable at the inception of the lease, and thus is accounted for as contingent rentals in their entirety. Accordingly, lease revenues are excluded from minimum lease payments but included in revenue as the consumables are purchased. The cost of the leased equipment is depreciated over its useful life and the expense included in cost of sales.
Arrangements to sell products to customers frequently include multiple deliverables, including the sale of the INFINITI analyzer combined with the sale of consumables. Sales to foreign distributors include training of their field agents whom will be responsible for installation, training, and maintenance for their customers internationally. The Company does not provide any price protection, rights of return, or extended payment terms to the equipment and consumables transfers.
Thedistributors. Prior to January 1, 2011 revenue was recognized upon completion of training as the Company recognizes revenue when all fourcould not establish vendor-specific objective evidence (“VSOE”) of the following criteria are met: (i) persuasive evidence thattraining. Beginning on January 1, 2011, the Company adopted new authoritative guidance on multiple-element arrangements, using the prospective method for all arrangements entered into or materially modified from the date of adoption. Under this new guidance, the Company allocates arrangement consideration in multiple-element revenue arrangements at the inception of an arrangement exists; (ii) deliveryto all deliverables or those packages in which all components of the products and/or services has occurred; (iii)package are delivered at the same time, based on the relative selling price method in accordance with the selling price hierarchy, which includes: (i) VSOE if available; (ii) third-party evidence (“TPE”) if VSOE is fixed or determinable;not available, and (iv) collectibility(iii) best estimate of selling price (“BESP”) if neither VSOE nor TPE is reasonably assured. In addition, the Company complies with the Securities and Exchange Commission, or SEC, Staff Accounting Bulletin, or SAB, No. 104,Revenue Recognition, which sets forth guidelines in the timingavailable.
Implementation of this new authoritative guidance had an insignificant impact on reported revenue recognition based upon factors such as passage of title, installation, payments and customer acceptance. Amounts received in excess ofcompared to revenue recognizable under SAB No. 104 are deferred.
AutoGenomics, Inc.previous guidance.
Notes to financial statements — (continued)
(Information as of March 31, 2008 and thereafter and for the three months ended
March 31, 2007 and 2008 is unaudited)
Shipping and handling fees and costs
The Company has not charged any material shipping and handling fees through March 31, 2008 and records shipping and handling costs in cost of sales. No significant expense was incurred for the years ended December 31, 2010 and 2011 or for the periods ended June 30, 2011 and 2012.
Research and development costs
Research and development costs consist primarily of salaries and related personnel costs, stock-based compensation, fees paid to outside parties, facilities costs, travel costs, depreciation and materials used in research and development. All research and development costs are charged to expense as incurred.
Advertising costs
All advertising costs are charged to expense as incurred. No significant expense was incurred for the years ended December 31, 2010 and 2011 or for the periods ended June 30, 2011 and 2012.
Income taxes
The Company has adopted the provisions of ASC 740, Accounting for Uncertainty in Income Taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. The Company measures tax assets and liabilities using the enacted tax rates expected to apply to taxable income in the years in which the Company expects to recover or settle those temporary differences. The Company recognizes the effect of a change in tax rates on deferred tax assets and liabilities in income in the period that includes the enactment date. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized.
In June 2006, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation, or FIN, No. 48,Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109. FIN No. 48 establishes a single model to address accounting for uncertain tax positions. FIN No. 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN No. 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted the provisions of FIN No. 48 on January 1, 2008.
Stock-based compensation
Prior to January 1, 2006, theThe Company accounted for stock-based employee compensation arrangements using the intrinsic value method of Accounting Principles Board, or APB, Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations.Prior to January 1, 2006, the Company utilized the minimum value method to comply with the disclosure-only provisions of SFAS No. 123,Accounting for Stock-Based Compensation. The pro forma net losses disclosed under the disclosure-only provisions of SFAS No. 123 were not materially different than the reported net losses for the nine months ended March 31, 2005. Under APB No. 25, compensation expense for employees is based on the excess, if any, of the fair value of the Company’s common stock over the exercise price of the option on the date of grant. No stock-based compensation expense was recorded under APB No. 25 for the nine months ended December 31, 2005.
AutoGenomics, Inc.
Notes to financial statements — (continued)
(Information as of March 31, 2008 and thereafter and for the three months ended
March 31, 2007 and 2008 is unaudited)
Effective January 1, 2006, the Company prospectively adopted SFAS No. 123R,Share-Based Payment, which requiresrecognizes compensation expense related to share-basedstock-based transactions, including employee stock options, to be measured and recognized in the Company’s financial statements based on their fair value. SFAS No. 123R revises SFAS No. 123, as amended, and supersedes APB No. 25. Under the prospective approach, SFAS No. 123R applies to new awards and to awards modified, repurchased, or cancelled after the required effective date. The Company recognizes compensation expense over the vesting period using the straight-line method and classifies these amounts in the statements of operations and comprehensive income (loss) based on the department to which the related employee reports. The Company uses the Black-Scholes valuation model to calculate the fair value of stock options.
The Company accounts for stock options issued to non-employees based on the fair value of the awards determined using the Black-Scholes valuation model. The fair value of employee stock options was estimated atis recognized over the grant date using the following assumptions:
Year ended December 31, | Three months ended March 31, | |||||||
2006 | 2007 | 2007 | 2008 | |||||
Risk-free interest rate | 4.75% | 4.51% | 4.54% | 3.15% | ||||
Dividend yield | — | — | — | — | ||||
Expected life of options (years) | 6.18 | 5.86 | 5.78 | 5.86 | ||||
Volatility | 70.00% | 66.00% | 66.00% | 66.00% |
The weighted average grant date fair value per share of employee stock options granted during the years ended December 31, 2006 and 2007 and the three months ended March 31, 2007 and 2008 was $0.34, $0.32, $0.31 and $0.86, respectively.
The Company recognized employee stock-based compensation in the statements of operations as follows:
Year ended December 31, | Three months ended March 31, | |||||||
2006 | 2007 | 2007 | 2008 | |||||
Cost of sales | $ 1,077 | $ 10,504 | $ 1,720 | $ 3,708 | ||||
Research and development | 3,650 | 15,435 | 2,961 | 4,960 | ||||
General and administrative | 4,663 | 93,543 | 37,818 | 34,777 | ||||
Sale and marketing | 796 | 12,234 | 1,203 | 6,472 | ||||
$ 10,186 | $131,716 | $ 43,702 | $ 49,917 | |||||
The adoption of SFAS No. 123R did not cause basic and diluted net loss per share of common stock to increase by a significant amount in 2006. No income tax benefit was recognized in the statement of operations for all periods presented. The total compensation cost related to unvested stock option grants not yet recognized as of March 31, 2008 was $0.5 million, and the weighted average period over which these grantsvesting period. Grants are expected to vest is 2.62 years.
The Company derived the risk-free interest rate assumption from the United States Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term
AutoGenomics, Inc.
Notes to financial statements — (continued)
(Information as of March 31, 2008 and thereafter and for the three months ended
March 31, 2007 and 2008 is unaudited)
of the award being valued. The Company based the assumed dividend yield on its expectation of not paying dividends in the foreseeable future. The Company calculated the weighted average expected life of options using the simplified method as prescribed by SAB No. 107,Share-Based Payment. This decision was based on the lack of relevant historical data due to the Company’s limited operating experience. In addition, due to the Company’s limited historical data, the estimated volatility also reflects the application of SAB No. 107, incorporating the historical volatility of comparable companies with publicly-available share prices. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company utilized its historical forfeitures to estimate its future forfeiture rate at 4% for 2006, 2007 and the three months ended March 31, 2008. Prior to adoption of SFAS No. 123R, the Company accounted for forfeitures of stock option grants as they occurred.
The Company records equity instruments issuedmade to non-employees as expense at their fair value overafter services are provided by the related service period as determined in accordance with SFAS No. 123R and EITF Issue No. 96-18,Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods and Services, and periodically revalues the equity instruments as they vest. Stock-based compensation expense related to non-employee consultants totaled $40,513, $12,217, $5,649, $1,054 and $10,847 for the nine months ended December 31, 2005, the years ended December 31, 2006 and 2007 and the three months ended March 31, 2007 and 2008, respectively.non-employee.
Net lossincome (loss) per share
Basic net lossincome (loss) per share attributable to common stockholders is calculated by dividing the net lossincome (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net lossincome (loss) per share attributable to common stockholders is computed by dividing the net lossincome (loss) attributable to common stockholders by the weighted average number of common share equivalents outstanding for the period determined using the treasury-stock method.method or the if-converted method, if applicable. For purposes of this calculation, convertible preferred stock, stock options, and warrants are considered to be common stock equivalents and are only included in the calculation of diluted net lossincome (loss) per share attributable to common stockholders when their effect is dilutive.
The unaudited pro forma basic and diluted net lossincome (loss) per share is calculated by dividing the pro forma net lossincome (loss) by the weighted average number of common shares outstanding for the period plus the weighted average number of common shares resulting from the assumed conversion of the outstanding shares of convertible preferred stock. The assumed conversion is calculated using the as-if-convertedif-converted method, as if such conversion had occurred as of the beginning of each period presented or the original issuance date, if later. The pro forma net loss is calculated by subtracting the accretion to liquidation value of convertible preferred stock from the net loss attributable to common stockholders.
AutoGenomics, Inc.
Notes to financial statements — (continued)
(Information as of March 31, 2008 and thereafter and for the three months ended
March 31, 2007 and 2008 is unaudited)
Nine months ended December 31, 2005 | Year ended December 31, | Three months ended March 31, | |||||||||||||
2006 | 2007 | 2007 | 2008 | ||||||||||||
Historical | |||||||||||||||
Numerator: | |||||||||||||||
Net loss | $(3,889,487 | ) | $(6,413,356 | ) | $(9,292,722 | ) | $(2,018,643 | ) | $(3,207,025 | ) | |||||
Accretion to liquidation value of convertible preferred stock | (447,108 | ) | (817,823 | ) | (74,451 | ) | (76,332 | ) | 94,824 | ||||||
Net loss attributable to common stockholders | $(4,336,595 | ) | $(7,231,179 | ) | $(9,367,173 | ) | $(2,094,975 | ) | $(3,112,201 | ) | |||||
Denominator: | |||||||||||||||
Weighted average common shares outstanding | 5,708,755 | 6,065,728 | 6,671,063 | 6,167,771 | 7,276,657 | ||||||||||
Basic and diluted net loss per share | $ (0.76 | ) | $ (1.19 | ) | $ (1.40 | ) | $ (0.34 | ) | $ (0.43 | ) | |||||
Pro Forma | |||||||||||||||
Net loss | $(9,292,722 | ) | $(3,207,025 | ) | |||||||||||
Pro forma basic and diluted net loss per share | $ (0.46 | ) | $ (0.15 | ) | |||||||||||
Shares used above | 6,671,063 | 7,276,657 | |||||||||||||
Pro forma adjustments to reflect assumed weighted average effect of conversion of preferred stock | 13,460,150 | 14,718,978 | |||||||||||||
Pro forma shares used to compute basic and diluted net loss per share | 20,131,213 | 21,995,635 | |||||||||||||
Historical outstanding anti-dilutive securities not included in diluted net loss per share calculation | |||||||||||||||
Preferred stock (as converted) | 7,402,806 | 11,448,449 | 13,806,239 | 13,802,441 | 17,240,351 | ||||||||||
Preferred stock warrants (as converted) | 339,652 | 742,615 | 738,817 | 742,615 | 727,963 | ||||||||||
Common stock warrants | 150,000 | 100,000 | 250,000 | 250,000 | 250,000 | ||||||||||
Common stock options | 3,275,223 | 3,163,885 | 2,875,655 | 3,503,885 | 3,176,405 | ||||||||||
11,167,681 | 15,454,949 | 17,670,711 | 18,298,941 | 21,394,719 | |||||||||||
Years ended December 31, | Six months ended June 30, | |||||||||||||||
2010 | 2011 | 2011 | 2012 | |||||||||||||
(unaudited) | ||||||||||||||||
(in thousands, except for shares and per share price) | ||||||||||||||||
Historical | ||||||||||||||||
Numerator: | ||||||||||||||||
Net income/(loss) | $ | (19,695 | ) | $ | (9,997 | ) | $ | (5,064 | ) | $ | 459 | |||||
|
|
|
|
|
|
|
| |||||||||
Denominator: | ||||||||||||||||
Weighted average shares used to compute net income/(loss) per share, basic | 7,823,355 | 7,982,984 | 7,979,527 | 8,028,070 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Weighted average shares used to compute net income/(loss), diluted | 7,823,355 | 7,982,984 | 7,979,527 | 27,570,272 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Basic net income/(loss) per share attributable to common stockholders | $ | (2.52 | ) | $ | (1.25 | ) | $ | (0.63 | ) | $ | 0.06 | |||||
|
|
|
|
|
|
|
| |||||||||
Diluted net income/(loss) per share attributable to common stockholders | $ | (2.52 | ) | $ | (1.25 | ) | $ | (0.63 | ) | $ | 0.02 | |||||
|
|
|
|
|
|
|
| |||||||||
Historical outstanding anti-dilutive securities not included in diluted net loss per share calculation | ||||||||||||||||
Preferred stock | 17,376,047 | 17,561,346 | 17,466,283 | 0 | ||||||||||||
Preferred stock warrants | 435,309 | 396,709 | 431,809 | 381,300 | ||||||||||||
Common stock warrants | 4,999,920 | 7,038,555 | 5,399,720 | 7,398,555 | ||||||||||||
Common stock options | 5,310,707 | 5,736,245 | 5,052,027 | 4,195,762 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | 28,121,783 | 30,732,855 | 28,349,839 | 11,975,617 | ||||||||||||
|
|
|
|
|
|
|
|
Pro forma (unaudited) Net income/(loss) Pro forma weighted average common shares outstanding Pro forma adjustments to reflect assumed weighted average effect of conversion of preferred stock Pro forma shares used to compute diluted net income/(loss) per share, basic Pro forma shares used to compute diluted net income/(loss) per share, diluted Years ended December 31, Six months ended June 30, 2010 2011 2011 2012 (unaudited) (in thousands, except for shares and per share price) $ (19,695 ) $ (9,997 ) $ (5,064 ) $ 459 7,823,355 7,982,984 7,979,527 8,028,070 17,376,047 17,561,346 17,466,283 18,260,146 25,199,402 25,544,330 25,445,810 26,288,216 25,199,402 25,544,330 25,445,810 27,570,272
AutoGenomics, Inc.
Notes to financial statements — (continued)
(Information as of March 31, 2008 and thereafter and for the three months ended
March 31, 2007 and 2008 is unaudited)
Comprehensive income (loss)
SFAS No. 130,Reporting Comprehensive Income, requires that allAll components of comprehensive income (loss), including net income (loss), beare reported in the financial statements of operations and comprehensive income (loss) in the period in which they are recognized. Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources, including unrealized gains and losses on investments. The Company reportsdoes not have any components of comprehensive income other than net income (loss) as a separate componentfor any of stockholders’ deficit.the periods presented.
Recently Issued Accounting Standards
RecentIn May 2011, the Financial Accounting Standards Board (FASB) issued an amendment to the accounting pronouncements
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurement, which defines and establishes a framework for measuring theguidance on fair value of assetsmeasurements to ensure that GAAP and liabilities when required or permitted by other standards within generally accepted accounting principles in the United States but does not require any newInternational Financial Reporting Standards have common requirements for fair value measurements. SFAS No. 157 also expandsmeasurement and disclosures, about fair value measurements. SFAS No. 157 is effective for all financial statements issued for fiscal years beginning after November 15, 2007. However, in February 2008, the FASB issued FSP No. 157-2 which delays the effective dateincluding a consistent definition of SFAS No. 157 in accordance with the provisions in FSP No. 157-2 as of January 1, 2008. The adoption of SFAS No. 157 did not have a significant impact on the Company’s financial statements and the resulting fair values calculated in accordance with SFAS No. 157 were not significantly different than the fair values that would have been calculated in accordance with the previous guidance.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, or SFAS No. 159, including an amendment of SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities, which allows an entity to choose to measure certain financial instruments and liabilities at fair value. Subsequent measurements for the financial instruments and liabilities an entity elects to measure at fair value will be recognized in earnings. SFAS No. 159 also establishes additional disclosure requirements. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 did not have a significant impact on the Company’s financial statements.
In June 2007, the FASB ratified EITF Issue No. 07-3,Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities. EITF No. 07-3 provides clarification surrounding the accounting for nonrefundable research and development advance payments, whereby such payments should be recorded as an asset when the advance payment is made and recognized as an expense when the research and development activities are performed. EITF No. 07-3guidance is effective for interim and annual reporting periods beginning on or after December 15, 2011. The Company adopted this guidance and it did not have a material impact on its financial statements for the period ended June 30, 2012.
In June 2011, the FASB issued an amendment to the accounting guidance on the presentation of comprehensive income. The guidance eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, and instead requires that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2007.2011. The Company adopted EITF No. 07-3 as of January 1, 2008. The adoption of EITF No. 07-3this guidance and it did not have a significantmaterial impact on its financial statements for the Company’s financial statements.period ended June 30, 2012.
In December 2007,2011, the FASB ratified EITF Issue No. 07-1,Accounting for Collaborative Agreements, or EITF No. 07-1, which addressesissued an amendment to the accounting for participants in collaborative agreements, defined as contractual arrangements that involve a joint operating activity,guidance on disclosures about offsetting assets and liabilities. The guidance requires an entity to disclose both gross and net information about financial instruments and derivative instruments that are
AutoGenomics, Inc.
Notes to financial statements — (continued)
(Information as of March 31, 2008 and thereafter and eligible for the three months ended
March 31, 2007 and 2008 is unaudited)
conducted without the creation of a separate legal entity. EITF No. 07-1 requires participants in a collaborative agreement to make separate disclosures for each period a statement of operations is presented regarding the nature and purpose of the agreement, the rights and obligations under the agreement, the accounting policy for the agreement, and the classification of and amounts arising from the agreement between participants. These arrangements involve two or more parties who are both active participantsoffset in the activity and that are exposedbalance sheet or subject to significant risks and rewards dependent on the commercial success of the activity. EITF No. 07-1 provides that a company should report the effects of adoption as a change in accounting principle through retrospective application to all periods and requires specific additional disclosures. EITF No. 07-1an enforceable master netting arrangement or similar agreement. The guidance is effective for interim and annual reporting periods beginning on or after December 15, 2008.January 1, 2013, and interim periods within those annual periods. The Company is currently assessing the impactdoes not expect the adoption of EITF No. 07-1this guidance will have a material impact on ourits financial statements.
2. Balance sheet detailsSheet Details
Inventory consistsconsisted of the following at:
December 31, | June 30, 2012 | |||||||||||||||||
2010 | 2011 | |||||||||||||||||
December 31, | March 31, | (unaudited) | ||||||||||||||||
2006 | 2007 | 2008 | (in thousands) | |||||||||||||||
Raw materials | $ 490,506 | $1,068,618 | $1,549,356 | $ | 767 | $ | 716 | $ | 1,048 | |||||||||
Work in process | 460,235 | 504,072 | 521,005 | 646 | 601 | 549 | ||||||||||||
Finished goods | 94,984 | 362,080 | 570,307 | 711 | 426 | 291 | ||||||||||||
|
|
| ||||||||||||||||
Total | $ | 2,124 | $ | 1,743 | $ | 1,888 | ||||||||||||
|
|
| ||||||||||||||||
$1,045,725 | $1,934,770 | $2,640,668 | ||||||||||||||||
The following table summarizes the activity in the reserve for excess and obsolete inventory during the years ended December 31, 2010 and 2011 and the six months ended June 30, 2012:
Balance at beginning of period | Charged to costs and expenses | Allowance reductions/ write-offs | Balance at end of period | |||||||||||||
(in thousands) | ||||||||||||||||
For the year ended December 31, 2010 | $ | 381 | $ | 412 | $ | (98 | ) | $ | 695 | |||||||
For the year ended December 31, 2011 | $ | 695 | $ | 94 | $ | (110 | ) | $ | 679 | |||||||
For the six months ended June 30, 2012 (unaudited) | $ | 679 | $ | 179 | $ | (90 | ) | $ | 768 |
Property, equipment and equipment consistsimprovements consisted of the following at:
Estimated | December 31, | March 31, | |||||||||
2006 | 2007 | 2008 | |||||||||
Equipment | 5 -7 years | $ 882,824 | $1,120,261 | $1,250,822 | |||||||
Computer equipment and software | 3 years | 91,239 | 107,937 | 107,937 | |||||||
Furniture | 5 years | 32,862 | 62,049 | 62,049 | |||||||
Reagent Access Plan assets | 3 years | 460,477 | 904,302 | 1,008,541 | |||||||
1,467,402 | 2,194,549 | 2,429,349 | |||||||||
Less accumulated depreciation and amortization | (575,714 | ) | (915,498 | ) | (1,038,494 | ) | |||||
$ 891,688 | $1,279,051 | $1,390,855 | |||||||||
Beginning in 2006, the Company began entering into agreements with certain customers wherein the Company places diagnostic test equipment at the customer’s site at no cost to the customer, provided the customer orders a certain volume of molecular diagnostic test products from the Company, or the Reagent Access Plan. The Company records Reagent Access Plan assets at its cost to manufacture.
AutoGenomics, Inc.
Notes to financial statements — (continued)
(Information as of March 31, 2008 and thereafter and for the three months ended
March 31, 2007 and 2008 is unaudited)
The Company funds certain equipment under capital lease obligations. The cost of leased equipment at December 31, 2006, 2007 and March 31, 2008 was $135,204. The accumulated amortization of equipment under capital lease at December 31, 2006, 2007 and March 31, 2008 was $131,749, $133,668 and $134,148, respectively.
Estimated life | December 31, | June 30, 2012 | ||||||||||||||
2010 | 2011 | |||||||||||||||
(unaudited) | ||||||||||||||||
(in thousands) | ||||||||||||||||
Domestic placement plan assets | 3 years | $ | 1,861 | $ | 1,824 | $ | 1,898 | |||||||||
Equipment | 5 - 7 years | 1,829 | 1,831 | 1,881 | ||||||||||||
Computer equipment and software | 3 years | 166 | 168 | 207 | ||||||||||||
Leasehold improvements | various | 159 | 159 | 159 | ||||||||||||
Furniture | 5 years | 155 | 156 | 156 | ||||||||||||
|
|
|
|
|
| |||||||||||
$ | 4,170 | $ | 4,138 | $ | 4,301 | |||||||||||
Less accumulated depreciation and amortization | 2,486 | 2,721 | 2,968 | |||||||||||||
|
|
|
|
|
| |||||||||||
Total | $ | 1,684 | $ | 1,417 | $ | 1,333 | ||||||||||
|
|
|
|
|
|
Depreciation and amortization of property, equipment and equipmentimprovements, including capitalized INFINITI analyzers in domestic placement plans, was $37,605, $188,172, $391,782, $77,443$779,415, $642,875, $355,251 and $123,194$323,773 for the nine months ended December 31, 2005, the years ended December 31, 20062010 and 2007,2011 and the threesix months ended March 31, 2007June 30, 2011 and 2008,2012, respectively.
Intangible assets consistsconsisted of the following at:
Estimated life | December 31, | June 30, 2012 | |||||||||||||||||||||||||
2010 | 2011 | ||||||||||||||||||||||||||
Estimated life | December 31, | March 31, | (unaudited) | ||||||||||||||||||||||||
2006 | 2007 | 2008 | (in thousands) | ||||||||||||||||||||||||
Licenses | 5 years | 75,000 | 216,066 | 216,066 | 5 years | $ | 216 | $ | 216 | $ | 216 | ||||||||||||||||
Less accumulated amortization | (11,250 | ) | (40,350 | ) | (51,150 | ) | 170 | 202 | 216 | ||||||||||||||||||
|
|
| |||||||||||||||||||||||||
Total | $ | 46 | $ | 14 | $ | — | |||||||||||||||||||||
|
|
| |||||||||||||||||||||||||
$ 63,750 | $175,716 | $164,916 | |||||||||||||||||||||||||
Amortization of licenses was $0, $11,250, $29,100, $3,750$43,200, $31,950, $17,850 and $10,800$14,100 for the nine months ended December 31, 2005, the years ended December 31, 20062010 and 2007,2011 and the threesix months ended March 31, 2007June 30, 2011 and 2008,2012, respectively. Estimated future amortization expense is as follows:
Years ending December 31, | ||
2008 | $ 43,212 | |
2009 | 43,212 | |
2010 | 43,212 | |
2011 | 31,962 | |
2012 | 14,118 | |
$175,716 | ||
Accrued expenses consistsconsisted of the following at:
December 31, | March 31, 2008 | |||||
2006 | 2007 | |||||
Payroll and related | $1,010,825 | $ 623,353 | $ 404,485 | |||
Current portion of deferred rent | 64,534 | 78,594 | 81,602 | |||
Professional fees | 60,649 | 170,734 | 168,068 | |||
Warranty | 12,384 | 65,200 | 74,333 | |||
Other | 12,655 | 344,366 | 225,249 | |||
$1,161,047 | $1,282,247 | $ 953,737 | ||||
December 31, | June 30, 2012 | |||||||||||
2010 | 2011 | |||||||||||
(unaudited) | ||||||||||||
(in thousands) | ||||||||||||
Payroll and related expenses | $ | 632 | $ | 618 | $ | 615 | ||||||
Professional fees | 25 | 80 | 80 | |||||||||
Accrued warranty costs | 53 | 30 | 30 | |||||||||
Initial public offering costs — terminated offering | 395 | 159 | 159 | |||||||||
Other | 274 | 359 | 392 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 1,379 | $ | 1,246 | $ | 1,276 | ||||||
|
|
|
|
|
|
AutoGenomics, Inc.
Notes to financial statements — (continued)
(Information as of MarchThe following table summarizes the activity in accrued warranty costs included in accrued expenses in the table above during the years ended December 31, 20082010 and thereafter2011 and for the threesix months ended
March 31, 2007 and 2008 is unaudited) June 30, 2012:
Balance at beginning of period | Charged to costs and expenses | Costs incurred | Balance at end of period | |||||||||||||
(in thousands) | ||||||||||||||||
For the year ended December 31, 2010 | $ | 41 | $ | 61 | $ | (49 | ) | $ | 53 | |||||||
For the year ended December 31, 2011 | $ | 53 | $ | 33 | $ | (56 | ) | $ | 30 | |||||||
For the six months ended June 30, 2012 (unaudited) | $ | 30 | $ | 38 | $ | (38 | ) | $ | 30 |
3. Promissory Notes payable
During the year ended December 31, 2010, the Company issued $6.1 million in subordinated notes bearing interest rates between 6% and 7% per annum with two year maturities, $0.1 million of which was subsequently paid in full in June 2010. In connection with the sale of Series C preferred stockthese notes, the Company sold unsecured convertible subordinated promissory notes, or Series C Notes Payable, bearing anissued freestanding warrants to purchase 1,814,100 shares of the Company’s common stock at exercise prices ranging from $3.00 to $5.00 per share. The warrants are immediately exercisable and expire five years after the date of issuance. The fair value of the warrants was determined using the Black-Scholes valuation model and was used to calculate the debt discount of $1.7 million. This amount is being amortized to interest rateexpense using the effective interest method over the two-year term of 8% per annum. In 2005 and 2006the notes.
During the year ended December 31, 2011, the Company sold Series C Notes Payable for an aggregate of $1,265,000 and $1,105,000, respectively. In 2006,issued $1.0 million in subordinated notes bearing interest at the $2,370,000 of aggregate outstanding Series C Notes Payable was converted into 861,818 shares of Series C convertible preferred stock at $2.75 per share (see Note 6). Accrued interest of $85,200 was reclassified to Series C convertible preferred stock in connection with the conversion. The holders of the Notes Payable were issued certain warrants in connection with the financing transaction and later conversion of the Series C Notes Payable (see Note 5).
In connection with the sale of Series D preferred stock the Company sold unsecured convertible subordinated promissory notes, or Series D Notes Payable, bearing an interest rate of 7% per annum with a maturity date of December 31, 2011. In connection with these notes, the Company issued freestanding warrants to purchase 300,000 shares of the Company’s common stock at an exercise price of $3.00 per share. The warrants are immediately exercisable and expire five years after the date of issuance. The fair value of the warrants was determined using the Black-Scholes valuation model and was used to calculate the debt discount of $0.2 million. This amount was amortized to interest expense using the effective interest method over the term of the notes. The Company also issued $0.2 million of short term notes during the year ended December 31, 2011. These subordinated notes bear an interest at rate of 12% per annum with a maturity date of up to six months after issuance. In connection with these notes, the Company issued freestanding warrants to purchase 87,500 shares of the Company’s common stock at an exercise price of $1.73 per share. The warrants are immediately exercisable and expire five years after the date of issuance. The fair value of the warrants was determined using the Black-Scholes valuation model and was used to calculate the debt discount of $0.1 million. This amount was amortized to interest expense using the effective interest method over the six month term of the notes. The Company also accepted the surrender of $0.3 million in aggregate principal amount and accrued and unpaid interest on outstanding promissory notes from the holders thereof as consideration for the
issuance of an equivalent value of 105,554 shares of the Company’s Series E Convertible Preferred Stock at a price of $2.75 per share.
During the six months ended June 30, 2012, the Company issued $1.7 million in short term notes payable bearing interest at rates between 10% and 12% per annum with maturity dates up to six months after issuance. In connection with these notes, the Company issued freestanding warrants to purchase 605,000 shares of the Company’s common stock at an exercise price of $1.73 per share. The warrants are immediately exercisable and expire five years after the date of issuance. The fair value of the warrants was determined using the Black-Scholes valuation model and was used to calculate the debt discount of $316,000. This amount is being amortized to interest expense using the effective interest method over the term of the notes.
In August 2011 the Company restructured two previously issued subordinated notes to senior unsecured promissory notes with a maturity date in February 2012. These notes are senior in terms of repayment and have a total outstanding principal of $3.9 million and bear interest rate at 13% per annum. In December 2007These notes were originally issued with freestanding warrants to purchase 1,300,000 shares of the Company’s common stock at an exercise price of $3.00 per share. The warrants are immediately exercisable and expire five years after the date of issuance.
Refinanced subordinated promissory notes where the present value of the future cash flows, under the modified notes, did not exceed the present value of the future cash flows under the original notes by more than 10%, were treated as a modification and the first quarterincrease in the fair value of 2008,the warrants resulting from the modification was recorded as a discount to the notes and is being amortized over the new term of the notes using the effective interest method. For notes where the present value of future cash flows changed by more than 10% under modified terms as compared to original terms, the Company sold Series D Notes Payableaccounted for an aggregatethe modification as a debt extinguishment, and accordingly recorded the notes at fair value as calculated using future discounted cash flows. The gain or loss on extinguishment is recorded in the statement of $1,000,000operations and $10,125,589, respectively. In March 2008,comprehensive income and loss as interest expense in the $11,125,589period in which the extinguishment occurred. The refinancings of aggregate outstanding Series D Notes Payable was converted into 3,423,258the subordinated promissory notes are summarized as follows:
April 2010 refinancing to modify the terms of the applicable subordinated promissory notes and related warrants:
Modification | ||||
Original notes and warrants | ||||
Note principal amount | $ | 6,040,000 | ||
Original maturity date | | August 2010- November 2011 | | |
Common stock warrants shares | 1,715,360 | |||
Warrant exercise price | $ | 7.00 | ||
Warrant expiration date | | 5 years from original issuance | | |
Modified notes and warrants | ||||
Note principal amount | $ | 6,040,000 | ||
Extended maturity date | April 2012 | |||
Common stock warrants shares | 1,715,360 | |||
Warrant exercise price | $ | 5.00 | ||
Warrant expiration date | | 6.5 years from original issuance | | |
Increase in fair value of warrant(s) | $ | 304,000 | ||
Gain on extinguishment | N/A |
November 2010, refinancing to modify the terms of the applicable subordinated promissory notes and related warrants:
Extinguishment | ||||
Original notes and warrants | ||||
Note principal amount | $ | 2,640,000 | ||
Original maturity date | | August 2010- November 2011 | | |
Common stock warrants shares | 710,000 | |||
Warrant exercise price | $ | 4.00 and 7.00 | ||
Warrant expiration date | | 5 years from original issuance | | |
Modified notes and warrants | ||||
Note principal amount | $ | 2,640,000 | ||
Extended maturity date | December 2012 | |||
Common stock warrants shares | 710,000 | |||
Warrant exercise price | $ | 3.00 | ||
Warrant expiration date | | 6.5 years from original issuance | | |
Increase in fair value of warrant(s) | $ | 336,000 | ||
Gain on extinguishment | $ | 136,000 |
Refinancings in 2011 to modify the terms of the applicable subordinated promissory notes and related warrants:
Modification | Extinguishment | |||||||
Original notes and warrants | ||||||||
Note principal amount | $ | 3,250,000 | $ | 2,345,000 | ||||
Original maturity date | | July 2011- December 2011 | | July 2011- | ||||
November 2011 | ||||||||
Common stock warrants shares | 710,000 | 665,980 | ||||||
Warrant exercise price | $ | 4.00 | $ | 4.00 and 7.00 | ||||
Warrant expiration date | 5 years from | 5 years from | ||||||
original issuance | original issuance | |||||||
Modified notes and warrants | ||||||||
Note principal amount | $ | 3,250,000 | $ | 2,345,000 | ||||
Extended maturity date | | February-April 2012 | | | February- December 2012 | | ||
Common stock warrants shares | 1,371,000 | 665,980 | ||||||
Warrant exercise price | $ | 3.00 | $ | 3.00 | ||||
Warrant expiration date | 6.5 years from | 6.5 years from | ||||||
original issuance | original issuance | |||||||
Increase in fair value of warrants | $ | 853,000 | $ | 75,000 | ||||
Gain on extinguishment | NA | $ | 124,000 |
February 2012 refinancing to modify the terms of the applicable subordinated promissory notes and related warrants:
Modification | Extinguishment | |||||||
Original notes and warrants | ||||||||
Note Principal Amount | $ | 250,000 | $ | 400,000 | ||||
Original Maturity Date | Apr-12 | Feb-12 | ||||||
Common Stock Warrants Shares | 71,000 | 113,600 | ||||||
Warrant Exercise Price | $ | 7.00 | $ | 4.00 | ||||
Warrant Expiration Date | 5 years from | 5 years from | ||||||
original issuance | original issuance | |||||||
Modified notes and warrants | ||||||||
Note Principal Amount | $ | 250,000 | $ | 400,000 | ||||
Extended Maturity Date | Jun-12 | Apr-12 | ||||||
Common Stock Warrants Shares | 71,000 | 113,600 | ||||||
Warrant Exercise Price | $ | 3.00 | $ | 3.00 | ||||
Warrant Expiration Date | 6.5 years from | 6.5 years from | ||||||
original issuance | original issuance | |||||||
Increase in Fair Value of Warrant(s) | $ | 36,000 | $ | 47,000 | ||||
Gain on Extinguishment | NA | $ | 78,000 |
The warrant cancellations and reissuances, summarized above, include the cancellation of original warrants and reissuance of new warrants to purchase 441,620 shares of Series D convertible preferredthe Company’s common stock at $3.25 per share (see Note 6). Accruedbeneficially held by members of the board of directors of the Company, officers of the Company, and a significant stockholder.
The components of the Company’s promissory notes payable consisted of:
December 31, | June 30, 2012 | |||||||||||
2010 | 2011 | |||||||||||
(unaudited) | ||||||||||||
(in thousands) | ||||||||||||
Subordinated Promissory Notes, 13% interest, due July 2011 | $ | 5,071 | $ | — | $ | — | ||||||
Subordinated Promissory Notes, 6% interest, due November to December 2011 | 595 | — | — | |||||||||
Senior Promissory Notes, 13% interest, due December 2011 | — | 400 | — | |||||||||
Senior Promissory Note, 13% interest, due February 2012 | — | 3,500 | 2,200 | |||||||||
Subordinated Short Term Notes Payable, 12% interest, due April & May 2012 | — | 175 | 695 | |||||||||
Subordinated Short Term Notes Payable, 10% interest, due June 2012 | — | — | 1,150 | |||||||||
Subordinated Promissory Notes, 7% interest, due December 2012 | 300 | 1,200 | 1,200 | |||||||||
Subordinated Promissory Notes, 8% interest, due December 2012 | 500 | 500 | 500 | |||||||||
Subordinated Promissory Notes, 6% interest, due February to June 2012 | 10,715 | 10,794 | 10,794 | |||||||||
Subordinated Promissory Notes, 6% interest, due December 2012 | 2,000 | 2,345 | 2,345 | |||||||||
Subordinated Promissory Notes, 13% interest, due December 2012 | — | 2,000 | 2,000 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 19,181 | $ | 20,914 | $ | 20,884 | ||||||
Unamortized premium/(discount) | (2,522 | ) | (281 | ) | 163 | |||||||
Accrued Interest | 2,120 | 2,882 | 3,445 | |||||||||
|
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|
|
| |||||||
Outstanding Balance | $ | 18,779 | $ | 23,515 | $ | 24,492 | ||||||
|
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|
|
The Company’s outstanding promissory notes have matured or will mature on or before December 31, 2012. As of June 30, 2012, the Company was in default on $14.8 million in principal amount of outstanding promissory notes.
Of the total notes payable listed above, $2.0 million, $2.4 million, and $3.9 million were issued to related parties and outstanding as of December 31, 2010 and 2011 and June 30, 2012, respectively, with interest of $101,251 was reclassifiedrates ranging from 6.0% to Series D convertible preferred stock in connection with the conversion.12.0%.
4. Commitments
Operating lease
The Company leases its corporate headquarters and manufacturing facility under a noncancelablenon-cancelable operating lease agreement expiring in February 2010, although the Company was granted options that could extend the lease through February 2016.December 2029. Rent expense under the lease was $280,957, $352,576, $352,576, $88,144$1.6 million, $1.8 million, $0.8 million and $88,144,$1.0 million for the nine months ended December 31, 2005, the years ended December 31, 20062010 and 2007,2011 and for the threesix months ended March 31, 2007June 30, 2011 and 2008,2012, respectively. The terms of the facility lease provide for rental payments on a monthly basis with periodic rent escalations over the term of the lease. lease as well as penalties of 11% of the monthly lease payment for late payment.
The Company recognizes rent expense on a straight-line basis over the lease period and has accrued for rent expense incurred but not paid. In addition,Certain incentives, were granted, including discounted rental payments and rent holidays. As such, thesetenant improvement allowances, have beenwere granted when the original lease was executed.
Accumulated discounted rental payments recorded asto deferred rent totaled $1.8 million, $2.1 million and these items are being recognized$2.2 million as reductions to rental expenseof December 31, 2010 and 2011 and June 30, 2012, respectively, and the balance of the tenant improvement allowance stayed consistent at $0.2 million. The Company amortizes the allowance on a straight-line basis over the term of the lease. Future
The Company has at times been unable to remit timely lease payments and the remediation of these defaults has resulted in amendments to the original lease that have included rent escalations and extensions of the original leasehold expiration date.
The amounts of future minimum lease commitments under the operating lease as of December 31, 2007 are as follows:
Years ending December 31, | ||
2008 | $431,170 | |
2009 | 445,208 | |
2010 | 74,870 | |
$951,248 | ||
Years ending December 31, 2012 2013 2014 2015 2016 and thereafter Total Amount (in thousands) $ 1,590 1,681 1,758 1,847 21,010 $ 27,886
AutoGenomics, Inc.
Notes to financial statements — (continued)
(Information as of March 31, 2008 and thereafter and for the three months ended
March 31, 2007 and 2008 is unaudited)
License agreement and patent purchase agreement
In April 2006,Included in intangible assets are amounts paid for various license agreements obligating the Company entered into a non-exclusive sub-license agreement for technology used in certain of its consumable products. The Company paid $75,000 for the sub-license and is obligated to pay royalties on relatedof six to ten percent of certain product sales. These license agreements expire at various times through May 2024.
5. Common and Convertible Preferred Stock Warrant Liabilities
Common stock warrant liability
One of the Company’s common stock warrants provides for the adjustment of its exercise price on a broad-based weighted average basis if the Company issues certain types of securities at a price per share below the then-current exercise price per share of the warrant. The agreement expires whenCompany uses the last patent coveredBlack-Scholes valuation model to calculate the fair value of its common stock warrant liability. The Company determined that using alternative valuation models, such as a Monte Carlo simulation model, would result inde minimus differences. The fair value of the common stock warrant liability was estimated at the balance sheet dates using the following assumptions:
December 31 | June 30, 2012 | |||||||||||
2010 | 2011 | |||||||||||
(unaudited) | ||||||||||||
Fair value | $ | 2.74 | $ | 1.73 | $ | 1.26 | ||||||
Exercise price | $ | 3.98 | $ | 2.97 | $ | 2.94 | ||||||
Contractual Term (yrs) | 3.60 | 2.60 | 2.10 | |||||||||
Stock price volatility | 76.84 | % | 60.17 | % | 54.15 | % | ||||||
Risk-free interest rate | 1.42 | % | 0.39 | % | 0.34 | % | ||||||
Dividend yield | — | — | — |
At December 31, 2010, outstanding common stock warrants consisted of:
Issuance Date | Term | Exercise price per share | Number of shares outstanding underlying warrant | Fair value at December 31, 2010 | ||||||||||||
(in thousands) | ||||||||||||||||
August 2009 | 5 years | $ | 3.98 | 568,000 | $ | 718 | ||||||||||
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| |||||||||||||
568,000 | $ | 718 | ||||||||||||||
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At December 31, 2011, outstanding common stock warrants consisted of:
Issuance Date | Term | Exercise price per share | Number of shares outstanding underlying warrant | Fair value at December 31, 2011 | ||||||||||||
(in thousands) | ||||||||||||||||
August 2009 | 5 years | $ | 2.97 | 568,000 | $ | 215 | ||||||||||
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| |||||||||||||
568,000 | $ | 215 | ||||||||||||||
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In June 2011, the Company and the applicable note holder amended a certain promissory note with an aggregate principal amount of $2,000,000 set to mature in July 2011, by extending the maturity date to December 2012. In connection with this amendment, the Company cancelled a warrant to purchase 568,000 shares of its common stock at an exercise price of $4.00 per share held by the agreement expires. The Company can terminate the agreement with 90 days written notice.
In July 2007, the Company entered into an agreementnote holder and reissued a warrant to purchase patents for technology used568,000 shares of common stock at an exercise price of $3.00 per share to the note holder which will expire in certain of its consumable products. The Company paid $141,066 for the patents and is obligated to pay royalties on related product sales for a period of ten years commencing on the second anniversary of the agreement.August 2014.
At June 30, 2012, outstanding common stock warrants consisted of:
Issuance date | Term | Exercise price per share | Number of shares outstanding underlying warrant | Fair value at June 30, 2012 | ||||||||||||
(in thousands) | ||||||||||||||||
August 2009 | 5 years | $ | 3.98 | 568,000 | $ | 61 | ||||||||||
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| |||||||||||||
568,000 | $ | 61 | ||||||||||||||
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|
5. Convertible preferred stock warrant liabilityliabilities
The Company uses the Black-Scholes valuation model to calculate the fair value of its preferred stock warrants. The fair value of the preferred stock warrants was estimated at the balance sheet dates using the following assumptions:
December 31, | June 30, 2012 | |||||
2010 | 2011 | |||||
(unaudited) | ||||||
Fair value | $3.11 | $4.00 | $4.00 | |||
Exercise Price | $2.75 - $3.80 | $3.25 - $3.80 | $3.25 - $3.80 | |||
Contractual Term (in years) | 0.08 - 0.99 | 0.55 - 0.63 | 0.05 -0.13 | |||
Stock Price Volatility | 76.84 | 60.17 | 54.15 | |||
Risk-free interest rate | 0.29% | 0.12% | 0.19% | |||
Dividend yield | — | — | — |
As of December 31, 2005,2010, outstanding convertible preferred stock warrants consisted of:
Issue Date | Original term | Convertible preferred stock | Exercise price | Number of shares outstanding underlying warrant | Fair value at December 31, 2005 | |||||
June 2003 | 5 years | Series A | $3.95 | 39,217 | $ 36,394 | |||||
July 2005 | 5 years | Series B | $2.75 | 213,818 | 344,247 | |||||
December 2005 | 5 years | Series C | $3.30 | 25,300 | 39,898 | |||||
278,335 | $420,539 | |||||||||
Issuance date | Term | Exercise price per share | Number of shares outstanding underlying warrant | Fair value at December 31, 2010 | ||||||||||||
(in thousands) | ||||||||||||||||
December 2010 | 5 years | $ | 3.80 | 15,700 | $ | 11 | ||||||||||
January 2006 | 5 years | $ | 3.30 | 2,400 | — | |||||||||||
May 2006 | 5 years | $ | 2.75 | 17,600 | 8 | |||||||||||
July and August 2006 | 5 years | $ | 3.30 | 43,063 | 27 | |||||||||||
July and August 2006 | 5 years | $ | 2.75 | 346,546 | 297 | |||||||||||
December 2006 | 5 years | $ | 2.75 | 10,000 | 11 | |||||||||||
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| |||||||||||||
Total | 435,309 | $ | 354 | |||||||||||||
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|
During the year ended December 31, 2010, 166,329 and 3,600 shares of Series B Convertible Preferred Stock and Series C Convertible Preferred Stock were issued pursuant to the exercise of preferred stock warrants at exercise prices of $2.75 and $3.30, respectively.
As of December 31, 2006,2011, outstanding convertible preferred stock warrants consisted of:
Issue Date | Original term | Convertible preferred stock | Exercise price | Number of shares outstanding underlying warrant | Fair value at December 31, 2006 | |||||
June 2003 | 5 years | Series A | $3.95 | 39,217 | $ 25,012 | |||||
July 2005 | 5 years | Series B | $2.75 | 213,818 | 310,036 | |||||
December 2005 | 5 years | Series C | $3.30 | 25,300 | 35,673 | |||||
January 2006 | 5 years | Series C | $3.30 | 2,400 | 3,432 | |||||
May 2006 | 5 years | Series C | $3.30 | 19,700 | 28,959 | |||||
July and August 2006 | 5 years | Series C | $3.30 | 38,781 | 58,172 | |||||
July and August 2006 | 5 years | Series C | $2.75 | 354,182 | 574,102 | |||||
December 2006 | 5 years | Series C | $2.75 | 10,000 | 16,800 | |||||
703,398 | $1,052,186 | |||||||||
Issuance/amendment date | Term | Exercise price per share | Number of shares outstanding underlying warrant | Fair value at December 31, 2011 | ||||||||||||
(in thousands) | ||||||||||||||||
May 2011 | 1 year | $ | 3.80 | 16,500 | $ | 11 | ||||||||||
July and August 2011 | 1 year | $ | 3.80 | 40,936 | 33 | |||||||||||
July and August 2011 | 1 year | $ | 3.25 | 339,273 | 368 | |||||||||||
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Total |
| 396,709 | $ | 412 | ||||||||||||
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AutoGenomics, Inc.
NotesDuring the year ended December 31, 2011, 2,991 shares of Series B Convertible Preferred Stock were issued pursuant to financial statements — (continued)
(Information asthe exercise of March 31, 2008 and thereafter andpreferred stock warrants at an exercise price of $3.30. In addition, warrants for the three months ended
March 31, 2007 and 2008 is unaudited)
purchase of 35,609 shares of preferred stock expired.
As of December 31, 2007,June 30, 2012, outstanding convertible preferred stock warrants consisted of:
Issue Date | Original term | Convertible preferred stock | Exercise price | Number of shares outstanding underlying warrant | Fair value at December 31, 2007 | |||||
June 2003 | 5 years | Series A | $3.95 | 37,318 | $ 7,889 | |||||
July 2005 | 5 years | Series B | $2.75 | 213,818 | 265,134 | |||||
December 2005 | 5 years | Series C | $3.30 | 25,300 | 30,613 | |||||
January 2006 | 5 years | Series C | $3.30 | 2,400 | 2,952 | |||||
May 2006 | 5 years | Series C | $3.30 | 19,700 | 25,216 | |||||
July and August 2006 | 5 years | Series C | $3.30 | 38,781 | 51,579 | |||||
July and August 2006 | 5 years | Series C | $2.75 | 354,182 | 514,218 | |||||
December 2006 | 5 years | Series C | $2.75 | 10,000 | 15,300 | |||||
701,499 | $912,901 | |||||||||
Issuance/amendment date | Term | Exercise price per share | Number of shares outstanding underlying warrant | Fair value at June 30, 2012 | ||||||||||||
(unaudited) | ||||||||||||||||
(in thousands) | ||||||||||||||||
May, July and August 2011 | 1 year | $ | 3.80 | 42,027 | $ | 13 | ||||||||||
July and August 2011 | 1 year | $ | 3.25 | 339,273 | 259 | |||||||||||
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|
| |||||||||||||
Total |
| 381,300 | $ | 272 | ||||||||||||
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|
AsDuring the period ended June 30, 2012, warrants for the purchase of March 31, 2008, outstanding15,409 shares of preferred stock expired.
During 2010 and 2011, the Company agreed with various warrant holders to increase the exercise price and extend the maturity one year for convertible preferred stock warrants consisted of:
Issue date | Original term | Convertible preferred stock | Exercise price | Number of shares outstanding underlying warrant | Fair value at March 31, 2008 | |||||
June 2003 | 5 years | Series A | $3.95 | 34,618 | $ 7,117 | |||||
July 2005 | 5 years | Series B | $2.75 | 213,818 | 320,727 | |||||
December 2005 | 5 years | Series C | $3.30 | 25,300 | 36,938 | |||||
January 2006 | 5 years | Series C | $3.30 | 2,400 | 3,552 | |||||
May 2006 | 5 years | Series C | $3.30 | 18,700 | 28,611 | |||||
July and August 2006 | 5 years | Series C | $3.30 | 37,963 | 59,982 | |||||
July and August 2006 | 5 years | Series C | $2.75 | 350,546 | 610,277 | |||||
December 2006 | 5 years | Series C | $2.75 | 10,000 | 18,200 | |||||
693,345 | $1,085,404 | |||||||||
Convertibleexercisable for 15,700 and 399,200 preferred stock warrant issuances
In July 2005,shares, respectively, that were expiring or expired. The Company has classified these warrants as a liability and has re-measured the Company issued warrantsliability to purchase 213,818 shares of Series B convertible preferred stock in exchange for services provided in connection with capital-raising activities on behalf of the Company. The warrants were fully exercisable at issuance and will expire five years from issuance. The estimated fair value of the warrants was recorded as a liability on the accompanying balance sheets with the related charge resulting in a reduction to the carrying value of the Series B convertible preferred stock.
Inat December 2005, the Company issued warrants to purchase 25,300 shares of Series C convertible preferred stock in conjunction with the issuance of the Series C Notes Payable. The warrants became exercisable upon the closing of the Company’s Series C preferred stock financing at an
AutoGenomics, Inc.
Notes to financial statements — (continued)
(Information as of March 31, 20082011 and thereafter2010 and for the three months ended
March 31, 2007 and 2008 is unaudited)
exercise price of 120% of the price per share of such offering, or $3.30 per share. The warrants will expire five years from the date of issuance. In accordance with EITF No. 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments, the Company initially recorded the related convertible debt net of a discount for (i) the estimated fair value of the warrants issued in the amount of $39,898 and (ii) the intrinsic value of the related beneficial conversion feature in the same amount. The total discount of $79,796 was fully amortized to interest expense in 2006 upon the conversion of the related Series C Notes Payable.
In January and May 2006, the Company issued warrants to purchase an aggregate of 22,100 shares of Series C convertible preferred stock in conjunction with the issuance of Series C Notes Payable. The warrants became exercisable upon the closing of the Company’s Series C preferred stock financing at an exercise price of 120% of the price per share of such offering, or $3.30 per share. The warrants will expire five years from the date of issue. In accordance with EITF No. 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments, the Company initially recorded the related convertible debt net of a discount for (i) the estimated fair value of the warrants issued in the amount of $34,852 and (ii) the intrinsic value of the related beneficial conversion feature in the same amount. The total discount of $69,704 was fully amortized to interest expense in 2006 upon the conversion of the related Series C Notes Payable.
In July and August 2006, as an inducement to convert the Series C Notes Payable, the Company issued warrants to purchase an aggregate of 38,781 shares of Series C convertible preferred stock. As a further inducement to invest in the Company, certain Series C investors were issued warrants to purchase an aggregate of 354,182 shares of Series C Convertible Preferred Stock. The warrants will expire five years from issuance. The estimated fair value of the warrants was recorded as a liability on the accompanying balance sheets with the related charge resulting in a reduction to the carrying value of the Series C convertible preferred stock.
In September 2006, as compensation to a consultant for Series C fundraising activities, the Company issued a warrant to purchase 10,000 shares of Series C convertible preferred stock. The warrants will expire five years from issuance. The estimated fair value of the warrants was recorded as a liability on the accompanying balance sheets with the related charge resulting in a reduction to the carrying value of the Series C convertible preferred stock.
The fair value of the warrants noted above was estimated based onJune 30, 2012 using the Black-Scholes valuation model and are summarized as follows:
Issuance Date | July 2005 | December 2005 | January and May 2006 | July 2006 | July and August 2006 | December 2006 | ||||||
Series | Series B | Series C | Series C | Series C | Series C | Series C | ||||||
Shares | 213,818 | 25,300 | 22,100 | 38,781 | 354,182 | 10,000 | ||||||
Exercise price per share | $2.75 | $3.30 | $3.30 | $3.30 | $2.75 | $2.75 | ||||||
Total fair value | $359,214 | $ 39,898 | $ 34,852 | $ 60,886 | $595,025 | $ 16,800 |
The risk-free interest rates used in the above fair value calculations ranged from 3.98% to 5.04% and the volatility, dividend yield and expected life were 70%, zero and five years, respectively.
AutoGenomics, Inc.
Notes to financial statements — (continued)
(Information as of March 31, 2008 and thereafter and for the three months ended
March 31, 2007 and 2008 is unaudited)
model.
6. Convertible preferred stockPreferred Stock
The Company’s convertible preferred stock had been classified as temporary equity onUpon the accompanying balance sheets insteadoccurrence of in stockholders’ deficit in accordance with EITF Abstracts Topic No. D-98,Classification and Measurement of Redeemable Securities. Upon certain change in control events that are outside of the control of the Company, including liquidation, sale or transfer of control of the Company, holders of the convertible preferred stock can cause its redemption.force the Company to redeem these shares. Accordingly, these shares are considered contingently redeemable. The Company has adjusted the carrying values of the convertible preferred stock to their liquidation values at each period end.
As of March 31, 2005, the Company had received $4,355,453 in cash for the sale of Series B preferred stock at $2.75 per share, but had not issued the related shares of stock. As a result, the Company recorded the cash receivedredeemable and are classified as Series B preferred stock issuable intemporary equity on the accompanying statement of convertible preferred stock and stockholders’ deficit.
In July 2005, the Company sold 2,105,210 shares of Series B preferred stock at $2.75 per share for proceeds of $5,785,050, net of issuance costs of $4,278. The net proceeds of $5,780,050 include $4,355,453 of cash received in the prior fiscal year as noted above. As consideration for Series B financing services, the Company issued an additional 19,287 shares of Series B preferred stock.
In July, August and December 2006, the Company sold an aggregate of 3,133,825 shares of Series C convertible preferred stock at $2.75 per share for proceeds of $8,525,201, net of issuance costs of $92,818. In July and August 2006, $2,370,000 of outstanding Series C Notes Payable was converted into 861,818 shares of Series C Convertible Preferred Stock at $2.75 per share. The related accrued interest of $85,200 was not considered in the conversion calculations and, as such, was credited to Series C convertible preferred stock as contributed capital. In addition, as consideration for Series C fundraising services, the Company issued an additional 50,000 shares of Series C preferred stock.
In March 2007, the Company sold 2,353,992 shares of Series C preferred stock at $2.75 per share for proceeds of $6,443,022, net of issuance costs of $30,456.
In March 2008, the principal amount of all outstanding unsecured convertible subordinated promissory notes, totaling $11,125,589, was converted into 3,423,258 shares of Series D Convertible Preferred Stock at $3.25 per share. The related accrued interest of $101,251 was not considered in the conversion calculations and, as such, was credited to Series D convertible preferred stock as contributed capital. The Company incurred $17,740 of costs in connection with the issuance.balance sheets.
The rights, preferences and privileges of the convertible preferred stock are as follows:
Dividends
The holders of Series A, Series B, Series C, Series D and Series D preferred stockE Convertible Preferred Stock are entitled to receive noncumulative dividends, in preference and in priority to any dividends on common stock, at a
AutoGenomics, Inc.
Notes to financial statements — (continued)
(Information as of March 31, 2008 and thereafter and for the three months ended
March 31, 2007 and 2008 is unaudited)
rate of $0.19, $0.17, $0.17, $0.20 and $0.20$0.165 per share, respectively, when and if declared by the Boardboard of Directors.directors. As of March 31, 2008,June 30, 2012, the board of directors hashad not declared any dividends.
Conversion
All preferred stock will automatically convert to common stock immediately prior to the closing of an underwritten public offering of common stock under the Securities Act of 1933, as amended, except for Series C preferred stockConvertible Preferred Stock and Series E Convertible Preferred Stock, each of which only automatically converts only if such public offering results in aggregate cash proceeds of at least $25,000,000.$25,000,000 or more. In addition, each individual series of convertible preferred stock will convert automatically convert to common stock upon the vote of a majority of the outstanding shares of each series. The conversion price of each series of the Company’s convertible preferred stock is adjusted on a broad-based weighted average basis if the Company issues certain types of securities at a price per share below the then current conversion price of the applicable series of convertible preferred stock. This conversion feature was evaluated and determined not to be subject to derivative accounting. As of June 30, 2012, the shares of Series A preferred stockConvertible Preferred Stock are convertible into common stock on a 2-for-1 basis. Thebasis into an aggregate of 3,158,454 shares of common stock, the shares of Series B, Series C and Series D preferred stockE Convertible Preferred Stock are convertible toon a 1.0042-for-1 basis into an aggregate of 4,487,288, 6,444,360 and 688,458 shares of common stock, respectively, and the shares of Series D Convertible Preferred Stock are convertible on a 1-for-1 basis. The holders1.0169-for-1 basis into an aggregate of preferred stock have antidilution protection for certain dilutive issuances below the respective conversion price3,481,093 shares of their preferredcommon stock.
Liquidation preference
Upon a liquidation, dissolution or winding up of the Company, the holders of the Series C preferred stockConvertible Preferred Stock are entitled to receive liquidation preferences at the rate of $2.75 per share (subject to appropriate adjustments for stock splits, stock dividends and other similar reclassifications) plus any declared but unpaid dividends. Liquidation payments to the holders of the Series C preferred stockConvertible Preferred Stock have priority over the holders of the Series A, Series B, Series D and Series D preferred stockE Convertible Preferred Stock and are made in preference to any payments to the holders of common stock. Upon completion of the required distributions to the Series C preferredConvertible Preferred stockholders, the Series A, Series B, Series D and Series D preferredE Convertible Preferred stockholders, prior and in preference to any distribution to the holders of common stock, are entitled to receive liquidationsliquidation preferences at the rate of $3.16, $2.75, $3.25 and $3.25$4.125 per share, respectively. The remaining assets of the Company are to be distributed to the Series C preferredConvertible Preferred and common stockholders, pro rata based on the number of shares of stock held on an as-if-convertedif-converted to common stock basis by each stockholder.
Voting
The holders of convertible preferred stock vote on an equivalent basis with common stockholders on an as-converted basis.
7. Stockholders’ deficitDeficit
Common stock warrant issuances
During 2005,Included in the Company’s outstanding warrants as of June 30, 2012 are warrants exercisable for 7,028,320, 1,028,335 and 255,000 shares of its common stock in connection with the issuance of promissory notes, the sale of Series E Convertible Preferred Stock and the provision of services rendered to the Company issued warrantsby non-employee consultants as compensation for those services, respectively.
The following summarizes transactions related to purchase 100,000common stock warrants:
Number of shares | Weighted-average exercise price per share | Weighted-average contractual life (years) | ||||||||||
Outstanding—January 1, 2010 | 4,018,740 | $ | 5.29 | 3.76 | ||||||||
Issued | 3,970,440 | 4.41 | 5.73 | |||||||||
Cancelled | (2,141,360 | ) | 6.80 | — | ||||||||
Exercised | (60,000 | ) | 0.50 | — | ||||||||
Expired | — | — | — | |||||||||
Outstanding—December 31, 2010 | 5,787,820 | $ | 4.17 | 5.07 | ||||||||
Issued | 3,513,885 | 3.00 | 4.66 | |||||||||
Cancelled | (1,420,000 | ) | 4.00 | — | ||||||||
Exercised | — | — | — | |||||||||
Expired | — | — | — | |||||||||
Outstanding—December 31, 2011 | 7,826,655 | $ | 3.69 | 5.22 | ||||||||
Issued | 665,000 | 3.00 | 5.00 | |||||||||
Cancelled | — | — | — | |||||||||
Exercised | — | — | — | |||||||||
Expired | (150,000 | ) | 0.50 | — | ||||||||
Outstanding—June 30, 2012 (unaudited) | 8,426,675 | $ | 3.69 | 5.21 |
The Company had 30,393,288, 33,114,819 and 34,280,031 shares of common stock with an exercise price of $0.50 per warrant share in exchange for services provided in connection with capital-raising activities on behalf of the Company. The estimated fair value of the warrants of $30,576 was recorded as additional paid-in capital and a charge to Series B convertible preferred stock issuance costs.
AutoGenomics, Inc.
Notes to financial statements — (continued)
(Information as of March 31, 2008 and thereafter and for the three months ended
March 31, 2007 and 2008 is unaudited)
In March 2007, the Company issued a warrant to purchase 150,000 shares of common stock with an exercise price of $0.50 per warrant share in exchange for services provided in connection with capital-raising activities on behalf of the Company. The estimated fair value of the warrants of $45,865 was recorded as additional paid-in capital and a charge to Series C convertible preferred stock issuance costs.
The following shares of common stock are reserved for future issuance at:at December 31, 2010 and 2011 and June 30, 2012, respectively, upon the conversion or exercise, as applicable, of its outstanding common stock options, common stock and preferred stock warrants (assuming conversion of the preferred stock warrants into common stock), and convertible preferred stock.
December 31, 2007 | March 31, 2008 | |||
Series A preferred stock | 3,104,564 | 3,109,964 | ||
Series B preferred stock | 4,302,040 | 4,302,040 | ||
Series C preferred stock | 6,399,635 | 6,405,089 | ||
Series D preferred stock | — | 3,423,258 | ||
Preferred stock warrants | 738,817 | 727,963 | ||
Common stock warrants | 250,000 | 250,000 | ||
Stock option plan: | ||||
Common stock options outstanding | 2,875,655 | 3,176,405 | ||
Shares available for future grant | 278,677 | 937,927 | ||
17,949,388 | 22,332,646 | |||
8. Equity incentive planStock-Based Compensation
In December 2000, the Company adopted the 2000 Equity Incentive Plan, or the 2000 Plan, which now has expired. The 2000 Plan allowed for the grant of stock options and the right to acquire restricted stock to employees, directors and consultants of the Company. The terms and conditions of specific awards were set at the discretion of the Company’s board of directors although generally options under the 2000 Plan vest in four annual installments of 25% and are generally immediately exercisable. The exercise price of incentive stock options was required to be not less than 100% of the fair market value of the Company’s common stock on the date of grant and the exercise price of any option granted to a 10% stockholder was required to be not less than 110% of the fair market value of the Company’s common stock on the date of grant. Options granted under the 2000 Plan expire no later than 10 years from the date of grant. Unvested common shares obtained upon early exercise of options are subject to repurchase by the Company at the original issue price. As of June 30, 2012, there were no unvested common shares outstanding that had originally been issued upon early exercise of options. The 2000 Plan expired in 2010 and no shares remain available for grant under the 2000 Plan.
As of December 31, 2010 there were outstanding vested and unvested options of 1,588,857 and 602,750, respectively, to purchase 2,191,607 shares of the Company’s common stock pursuant to the 2000 Plan.
As of December 31, 2011, there were outstanding vested and unvested options of 1,744,677 and 272,500, respectively, to purchase 2,017,177 shares of the Company’s common stock pursuant to the 2000 Plan.
As of June 30, 2012, there were outstanding vested and unvested options of 1,629,477 and 49,000, respectively, to purchase a total of 1,678,477 shares of the Company’s common stock pursuant to the 2000 Plan.
In October 2008, the Company adopted the 2008 Equity Incentive Award Plan, or the 2008 Plan. The 2008 Plan allows for the grant of stock options and rightsthe right to acquire restricted stock to employees, directors and
consultants of the Company. The terms and conditions of specific awards are set at the discretion of the Company’s board of directors although generally options vest in four annual installments of 25% and are generally immediately exercisable.. The exercise price of incentive stock options shall not be less than 100% of the fair market value of the Company’s common stock on the date of grant and the exercise price of any option granted to a 10% stockholder may be no less than 110% of the fair market value of the Company’s common stock on the date of grant. Options granted under the 2008 Plan expire no later than 10 years from the date of grant. Unvested common shares obtained upon early exercise of options are subject to repurchase by the Company at the original issue price. The 2008 Plan has 6,600,000 reserved 2,000,000 shares of common stock pursuant to awards under the 2008 Plan. In addition, shares available for issuance of which 937,927and not subject to awards and shares forfeited under the 2000 Plan, aggregating 1,553,392 shares, transferred to and were made available for granting pursuant to the 2008 Plan. In aggregate, 1,070,574 shares remained available for issuancegrant under the 2008 Plan at MarchDecember 31, 2008.
AutoGenomics, Inc.As of December 31, 2010 there were outstanding vested and unvested options of 560,700 and 1,196,400, respectively, to purchase a total of 1,757,100 shares of the Company’s common stock pursuant to the 2008 Plan.
NotesAs of December 31, 2011, there were outstanding vested and unvested options of 1,126,418 and 1,062,200, respectively, to financial statements — (continued)purchase a total of 2,188,618 shares of the Company’s common stock pursuant to the 2008 Plan.
(Information asAs of March 31,June 30, 2012, there were outstanding vested and unvested options of 1,075,835 and 1,285,700, respectively, to purchase a total of 2,361,535 shares of the Company’s common stock pursuant to the 2008 and thereafter and for the three months ended
March 31, 2007 and 2008 is unaudited)
Plan.
The following table summarizes stock option transactions from January 1, 2010 through June 30, 2012:
Options | Weighted-average exercise price per share | Weighted-average remaining contractual term (years) | Intrinsic value | |||||||||||||
(in thousands) | ||||||||||||||||
Outstanding—January 1, 2010 | 4,440,077 | $ | 1.29 | |||||||||||||
Granted | 1,931,400 | $ | 1.80 | |||||||||||||
Exercised | (165,900 | ) | $ | 0.87 | $ | 270 | ||||||||||
Forfeited | (894,870 | ) | $ | 0.95 | ||||||||||||
Outstanding—December 31, 2010 | 5,310,707 | $ | 1.54 | |||||||||||||
Granted | 684,218 | $ | 1.73 | |||||||||||||
Exercised | (12,250 | ) | $ | 0.50 | $ | 15 | ||||||||||
Forfeited | (246,430 | ) | $ | 2.33 | ||||||||||||
Outstanding—December 31, 2011 | 5,736,245 | $ | 1.53 | |||||||||||||
Granted | 275,000 | $ | 1.73 | |||||||||||||
Exercised | (50,000 | ) | $ | 0.25 | $ | 76 | ||||||||||
Forfeited | (163,483 | ) | $ | 0.88 | ||||||||||||
Outstanding—June 30, 2012 (unaudited) | 5,792,762 | $ | 1.57 | |||||||||||||
Vested and expected to vest, exercisable as of June 30, 2012 (unaudited) | 4,117,323 | $ | 1.30 | 6.7 | $ | 2,843 | ||||||||||
Non–vested as of June 30, 2012 (unaudited) | 1,680,439 | $ | 2.53 | 7.4 | $ | — |
Determining Fair Value of Stock Options
The fair value of each grant of stock options was determined by the Company and its board of directors using the methods and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment to determine.
Valuation Method—The Company estimates the fair value of its stock options using the Black-Scholes valuation model.
Expected Term—The expected life of employee and non-employee director stock options represents the average of the contractual term of the options and the weighted-average vesting period, as permitted under the Plansimplified method. The Company has elected to use the simplified method, as the Company does not have enough historical exercise experience to provide a reasonable basis upon which to estimate the expected term and the stock option grants are considered “plain vanilla” options.
Expected Volatility—The expected volatility is derived from March 31, 2005the historical stock volatilities of several comparable publicly listed peer companies over a period approximately equal to March 31, 2008:the expected term of the options because the Company has limited information on the volatility of its common stock since the Company has no trading history. When making the selections of the comparable industry peers to be used in the volatility calculation, the Company considered the size, operational and economic similarities to its principle business operations.
Fair Value of Common Stock—The fair value of the common stock underlying the stock options has historically been determined by the Company’s board of directors. Because there has been no public market for the Company’s common stock, the board of directors has determined the fair value of the common stock at the time of the option grant by considering a number of objective and subjective factors including valuations performed by unrelated third-party specialists, which included valuations of comparable companies, operating and financial performance, lack of liquidity of capital stock and general and industry-specific economic outlook, amongst other factors. Once the Company’s common stock is listed on an established stock exchange or national market system, the fair value will be based on the publicly traded share price.
Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term of the options.
Expected Dividend—The expected dividend has been zero as the Company has never paid dividends and has no expectations to do so.
Forfeiture Rate—The Company estimated its forfeiture rate at 4% based on an analysis of its actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. The impact from a forfeiture rate adjustment will be recognized in full in the period of adjustment, and if the actual number of future forfeitures differs from that estimated, the Company may be required to record adjustments to stock-based compensation expense in future periods.
The fair value of employee stock options was estimated at the grant date using the following assumptions:
Options | Weighted- average exercise price | Weighted- average remaining contractual term (years) | ||||||
Outstanding, March 31, 2005 | 3,411,570 | $0.19 | ||||||
Granted | 132,153 | $0.47 | ||||||
Exercised | (134,500 | ) | $0.41 | |||||
Forfeited | (134,000 | ) | $0.27 | |||||
Outstanding, December 31, 2005 | 3,275,223 | $0.19 | ||||||
Granted | 523,200 | $0.50 | ||||||
Exercised | (337,038 | ) | $0.15 | |||||
Forfeited | (297,500 | ) | $0.35 | |||||
Outstanding, December 31, 2006 | 3,163,885 | $0.23 | ||||||
Granted | 672,000 | $0.50 | ||||||
Exercised | (906,230 | ) | $0.26 | |||||
Forfeited | (54,000 | ) | $0.49 | |||||
Outstanding, December 31, 2007 | 2,875,655 | $0.28 | 6.07 | |||||
Granted | 389,000 | $0.54 | ||||||
Exercised | (40,000 | ) | $0.31 | |||||
Forfeited | (48,250 | ) | $0.45 | |||||
Outstanding, March 31, 2008 | 3,176,405 | $0.31 | 6.26 | |||||
Vested and expected to vest as of March 31, 2008 | 3,122,767 | $0.31 | ||||||
Vested and exercisable as of March 31, 2008 | 3,176,405 | $0.31 | ||||||
Years ended December 31, | Six months ended June 30, 2012 | |||||||||||
2010 | 2011 | |||||||||||
(unaudited) | ||||||||||||
Fair value | $ | 0.13-2.74 | $ | 1.73 | $ | 1.73 | ||||||
Risk-free interest rate | 1.35% - 2.93% | 0.80% - 1.23% | 0.80% | |||||||||
Dividend yield | — | — | — | |||||||||
Expected life of options (years) | 5.00 - 6.25 | 5.08 - 6.25 | 5.50 | |||||||||
Volatility | 68.65% - 71.59% | 69.89% - 75.00% | 69.89% |
AsInformation for the first six months of March 31, 2008,fiscal year 2011 is not included in the above table as there were outstanding vestedno option grants during that period.
The Company recognized employee stock-based compensation in the statements of operations and comprehensive income (loss) as follows:
Years ended December 31, | Six months ended June 30, | |||||||||||||||
2010 | 2011 | 2011 | 2012 | |||||||||||||
(unaudited) | ||||||||||||||||
Cost of sales | $ | 227 | $ | 236 | $ | 73 | $ | 71 | ||||||||
Research and development | 432 | 395 | 122 | 91 | ||||||||||||
General and administrative | 901 | 780 | 306 | 175 | ||||||||||||
Sales and marketing | 1,203 | 166 | 53 | 49 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 2,763 | $ | 1,577 | $ | 554 | $ | 386 | ||||||||
|
|
|
|
|
|
|
|
No income tax benefit has been recognized in the statement of operations for the periods presented. The total compensation cost related to unvested optionsstock option grants not yet recognized as of 2,244,005June 30, 2012 was $2.2 million, and 932,400, respectively,the weighted average period over which these grants was expected to vest is 1.4 years.
Stock based compensation expense related to non-employee consultants totaled $0.2 million, $0.1 million, $0 and $0 for the years ended December 31, 2010 and 2011 and the six months ended June 30, 2011 and 2012, respectively.
The Company has issued options to purchase 3,176,405 shares of the Company’s common stock.
The Company engaged SVB Analytics, Inc., or SVB Analytics, an unrelated third-party valuation specialist,stock to perform a contemporaneous valuation analysiscertain of the Company’s common stockdirectors, executive officers and key employees that are not subject to either the 2008 Plan or the 2000 Plan. The terms of these options are substantially the same as of December 31, 2006, December 31, 2007 and April 30, 2008. Each valuation was prepared in accordance withthose issued under the methodologies prescribed by the American Institute of Certified Public Accountants, or AICPA, Practice Aid,Valuation of Privately-Held-Company Equity Securities Issued as Compensation. In accordance with the AICPA guidance, SVB Analytics considered a variety of valuation methodologies (market approach, income approach and cost approach).2000 Plan. As of December 31, 2006 and December 31, 2007, SVB Analytics calculated the final enterprise valuations using a weighted combination of the results of both the market approach and the income approach and allocated this valueJune 30, 2012, there were outstanding options to the common stock based on the option pricing method. As of April 30, 2008, SVB Analytics utilized a probability weighted expected return
AutoGenomics, Inc.
Notes to financial statements — (continued)
(Information as of March 31, 2008 and thereafter and for the three months ended
March 31, 2007 and 2008 is unaudited)
method, or PWERM, to allocate value to the common stock. The enterprise values concluded in the PWERM analysis were based on a combination of market and income approaches and an option pricing method back solve technique. Given the proximity of the Company to a liquidity event it was believed that greater clarity was available to the company to define and estimate likely outcomes. As such, the PWERM provided a more refined estimate of the likely value of common stock. These analyses result in estimates of the fair market valuepurchase 1,406,750 shares of our common stock at December 31, 2006, December 31, 2007 and April 30,that were not issued under either the 2008 of $0.50 per share, $0.64 per share and $2.75 per share, respectively. SincePlan or the 2000 Plan.
The Company had no specific corporate milestones between December 31, 2007 and April 30, 2008 tohas adopted an Employee Stock Purchase Plan which the Company could specifically assign the change in valuation duringcontains an “evergreen provision” that period, the Company allocated the change ratably to each of the four monthsallows for an annual increase in the period.number of shares available for issuance. This plan provides for an aggregate limit on the number of shares of common stock that may be issued over the course of its ten-year term of 2,250,000 shares. The Company has not issued any shares or awards under this plan as it is not yet effective.
9. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes the Company’s assets and liabilities that require fair value measurements on a recurring basis and their respective input levels based on the fair value hierarchy:
Fair value at December 31, 2010 | Fair value measurements at December 31, 2010 using: | |||||||||||
Quoted market prices for identical assets (Level 1) | Significant unobservable inputs (Level 3) | |||||||||||
(in thousands) | ||||||||||||
Money market funds | $ | 92 | $ | 92 | $ | — | ||||||
Common stock warrant liabilities | 718 | — | 718 | |||||||||
Preferred stock warrant liabilities | 354 | — | 354 | �� | ||||||||
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|
| |||||||||
Total | $ | 92 | $ | 1,072 | ||||||||
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|
Money market funds Common stock warrant liabilities Preferred stock warrant liabilities Total Fair value at
December 31,
2011 Fair value measurements at
December 31, 2011 using: Quoted market prices
for identical assets
(Level 1) Significant
unobservable
inputs
(Level 3) (in thousands) $ 1 $ 1 $ — 215 — 215 412 — 412 $ 1 $ 627
Fair value at June 30, 2012 | Fair value measurements at June 30, 2012 (unaudited) using: | |||||||||||
Quoted market prices for identical assets (Level 1) | Significant unobservable inputs (Level 3) | |||||||||||
(in thousands) | ||||||||||||
Money market funds | $ | 40 | $ | 40 | $ | — | ||||||
Common stock warrant liabilities | 61 | — | 61 | |||||||||
Preferred stock warrant liabilities | 272 | — | 272 | |||||||||
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| |||||||||
Total | $ | 40 | $ | 333 | ||||||||
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Preferred and common stock warrant liabilities
The following table summarizes the activity in the common stock and preferred stock warrant liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
Preferred stock warrant liabilities | Common stock warrant liabilities | |||||||
(in thousands) | ||||||||
Balance at January 1, 2010 | $ | 1,212 | $ | 786 | ||||
Change in fair value of warrant liabilities | (599 | ) | (68 | ) | ||||
Issuances and settlements | (259 | ) | — | |||||
Transfers in and out of Level III | — | — | ||||||
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| |||||
Balance at December 31, 2010 | 354 | 718 | ||||||
Change in fair value of warrant liabilities | 77 | (503 | ) | |||||
Issuances and settlements | (19 | ) | — | |||||
Transfers in and out of Level III | — | — | ||||||
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| |||||
Balance at December 31, 2011 | 412 | 215 | ||||||
Change in fair value of warrant liabilities | (129 | ) | (154 | ) | ||||
Issuances and settlements | (11 | ) | — | |||||
Transfers in and out of Level III | — | — | ||||||
|
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|
| |||||
Balance at June 30, 2012 (unaudited) | $ | 272 | $ | 61 | ||||
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Certain assets and liabilities are measured at fair value on a nonrecurring basis and therefore are not included in the tables above. These include certain long-lived assets measured at cost that were written down to fair value during 2010 as a result of an impairment. In addition, modified notes payable determined to be extinguished were measured and recognized at fair value on the extinguishment date. The fair values of these assets and notes were calculated using discounted cash flow models that utilized certain unobservable inputs (Level III).
10. Income taxesTaxes
The Company reported net lossesis anticipating a taxable loss for all periods through December 31 2007, and therefore,presented with the exception of the June 30, 2012 period for which previously incurred net operating losses will be utilized to offset taxable income. Additionally, management has determined that a full valuation allowance should be maintained against net deferred tax assets (discussed further below). As such, no income tax provision has been recorded for income taxes was recorded.any of the periods presented.
The effective tax rate on income taxes is reconciled to the statutory federal income tax rate as follows:
Nine months ended December 31, | Years ended December 31, | |||||
2005 | 2006 | 2007 | ||||
Tax computed at the federal statutory rate | 35.0% | 35.0% | 35.0% | |||
State income taxes, net of federal benefit | 5.7% | 5.5% | 5.4% | |||
Stock-based compensation | (0.4)% | (0.1)% | (0.4)% | |||
Permanent differences and other | (0.1)% | (1.1)% | 0.3% | |||
Losses not benefited | (24.6)% | (33.8)% | (46.4)% | |||
Change in valuation allowance and other | (15.6)% | (5.5)% | 6.1% | |||
Actual rate | 0.0% | 0.0% | 0.0% | |||
AutoGenomics, Inc.
Notes to financial statements — (continued)
(Information as of March 31, 2008 and thereafter and for the three months ended
March 31, 2007 and 2008 is unaudited)
For the years ended December 31, | For the six months ended June 30, | |||||||||||||||
2010 | 2011 | 2011 | 2012 | |||||||||||||
(unaudited) | ||||||||||||||||
Tax computed at the federal statutory rate | (35.0 | )% | (35.0 | )% | (35.0 | )% | (35.0 | )% | ||||||||
State income taxes, net of federal benefit | (4.8 | )% | (4.8 | )% | (4.8 | )% | (4.8 | )% | ||||||||
Permanent differences and other | 3.1 | % | 1.3 | % | 5.5 | % | 10.8 | % | ||||||||
Changes in valuation allowance | 36.7 | % | 38.5 | % | 34.3 | % | 29.0 | % | ||||||||
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| |||||||||
Actual rate | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||
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Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Significant components of the deferred tax assets are as follows:
December 31, | June 30, 2012 | |||||||||||||||||
2010 | 2011 | |||||||||||||||||
December 31, | (unaudited) | |||||||||||||||||
2006 | 2007 | (in thousands) | ||||||||||||||||
Deferred tax assets: | ||||||||||||||||||
Net operating losses | $ | 23,018 | $ | 26,456 | $ | 26,513 | ||||||||||||
Credits | 1,687 | 1,856 | 1,932 | |||||||||||||||
Accrued expenses | $ 410,954 | $ 112,674 | 1,343 | 1,407 | 1,473 | |||||||||||||
Intangible assets | 2,309,764 | 2,008,817 | 5,264 | 5,936 | 6,243 | |||||||||||||
Stock-based compensation | 2,445 | 16,974 | 1,053 | 1,179 | 1,195 | |||||||||||||
Other | 50,218 | 71,230 | 349 | 344 | 379 | |||||||||||||
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| ||||||||||||||||
2,773,381 | 2,209,695 | 32,714 | 37,178 | 37,735 | ||||||||||||||
Valuation allowance | (2,766,595 | ) | (2,198,287 | ) | (32,661 | ) | (37,023 | ) | (37,505 | ) | ||||||||
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| ||||||||||||||||
Total deferred tax assets, net of valuation allowance | 6,786 | 11,408 | ||||||||||||||||
Total deferred tax assets | 53 | 155 | 230 | |||||||||||||||
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| ||||||||||||||||
Deferred tax liabilities: | ||||||||||||||||||
Fixed assets | (6,786 | ) | (11,408 | ) | (53 | ) | (155 | ) | (230 | ) | ||||||||
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|
| ||||||||||||||||
Net deferred tax assets | $ — | $ — | ||||||||||||||||
Total deferred tax liabilities | (53 | ) | (155 | ) | (230 | ) | ||||||||||||
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| ||||||||||||||||
Total deferred tax assets, net of valuation allowance | $ | — | $ | — | $ | — | ||||||||||||
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A valuation allowance of $2,766,595$32.7 million, $37.0 million and $2,198,287$37.5 million at December 31, 20062010 and 2007,2011 and June 30, 2012, respectively, has been recorded to offset net deferred tax assets as the Company is unable to conclude that it is more likely than not that such deferred tax assets will be realized.
At December 31, 2007,2011, the Company had federal tax net operating loss carryforwards of $25,123,471$67.9 million and state tax net operating loss carryforwards of $24,582,952.$56.8 million. The federal and state tax net operating loss carryforwards will begin to expire in 20192020 and 2011,2012, respectively. At December 31, 2007,2011, the Company had federal research and development credit carryforwards of $558,166$1.0 million and state research credit carryforwards of $654,415.$1.3 million. The federal research and development credit carryforwards begins to expire in 2022. The state research credit carryforwards do not expire. At June 30, 2012, the Company had federal tax net operating loss carryforwards of $68.1 million and state tax net operating loss carryforwards of $56.9 million. The federal and state tax net operating loss carryforwards will begin to expire in 2020 and 2012, respectively. At June 30, 2012, the Company had federal research and development credit carryforwards of $1.1 million and state research credit carryforwards of $1.3 million. The federal research and development credit carryforwards begins to expire in 2022. The state research credit carryforwards do not expire.
The Company recognizes uncertain tax positions in accordance with ASC 740,Income Taxes. The Company adopted the provisions of FIN No. 48uncertain tax position standard on January 1, 2008. As of the date of adoption, the Company had no unrecognized tax benefits. The adoption of FIN No. 48 did not result in an adjustment to accumulated deficit. The Company had no unrecognized tax benefits at June 30, 2012. The Company will recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company recognized no interest or penalties upon the adoption of FIN No. 48.the standard or at June 30, 2012. The Company does not expect any significant increases or decreases to its unrecognized tax benefits within 12 months of this reporting date.
The Company is subject to U.S. federal and state income taxes. The Company is no longer subject to U.S. federal or state income tax examinations for years ended before MarchDecember 31, 20052007 and MarchDecember 31, 2004,2006, respectively. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated
AutoGenomics, Inc.
NotesDeferred tax assets pertaining to financial statements — (continued)
(Information aswindfall tax benefits on exercise of March 31, 2008share awards and thereafterthe corresponding credit to additional paid-in-capital are recorded if the related tax deduction reduces tax payable and for the three months ended
March 31, 2007Company has elected the “with and 2008 is unaudited)
and carried forward, and make adjustments up to the amount of the net operating loss or credit carryforward amount. The Company is not currently under Internal Revenue Service, or IRS, or state examination.without” approach regarding windfall tax benefits.
Utilization of net operating loss (NOL) carryforwards, credit carryforwards, and certain deductions may be subject to substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The tax benefits related to future utilization of federal and state net operating loss carryforwards, credit carryforwards, and other deferred tax assets may be limited or lost if cumulative changes in ownership exceeds 50% within any three-year period. The Company has not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company’s formation due to the complexity and cost associated with such a study, and the fact that there may be additional such ownership changes in the future. Such a limitation may occur as a result of a change in ownership upon the planned initial public offering. If the Company has experienced an ownership change at any time since its formation, utilization of the net operating lossNOL or credit carryforwards to offset future taxable income and taxes, respectively, would be subject to an annual limitation under Section 382 of the Code, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of all or a portion of the net operating lossNOL or credit carryforwards before utilization. Until a study is completed and any limitation known, no amounts of domestic net operating lossesNOL or tax credit carryforwards are being considered as an uncertain tax position andor disclosed as unrecognized tax benefits under FIN No. 48 since no benefits have been realized to date. The deferred tax assets related to these domestic loss and credit carryforwards and the offsetting valuation allowances have also been removed from the financial statements with no impact on earnings. These amounts are not recognized until they can be measured after a Section 382 analysis is completed.
10.11. Employee savings planSavings Plan
The Company maintains a defined contribution 401(k) plan available to eligible employees. Employee contributions are voluntary and are determined on an individual basis, limited to the maximum amount allowable under federal tax regulations. The Company, at its discretion, may make certain contributions to the 401(k) plan. No contributions were approved or funded by the Company through March 31, 2008.June 30, 2012.
11.12. Subsequent events
Initial public offering and unaudited pro forma balance sheet
In July 2008,The Company evaluated subsequent events through September 26, 2012, the Company’s board of directors authorized management to file a registration statement with the SEC for the Company to sell shares of its common stock to the public. The board of directors also approved (subject to stockholder approval) that prior to the effective date of the offering contemplated by this prospectus,issuance of these financial statements. In July 2012 the Company will reincorporate in Delaware.entered into a new lease amendment for the Company’s facilities. This amendment extends the lease until 2029 and increases lease payments. The amendment also has a requirement that the past due rent of approximately $1.1 million be paid by November 1, 2012.
AutoGenomics, Inc.
Notes to financial statements — (continued)
(Information as of March 31, 2008 and thereafter and for the three months ended
March 31, 2007 and 2008 is unaudited) Shares
The financial statements and accompanying notes have been retroactively restated to reflect the effect of the reincorporation in Delaware. If the initial public offering is completed under the terms presently anticipated, all of the convertible preferred stock outstanding at the time of the offering will automatically convert into shares of common stock. The accompanying pro forma balance sheet reflects the assumed conversion of the convertible preferred stock and does not assume the reclassification of the convertible preferred stock warrant liability to equity since the warrants may not become exercisable for common stock. The unaudited pro forma balance sheet does not assume any proceeds from the proposed initial public offering.
sharesCommon Stock
AutoGenomics, Inc.PROSPECTUS
Common shares
Prospectus
JPMorgan
Deutsche Bank SecuritiesLeerink Swann
, 2008Cantor Fitzgerald & Co.
Part II
Information not requiredNot Required in prospectusProspectus
Item 13.Other Expensesexpenses of Issuanceissuance and Distribution.distribution.
The table below lists various expenses, other than underwriting discounts and commissions, we expect to incur in connection with the sale and distribution of the securities being registered hereby. All the expenses are estimates, except the Securities and Exchange Commission registration fee, the FINRA filing fee and the NASDAQ listing fee.
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Type | Amount | |||
Securities and Exchange Commission Registration Fee | $ | 7,449 | ||
FINRA Filing Fee | $ | 10,250 | ||
NASDAQ Fee | * | |||
Legal Fees and Expenses | * | |||
Accounting Fee and Expenses | * | |||
Printing and Engraving Expenses | * | |||
Transfer Agent and Registrar Fees | * | |||
Miscellaneous Expenses | * | |||
* | ||||
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Total | $ | * | ||
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* | To be filed by |
Item 14.Indemnification of Directors and Officers.Officers.
Section 102 of the Delaware General Corporation Law, or DGCL, as amended, allows a corporation to eliminate the personal liability of directors of a corporation to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except where the director breached the duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law or obtained an improper personal benefit. Upon completion of our reincorporation in Delaware, ourOur certificate of incorporation will eliminateeliminates this liability.
Section 145 of the DGCL provides for the indemnification of officers, directors and other corporate agents in terms sufficiently broad to indemnify such persons under circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act. Upon completion of our reincorporation in Delaware, ourOur certificate of incorporation and bylaws will provide for indemnification of our officers, directors, employees and agents to the extent and under the circumstances permitted under the DGCL.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the underwriters of us, our directors and officers, and by us of the underwriters, for some liabilities arising under the Securities Act, and affords some rights of contributions with respect thereto.
We have executed indemnification agreements with each of our directors and each of our executive officers. These agreements provide indemnification to our directors and executive officers under certain circumstances for acts or omissions that may be sufficiently broad to indemnify such persons for liabilities arising under the Securities Act.
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Item 15.Recent Sales of Unregistered Securities.Securities.
Since January 1, 2005,June 30, 2009, we have issued the following securities that were not registered under the Securities Act of 1933:1933, as amended:
(a) Stock Option Grants
From January 1, 20052009 through July 21, 2008,June 30, 2012, we granted stock options to our employees, directors and consultants pursuant to which the optioneesoptionee may purchase up to an aggregate of 2,813,1533,789,918 shares of our common stock at the currenta weighted average exercise price of $0.84$1.98 per share. Of the options we granted during this period, options to purchase a total of 369,250477,883 shares have been forfeited and 535,250 have been exercised.or cancelled. The sale and issuance of these securitiesthe stock options were exempt from registration under Section 4(2) of the Securities Act or Rule 701 under the Securities Act.
(b) Issuances of Common Stock
From June 30, 2009 through June 30, 2012, we issued and sold 254,200 shares of our common stock to our employees, directors and consultants upon the exercise of stock options at a weighted average exercise price of $0.72 per share for an aggregate exercise price equal to approximately $183,000. These underlying stock options were granted between January 2002 and June 2008 pursuant to our equity incentive compensation plans and agreements.
In August 2010 we issued and sold 60,000 shares of our common stock to one of our board members at an exercise price of $0.50 per share, for an aggregate exercise price of $30,000, pursuant to the exercise by such board member of a then outstanding warrant to purchase such shares that was issued in August 2005.
No underwriters were involved in the foregoing sales of securities. The sale and issuance of the securities described in this Item 15(b) above were exempt from registration under Section 4(2) of the Securities Act or Rule 701 under the Securities Act.
(c) Issuances of Preferred Stock and related Warrants
(1) In July 2005,2010, we issued and sold 2,105,210 shares of Series B Convertible Preferred Stock at a price of $2.75 to accredited investors, for aggregate consideration of $5,789,328. As consideration for its services in connection with the issuance, we issued an additional 19,287 shares of Series B Convertible Preferred Stock to an investor. In connection with this private placement, we issued warrants to purchase 213,818166,329 shares of our Series B Convertible Preferred Stock to accreditedthree existing holders at an exercise price of $2.75 per share, for an aggregate exercise price of $457,000, pursuant to the exercise by such holders of then outstanding warrants to purchase such shares that were originally issued in connection with the sale and issuance of our Series B Convertible Preferred Stock in 2005.
From December 2010 through July 2012, we issued 6,591 shares of our Series C Convertible Preferred Stock to four existing holders at a weighted average exercise price of $3.34 per share for an aggregate exercise price of $22,000, pursuant to the exercise by such holders of then outstanding warrants to purchase such shares that were originally issued in connection with the sale and issuance of our Series C Convertible Preferred Stock in 2007.
In May, July and August 2011, warrants to purchase 59,072 shares of our Series C Convertible Preferred Stock at an exercise price of $3.30 per share were due to expire. These warrants were originally issued in connection with the sale and issuance of our Series C Convertible Preferred Stock in 2007. We offered to extend the expiration date of these warrants to May 2012, July 2012 and August 2012, respectively, in exchange for an increase in the exercise price of such warrants from $3.30 per share to $3.80 per share. Holders of warrants for the purchase of 51,800 of these warrants accepted the offer. The remaining warrants, for the purchase of 7,272 shares of our Series C Convertible Preferred Stock, expired in accordance with their respective terms.
In July and August 2011, warrants to purchase 348,910 shares of our Series C Convertible Preferred Stock at an exercise price of $2.75 per share were due to expire. These warrants were originally issued in connection with the sale and issuance of our Series C Convertible Preferred Stock in 2007. We offered to extend the expiration date of these warrants to July 2013 and August 2013, respectively, in exchange for an increase in the exercise price of such warrants from $2.75 per share to $3.25 per share. Holders of warrants for the purchase of 334,364 shares of our Series C Convertible Preferred Stock accepted the offer. The remaining warrants, for the purchase of 14,546 shares of our Series C Convertible Preferred Stock, expired in accordance with their respective terms.
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In November 2011, we issued and sold an aggregate of 685,555 shares of our Series E Convertible Preferred Stock to eight investors at a purchase price of $2.75 per share, for an aggregate purchase price of $1.9 million. As part of this offering, we also issued to these investors five-year warrants for the purchase of 1,028,335 shares of our common stock at an exercise price of $2.75 per share.
(2) In December 2005 and January and May 2006, we issued unsecured convertible subordinated promissory notes, in the aggregate principal amount of $2,370,000, to accredited investors. In July and August 2006, these promissory notes converted into 861,818 shares of Series C Convertible Preferred Stock at a price of $2.75 per share. In July, August and December 2006, we issued and sold an additional 3,133,825 shares of Series C Convertible Preferred Stock at a price of $2.75 per share to accredited investors, for aggregate consideration of $8,618,019. As consideration for his services in connection with the issuance, we issued an additional 50,000 shares of Series C Convertible Preferred Stock to one of our directors. From December 2005 through October 2006, we issued2012, warrants to purchase 450,36342,300 shares of our Series C Convertible Preferred Stock to accredited investors with a weighted averageat an exercise price of $2.86$3.80 per share. Ofshare were due to expire. These warrants were originally issued in connection with the warrants we granted during this period, warrants to purchase a totalsale and issuance of 11,454 shares ofour Series C Convertible Preferred Stock have been exercised.
(3) In Februaryin 2007 (and, as described above, were amended in 2011). We offered to extend the expiration date of these warrants to July 2013 and March 2007, we issued and sold 2,353,992August 2013, respectively, in exchange for an increase in the exercise price of such warrants from $3.80 per share to $4.05 per share. Holders of warrants for the purchase of 34,064 of these warrants accepted the offer. The remaining warrants, for the purchase of 8,236 shares of our Series C Convertible Preferred Stock, expired in accordance with their respective terms.
In July and August 2012, warrants to purchase 342,000 shares of our Series C Convertible Preferred Stock at a price of $2.75 per share to accredited investors, for an aggregate consideration of $6,473,478.
(4) From December 2007 through March 2008, we issued unsecured convertible subordinated promissory notes, in the aggregate principal amount of $11,125,589, to accredited investors. In March 2008, these promissory notes converted into 3,423,258 shares of Series D Convertible Preferred Stock at aexercise price of $3.25 per share.
(5) During 2005, weshare were due to expire. These warrants were originally issued in connection with the sale and issuance of our Series C Convertible Preferred Stock in 2007 (and, as described above, were amended in 2011). We offered to extend the expiration date of these warrants to July 2013 and August 2013, respectively, in exchange for an increase in the exercise price of such warrants from $3.25 per share to $3.50 per share. Holders of warrants for the purchase 100,000of 308,727 of these warrants accepted the offer. The remaining warrants, for the purchase of 33,273 shares of our common stock to accredited investors at an exercise price $0.50 per share. Of the warrants we granted during this period, warrants to purchase a total of 40,000 shares of common stock have been exercised.
(6) In March 2007, we issued a warrant to purchase 150,000 shares of our common stock to A R Properties at an exercise price of $0.50 per share.
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(7) In May 2008, we issued a warrant to purchase 50,000 shares of our common stock to AutoGenomics India (Private) Limited, which is not a subsidiary or affiliate of AutoGenomics, Inc., at an exercise price of $0.60 per share.Series C Convertible Preferred Stock, expired in accordance with their respective terms.
No underwriters were involved in the foregoing sales of securities. The securities described in this paragraph (b) of Item 15above were sold and issued to accredited investors in reliance upon the exemption from the registration requirements of the Securities Act, as set forth in Section 4(2) underof the Securities Act and Rule 506 of Regulation D under the Securities Act.
(d) Issuances of Subordinated Promissory Notes and related Warrants
From March 2009 through December 2009, we issued $5,035,000 aggregate principal amount of subordinated promissory notes in a private placement to certain accredited investors. The notes bear a weighted average annual interest rate of 6.2%, with the principal and accrued interest balances due two years after the date of issuance. We may elect to prepay the notes at any time without penalty. In the private placement, we also issued warrants to purchase 1,429,940 shares of our common stock with exercise prices ranging from $4.00 to $7.00 per share. The warrants are now fully exercisable and have a term of five years from their date of issue.
In July 2009 and August 2009, we issued $5,071,000 in subordinated promissory notes in a private placement to certain accredited investors. Of this amount, $1,571,000 was used to repay the principal and accrued interest on a subordinated promissory note we issued in September 2008. The new notes bear interest at the rate of 13% per annum, with the principal and accrued interest balances due two years after the date of issuance. We may elect to prepay the notes at any time without penalty. In the private placement, we also issued warrants to purchase 1,420,000 shares of our common stock with an exercise price of $4.00 per share. The warrants are now fully exercisable and have a term of five years from their date of issue. In connection with this issuance of subordinated promissory notes, warrants to purchase 213,000 shares of our common stock with an exercise price of $7.00 per share associated with the subordinated promissory note issued in September 2008 and repaid in July 2009 were cancelled and replaced by warrants to purchase 426,000 shares of our common stock with an exercise price of $4.00 per share.
In February and March 2010, we issued $525,000 aggregate principal amount of subordinated promissory notes to certain accredited investors. The notes bear interest at the rate of 6.0% per annum, with the principal and accrued interest balances generally due two years after the date of issuance, depending on the provisions of the note. We may elect to prepay the notes at any time without penalty. In connection with this offering, we also issued warrants to purchase 149,100 shares of our common stock with an exercise price of $4.00 per share. The warrants are now fully exercisable and have a term of five years from their date of issue.
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In March 2010, we issued $5,250,000 aggregate principal amount of subordinated notes in a private placement to certain accredited investors. The notes bear interest at the rate of 6% per annum, with the principal and accrued interest balances due two years after the date of issuance. We may elect to prepay the notes at any time without penalty. In the private placement, we also issued warrants to purchase 1,575,000 shares of our common stock with an exercise price of $5.00 per share. The warrants are now fully exercisable and have a term of five years from their date of issue.
In April 2010, we and the applicable note holder amended a subordinated promissory note with a principal amount of $1,000,000 set to mature in August 2010 by extending the maturity date to April 2011. In connection with this amendment, we cancelled a warrant to purchase 284,000 shares of our common stock at an exercise price of $7.00 per share held by the note holder which was to expire five years after the issuance date, and reissued a warrant to purchase 284,000 shares of our common stock at an exercise price of $5.00 per share to the note holder which will expire six and one-half years after the original issuance date. Also in April 2010, we and the applicable note holders amended certain subordinated promissory notes with an aggregate principal amount of $5,040,000 set to mature between August 2010 and December 2011 by extending the maturity dates to April 2012. These notes are now due and owing. In connection with these amendments, we cancelled warrants to purchase 1,431,360 shares of our common stock at an exercise price of $7.00 per share held by the note holders which were to expire five years after the issuance date and reissued warrants to purchase 1,431,360 shares of our common stock at an exercise price of $5.00 per share to the note holders which will expire six and one-half years after the original issuance date.
In November 2010, we and the applicable note holder amended certain promissory notes with an aggregate principal amount of $2,500,000 set to mature in August 2010, February 2011, May 2011 and November 2011, by extending the maturity dates to December 2012. In connection with these amendments, we cancelled warrants to purchase 710,000 shares of our common stock at exercise prices of $4.00, $5.00 and $7.00 per share held by the note holder and reissued warrants to purchase 710,000 shares of our common stock at an exercise price of $3.00 per share to the note holder which will expire in January 2016.
From December 2010 through May 2011, we issued $1,300,000 aggregate principal amount of promissory notes to certain accredited investors. The notes bear interest at the rate of 7.0% per annum, and generally mature in December 2012. In connection with the issuance of these notes, we also issued warrants to purchase 390,000 shares of our common stock with an exercise price of $3.00 per share. The warrants have a term of five years from their date of issue.
In June 2011, we and the applicable note holder amended a certain promissory note with an aggregate principal amount of $2,000,000 set to mature in July 2011, by extending the maturity date to December 2012. In connection with this amendment, we cancelled a warrant to purchase 568,000 shares of our common stock at an exercise price of $4.00 per share held by the note holder and reissued a warrant to purchase 568,000 shares of our common stock at an exercise price of $3.00 per share to the note holder which will expire in August 2014.
In August 2011, we and the applicable note holder exchanged promissory notes with an aggregate principal amount of $3,500,000 that were set to mature in July 2011 for promissory notes with an aggregate principal amount of $3,900,000, set to expire December 2011 and February 2012. In connection with this exchange, we cancelled warrants to purchase 852,000 shares of our common stock at an exercise price of $4.00 per share held by the note holder and reissued a warrant to purchase 1,300,000 shares of our common stock at an exercise price of $3.00 to the note holder which will expire in August 2016.
In December 2011, we and the applicable note holders amended promissory notes with an aggregate principal amount of $595,000 that were set to expire in December 2011, by extending the maturity dates to dates in 2012. In connection with this amendment, we amended warrants to purchase 168,980 shares of our common stock by reducing the exercise price from $4.00 per share to $3.00 per share.
From November 2011 through January 2012, we issued $695,000 aggregate principal amount of promissory notes to certain accredited investors. The notes bear interest at the rate of 12.0% per annum, and matured in April 2012. In connection with this offering, we issued warrants to purchase 347,500 shares of our common stock at an exercise price of $1.73 per share to the note holders which will expire five years from their date of issue.
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In February 2012, we and the applicable note holder amended a certain promissory note with a principal amount of $250,000 set to mature in April 2012, by extending the maturity date to June 2012. In connection with this amendment, we amended a warrant to purchase 71,000 shares of our common stock at an exercise price of $5.00 per share held by the note holder, by reducing the exercise price to $3.00 per share and extending the term of the warrant until June 2017.
In February 2012, we and the applicable note holders amended certain promissory notes with an aggregate principal amount of $400,000 set to mature in February 2012, by extending the maturity dates to April 2012. In connection with these amendments, we amended warrants to purchase 113,600 shares of our common stock at an exercise price of $4.00 per share held by the note holder, by reducing the exercise price to $3.00 per share and extending the term of the warrant until April 2017.
In March 2012, we issued $1,150,000 aggregate principal amount of promissory notes to certain accredited investors. The notes bear interest at the rate of 10.0% per annum, with the principal and accrued interest balances generally due in June 2012. In connection with the issuance of these notes, we issued warrants to purchase 345,000 shares of our common stock with an exercise price of $1.73 per share which will expire five years from their date of issue.
No underwriters were involved in the foregoing sales of securities. The sale and issuance of the securities described in this Item 15(d) above were exempt from registration under Section 4(2) of the Securities Act or Rule 506 of Regulation D under the Securities Act.
(e) Issuances of Other Warrants
In October 2010, we issued a consultant a warrant to purchase 30,000 shares of our common stock at an exercise price of $2.01 per share in connection with services provided to us. The warrant is set to expire in September 2015.
In August 2011, we issued to certain non-employee members of our board of directors warrants to purchase an aggregate of 100,000 shares of our common stock at an exercise price of $1.73 per share. These warrants will expire five years from their date of issue.
In October 2011, we issued a consultant a warrant to purchase 75,000 shares of our common stock at an exercise price of $0.25 per share in connection with services provided to us. The warrant is set to expire in October 2014.
In May 2012, we issued to certain non-employee members of our board of directors warrants to purchase an aggregate of 30,000 shares of our common stock at an exercise price of $1.73 per share. These warrants will expire five years from their date of issue.
No underwriters were involved in the foregoing sales of securities. The securities described in this Item 15(c) above were sold and issued to accredited investors in reliance upon the exemption from the registration requirements of the Securities Act, as set forth in Section 4(2) of the Securities Act or Rule 506 of Regulation D under the Securities Act.
Item 16.Exhibits and Financial Statement Schedules.Schedules.
See “Exhibit Index.”
Item 17.Undertakings. Undertakings.
The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.
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Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933, as amended, and will be governed by the final adjudication of such issue.
The registrant hereby undertakes that:
(a) | For purposes of determining any liability under the Securities Act of 1933, as amended, the information omitted from a form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933, as amended, shall be deemed to be part of this registration statement as of the time it was declared effective. |
(b) | For the purpose of determining any liability under the Securities Act of 1933, as amended, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
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Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Carlsbad,Vista, State of California, on this 24thday of July, 2008.September 26, 2012.
AUTOGENOMICS, INC. | ||
By: | /s/ | |
Fareed Kureshy | ||
Chairman, President and Chief Executive Officer |
Power of attorneyAttorney
KNOW ALL PERSONS BY THESE PRESENTS, that eachEach person whose individual signature appears below hereby authorizesconstitutes and appoints Fareed Kureshy and Thomas V. Hennessey, Jr., jointly and severally, each of them,in his own capacity, his true and lawful attorneys-in-fact, with full power of substitution and resubstitution, for him and full power to act without the other, as his true and lawful attorney-in-fact and agent to act in his name, place and stead, in any and all capacities, to execute in the name and on behalf of each person, individually and in each capacity stated below, and to filesign any and all amendments (including post-effective amendments) to this Registration Statement, includingregistration statementand any and all post-effective amendments and amendments thereto, and anyadditional registration statement relating to the same offering as this Registration Statement that is to be effective upon filingstatements pursuant to Rule 462(b) underof the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each such said attorneys-in-fact and agents and each of them,with full power and authority to do so and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, and agents or anyeither of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities indicated below on the dates indicated below.
Name | Title | Date | ||
/s/ Fareed Kureshy | Chairman, President, | |||
/s/ Thomas V. Hennessey, Jr. | Chief Operating Officer, Chief Financial Officer and Director (principal financial officer and principal accounting officer) | September 26, 2012 | ||
/s/ Stephen Allison Stephen Allison | September 26, 2012 | |||
/s/ Charles Birmingham | Director | September 26, 2012 | ||
/s/ William H. William H. Davidson, D.B.A. | Director | |||
/s/ Laurence M. Demers, Ph.D. | Director | |||
/s/
| Director | |||
/s/
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Eugene J. Zurlo | Director |
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Exhibit indexIndex
Exhibit | |||
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1.1** |
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Form of Common Stock | |||
Subordinated Promissory Note (No. 200907-001), issued by the Registrant to Tregale Group Ltd in the principal amount of $1,500,000 | |||
4.3* | Subordinated Promissory Note (No. 200907-002), issued by the Registrant to Tregale Group Ltd in the principal amount of $1,571,014 | ||
4.4* | Subordinated Promissory Note (No. 200908-001), issued by the Registrant to Scott GRAT No. 5 in the principal amount of $2,000,000 | ||
4.5* | Agreement to Furnish Debt Instruments | ||
5.1** |
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2000 Equity Incentive Plan and forms of agreements relating | |||
Form of Common Stock Option Agreement used for certain grants outside of the 2000 Equity Incentive | |||
2008 Equity | |||
2008 Employee Stock Purchase Plan | |||
10.6** | Director Compensation Policy | ||
Registration Rights Agreement dated July 19, 2006, by and among the Registrant, MESA Development Inc. of Nevada and the purchasers of the Registrant’s Series C Convertible Preferred | |||
10.8* | License Agreement dated April 14, 2006, between the Registrant and Mayo Foundation for Medical Education and Research | ||
10.9* | Nonexclusive Patent License Agreement dated April 14, 2006, between the Registrant and the Mayo Foundation for Medical Education and Research | ||
10.10* | Standard Industrial/Commercial Single Tenant Lease dated February 12, 2009, by and between PCCP DJ Ortho, LLC (“PCCP”) and the Registrant (the “Vista Lease”) | ||
10.11* | First Amendment to Vista Lease dated August 6, 2009 by and between PCCP and the Registrant; Second Amendment to Vista Lease dated August 13, 2010 by and between PCCP and the Registrant; Third Amendment to Vista Lease dated March 14, 2011 by and between PCCP and the Registrant; Fourth Amendment to Vista Lease dated May 20, 2011 by and between PCCP and the Registrant; Fifth Amendment to Vista Lease dated July 26, 2011 by and between PCCP and the Registrant; Sixth Amendment to Vista Lease dated December 1, 2011 by and between PCCP and the Registrant; Seventh Amendment to Vista Lease dated March 30, 2012 by and between PCCP and the Registrant; and Eighth Amendment to Vista Lease dated July 1, 2012 by and between PCCP and the Registrant |
Exhibit | Exhibit Description | |
Subordinated Promissory Note (No. 200809-010), issued by the Registrant to William Davidson in the principal amount of $100,000 (all other Subordinated Promissory Notes which are substantially identical in all material respects to this Subordinated Promissory Note, except as to the parties thereto, dates of issuance, principal amounts, interest rates and maturity dates, are omitted pursuant to Instruction 2 to Item 601 of Regulation S-K) | ||
10.13* | Subordinated Promissory Note (No. 201003-001), issued by the Registrant to Elissa Kenna Trust in the principal amount of $500,000 (all other Subordinated Promissory Notes which are substantially identical in all material respects to this Subordinated Promissory Note, except as to the parties thereto, dates of issuance, principal amounts and maturity dates, are omitted pursuant to Instruction 2 of Item 601 of Regulation S-K) | |
10.14* | Warrant to Purchase Common Stock (No. CS-05), dated March 21, 2007, issued to AR Properties (all other Warrants to Purchase Common Stock which are substantially identical in all material respects to this Warrant to Purchase Common Stock, except as to the parties thereto, dates of issuance, number of warrant shares, exercise prices, vesting periods and expiration dates, are omitted pursuant to Instruction 2 of Item 601 of Regulation S-K) | |
10.15* | Warrant to Purchase Common Stock (No. 201004-010), dated April 15, 2010, issued to Terrance A Noonan (all other Warrants to Purchase Common Stock which are substantially identical in all material respects to this Warrant to Purchase Common Stock, except as to the parties thereto, dates of issuance, number of warrant shares, exercise prices and expiration dates, are omitted pursuant to Instruction 2 of Item 601 of Regulation S-K) | |
10.16* | Warrant to Purchase Common Stock (No. 200908-001), dated August 19, 2009, issued to Scott GRAT No. 5 | |
10.17* | Warrant to Purchase Common Stock (No. 201003-001), dated March 9, 2010, issued to Elissa Kenna Trust (all other Warrants to Purchase Common Stock which are substantially identical in all material respects to this Warrant to Purchase Common Stock, except as to the parties thereto, dates of issuance, number of warrant shares and expiration dates, are omitted pursuant to Instruction 2 of Item 601 of Regulation S-K) | |
10.18* | Warrant to Purchase Preferred Stock (No. C-01), dated December 30, 2005, issued to The Rue Family Trust dtd 2-10-89, Michael M. Rue, Trustee (all other Warrants to Purchase Preferred stock which are substantially identical in all material respects to this Warrant to Purchase Preferred Stock, except as to the parties thereto, dates of issuance, number of warrant shares and expiration dates, are omitted pursuant to Instruction 2 of Item 601 of Regulation S-K) | |
10.19* | Warrant to Purchase Series C Convertible Preferred Stock (No. C2-01), dated July 19, 2006, issued to Robert A. Levin (all other Warrants to Purchase Series C Convertible Preferred Stock which are substantially identical in all material respects to this Warrant to Purchase Series C Convertible Preferred Stock, except as to the parties thereto, dates of issuance, number of warrant shares and expiration dates, are omitted pursuant to Instruction 2 of Item 601 of Regulation S-K) | |
10.20* | Warrant to Purchase Common Stock (No. E-01), dated November 29, 2011, issued to Roland F. Smith (all other Warrants to Purchase Common Stock that are substantially identical in all material respects to this Warrant to Purchase Common Stock, except as to number of warrant shares, are omitted pursuant to Instruction 2 of Item 601 of Regulation S-K) |
Exhibit | Exhibit Description | ||
23.1* | Consent of Independent Registered Public Accounting | ||
23.2** | Consent of | ||
| |||
Power of Attorney |
* | Filed herewith. |
** | To be filed by amendment. |
f | Indicates a management contract or compensatory plan or arrangement. |
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