As filed with the Securities and Exchange Commission on June 13, 2017
Registration No. 333-218140
UNITED STATES
securities and exchange commission
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF
Pre-Effective
Amendment No. 2
to
form s-1
Registration Statement Under The Securities Act of 1933
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PROFESSIONAL DETAILING, INC.
(Exact
Interpace Diagnostics Group, Inc.
(Exact name of Registrant as specified in its charter)
| Delaware | 3841 | 22-2919486 | ||
(State or of | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification No.) |
Morris Corporate Center 1, Building A
300 Interpace Parkway, Parsippany, NJ 07054
(844) 405-9655
(Address, including zip code, and telephone number, including area code, of Registrant'sRegistrant’s principal executive offices)
CHARLES T. SALDARINI
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PROFESSIONAL DETAILING, INC.
599 MACARTHUR BOULEVARD
MAHWAH, NEW JERSEY 07430-2326
(201) 818-8450
(201) 818-8445 FACSIMILE
(Name,
Jack Stover
President and Chief Executive Officer
Interpace Diagnostics Group, Inc.
Morris Corporate Center 1, Building A
300 Interpace Parkway, Parsippany, NJ 07054
(844) 405-9655
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
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Copies to:
COPIES TO:
Merrill M. Kraines, Esq. Pepper Hamilton LLP The New York Times Building 37thFloor 620 Eighth Avenue New York, NY 10018-1405 (212) 808-2711 | Barry I. Grossman, Esq. Benjamin S. Ellenoff Grossman & 1345 Avenue of the Americas New York, NY 10105 (212) |
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes 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, as amended (the 'Securities Act'), check the following box. / /
[X]
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
offering [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
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. / /
If delivery[ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the prospectus is expectedExchange Act.
| Large accelerated filer | [ ] | Accelerated filer | [ ] | |||
| Non-accelerated filer | [ ] (Do not check if a smaller reporting company) | Smaller reporting company | [X] | |||
| Emerging Growth Company | [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to be made pursuant to Rule 434,
please checkuse the following box. / /
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CALCULATION OF REGISTRATION FEE
| CALCULATION OF REGISTRATION FEE | ||||||||
| Title of Each Class of Securities to be Registered(1) | Proposed Maximum Aggregate Offering Price(2)(3) | Amount of Registration Fee | ||||||
| Common stock, $0.01 par value per share | $ | 14,950,000 | (4) | $ | 1,732.71 | (6) | ||
| Pre-funded warrants to purchase shares of common stock and common stock issuable upon exercise thereof | $ | (4) | $ | |||||
| Common warrants to purchase shares of common stock | $ | (5)(7) | $ | |||||
| Shares of common stock issuable upon exercise of the common warrants | $ |
17,940,000 | (8) | $ | 2,079.25 | |||
| Total | $ | 32,890,000 | $ | 3,811.96 | (6) | |||
| (1) | Pursuant to Rule 416, the securities being registered hereunder include such indeterminate number of additional securities as may be issuable to prevent dilution resulting from stock splits, stock dividends or similar transactions. |
| (2) | Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act. |
| (3) | Includes the offering price of additional securities that the underwriters have the option to purchase. |
| (4) | The proposed maximum offering price of the common stock proposed to be sold in the offering will be reduced on a dollar-for-dollar basis based on the offering price of any pre-funded warrants offered and sold in the offering, and as such the proposed maximum aggregate offering price of the common stock and pre-funded warrants (including the common stock issuable upon exercise of the pre-funded warrants), if any, will remain at $14,950,000 |
| (5) | The common warrants to be issued to investors hereunder are included in the price of the common stock and/or pre-funded warrants, as applicable, above. |
| (6) | Of which $1,599.42 was previously paid. |
| (7) | No fee pursuant to Rule 457(g) under the Securities Act. |
| (8) | We assumed the common warrants were exercisable at a per share exercise price equal to 120% of the public offering price. The proposed maximum aggregate public offering price of the warrants was calculated to be $17,940,000, which is equal to 120% of $14,950,000 |
The Company has agreedRegistrant hereby amends this Registration Statement on such date or dates as may be necessary to indemnifydelay its effective date until the Underwriters against certain
liabilities, including liabilities underRegistrant 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 this Registration Statement shall become effective on such date as amended.
(2) Before deducting expenses payable by the Company estimatedCommission, acting pursuant to Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is subject to completion, is not an offer to sell these securities, and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Preliminary Prospectus
Subject to completion, dated June 13, 2017
7,428,571Shares of Common Stock
Pre-funded Warrants to Purchase Shares of Common Stock
Common Warrants to Purchase7,428,571 Shares of Common Stock
We are offering 7,428,571 shares of our common stock together with an equal number of common warrants to purchase shares of our common stock (and the shares of common stock that are issuable from time to time upon exercise of the common warrants). Each common warrant upon exercise at $______.
(3) The Company has granteda price of 7,428,571 will result in the issuance of one share of common stock to the Underwritersholder of such common warrant.We are also offering to each purchaser whose purchase of shares of common stock in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% of our outstanding common stock immediately following the consummation of this offering, the opportunity to purchase, if the purchaser so chooses, pre-funded warrants, in lieu of shares of common stock that would otherwise result in the purchaser’s beneficial ownership exceeding 4.99% of our outstanding common stock. Subject to limited exceptions, a holder of pre-funded warrants will not have the right to exercise any portion of its pre-funded warrants if the holder, together with its affiliates, would beneficially own in excess of 4.99% (or, at the election of the holder, 9.99%) of the number of shares of common stock outstanding immediately after giving effect to such exercise. Each pre-funded warrant will be exercisable for one share of our common stock. The purchase price of each pre-funded warrant will equal the price per share at which the shares of common stock are being sold to the public in this offering, minus $0.01, and the exercise price of each pre-funded warrant will be $0.01 per share. This offering also relates to the shares of common stock issuable upon exercise of any pre-funded warrants sold in this offering. Each pre-funded warrant is being sold together with a common warrant with the same terms as the common warrant described above. For each pre-funded warrant we sell, the number of shares of common stock we are offering will be decreased on a one-for-one basis. Because a common warrant is being sold together in this offering with each share of common stock and, in the alternative, each pre-funded warrant to purchase one share of common stock, the number of common warrants sold in this offering will not change as a result of a change in the mix of the shares of our common stock and pre-funded warrants sold. The common warrants will be exercisable immediately and will expire five years from the date of issuance. The shares of common stock and pre-funded warrants, if any , can each be purchased only with the accompanying common warrants, but will be issued separately , and will be immediately separable upon issuance.
Our common stock is listed on The Nasdaq Capital Market under the symbol “IDXG”. The closing price of our common stock on June 12, 2017, as reported by The Nasdaq Capital Market, was $1.75 per share. The public offering price per share of common stock and any pre-funded warrant together with the common warrant that accompanies common stock or a pre-funded warrant will be determined between us and the underwriter at the time of pricing, and may be at a discount to the current market price. There is no established public trading market for the pre-funded warrants or common warrants, and we do not expect a market to develop. In addition, we do not intend to apply for a listing of the pre-funded warrants or common warrants on any national securities exchange . Without an active trading market, the liquidity of the common warrants and the pre-funded warrants will be limited.
Per Share and | Per Pre-Funded Warrant and Accompanying Common Warrant | Total | ||||||||||
| Public offering price(1) | $ | $ | $ | |||||||||
| Underwriting discounts and commissions(2) | $ | $ | $ | |||||||||
| Proceeds, before expenses, to us | $ | $ | $ | |||||||||
(1) The public offering price is $[●] per share of common stock , $[●] per pre-funded warrant , and $0.01 per accompanying common warrant.
(2) In addition, we have agreed to reimburse the underwriter for certain expenses. See “Underwriting” beginning on page 69 of this prospectus for additional information.
Maxim Group LLC, which we refer to as the “representative,” has agreed to act as the representative of the underwriters in connection with this offering. The underwriters may engage one or more selected dealers in this offering. The offering is being underwritten on a firm commitment basis. We have granted the underwriters an option exercisable within 30for a period of 45 days offrom the date hereof,of this prospectus to purchase up to an additional 1,114,286 shares of our common stock at a price of $[●] per share and/or common warrants to purchase up to an aggregate of ______ additional
Shares1,114,286 shares of common stock at a price of $0.01 per common warrant, in each case less the priceunderwriting discount, to public less underwriting discounts and commissions
for the purpose of coveringcover over-allotments, if any. If
Investing in our securities involves a high degree of risk. See the Underwriters
exercise such Sharessection entitled “Risk Factors” beginning on page 17 of this prospectus for a discussion of information that should be considered in full,connection with an investment in our securities.
Neither the total priceSecurities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to public, underwriting
discountsthe contrary is a criminal offense. The securities are not being offered in any jurisdiction where the offer is not permitted.
The underwriters expect to deliver the shares of common stock and commissionscommon warrants and proceedsany pre-funded warrants to Company will be $______, $______
and $______, respectively. See 'Underwriters.'
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The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Ropes & Gray, counsel for the Underwriters. It is expected that delivery of
the Shares will be madepurchasers on or about [●], 1998 at the office2017.
Sole Book Running Manager
Maxim Group LLC
Co-Manager
WestPark Capital, Inc.
The date of Morgan
Stanley & Co. Incorporated, New York, N.Y., against payment therefor in
immediately available funds.
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MORGAN STANLEY DEAN WITTER
WILLIAM BLAIR & COMPANY
HAMBRECHT & QUIST
, 1998
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREBY SHALL UNDER ANY
CIRCUMSTANCE IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
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UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING) ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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this prospectus is _______, 2017
TABLE OF CONTENTS
| Page | |
| PROSPECTUS SUMMARY | 3 |
| Company Overview | 3 |
| Recent Business Developments | 10 |
| Corporate Information | 12 |
| Available Information | 13 |
| The Offering | 13 |
| SUMMARY FINANCIAL DATA | 16 |
| RISK FACTORS | 17 |
| CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS | 53 |
| USE OF PROCEEDS | 55 |
| PRICE RANGE OF COMMON STOCK | 56 |
| DIVIDEND POLICY | 56 |
| CAPITALIZATION | 57 |
| OUTSTANDING WARRANTS | 58 |
| DILUTION | 59 |
| SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT | 61 |
| DESCRIPTION OF SECURITIES | 62 |
| UNDERWRITING | 69 |
| LEGAL MATTERS | 76 |
| EXPERTS | 76 |
| WHERE YOU CAN FIND MORE INFORMATION | 76 |
| INCORPORATION OF CERTAIN INFORMATION BY REFERENCE | 77 |
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You should rely only on the information contained in this prospectus or in any related free writing prospectus filed by us with the Securities and Exchange Commission, or the SEC. We have not, and the underwriters and their affiliates have not, authorized anyone to provide you with any information or to make any representation not contained in this prospectus. We do not, and the underwriters and their affiliates do not, take any responsibility for, and can provide no assurance as to the reliability of, any information that others may provide to you. This prospectus is not an offer to sell or an offer to buy securities in any jurisdiction where offers and sales are not permitted. The Company intendsinformation in this prospectus is accurate only as of its date, regardless of the time of delivery of this prospectus or any sale of securities. You should also read and consider the information in the documents to furnishwhich we have referred you under the caption “Where You Can Find More Information” in the prospectus. In addition, this prospectus contains summaries of certain provisions contained in some of the documents described herein, but reference is made to its stockholders annual reports
containing audited financial statementsthe actual documents for complete information. All of the summaries are qualified in their entirety by the actual documents. Copies of some of the documents referred to herein have been filed, will be filed or will be incorporated by reference as exhibits to the registration statement of which this prospectus is a part, and an opinion thereon expressedyou may obtain copies of those documents as described below under the heading “Where You Can Find More Information.”
You should assume that the information in this prospectus is accurate only as of the date on the front of this document and that any information we have incorporated by independent accountantsreference is accurate only as of the date of the document incorporated by reference, regardless of the time of delivery of this prospectus, or any sale of a security registered under the registration statement of which this prospectus is a part.
For investors outside the United States, neither we nor the underwriters have done anything that would permit a public offering of the securities or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and quarterly reports forobserve any restrictions relating to, the first three quartersoffering of each fiscal year containing interim financial information.
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE 'UNDERWRITERS.'
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Inthe securities and the distribution of this Prospectus,prospectus outside of the termUnited States.
As used in this prospectus, unless the 'Company'context indicates or 'PDI' includes Professional
Detailing,otherwise requires, the “Company,” “we,” “us,”, “our” or “Interpace” refer to Interpace Diagnostics Group, Inc., a Delaware corporation, and its predecessors. The Company's
corporate headquarterssubsidiaries.
This prospectus contains and incorporates by reference market data and industry statistics and forecasts that are located at 599 MacArthur Boulevard, Mahwah, New
Jersey 07430,based on our own internal estimates as well as independent industry publications and its telephone number is (201) 818-8450.
We have secured trademark registrations for the marks ThyGenX®, ThyraMIR®, PancraGEN® PATHFINDERTG® and Mirinform® in the United States, and Mirinform® with the World Intellectual Property Organization. This prospectus contains references to our trademarks. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork and other visual displays, may appear without the ® or ™ symbols, but such references, or the lack thereof, are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
| -ii- |
The following summary is qualified in its entirety by, and should be read together with, the more detailed information and the Financial Statementsfinancial statements and therelated notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated,prospectus and incorporated by reference. Before you decide to invest in our securities, you should read the informationentire prospectus carefully, including the risk factors and the financial statements and related notes included in this Prospectus has been adjusted to reflectprospectus and incorporated by reference.
We are a merger (the 'Merger')fully integrated commercial company that provides clinically useful molecular diagnostic tests and pathology services. We develop and commercialize molecular diagnostic tests and related first line assays principally focused on early detection of Professional Detailing, Inc.patients at high risk of cancer and leverage the latest technology and personalized medicine for improved patient diagnosis and management. We currently have three commercialized molecular diagnostic assays in the marketplace for which we are reimbursed by Medicare and multiple private payors: PancraGEN®, a New Jersey corporation,pancreatic cyst and pancreaticobiliary solid lesion molecular test that can aid in pancreatic cyst diagnosis and pancreatic cancer risk assessment utilizing our proprietary PathFinder platform; ThyGenX®, which assesses thyroid nodules for risk of malignancy; and ThyraMIR®, which assesses thyroid nodules for risk of malignancy utilizing a proprietary micro-RNA gene expression assay. We are also in the process of “soft launching” while we gather additional market data, BarreGEN®, an esophageal cancer risk classifier for Barrett’s Esophagus that utilizes our PathFinder platform.
Our mission is to provide personalized medicine through molecular diagnostics and innovation to advance patient care based on rigorous science. We are leveraging our Clinical Laboratory Improvement Amendments, or CLIA, certified and College of American Pathologists, or CAP, accredited laboratories to develop and commercialize our assays and products. We aim to provide physicians and patients with diagnostic options for detecting genetic and into
Professional Detailing, Inc., a Delaware corporation, immediately prior toother molecular mutations that are associated with gastrointestinal and endocrine cancer. Our customers consist primarily of physicians, hospitals and clinics.
With the
effective date of the registration statement of which this Prospectus is a part.
Upon completion of the Merger,sale of substantially all of our contract sales organization (CSO) business in December 2015 and transition of related activities through September 2016, we are now concentrating our efforts on our molecular diagnostics business by offering solutions for determining the shareholderspresence of certain cancers to clinicians and their patients as well as providing prognostic pre-cancerous information, which we believe to be an expanding market opportunity. The global molecular diagnostics market is estimated to be $6.45 billion and is a segment within the approximately $60 billion in vitro diagnostics market. We believe that the molecular diagnostics market offers significant growth and strong patient value given the substantial opportunity it affords to lower healthcare costs by helping to reduce unnecessary surgeries and ensuring the appropriate frequency of monitoring. We are keenly focused on growing our test volumes, securing additional coverage and reimbursement, maintaining our current reimbursement and supporting revenue growth for our three commercialized innovative tests, introducing related first line product and service extensions, as well as expanding our business by developing and promoting synergistic products, like BarreGEN®, in our market.
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In March 2016, we announced that we implemented a broad-based program to maximize efficiencies and cut costs as we focused on improving cash flows and profitability while completing our transition to a standalone molecular diagnostics business. In addition to reducing headcount, we realigned our compensation structure, consolidated positions, eliminated programs and development plans that did not have near term benefits, and streamlined and right-sized operating systems while reducing overhead. This was done while supporting the transition of our CSO business to the buyer of that business and continuing to shut-down less profitable CSO contracts that were not part of the sale of that business.
In August 2016, we announced that the New Jersey corporation
will own an aggregateYork State Department of _______ sharesHealth had reviewed and approved ThyraMIR®, the Company’s micro RNA gene-expression based test, for use in New York State. New York State accounts for approximately 5% of the Delaware corporation and all
outstanding options600,000 Thyroid Fine Needle Aspirate, or FNA, biopsies performed in the U.S. annually according to purchase shares ofThyroid Disease Manager. With this final approval ThyraMIR® is now available to patients across the U.S.
In October 2016, we announced that the New Jersey corporation will be
converted into optionsYork State Department of Health had reviewed and approved for use ThyGenX®, our NextGen Sequencing oncogene panel for thyroid nodules. The New York State approval of ThyGenX® enables us to purchase sharestest specimens from patients in New York and therefore, enables us to market both ThyGenX® and ThyraMIR® together in that state. As ThyGenX® always precedes the running of ThyraMIR®, approximately 80% of ThyGenX® cases warranting reflex to a more sophisticated miro-RNA assessment via ThyraMIR®. Of the Delaware corporation. All
references hereinseveral states that require special licensure to industry financialprovide testing to patients who reside in their jurisdiction, New York was the final state to issue a license.
Also, in October 2016, we announced completion, validation and statistical informationlaunch of two new thyroid services, cytopathology services and slides as a primary specimen, further expanding our comprehensive support of physicians and health care institutions servicing thyroid patients. Our new cytopathology service is designed to assist physicians and clinics that prefer to have the initial FNA biopsy assessed by an independent third party versus having it performed on site.
We have been successfully expanding the reimbursement of our products in 2016 and 2017. In summary, three of our molecular diagnostics are based on
trade articles, industry reportsnow covered by Medicare by way of our local Medicare Administrative Carrier (MAC), Novitas Solutions, Inc. or Novitas Solutions. Specifically we have made the following progress with various payors in 2016 and other sources2017:
● In April 2017, we announced that UnitedHealthcare, the Company believes to
be reliable, although there can be no assurance to that effect. Unless specified
to the contrary or the context clearly implies otherwise, all references herein
to the 'Company' or 'PDI' shall be deemed to include Professional Detailing,
Inc., a Delaware corporation, and its predecessors. Unless otherwise indicated,
the informationlargest health plan in this Prospectus assumes no exercise of the Underwriters'
over-allotment option.
THE COMPANY
The Company is a leading provider of comprehensive customized sales
solutions on an outsourced basis to the United States, pharmaceutical industry.has agreed to cover our ThyraMIR® test used in assessing indeterminate thyroid nodule fine needle aspirate (FNA) biopsies. The Company believes itcoverage is now in effect and is subject to members’ specific benefit plan design. Our ThyGenX® and ThyraMIR® assays are now covered for approximately 250 million patients nationwide, including through Medicare, national, and regional health plans.
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● In December 2016, we announced that Aetna, the third largest health plan in the United States, agreed to cover our ThyraMIR® test for all of Aetna’s approximately 46 million members nationwide, with coverage effective immediately.
● In April 2016, we announced that we received coverage for all of our products by Galaxy Health Network, a national managed care provider with over 3.5 million covered lives. Galaxy Health Network’s Preferred Provider Organization includes a network of over 400,000 contracted physicians, 2,700 hospitals and 47,000 ancillary providers.
● In April 2016, we also announced new coding by Novitas Solutions, Inc., or Novitas Solutions, for PancraGEN®. Novitas Solutions has achievedassigned a new molecular Current Procedural Terminology, or CPT, code to its PancraGEN® test for pancreatic cysts. Prior to this leadership position based on its 10
yearscoding change, the test was covered under a miscellaneous chemistry code, which is used for billing a wide range of tests across the laboratory industry experience and its relationshipsdoes not effectively differentiate between technologies that have significantly different features and offer unique benefits to patients with manyspecific diseases.
● In February 2016, we announced that we received Medicare approval for coverage of ThyraMIR®. As a result, ThyraMIR® is now accessible to more than 50 million Medicare covered patients nationwide effective December 14, 2015. ThyGenX® is already covered by Medicare. Therefore, the addition of coverage for ThyraMIR® provides Medicare covered patients the benefits of the pharmaceutical industry's largest companies. Since inception,ThyGenX®/ThyraMIR® combination test.
● In January 2016, we announced that Novitas Solutions issued a new local coverage determination, or LCD, for PancraGEN®. The LCD provides the Company has
designed customized product detailing programsspecific circumstances under which PancraGEN® is covered. The new policy is non-conditional and may improve the efficiency of the testing process for doctors and patients. The LCD covers approximately 25 clients,
including Pfizer,55 million patients, bringing the total patients covered for PancraGEN® to nearly 68 million.
Our Business
In August 2014, we acquired certain assets from Asuragen Inc., Astra Merckor Asuragen, in the endocrine and thyroid cancer sectors, and in October 2014, we acquired our pancreatic and gastrointestinal assets from RedPath Integrated Technologies Inc., Glaxo Wellcome Inc.or RedPath. In December 2015, we sold the majority of the assets of our CSO business and Johnson &
Johnson, Inc. These programs have been designedbecame a dedicated molecular diagnostics and related first line assays company.
We are now a fully integrated commercial company focused principally on molecular diagnostics and improving patient care by resolving diagnostic uncertainty with evidence that is trustworthy and actionable. Our products and services uniquely combine genomic technology, clinical science and pathological review to promote more than 70
different products, including such leading prescription medications as
Prilosec(Registered), Wellbutrin(Registered)provide answers that give physicians and Cardura(Registered),patients a clear path forward and help avoid risky, costly surgeries that are often unnecessary.
Our goal is to drive shareholder value by demonstrating the value of our assays to improve patient outcomes and reducing the cost of healthcare.
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The role of molecular diagnostic information in medical practice is evolving rapidly. The diagnosis of complex diseases as well as a numberthe role of over-the-counter ('OTC') products suchmolecular diagnostics in treatment decisions continue to expand to complement the first line evaluations typically performed by pathologists. Information at the molecular level enables one to understand more fully the makeup and specific subtype of disease to improve diagnosis. In many cases, the molecular diagnostic information derived can ultimately help guide treatment decisions as Bayer(Registered) Aspirin,
Pepcid AC(Registered)part of the standard of care. The ATA Guidelines suggest that molecular testing is appropriate in cases where standard cytology results are indeterminate and Monistat 5(Registered),unclear. The American Society of Gastrointestinal Endoscopy (ASGE) published guidelines in 2016 that state “we suggest that molecular testing of the cyst be considered when initial ancillary testing of cytology and CEA is inconclusive and when test results may alter management.”
We deploy biomarker analysis combined with microRNA expression to hospitals, pharmaciesimprove diagnostic clarity for cancer. In our thyroid and pancreatic cancer indications, diagnosis can be ambiguous and can lead to indeterminate first line assessments and uncertainty among physicians regarding how to effectively treat patients. Accordingly, physicians may often select surgery due to lack of confirmation of disease progression. Our tests are designed to help provide clarity of diagnosis that can in turn guide treatment decisions often, eliminating costly, risky surgeries and other unnecessary medical procedures, helping to improve the lives of patients and saving the healthcare system money.
Patients typically access our tests through their physician during the diagnostic process. All of our testing services are made available through our clinical reference laboratories located in Pittsburgh, Pennsylvania and New Haven, Connecticut, which are each CLIA certified and CAP accredited. The Clinical Laboratory Improvement Amendments (CLIA) of 1988 are US federal regulatory standards that apply to all clinical laboratory testing performed on humans in the US, except clinical trials and basic research. The CAP Laboratory Accreditation Program was granted by the Centers for Medicare and Medicaid Services or (CMS) which allows CAP inspection instead of CMS inspection.
The published evidence supporting our tests demonstrates the robustness of our science and clinical studies. Patients and physicians can access our full list of publications on our website. We continue to build upon our extensive library of clinical evidence. We also expect to continue expanding our offerings in approximately 20 different specialties. The Company's primary
objectivegastrointestinal and endocrinology cancers, as well as other cancer indications that we believe will benefit from our technology and approach.
We believe our focus on developing clinically useful tests that change patient care is enabling the company to enhance its leadership positioncontinue to expand in this marketplace. Our thyroid assays, ThyGenX® and ThyraMIR®, are covered by our MAC, Novitas Solutions, and are now covered for more than 250 million people in the growing contract sales
organization ('CSO') industryU.S. for use in thyroid cancer diagnosis. PancraGEN®, our assay for pancreatic cancer is also covered by Novitas Solutions and is now covered for more than 71 million people in the US.
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Background
The global molecular diagnostics market is projected to becomereach $10.12 billion by 2021 from $6.54 billion in 2016, at a CAGR of 9.1% from 2016 to 2021 according to Markets and Markets.
The molecular diagnostics segment is highly fragmented with numerous science-based companies that have developed clinical tests that are on the premier suppliermarket or ready or near ready to be marketed. A vast majority of comprehensive sales solutionsthese companies have very limited experience bringing a test to market and many of them do not have the pharmaceutical industrycapital to build an infrastructure to effectively commercialize their tests. Due to their complexity, most molecular diagnostic tests require a specialized go-to-market strategy that includes messaging to physicians, hospitals and other segmentspotentially patients and managed care organizations. Additionally, robust data and clinical studies are often necessary to demonstrate to physicians and managed care organizations the benefit and utility of the healthcare market.
The Company has demonstrated strong internal growth, generated by securing
new business from leading pharmaceutical companiesassays offered. We believe that developing and by renewingdelivering these kinds of messages is one of our core strengths.
Oncology, which represents the third largest segment after infectious disease and expanding
programs with existing clients. The Company believes that itblood screening, is one of the largest CSOs operatingfastest growing segments of the molecular diagnostics market. The Centers for Medicare and Medicaid Services, or CMS, of the Department of Health and Human Services estimated in June 2014 that there were more than 5,900 independent clinical reference laboratories and specialty clinics, and more than 8,900 hospital-based laboratories, in the United States measured bothStates.
Our Molecular Diagnostic Tests
We are developing and commercializing molecular diagnostic tests to detect genetic alterations that are associated with gastrointestinal and endocrine cancer risk, which are principally focused on early detection of cancer. Our tests assist healthcare providers in distinguishing between patients at high risk of cancer from those at low risk. Thus, as part of a comprehensive diagnostic and treatment plan, our tests allow healthcare providers to determine whether surgery or active surveillance is most appropriate. We believe our tests can help avoid unnecessary surgeries in patients at low risk, thereby reducing healthcare costs and potential risks associated with surgery.
We offer PancraGEN®, a molecular diagnostic test designed for assessing long-term risk of malignancy in pancreatic cysts and solid pancreaticobiliary lesions, ThyGenX®, a next-generation sequencing test in combination with ThyraMIR®, a novel microRNA gene expression classifier, designed to assist physicians in distinguishing between benign and malignant lesions in indeterminate thyroid nodules, and BarreGEN®, an assay for evaluating Barrett’s Esophagus, an esophageal cancer risk classifier, which we distribute today to limited customers while we gather additional data, perform clinical studies, seek initial reimbursement and are looking for collaboration partners.
Gastrointestinal Cancer Tests
Our current gastrointestinal cancer risk diagnostic test, PancraGEN® is based on our PathFinderTG platform, or PathFinder. PathFinder is designed to use advanced clinical algorithms to accurately stratify patients according to risk of cancer by revenueassessing panels of DNA abnormalities in patients who have pancreaticobiliary lesions (cysts or solid masses) with potential for cancer. PathFinder is supported by our state of the art CLIA certified, and total
numberCAP accredited laboratory in Pittsburgh, Pennsylvania. Our Pittsburgh laboratory is our major commercial-scale and development Center of sales representativesExcellence where we process the majority of our current and future oncology related tests, and we support our gastrointestinal development activities through this laboratory.
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Accurate detection of pancreatic cancer risk is crucial. Pancreatic cancer is now the third leading cause of cancer deaths in the U.S. with an average survival rate of five years. PancraGEN® is designed to determine the risk of malignancy in pancreatic cysts and pancreaticobiliary solid lesions. We believe that PancraGEN® is the leading integrated molecular diagnostic test for determining risk of malignancy in pancreatic cysts currently available on the market. We currently estimate that the immediate addressable market for PancraGEN® is approximately 150,000 indeterminate cysts annually or approximately $300 to $350 million annually based on the current size of the patient population and current and anticipated reimbursement rates. To date, PancraGEN® has been used in programs. Revenueabout 30,000 clinical cases. The National Pancreatic Cyst Registry study published in Endoscopy in 2015 demonstrated the clinical validity of PancraGEN® and that it more accurately determined the malignant potential of pancreatic cysts than the International Consensus Guideline 2012 EUS criteria for detection of malignant pancreatic cystic lesions in the context of routine clinical care. The vast majority of all surgeries for pancreatic cysts are for non-malignant disease. The American College of Gastroenterology (ACG) 2015 Guidelines support the basic principle that too many pancreatic surgeries are being performed unnecessarily on benign lesions. In addition, the 2016 guidelines published by the American Society of Gastroenterology Endoscopy (ASGE) included a specific recommendation for use of molecular testing in specific circumstances where other types of testing and analysis have not provided sufficient data on which to determine the best course of action for patient treatment. Accordingly, we believe that PancraGEN® provides a highly reliable molecular diagnostic option for distinguishing between patients with pancreatic cysts who are at low or high risk of pancreatic cancer.
We have also developed a cancer risk diagnostic assay, BarreGEN®, which is designed to evaluate patients with Barrett’s esophagus, an upper gastrointestinal condition that can progress into esophageal cancer. BarreGEN®, which utilizes our PathFinder platform, is distributed today on a limited basis while we gather additional data, perform clinical studies, seek initial reimbursement and are looking for collaboration partners. We preliminarily estimate that the total market is approximately $2 billion annually based on the current size of the patient population and anticipated reimbursement rates comparable to those received currently for PancraGEN® for pancreatic lesions. We are planning to expand our initial soft launch of BarreGEN® in 2017 with certain key opinion leaders (KOL’s) and seek to partner this product for development and marketing with a larger partner in the gastrointestinal diagnostic market.
Endocrine Cancer Tests
We currently market and sell a dual platform endocrine cancer risk diagnostic test. The incidence of thyroid nodules is on the rise. ThyGenX® is a next generation DNA and RNA sequencing oncogene panel and when applied to indeterminate FNA, provides a highly specific “rule-in” test with over 80% positive predictive value in predicting whether a patient’s thyroid nodule is cancerous. ThyGenX® works synergistically with our second endocrine cancer diagnostic test ThyraMIR®, which is based on microRNA and is designed to provide a highly sensitive “rule-out” test to accurately categorize a mutation negative indeterminate FNA as being benign or malignant. Our testing is performed in our state of the art CLIA certified, CAP accredited laboratories in Pittsburgh, Pennsylvania and New Haven, Connecticut. We estimate the total market for our endocrine cancer diagnostic tests is approximately $350 million annually based on the current size of the patient population, estimated numbers of indeterminate FNAs and current and anticipated reimbursement rates. ThyGenX® is used by some customers as a base line oncogene panel assessment and approximately 80% of such users will reflex to also using ThyraMIR® as a more specific evaluation.
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Endocrinologists evaluate thyroid nodules for possible cancer by collecting cells through fine needle aspirants or FNAs that are then analyzed by cytopathologists to determine whether or not a thyroid nodule is cancerous. It is estimated that up to 20% or up to approximately 100,000 of FNAs analyzed annually yield indeterminate results, meaning they cannot be diagnosed as definitely being malignant or benign by cytopathology alone. Traditionally, guidelines recommended that some patients with indeterminate cytopathology results undergo surgery to remove all or part of their thyroid to obtain an accurate diagnosis by looking directly at the thyroid tissue. Historically, in approximately 70% to 80% of these cases, the thyroid nodule proves to be benign. In addition to exposing a patient to unnecessary surgical risk and incurring costs, surgery can lead to a lifetime of thyroid hormone replacement therapy. Our ThyGenX® and ThyraMIR® assays, are aimed at significantly improving the ability of physicians to determine an accurate diagnosis of an indeterminate FNA result.
Research and Development
We conduct most of our research and development activities at our CLIA certified and CAP accredited laboratories in Pittsburgh, Pennsylvania and New Haven, Connecticut. Our research and development efforts currently focus on providing data and clinical studies and analyses necessary to support our existing products on the market. Additionally our research and development activities provide product line extension of our existing products as well as new product opportunities utilizing our proprietary platforms.
We will also focus our research and development efforts on enhancing existing molecular diagnostic tests as new research becomes available. We may enter collaborative relationships with research and academic institutions for the development of additional or enhanced molecular diagnostic tests to further increase the depth and breadth of our molecular diagnostic test offerings. Where appropriate, we may also enter into licensing agreements with our collaborative partners to both license intellectual property for use in our molecular diagnostic test panels as well as licensing such intellectual property out, as appropriate.
Our research and development costs wereapproximately $1.6 million and $2.3 million in 2016 and 2015, respectively.
Our Strategy
Our primary goal now is to build a leading commercial oncology-based diagnostics business focused on gastrointestinal and endocrine cancer markets. We seek to grow our molecular diagnostics business both organically as well as by selective partnering. The key elements of our strategy to achieve this goal include:
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| ● | Leveraging our predictable gastrointestinal and endocrinology businesses, PancraGEN®, ThyGenX® and ThyraMIR®and focusing on personalized medicine and early intervention related to cancer risk; |
| ● | Expanding our soft launch of BarreGEN®, our esophageal cancer risk classifier for Barrett’s Esophagus that utilizes our PathFinder platform, to continue to gather data and seek key reimbursement support while seeking larger partners to collaborate with us and speed up full market introduction; |
| ● | Targeting synergistic product and service opportunities to distribute through our commercial structure; | |
| ● | Targeting potential merger and acquisition opportunities to expand our business; |
| ● | Developing and commercializing other related first-line assays and service offerings to assist in the awareness of our current products and services; | |
| ● | Renewing our agreement with Labcorp to provide ThyGenX® and ThyGenX® with reflex to ThyraMIR®to assist with thyroid cancer diagnosis when FNA cytology results are indeterminate; |
| ● | Expanding our sales staff appropriately while supporting our products with high quality data and studies and seeking dependable and appropriate reimbursement rates; and |
| ● | Improving our awareness and opportunities in the public markets. |
Note Exchange and Subsequent Conversion
As part of our acquisition of RedPath Integrated Pathology, Inc., we issued a non-negotiable subordinated secured, non-interest bearing, promissory note, dated as of October 31, 2014, with an aggregate principal amount of $10.7 million outstanding (the “RedPath Note”). In December 2016 we repaid $1.33 million in principal of the RedPath Note resulting in an outstanding balance of $9.34 million. The RedPath Note was subsequently acquired by an institutional investor for $8.87 million on March 22, 2017. Also on that date we and the investor exchanged the RedPath Note for a senior secured convertible note in the aggregate principal amount of $5.32 million and a senior secured non-convertible note in the aggregate principal amount of $3.55 million. On April 18, 2017, we and the investor exchanged the senior secured non-convertible note for $3.55 million of our senior secured convertible note. Between March 23, 2017 and April 18, 2017, the senior secured convertible notes were converted in full for 3,795,429 shares of our common stock. We no longer have any outstanding secured debt, and any security interests and liens related to our former secured debt have been or will be released and/or terminated upon the completion of applicable filings.
Recent Financings
Since late December 2016, we closed on four equity offerings raising gross profit grewproceeds of $14.1 million. The details are as follows:
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| ● | On December 22, 2016, we completed a registered direct public offering (the “First Registered Direct Offering”) to sell 2,000,000 shares of our common stock and pre-funded warrants to purchase 1,600,000 shares of common stock to an institutional investor, which resulted in gross proceeds to us of approximately $1.9 million (net proceeds of $1.7 million after expenses), of which approximately $1.33 million was used to repay secured debt. |
| ● | On January 6, 2017, we completed a registered direct public offering (the “Second Registered Direct Offering”), to sell 630,000 shares of our common stock at a price of $6.81 per share to certain institutional investors, which resulted in gross proceeds to us of approximately $4.2 million. |
| ● | On January 25, 2017, we completed a registered direct public offering (the “Third Registered Direct Offering”), to sell 855,000 shares of our common stock and a concurrent private placement of warrants to purchase 855,000 shares of our common stock (the “Concurrent Warrants”), to the same investors participating in the Third Registered Direct Offering, or the Private Placement. The Concurrent Warrants and the shares of our common stock issuable upon the exercise of the Concurrent Warrants were not registered under the Securities Act and were sold pursuant to the exemption provided in Section 4(a)(2) under the Securities Act and Rule 506(b) of Regulation D promulgated thereunder. The shares of common stock sold in the Third Registered Direct Offering and the Concurrent Warrants issued in the concurrent Private Placement were issued separately but sold together at a combined purchase price of $4.69 per share of common stock and accompanying Concurrent Warrant. The Third Registered Direct Offering and the Private Placement together resulted in gross proceeds to us of approximately $4.0 million. We used approximately $1.0 million of the proceeds to satisfy the obligations due to five former senior executives. |
| ● | On February 8, 2017, we completed an underwritten, confidentially marketed public offering (“CMPO”), to sell 1,200,000 shares of our common stock at a price of $3.00 per share. In addition, we granted the underwriters an option to purchase up to an additional 9% of the total number of shares of common stock sold by us in the CMPO, solely for the purpose of covering over-allotments, if any. The underwriters exercised the over-allotment option in full. The CMPO resulted in gross proceeds to us of approximately $3.9 million. |
Blue Cross Blue Shield Agreement
On January 3, 2017, we announced that we had entered into an agreement with the Blue Cross Blue Shield (BCBS) Association’s Center for Clinical Effectiveness “Evidence Street”, a program that provides us with the opportunity to provide available evidence for our molecular Thyroid and Pancreas tests, to support further coverage determinations among Blue Cross Blue Shield and other health plans.
International Expansion – Agreement with Best Med Opinion Ltd
On January 20, 2017, we announced that we had entered into an agreement with Best Med Opinion Ltd, or Best Med, of Tel Aviv, Israel, a provider of second opinion and clinical services for physicians and patients in Israel and several other countries. As part of this agreement, effective February 1, 2017, Best Med will provide physicians and patients with information regarding our ThyGenX®, ThyraMIR®, and PancraGEN® tests, and when these tests are selected to support and inform treatment decisions, Best Med will manage the logistics associated with collecting and shipping samples to our CLIA certified, CAP accredited laboratories and report results back to the ordering physician. The agreement designates Best Med as the exclusive provider of our products for the country of Israel, and under the agreement, providers in Israel will be able to order all of our marketed molecular diagnostic products. The agreement is part of our international expansion efforts to leverage the opportunities for our products outside the U.S. market.
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PanDNA®
On March 29, 2017, we announced the initial launch of PanDNA®, a new product that stratifies patients’ risk of developing pancreatic cancer based on three specific molecular criteria. PanDNA® was developed using our proprietary database of results for over 15,000 patients with pancreatic cysts.
TERT Biomarker
On May 24, 2017, we announced the launch of a new biomarker to be ordered along with our current molecular thyroid testing options. The TERT marker is a strong molecular predictor of the aggressiveness of thyroid cancer and adds additional insights into a patient’s molecular profile. Currently, the ThyGenX® mutation panel includes the following markers that are predictive of thyroid cancer from cytologically indeterminate thyroid nodules, including BRAF, HRAS, KRAS, NRAS, RET/PTC, PAX8/PPARy, and PIK3CA. By adding TERT, we believe the panel will not only continue to be a strong positive predictor of thyroid cancer, but will also provide evidence that a positive result indicates the cancer is likely to be more aggressive in nature.
Telomerase reverse transcriptase (or TERT) encodes the reverse transcriptase component of telomerase, which adds telomere repeats to chromosome ends, enabling cell replication. Published data suggests that TERT mutations can extend the life span of the tumor cell and allow time for other mutations to develop. Mutations in the TERT promoter region are found in thyroid cancers and seem to act synergistically when they occur with the BRAF V600 mutation. The coexistence of mutations in TERT and BRAF genes have been shown to dramatically increase the risk of thyroid cancer aggressiveness, tumor recurrence and thyroid cancer-specific deaths.
Physicians will be able to order TERT as part of the ThyGenX® mutation panel or on an individual basis.
Einstein Medical Center Agreement
On June 5, 2017 we announced that we had entered into a laboratory services agreement with Einstein Medical Center of Philadelphia (Einstein) to provide expanded laboratory analytical services to Einstein for improved identification of indeterminate thyroid nodules, through our combined ThyGenX® and ThyraMIR® molecular tests.
The new agreement provides access for Einstein’s endocrinologists, ear, nose and throat physicians, and otolaryngologists to our products for thyroid nodules that are initially deemed indeterminate. Nationwide, approximately 20% of thyroid nodules assessed using fine needle aspirate (FNA) biopsies are indeterminate and eligible for further analysis with molecular testing. The American Thyroid Association has published guidelines that support the use of molecular testing in those circumstances where traditional cytopathology is indeterminate and unable to differentiate between malignant and benign thyroid nodules.
Einstein Medical Center of Philadelphia is associated with Einstein Healthcare Network, a private, not-for-profit organization with several major facilities and many outpatient centers.
Parsippany Lease
On May 9, 2017, we entered into an agreement with our landlord for our Parsippany office space under a lease expiring on June 30, 2017. The agreement settles a prior eviction action and the arrearages under the current lease as well as the rent and additional rent to become due for the months of May and June. We will pay the amounts due under the lease in six installments of $25,000 commencing April 30, 2017 and ending on September 30, 2017 without any additional interest or late charges and with the balance of lease arrearages to be paid in one final payment on September 30, 2017. In the event the parties enter into a new lease, the amount of the final payment due September 30, 2017 will be reduced through application of the tenant credit provided for in a new lease agreement.
OnMay 24, 2017 we entered into a new lease with our Parsippany landlord. The lease is for a space of approximately 5,900 square feet and is for a period of sixty-three months commencing July 1, 2017 at compound ratesan initial monthly obligation of 87.7%approximately $13,000 per month subject to annual increases of fifty cents per square foot. The initial year of the lease has a two-month rent abatement period. The lease has an early termination date of June 30, 2020, provided we provide at least 12 months’ notice in advance.
Pittsburgh Lease
On April 1, 2017 we renewed our lease for our Pittsburgh laboratory for one year. The lease is for 20,000 square feet of laboratory and 58.0%office space and ends on March 31, 2018 . The lease obligation is $32,000 per month for twelve months.
New Haven Lease
We continue to renew our New Haven lab facility each month at a cost of $3,000 per month, while certain tests are performed there.
Other Amounts Owed
Currently, we are seeking to restructure past due vendor and related claims of approximately $3.6 million, which includes $1.6 million due to certain vendors with whom we have made payment plans. In addition, as of June 1, 2017, we have outstanding royalty obligations totaling approximately $1.0 million and $0.3 million of outstanding state tax liabilities due to various taxing authorities.
Additionally, related to liabilities assumed pursuant to the Agreement and Plan of Merger, dated October 31, 2014, wherein we acquired ownership and licensing rights to the RedPath assets including PancraGEN®and other molecular diagnostic and laboratory tests, the Department of Justice has recently submitted a claim for $0.5 million based on 2016 revenues. There may also be up to an additional $1 million owed based upon 2017 revenues, related to a Settlement Agreement between RedPath and the United States of America, dated January 28, 2013. The Settlement Agreement relates to penalties assessed for improper submission of Medicare claims by RedPath Integrated Pathology, Inc. for the period October 1, 2010 to September 30, 2012.
We were originally incorporated in New Jersey in 1986 and began commercial operations as a Contract Sales Organization (CSO) in 1987. In connection with our initial public offering, we reincorporated in Delaware in 1998. We currently operate under one operating segment, which is our molecular diagnostic business. We conduct our business through our wholly-owned subsidiaries, Interpace LLC, which was formed in Delaware in 2013, and Interpace Diagnostics Corporation (formerly known as RedPath Integrated Pathology, Inc.), respectively, between 1994which was formed in Delaware in 2007. Our executive offices are located at Morris Corporate Center 1, Building A, 300 Interpace Parkway, Parsippany, New Jersey 07054. Our telephone number is (855) 776-6419.
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We file electronically with the Securities and 1997. Exchange Commission, or SEC, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We make available on our website at www.interpacediagnostics.com, free of charge, copies of these reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
The public may read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that website iswww.sec.gov.
The information in or accessible through the websites referred to above are not incorporated into, and are not considered part of, this prospectus. Further, our references to the URLs for these websites are intended to be inactive textual references only.
| Common stock offered by us in this offering | 7,428,571 shares of our common stock (together with pre-funded warrants, if any, and common warrants as set forth below). | |
| Pre-funded warrants offered by us in this offering | We are also offering to each purchaser whose purchase of shares of common stock in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% of our outstanding common stock immediately following the consummation of this offering, the opportunity to purchase, if the purchaser so chooses, pre-funded warrants, in lieu of shares of common stock that would otherwise result in the purchaser’s beneficial ownership exceeding 4.99% of our outstanding common stock. Subject to limited exceptions, a holder of pre-funded warrants will not have the right to exercise any portion of its pre-funded warrants if the holder, together with its affiliates, would beneficially own in excess of 4.99% (or, at the election of the holder, 9.99%) of the number of shares of common stock outstanding immediately after giving effect to such exercise. Each pre-funded warrant will be exercisable for one share of our common stock. The purchase price of each pre-funded warrant will equal the price per share at which the shares of common stock are being sold to the public in this offering, minus $0.01, and the exercise price of each pre-funded warrant will be $0.01 per share. This offering also relates to the shares of common stock issuable upon exercise of any pre-funded warrants sold in this offering. For each pre-funded warrant we sell, the number of shares of common stock we are offering will be decreased on a one-for-one basis. | |
Common warrants offered by us in this offering | Common warrants to purchase an aggregate of 7,428,571 shares of our common stock. Each share of our common stock is being sold together with a common warrant to purchase 7,428,571 shares of our common stock. Because a common warrant to purchase one share of our common stock is being sold together in this offering with each share of common stock and, in the alternative, each pre-funded warrant to purchase one share of common stock, the number of common warrants sold in this offering will not change as a result of a change in the mix of the shares of our common stock and pre-funded warrants sold. Each common warrant will have an exercise price of $[●] per share (subject to appropriate adjustment in the event of recapitalization events, stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events), will be immediately exercisable and will expire on the fifth anniversary of the original issuance date. No fractional shares of common stock will be issued in connection with the exercise of a common warrant. In lieu of fractional shares, we will round up to the next whole share. This prospectus also relates to the offering of the shares of common stock issuable upon exercise of the common warrants. |
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| Common stock to be outstanding after this offering | 16,217,175shares (assuming no sale of any pre-funded warrants and assuming none of the common warrants issued in this offering are exercised). | |
Option to purchase additional shares and/or common warrants | The underwriters have a 45-day option to purchase up to an additional 15% of the total number of shares of our common stock and/or common warrants to purchase shares of our common stock to cover over-allotments, if any. | |
| Use of proceeds | We estimate that the net proceeds to us from this offering will be approximately $11.6 million, based upon the assumed public offering price of $1.75 per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us and assuming no exercise of the common warrants. We intend to use the net proceeds from the sale of the securities for working capital, trade payables, payment of legacy CSO obligations that were not assumed by the CSO Acquirer, as defined below, and general corporate purposes.1See “Use of Proceeds” on page 55 of this prospectus. | |
Risk factors Lock-Up Agreements | You should carefully read and consider the information set forth under “Risk Factors” on page 17 of this prospectus and the documents incorporated by reference herein before deciding to invest in our securities. We and all of our executive officers and directors will enter into lock-up agreements with the underwriters. Under these agreements, we and each of these persons may not, without the prior written approval of Maxim Group LLC, offer, sell, contract to sell or otherwise dispose of or hedge common stock or securities convertible into or exchangeable for common stock, subject to certain exceptions. The restrictions contained in these agreements will be in effect for a period of 120 days after the date of this offering, as to us, and for a period of 180 days after the date of the closing of this offering, as to our officers and directors . For more information, see “Underwriting” on page 69 of this prospectus. | |
| Nasdaq Capital Market common stock symbol | IDXG | |
Listing of Pre-Funded Warrants and Common Warrants | We do not intend to list the pre-funded warrants or the common warrants on any securities exchange or nationally recognized trading system. | |
1Pursuant to our Employment Agreement with Jack Stover, our President and Chief Executive Officer, dated October 30, 2016, Mr. Stover is entitled to receive a bonus equal to 3% of the net proceeds received by us in the offering, or approximately $0.4 million.
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The number of sales representatives (both full-timeshares of common stock to be outstanding immediately after this offering is based on 8,788,604 shares of common stock outstanding as of June 1, 2017 and part-time) employedexcludes:
| ● | Shares of our common stock that may be issued upon exercise of prefunded warrants and common warrants issued in this offering; |
| ● | 68,000 shares of our common stock issuable upon the settlement of restricted stock units, or RSUs, issued to our employees and directors; |
| ● | 84,963 shares of common stock issuable upon settlement of stock appreciation rights, or SARs, issued to our employees, at a weighted average exercise price of $42.91 per share, of which 84,963 shares of common stock are vested and exercisable; |
| ● | 507,529 shares of common stock issuable upon exercise of outstanding options under our Amended and Restated 2004 Stock Award and Incentive Plan (the “2014 Plan”), of which 184,647 are subject to stockholder approval with respect to their grant and an increase in the number of shares in the 2014 Plan; and |
| ● | 955,000 shares of common stock issuable upon the exercise of warrants outstanding at a weighted average exercise price of $4.69 per share. |
Unless otherwise indicated, all information contained in this prospectus assumes no exercise by the Company has increased from approximately 100 asunderwriters of their overallotment option.
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The following tables presents summary condensed consolidated statements of comprehensive income (loss) for the periods indicated. The information is only a summary and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 1993 to
approximately 1,0002016, as amended, our Quarterly Report on Form 10-Q for the period ended March 31, 2017, and the financial information and related notes incorporated by reference in this prospectus. See “Incorporation of Certain Information by Reference” on page 77 of this prospectus and “Where You Can Find Additional Information” on page 76 of this prospectus. We have derived the following summary financial data for the (i) years ended December 31, 1997. Over2016 and December 31, 2015 from our audited consolidated financial statements that same period,are incorporated by reference in this prospectus and (ii) quarters ended March 31, 2017 and March 31, 2016 from our unaudited consolidated financial statements that are incorporated by reference in this prospectus.
INTERPACE DIAGNOSTICS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, except for per share data)
| For The Years Ended | For the Three Month Period Ended | |||||||||||||||
| December 31, 2016 | December 31, 2015 | March 31, 2017 | March 31, 2016 | |||||||||||||
| Revenue, net | $ | 13,085 | $ | 9,432 | $ | 3,470 | $ | 3,035 | ||||||||
| Gross profit | 6,444 | 2,522 | 1,699 | 1,856 | ||||||||||||
| Operating (loss) income | (6,442 | ) | (40,408 | ) | 3,698 | (3,800 | ) | |||||||||
| Net (loss) income | (8,332 | ) | (11,356 | ) | 2,414 | (4,786 | ) | |||||||||
| Net (loss) income per basic share of common stock | $ | (4.59 | ) | $ | (7.34 | ) | $ | 0.56 | $ | (2.69 | ) | |||||
| Net (loss) income per diluted share of common stock | $ | (4.59 | ) | $ | (7.34 | ) | $ | 0.55 | $ | (2.69 | ) | |||||
| Weighted average number of common shares and common share equivalents outstanding: | ||||||||||||||||
| Basic | 1,816 | 1,548 | 4,294 | 1,776 | ||||||||||||
| Diluted | 1,816 | 1,548 | 4,384 | 1,776 | ||||||||||||
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An investment in our securities, including our common stock , common warrants, and pre-funded warrants, involves a high degree of risk. You should carefully consider the Company's mix between part-timerisks described below and full-time representatives shifted from 100%
part-time to 45% part-time. The Company has also experienced a consistently high
renewal rate among its clients. For example,all of the other information contained in this prospectus and incorporated by reference into this prospectus, including our Annual Report on Form 10-K for the year ended December 31, 1997, approximately 86%2016, as amended, our Quarterly Report on Form 10-Q for the period ended March 31, 2017 and our financial statements and related notes, before investing in our securities. If any of the Company'spossible events described in those sections or below actually occur, our business, business prospects, cash flow, results of operations or financial condition could be harmed. In this case, the trading price of our common stock could decline, and you might lose all or part of your investment.
The following is a discussion of the risk factors that we believe are material to us at this time. These risks and uncertainties are not the only ones facing us and there may be additional matters that we are unaware of or that we currently consider immaterial. All of these could adversely affect our business, business prospects, results of operations, financial condition and cash flows.
RISKS RELATING TO OUR BUSINESS
There are substantial doubts about our ability to continue as a going concern due to our operating history of net losses, negative working capital and insufficient cash flows, and lack of liquidity to pay our current obligations and if we are unable to continue our business, our shares may have little or no value.
Our ability to become a profitable operating company is dependent upon our ability to generate revenues and/or obtain financing adequate to support our cost structure. We do not currently have enough cash on hand to meet our obligations over the next twelve months, and we cannot provide our stockholders any assurance that we will be able to raise sufficient funding from the generation of revenue, wasthe sale of our common stock, or through financing to sustain us over the next twelve months.
For the fiscal year ended December 31, 2016 and quarter ended March 31, 2017, we had an operating loss of $6.4 million and operating income of $3.7 million, respectively. As of March 31, 2017, we had cash and cash equivalents of $7.1 million and current liabilities of $13.0 million. From September 30, 2016 through December 31, 2016, we provided working capital by extending our payables primarily by not making timely payments on current obligations and debt incurred prior to the sale of our CSO business, entering into payment plans, negotiating termination agreements on commitments that were not useful to our current business and not paying certain severance obligations to terminated employees. We completed four public offerings and a private placement of warrants from December 22, 2016 through February 8, 2017, which resulted in aggregate gross proceeds to us of approximately $14.1 million. Of that amount, we used approximately $1.3 million to make the first principal payment on that certain Non-Negotiable Subordinated Secured Promissory Note, dated as of October 31, 2014, as amended, or the RedPath Note, on December 31, 2016 (which RedPath Note has since been acquired by an investor, exchanged with the Company for the Exchanged Notes and converted into common stock) and approximately $1.0 million on February 27, 2017 to satisfy severance obligations due to five former senior executives. The proceeds from the public offerings and private placement have improved our overall cash position. However, we remain in default of certain of our current obligations and certain vendors have threatened litigation against us. The Company must also fund its operating deficit until a sustainable level of revenue is achieved. These factors have raised substantial doubts about our ability to continue as a going concern. We may need to attempt to raise additional equity capital by selling shares of common stock or other dilutive or non-dilutive means, if necessary. However, the doubts raised, relating to our ability to continue as a going concern, may make investing in our securities an unattractive investment for potential investors. These factors, among others, may make it difficult to raise any additional capital.
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Our molecular diagnostics business has limited revenue, and we expect to incur net losses for the foreseeable future and may never achieve or sustain profitability.
In 2014, we acquired RedPath and certain assets from Asuragen. As a result, we now offer PancraGEN®, ThyGenX®, and ThyraMIR® and to a limited extent, BarreGEN® . The revenue generated from our molecular diagnostics business was $13.1 million and $3.5 million for the fiscal year ended December 31, 2016 and our quarter ended March 31, 2017, respectively. For the fiscal year ended December 31, 2016, our molecular diagnostics business had an operating loss of approximately $6.4 million. For our quarter ended March 31, 2017, our molecular diagnostics business had operating income from continuing operations of approximately $3.7 million. However, without the reversal of contingent consideration liabilities of $5.8 million during the quarter ended March 31, 2017, we would have had an operating loss of $2.1 million. Although we expect the revenue generated from our molecular diagnostics business to grow in the future, there can be no assurance that we will achieve revenue sufficient to offset expenses. Over the next several years, we expect to continue to devote resources to increase adoption of, and reimbursement for, our molecular diagnostic tests and to develop and acquire additional diagnostic solutions. However, our business may never achieve or sustain profitability, and our failure to achieve and sustain profitability in the future could have a material adverse effect on our business, financial condition and results of operations.
We may not be able to fund the remaining obligations of our previously sold CSO business, which could have a material adverse effect on our business and results of operations.
As a result of an Asset Purchase Agreement, dated as of October 30, 2015, by and between us and the CSO Acquirer (“Asset Sale”), not all of our CSO obligations were assumed by the CSO Acquirer . These obligations consist of up to $2.6 million, in aggregate, of accounts payable, costs relating to the closeout of the portion of the CSO business that principally related to the provision of services for multiple non-competing brands for different clients, or the ERT Unit, which the CSO Acquirer did not acquire in the Asset Sale, and termination of various vendor contracts that had contributedbeen associated with the CSO business. As such, we continue to pay some of these obligations, but may not be able to satisfy all of these remaining obligations. If we are unable to satisfy all our remaining CSO obligations, our business and results of operations could be materially and adversely affected.
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Our profitability will be impaired by our obligations to make royalty and milestone payments to Asuragen.
In connection with our acquisition of certain assets of Asuragen in 2014, we are obligated to make certain royalty and milestone payments. Under the Asuragen License Agreement, we owed $500,000, all of which was paid in installments throughout 2016 and paid in full as of January 13, 2017. We are further obligated to pay royalties on the future net sales of the miRInform ® pancreas platform for a period of ten years following a qualifying sale, on the future net sales of the miRInform® thyroid platform through August 13, 2024 and on certain other thyroid diagnostics tests for a period of ten years following a qualifying sale.
Even if we are able to successfully launch the above referenced diagnostic tests, our profitability will be impaired by our obligations to make royalty and milestone payments to Asuragen. Although we believe, under such circumstances, that the increase in revenue will exceed the corresponding royalty and milestone payments, our obligations to Asuragen could have a material adverse effect on our business, financial condition and results of operations if we are unable to manage our operating costs and expenses at profitable levels.
Our inability to finance our business on acceptable terms in the future may limit our ability to develop and commercialize new molecular diagnostic solutions and technologies and grow our business, and potentially force us to seek bankruptcy protection.
We expect capital expenditures and operating expenses to increase over the next several years as we expand our infrastructure and commercial operations. As of March 31, 2017, we had cash and cash equivalents of $7.1 million, net accounts receivable of $2.3 million, current assets of $10.7 million and current liabilities of $13.0 million. While the Company has made significant reductions in indebtedness, the Company is not yet cash flow positive from operations. Accordingly, due to the Company’s operating deficit and obligations, we may need to finance our business in the future through collaborations, equity offerings, debt financings, licensing arrangements or other dilutive or non-dilutive means. Additional funding may not be available to us on acceptable terms, or at all. If we raise funds by issuing additional equity securities, dilution to our stockholders could result. Further, our ability to raise additional financing through equity offerings in the future may be more difficult and costly since we have lost our eligibility until November 2017 to use our registration statement on Form S-3 (File No. 333-207263) declared effective by the SEC on October 9, 2015 because we failed to file a timely Form 8-K. In addition, we granted each institutional investor who participated in the Second Registered Direct Offering, the right, for a period of 15 months following January 6, 2017, or until April 6, 2018, to participate in any public or private offering by us of equity securities, subject to certain exceptions, up to such investor’s pro rata portion of 50% of the securities being offered, or the Participation Right. If we fail to comply with the applicable provisions of the Participation Right or do not receive waivers from such investors, we may not be able to raise funds through another equity offering. The incurrence of additional indebtedness or the issuance of certain equity securities could result in increased fixed payment obligations and could also result in restrictive covenants, such as limitations on our ability to incur additional debt or issue additional equity, limitations on our ability to acquire or license intellectual property rights, and other operating restrictions that could adversely affect our ability to conduct our business.
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Our financial results currently depend solely on sales of our molecular diagnostic tests, and we will need to generate sufficient revenue from these and other molecular diagnostic solutions that we develop or acquire to grow our business.
The majority of our revenue currently is derived from the sale of our molecular diagnostic tests, which we initially launched commercially in the second half of 2014. We have several additional molecular diagnostics tests and complimentary service extensions that we have recently launched or are in late stage development, but there can be no assurance that we will be able to successfully commercialize or sufficiently grow those tests. If we are unable to increase sales of our molecular diagnostic tests, expand reimbursement for these tests, or successfully develop and commercialize other molecular diagnostic tests, our revenue and our ability to achieve and sustain profitability would be impaired, and this could have a material adverse effect on our business, financial condition and results of operations.
We have a limited operating history as a molecular diagnostics company, which may make it difficult for you to evaluate the success of our business to date and to assess our future viability.
We were originally incorporated in New Jersey in 1986 and began commercial operations in 1987. In connection with our initial public offering, we re-incorporated in Delaware in 1998. From 1987 until the Asset Sale described below, our operations focused primarily on our CSO business, which was the personal promotion of pharmaceutical customers’ products through outsourced sales teams. We now conduct our molecular diagnostics business through our wholly owned subsidiaries, Interpace LLC, which was formed in Delaware in 2013, and Interpace Diagnostics Corporation, which was formed in Delaware in 2007. We began our own commercial sales of our molecular diagnostic tests in late 2014. Consequently, any evaluations about our future success, performance or viability may not be as accurate as they could be if we had a longer operating history.
Recent changes in our senior management team and the lack of shared experience among the current members of our senior management team could negatively affect our results of operations and our business may be harmed.
Effective as of December 22, 2015, our President and Chief Executive Officer resigned and also resigned as a member of our Board of Directors (the “Board”). Our Board appointed Jack E. Stover, previously Chairman of our Audit Committee, as Interim President and Chief Executive Officer, and subsequently, effective June 21, 2016, Mr. Stover was appointed President and Chief Executive Officer. Additionally, in light of the departure of our previous Chief Financial Officer, James Early was appointed as Chief Financial Officer effective as of October 11, 2016. Mr. Early also serves as our principal accounting officer. From August 29, 2016 until October 11, 2016, Mr. Early was engaged by us as a consultant to perform the role of interim chief financial officer.
As a result of these changes, we may experience disruption or have difficulty in maintaining or developing our business during this transition. Further, our senior management team has limited experience working together as a group. This lack of shared experience could negatively impact our senior management team’s ability to quickly and efficiently respond to problems and effectively manage our business. If our management team is not able to work together as a group, our results of operations may suffer and our business may be harmed.
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The loss of members of our senior management team or our inability to attract and retain key personnel could adversely affect our business.
As a small company with 63 employees, the success of our business depends largely on the skills, experience and performance of members of our senior management team and others in key management positions. The efforts of these persons will be critical to us as we continue to grow our molecular diagnostics business and develop and/or acquire additional molecular diagnostic tests. If we were to lose one or more of these key employees, we may experience difficulties in competing effectively, developing our technologies and implementing our business strategy. In addition, our commercial laboratory operations depend on our ability to attract and retain highly skilled scientists, including licensed clinical laboratory scientists. We may not be able to attract or retain qualified scientists and technicians in the future due to the competition for qualified personnel, and we may have to pay higher salaries to attract and retain qualified personnel. We may also be at a disadvantage in recruiting and retaining key personnel as our small size, limited resources, limited liquidity, work force reductions in late 2015 and recent changes in our senior management team may be viewed as providing a less stable environment, with fewer opportunities than would be the case at one of our larger competitors. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that could adversely affect our ability to support our clinical laboratory and commercialization.
We depend on a few payors for a significant portion of our revenue, and if one or more significant payors stops providing reimbursement or decreases the amount of reimbursement for our molecular diagnostic tests, our revenue could decline.
Due to the age of our typical patients, the majority of our gastrointestinal patients are Medicare based while the majority of our endocrine patients are covered by commercial insurance carriers. Accordingly, our success in adding and obtaining commercial carriers has been more significant for our thyroid assays.
Revenue for tests performed on patients covered by Medicare was approximately 41% of our total net revenue for the fiscal year ended December 31, 2016 and 41% of total net revenue for the quarter ended March 31, 2017. The percentage of our revenue derived from significant payors is expected to fluctuate from period to period as our revenue increases, as additional payors provide reimbursement for our molecular diagnostic tests or if one or more payors were to stop reimbursing for our molecular diagnostic tests or change their reimbursed amounts.
Since September 2012, Novitas Solutions has been the regional MAC that handles claims processing for Medicare services with jurisdiction for PancraGEN® , ThyGenX® , ThyraMIR® and BarreGEN® . On a five-year rotational basis, Medicare requests bids for its 1996regional MAC services. Any future changes in the MAC processing or coding for Medicare claims for our molecular diagnostic tests could result in a change in the coverage or reimbursement rates for such molecular diagnostic tests, or the loss of coverage.
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Our PancraGEN® and ThyGenX® tests are reimbursed by Medicare based on applicable CPT codes. PancraGEN® is currently reimbursed by Medicare at $3,038 per test, ThyGenX® is currently reimbursed by Medicare at $1,054 a test and ThyraMIR® is currently reimbursed by Medicare at $2,110. Presently, our BarreGEN®assay is not reimbursed at all. Any future reduction from the current rate would have a material adverse effect on business and results of operations.
Although we have entered into contracts with certain third-party payors which establish in-network allowable rates of reimbursement for our molecular diagnostic tests, payors may suspend or discontinue reimbursement at any time, may require or increase co-payments from patients, or may reduce the reimbursement rates paid to us. Any such actions could have a negative effect on our revenue.
According
If payors do not provide reimbursement, rescind or modify their reimbursement policies or delay payments for our tests, or if we are unable to PMSI Scott-Levin Inc.successfully negotiate additional reimbursement contracts, our commercial success could be compromised.
Physicians may generally not order our tests unless payors reimburse a substantial portion of the test price. There is typically uncertainty concerning third-party reimbursement of any test incorporating new molecular diagnostic technology. Reimbursement by a payor may depend on a number of factors, including a payor’s determination that tests such as our molecular diagnostic tests are: (a) not experimental or investigational; (b) pre-authorized and appropriate for the patient; (c) cost-effective; (d) supported by peer-reviewed publications; and (e) included in clinical practice guidelines. Since each payor generally makes its own decision as to whether to establish a policy or enter into a contract to reimburse our tests, seeking these approvals is a time-consuming and costly process. Although we have contracted rates of reimbursement with certain payors, which establishes in-network allowable rates of reimbursement for our PancraGEN®, ThyGenX® , and ThyraMIR®tests, payors may suspend or discontinue reimbursement at any time, may require or increase co-payments from patients, or may reduce the reimbursement rates paid to us. Any such actions could have a healthcare marketing information
company ('Scott-Levin')negative effect on our revenue.
We have contracted rates of reimbursement with payors for our PancraGEN®, ThyGenX® and ThyraMIR® tests. Without a contracted rate for reimbursement, claims may be denied upon submission, and we may need to appeal the claims. The appeals process is time consuming and expensive, and may not result in payment. We expect to continue to focus resources on increasing adoption of and coverage and reimbursement for our molecular diagnostic tests. We cannot, however, predict whether, under what circumstances, or at what payment levels payors will reimburse us for our molecular diagnostic tests, if at all. In addition, the launch of our molecular diagnostic tests, PancraGEN® , ThyGenX® , ThyraMIR® and BarreGEN®and any other new products we may acquire or develop in the future may require that we expend substantial time and resources in order to obtain and retain reimbursement. Also, payor consolidation is underway and creates uncertainty as to whether coverage and contracts with existing payors will remain in effect. Finally, commercial payors may tie their allowable rates to Medicare rates, and should Medicare reduce their rates, we may be negatively impacted. If we fail to establish broad adoption of and reimbursement for our molecular diagnostic tests, or if we are unable to maintain existing reimbursement from payors, our ability to generate revenue could be harmed and this could have a material adverse effect on our business, financial condition and results of operations.
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We may experience limits on our revenue if physicians decide not to order our molecular diagnostic tests.
If we are unable to create or maintain demand for our molecular diagnostic tests in sufficient volume, we may not become profitable. To generate demand, we will need to continue to educate physicians and the medical community on the value and benefits of our molecular diagnostic tests in order to change clinical practices through published papers, presentations at scientific conferences and one-on-one education by our internal sales force. In addition, our ability to obtain and maintain adequate reimbursement from third-party payors will be critical to generating revenue.
In many cases, practice guidelines in the United States pharmaceutical companies spent
approximately $4.5 billionhave recommended therapies or surgery to determine if a patient’s condition is malignant or benign. Accordingly, physicians may be reluctant to order a diagnostic test that may suggest surgery is unnecessary. In addition, our molecular diagnostic tests are performed at our laboratories rather than by a pathologist in a local laboratory, so pathologists may be reluctant to support our molecular diagnostic tests. In addition, guidelines for the diagnosis and treatment may change to recommend another type of treatment protocol, and these changes may result in medical practitioners deciding not to use our molecular diagnostic tests. These facts may make physicians reluctant to convert to using our molecular diagnostic tests, which could limit our ability to generate revenue and achieve profitability, which could have a material adverse effect on product detailingour business, financial condition and results of operations.
We may experience limits on our revenue if patients decide not to use our molecular diagnostic tests.
Some patients may decide not to use our molecular diagnostic tests due to price, all or part of which may be payable directly by the patient if the patient’s insurer denies reimbursement in 1996.full or in part. Many insurers seek to shift more of the cost of healthcare to patients in the form of higher co-payments or premiums. In addition, the current economic environment in the United States has and may continue to result in the loss of healthcare coverage. Implementation of provisions of PPACA (also known as the Affordable Care Act) also resulted in the loss of health insurance, and increases in premiums and reductions in coverage, for some patients. These events may result in patients delaying or forgoing medical checkups or treatment due to their inability to pay for our test, which could have an adverse effect on our revenue. In addition, the President of the United States has announced that he favors repealing PPACA in 2017, and leaders of the Republication-controlled federal legislature also have expressed a desire to repeal PPACA. The Company estimatesscope and timing of any legislation to repeal, amend, replace, or reform PPACA is uncertain, but if such legislation were to become law, it could have a significant impact on the U.S. healthcare system. We do have a Patient Assistance Program that product detailing,allows eligible patients to apply for assistance in covering a portion of their out of pocket obligation; however, there is no guarantee that this Program will be sufficient to influence patients to use our molecular diagnostic tests.
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If our internal sales force is less successful than anticipated, our business expansion plans could suffer and our ability to generate revenues could be diminished. In addition, we have limited history selling our molecular diagnostics tests on average, represents approximately 60%a direct basis and our limited history makes forecasting difficult.
If our internal sales force is not successful, or new additions to our sales team fail to gain traction among our customers, we may not be able to increase market awareness and sales of our molecular diagnostic tests. If we fail to establish our molecular diagnostic tests in the marketplace, it could have a negative effect on our ability to sell subsequent molecular diagnostic tests or other products or services and hinder the desired expansion of our business. We have growing, however limited, historical experience forecasting the direct sales of our molecular diagnostics products. Our ability to process quantities that meet customer demand is dependent upon our ability to forecast accurately and plan production accordingly.
Due to how we recognize revenue, our quarterly operating results are likely to fluctuate.
We recognize a significant portion of our revenue when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists; services have been rendered; the selling price is fixed or determinable; and collectability is reasonably assured. We have little visibility as to when we will receive payment, and we must appeal negative payment decisions, which delays collections. For molecular diagnostic tests performed where we have an agreed upon reimbursement rate or we are able to make a reasonable estimate of reimbursement at the time delivery is complete, such as in the case of Medicare and certain other payors, we recognize the related revenue upon delivery of a pharmaceutical company's total promotional spending. Product detailing involvespatient report to the prescribing physician based on the established billing rate less contractual and other adjustments to arrive at the net amount that we expect to collect. We determine the net amount we expect to collect based on a face-to-faceper payor, per contract or agreement basis. In situations where we are not able to make a reasonable estimate of reimbursement, we recognize revenue upon the earlier of receipt of third-party notification of payment or when cash is received. Upon ultimate collection, the amount received from Medicare and other payors where reimbursement was estimated is compared to previous estimates and the contractual allowance is adjusted accordingly. These factors will likely result in fluctuations in our quarterly revenue. Should we recognize revenue from payors on an accrual basis and later determine the judgments underlying estimated reimbursement change, or were incorrect at the time we accrued such revenue, our financial results could be negatively impacted in future quarters. As a result, comparing our operating results on a period-to-period basis may vary. You should not rely on our past results as an indication of our future performance. In addition, these fluctuations in revenue may make it difficult for us, research analysts and investors to accurately forecast our revenue and operating results. If our revenue or operating results fall below consensus expectations, the price of our common stock would likely decline.
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We rely on sole suppliers for many of the materials used in our molecular diagnostic tests, and we may not be able to find replacements or transition to alternative suppliers in a timely manner.
We rely on sole suppliers for many materials that we use to perform our molecular diagnostic tests, including Asuragen for our thyroid tests pursuant to our supply agreement with them. We also purchase reagents used in our molecular diagnostic tests from sole-source suppliers. While we have developed alternate sourcing strategies for many of these materials and vendors, we cannot be certain whether these strategies will be effective or the alternative sources will be available in a timely manner. We do not currently have alternative sources for certain supplies and materials, although we believe that alternative sources are available. If these suppliers can no longer provide us with the materials we need to perform our molecular diagnostic tests, if the materials do not meet our quality specifications, or if we cannot obtain acceptable substitute materials, an interruption in molecular diagnostic test processing could occur. Any such interruption may directly impact our revenue and cause us to incur higher costs.
We may experience problems in scaling our operations, or delays or reagent and supply shortages that could limit the growth of our revenue.
If we encounter difficulties in scaling our operations as a result of, among other things, quality control and quality assurance issues, availability of reagents and raw material supplies, or sufficient credit worthiness to acquire sufficient reagents and supplies, we will likely experience reduced sales of our molecular diagnostic tests, increased repair or re-engineering costs, and defects and increased expenses due to switching to alternate suppliers, any of which would reduce our revenues and gross margins.
Although we attempt to match our capabilities to estimates of marketplace demand, to the extent demand materially varies from our estimates, we may experience constraints in our operations and delivery capacity, which could adversely impact revenue in a given fiscal period. Should our need for raw materials and reagents used in our molecular diagnostic tests fluctuate, we could incur additional costs associated with either expediting or postponing delivery of those materials or reagents.
If we are unable to support demand for our molecular diagnostic tests or any of our future tests or solutions, our business could suffer.
As demand for our molecular diagnostic tests grows, we will need to continue to scale our testing capacity and processing technology, expand customer service, billing and systems processes and enhance our internal quality assurance program. We will also need additional certified laboratory scientists and other scientific and technical personnel to process higher volumes of our molecular diagnostic tests. We cannot assure you that increases in scale, related improvements and quality assurance will be implemented successfully or that appropriate personnel will be available. Failure to implement necessary procedures, transition to new processes or hire the necessary or appropriately trained personnel could result in higher costs of processing tests or inability to meet demand. There can be no assurance that we will be able to perform our testing on a timely basis at a level consistent with demand, or that our efforts to scale our operations will not negatively affect the quality of test results. If we encounter difficulty meeting betweenmarket demand or quality standards, our reputation could be harmed and our future prospects and our business could suffer, causing a sales representativematerial adverse effect on our business, financial condition and results of operations.
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If we are unable to compete successfully, we may be unable to increase or sustain our revenue or achieve profitability.
We compete with physicians and the medical community who may use less sophisticated methods to diagnose gastrointestinal and endocrine cancers. In many cases, practice guidelines in the United States have recommended therapies or surgery to determine if a targeted prescriber,
usuallypatient’s condition is malignant or benign. As a physician identified becauseresult, we believe that we will need to continue to educate physicians and the medical community on the value and benefits of his or her specialty or prescribing
patterns. Detailing generally occursour molecular diagnostic tests in physician officesorder to continue to positively impact clinical practices. In addition, we face competition from other companies that offer diagnostic tests. Specifically, in regard to our thyroid diagnostic tests, Veracyte has thyroid nodule cancer diagnostic tests that compete with our ThyGenX® and hospitals,
although conventionsThyraMIR®tests, which are currently on the market, and trade association meetingsVeracyte may also provide an
appropriate forum. The sales representativebe developing additional tests aimed at FNAs for thyroid cancer. Quest currently offers a diagnostic test similar to the earlier version of our ThyGenX® test, and CBL is required to possessoffering a high level
of product knowledge,diagnostic test that analyzes genetic alterations using next-generation sequencing. Other competitors for our thyroid assays include Rosetta Genomics, Accelerate Diagnostics, Inc., Cancer Genetics, Inc., Genomic Health Inc., NeoGenomics Inc. and Trovagene, Inc. While we do not believe we currently have direct competition for PancraGEN® in the gastrointestinal market, there is the potential for indirect competition as well as direct competition due to the limited penetration we currently have of this market.
It is also possible that we face future competition from Laboratory Developed Tests (“LDTs”) developed by commercial laboratories such as Quest and/or other technicaldiagnostic companies developing new molecular diagnostic tests or technologies. Furthermore, we may be subject to competition as a result of the new, unforeseen technologies that can be developed by our competitors in the gastrointestinal and therapeutic expertise.
Product detailingendocrine cancer molecular diagnostic tests space.
To compete successfully, we must be able to demonstrate, among other things, that our test results are accurate and cost effective, and we must secure a meaningful level of reimbursement for our tests. Since our molecular diagnostics business began in 2014, many of our potential competitors have stronger brand recognition and greater financial capabilities than we do. Others may develop a test with a lower price than ours that could be viewed by physicians and payors as functionally equivalent to our molecular diagnostic tests, or offer a test at prices designed to promote market penetration, which could force us to lower the price of our molecular diagnostic tests and affect our ability to achieve and maintain profitability. If we are unable to compete successfully against current and future competitors, we may be unable to increase market acceptance of our molecular diagnostic tests and overall sales, which could prevent us from increasing our revenue or achieving profitability and cause the market price of our common stock to decline. As we add new molecular diagnostic tests and services, we will face many of these same competitive risks for these new tests and services.
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Developing new molecular diagnostic tests involves a technicallengthy and complex process, and we may not be able to commercialize on a timely basis, or at all, other molecular diagnostic tests we are developing.
Developing new molecular diagnostic tests and solutions require us to devote considerable resources to research and development. We may face challenges obtaining sufficient numbers of samples to validate a newly acquired or developed molecular diagnostic test. In order to develop and commercialize new tests, we typically need to:
| ● | expend significant funds to conduct substantial research and development; | |
| ● | conduct successful analytical and clinical studies; | |
| ● | scale our laboratory processes to accommodate new molecular diagnostic tests; and | |
| ● | build the commercial infrastructure to market and sell new tests. |
Typically, few research and development projects result in commercial products, and success in early clinical studies often is not replicated in later studies. At any point, we may abandon development of a test or we may be required to expend considerable resources repeating clinical studies, which would adversely affect the timing for generating revenue from such test. If a clinical validation study fails to demonstrate the prospectively defined endpoints of the study or if we fail to sufficiently demonstrate analytical validity, we might choose to abandon the development of the molecular diagnostic test, which could harm our business. In addition, competitors may develop and commercialize new competing tests faster than us or at a lower cost, which could have a material adverse effect on our business, financial condition and results of operations.
Unfavorable results of legal proceedings could have a material adverse effect on our business, financial condition and results of operations.
We are and may become subject to various legal proceedings and claims that arise in or outside the ordinary course of business. The results of legal proceedings cannot be predicted with certainty. Regardless of merit, litigation may be both time-consuming and disruptive to our operations and cause significant expense and diversion of management attention. If we do not prevail in the legal proceedings, we may be faced with significant monetary damages or injunctive relief against us that could have a material adverse effect on our business, financial condition and results of operations.
If we are unable to develop or acquire molecular diagnostic tests to keep pace with rapid technological, medical and scientific change, our operating results and competitive position could be affected.
Recently, there have been numerous advances in technologies relating to diagnostics, particularly diagnostics that are based on genomic information. These advances require us to continuously develop our technology and to work to develop new solutions to keep pace with evolving standards of care. Our solutions could become obsolete unless we continually innovate and expand our product offerings to include new clinical applications. If we are unable to develop or acquire new molecular diagnostic tests or to demonstrate the applicability of our molecular diagnostic tests for other diseases, our sales could decline and our competitive position could be harmed.
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If the U.S. Food and Drug Administration were to begin to enforce regulation of our molecular diagnostic tests, we could incur substantial costs and delays associated with trying to obtain pre-market clearance or approval and costs associated with complying with post-market requirements.
Clinical laboratory tests like our molecular diagnostic tests are regulated under CLIA as well as by applicable State laws. Most LDTs are currently not subject to the FDA’s, regulation (although reagents, instruments, software or components provided by third parties and used to perform LDTs may be subject to regulation). In October 2014, the FDA issued two draft guidance documents: “Framework for Regulatory Oversight of Laboratory Developed Tests”, which provides an overview of how the FDA would regulate LDTs through a risk-based approach, and “FDA Notification and Medical Device Reporting for Laboratory Developed Tests”, which provides guidance on how the FDA intends to collect information on existing LDTs, including adverse event reports. Pursuant to the Framework for Regulatory Oversight draft guidance, LDT manufacturers will be subject to medical device registration, listing, and adverse event reporting requirements. LDT manufacturers will be required to either submit a pre-market application and receive the FDA’s approval before an LDT may be marketed or submit a pre-market notification in advance of marketing. The Framework for Regulatory Oversight draft guidance states that within six months after the guidance documents are finalized, all laboratories will be required to give notice to the FDA and provide basic information concerning the nature of the LDTs offered.
On November 18, 2016, however, the FDA announced that it would not release the final guidance at this time and instead would continue to work with stakeholders, the new administration and Congress to determine the right approach. On January 13, 2017, the FDA released a discussion paper on LDTs outlining a possible risk-based approach for FDA and CMS oversight of LDTs. According to the 2017 discussion paper, previously marketed LDTs would not be expected to comply with most or all FDA oversight requirements (grandfathering), except for adverse event and malfunction reporting. In addition, certain new and significantly modified LDTs would not be expected to comply with pre-market review unless the agency determines certain tests could lead to patient harm. Since LDTs currently on the market would be grandfathered in, pre-market review of new and significantly modified LDTs could be phased-in over a four year period, as opposed to the product's legally
authorized indicationsnine years proposed in the Framework for Regulatory Oversight draft guidance. In addition, tests introduced after the effective date, but before their phase-in date, could continue to be offered during pre-market review.
The discussion paper notes that FDA will focus on analytical and usage, roleclinical validity as the basis for marketing authorization. The FDA anticipates laboratories that already conduct proper validation should not be expected to experience new costs for validating their tests to support marketing authorization and laboratories that conduct appropriate evaluations would not have to collect additional data to demonstrate analytical validity for FDA clearance or approval. The evidence of the analytical and clinical validity of all LDTs will be made publically available. LDTs are encouraged to submit prospective change protocols in diseasetheir pre-market submission that outline specific types of anticipated changes, the procedures that will be followed to implement them and the criteria that will be met prior to implementation.
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Despite the FDA decision not to release the guidance at this time, it can choose to release the guidance at any time in the future. If the guidance is released and pre-market review is required, our business could be negatively impacted as a result of commercial delay that may be caused by the new requirements. The cost of conducting clinical trials and otherwise developing data and information to support pre-market applications may be significant. If we are required to submit applications for our currently-marketed tests, we may be required to conduct additional studies, which may be time-consuming and costly and could result in our currently-marketed tests being withdrawn from the market. Continued compliance with the FDA’s regulations would increase the cost of conducting our business, and subject us to heightened regulation by the FDA and penalties for failure to comply with these requirements. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, such as fines, product suspensions, warning letters, recalls, injunctions and other civil and criminal sanctions. There are other regulatory and legislative proposals that would increase general FDA oversight of clinical laboratories and LDTs. The outcome and ultimate impact of such proposals on the business is difficult to predict at this time. We are monitoring developments and anticipate that our products will be able to comply with requirements that are ultimately imposed by the FDA. In the meantime, we maintain our CLIA accreditation, which permits the use of LDTs for diagnostics purposes.
If we fail to comply with Federal, State and foreign laboratory licensing requirements, we could lose the ability to perform our tests or experience disruptions to our business.
We are subject to CLIA, a Federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment mechanism of action, side effects, dosing, drug interactions, costdisease. CLIA regulations mandate specific standards in the areas of personnel qualifications, administration, and availability (i.e.,participation in proficiency testing, patient test management and quality assurance. CLIA certification is also required in order for us to be eligible to bill Federal and State healthcare programs, as well as many private third-party payors, for our molecular diagnostic tests. To renew these certifications, we are subject to survey and inspection every two years. Moreover, CLIA inspectors may make random inspections of our clinical reference laboratories. We are also required to maintain State licenses to conduct testing in our New Haven, Connecticut and Pittsburgh, Pennsylvania laboratories. Connecticut and Pennsylvania laws require that we maintain a license and establishes standards for the 'details').
The CSO industry provides outsourced physician detailing programsday-to-day operation of our clinical reference laboratory in New Haven, Connecticut and Pittsburgh, Pennsylvania. In addition, our Pittsburgh and New Haven laboratories are required to be licensed on a test-specific basis by California, Florida, Maryland, New York and Rhode Island. California, Florida, Maryland, New York and Rhode Island laws also mandate proficiency testing for laboratories licensed under the laws of each respective State regardless of whether such laboratories are located in California, Florida, Maryland, New York or Rhode Island. In 2016, we received final approval for our ThyGenX ® and ThyraMIR® assays in New York State. If we were unable to obtain or lose our CLIA certificate for our laboratories, whether as a result of revocation, suspension or limitation, we would no longer be able to perform our molecular diagnostic tests, which could have a material adverse effect on our business, financial condition and results of operations. If we were to lose our licenses issued by New York or by other States where we are required to hold licenses, we would not be able to test specimens from those States. New molecular diagnostic tests we may develop may be subject to new approvals by governmental bodies such as New York State, and we may not be able to offer our new molecular diagnostic tests to patients in such jurisdictions until such approvals are received.
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Recent legislation reforming the U.S. healthcare system may have a material adverse effect on our financial condition and operations.
PPACA makes changes that are expected to significantly impact the pharmaceutical, medical device and diagnostic companies. CSOs have evolved from
providing detailing support for OTC products intoclinical laboratory industries. Beginning in 2013, each medical device manufacturer must pay a full-service industry
handling somesales tax in an amount equal to 2.3% of the leading prescription pharmaceutical compounds. Sinceprice for which such manufacturer sells its medical devices that are listed with the early 1990s,FDA. The FDA’s final guidance on LDTs may require our molecular diagnostic tests to be regulated as medical devices. However, consistent with the FDA’s policy of exercising enforcement discretion for LDTs, our molecular diagnostic tests are not currently listed as medical devices with the FDA. In December 2015, the Consolidated Appropriations Act was adopted, which included a two-year moratorium on the medical device excise tax. The moratorium will end on December 31, 2017, and we cannot assure that the tax will not be extended to services such as ours in the future if our tests were to be regulated as devices. However, in January 2017, Congress introduced the Medical Device Access and Innovation Protection Act, which could repeal the medical device tax.
Other significant measures contained in PPACA include, for example, coordination and promotion of research on comparative clinical effectiveness of different technologies and procedures, initiatives to revise Medicare payment methodologies, such as bundling of payments across the continuum of care by providers and physicians, and initiatives to promote quality indicators in payment methodologies. PPACA also includes significant new fraud and abuse measures, including required disclosures of financial arrangements with physician customers, lower thresholds for violations and increasing potential penalties for such violations. In addition, PPACA establishes an Independent Payment Advisory Board, or IPAB, to reduce the per capita rate of growth in Medicare spending. The IPAB has broad discretion to propose policies to reduce expenditures, which may have a negative effect on payment rates for services. The IPAB proposals may affect payments for clinical laboratory services beginning in 2016 and for hospital services beginning in 2020. We are monitoring the effect of PPACA to determine the trends and any potential changes that may be necessitated by the legislation, any of which may potentially affect our business.
Following the 2016 U.S. general election, a single party now leads the executive branch and holds majorities in both the U.S. Senate and House of Representatives. The President of the United States has announced that he favors repealing PPACA in 2017, and leaders of the Republication-controlled federal legislature also have expressed a desire to repeal PPACA. The scope and timing of any legislation to repeal, amend, replace, or reform PPACA is uncertain, but if such legislation were to become law, it could have a significant impact on the U.S. healthcare system.
On January 20, 2017, the new administration signed an executive order directing federal agencies to exercise existing authorities to reduce burdens associated with PPACA pending further action by Congress. On the same day, the White House issued a regulatory freeze memo under which rules and guidance published but not yet effective must be frozen for 60 days pending review; rules and guidance submitted for publication but not yet published must be withdrawn; and rules and guidance not yet submitted for publication must not be submitted without further direction from the Administration. Since then, further executive orders and statements from the White House and Congress have addressed potential regulatory changes that could affect us and our customers. Changes to, or repeal of, PPACA may continue to affect coverage, reimbursement, and utilization of laboratory services, as well as administrative requirements, in ways that are currently unpredictable.
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In addition to PPACA, the effect of which cannot presently be fully quantified, various healthcare reform proposals have emerged from Federal and State governments. For example, in February 2012, Congress passed the Middle Class Tax Relief and Job Creation Act of 2012, which reduced the clinical laboratory payment rates on the Medicare CLFS by 2% in 2013. In addition, a further reduction of 2% was implemented under the Budget Control Act of 2011, which is to be in effect for dates of service on or after April 1, 2013 until fiscal year 2024. Reductions resulting from the Congressional sequester are applied to total claim payments made; however, they do not currently result in a rebasing of the negotiated or established Medicare or Medicaid reimbursement rates.
State legislation on reimbursement applies to Medicaid reimbursement and Managed Medicaid reimbursement rates within that State. Some States have passed or proposed legislation that would revise reimbursement methodology for clinical laboratory payment rates under those Medicaid programs. We cannot predict whether future healthcare initiatives will be implemented at the Federal or State level or in countries outside of the United States in which we may do business, or the effect any future legislation or regulation will have on us. The taxes imposed by Federal legislation, cost reduction measures and the expansion in the role of the U.S. government in the healthcare industry may result in decreased revenue, lower reimbursement by payors for our tests or reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations.
Ongoing calls for deficit reduction at the Federal government level and reforms to programs such as the Medicare program to pay for such reductions may affect the pharmaceutical, industrymedical device and clinical laboratory industries. In particular, recommendations by the Simpson-Bowles Commission called for the combination of Medicare Part A (hospital insurance) and Part B (physician and ancillary service insurance) into a single co-insurance and co-payment structure. Currently, clinical laboratory services are excluded from the Medicare Part B co-insurance and co-payment as preventative services. Combining Parts A and B may require clinical laboratories to collect co-payments from patients, which may increase our costs and reduce the amount ultimately collected.
In 2013, CMS announced plans to bundle payments for clinical laboratory tests together with other services performed during hospital outpatient visits under the Hospital Outpatient Prospective Payment System. CMS exempted molecular diagnostic tests from this packaging provision at that time. It is possible that this exemption could be removed by CMS in future rule making, which might result in lower reimbursement for tests performed in this setting.
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In April 2014, the President signed PAMA, which included a substantial new payment system for clinical laboratory tests under the CLFS. PAMA removed CMS’s authority to adjust the CLFS based and established a new method for setting CLFS rates. Implementation of this new method for setting CLFS rates began in 2016. Under PAMA, laboratories that have more than $12,500 in Medicare revenues from laboratory services and that receive more than 50 percent of their Medicare revenues from laboratory services would report private payor data from January 1, 2016 through June 30, 2016, to CMS between January 1, 2017 and March 31, 2017. CMS will post the new Medicare CLFS rates (based on weighted median private payor rates) in November 2016 and the new rates will be effective beginning on January 1, 2018. Any reductions to payment rates resulting from the new methodology are limited to 10% per test per year in each of the years 2017 through 2019 and to 15% per test per year in each of the years 2020 through 2022. CMS has increasingly used
CSOsissued draft regulations regarding these changes. Further rule-making from CMS will define the time period and data elements evaluated on an annual basis to provideset reimbursement rates for tests like ours.
Complying with numerous statutes and regulations pertaining to our molecular diagnostics business is an expensive and time-consuming process, and any failure to comply could result in substantial penalties.
We are subject to regulation by both the detailingFederal government and the States in which we conduct our molecular diagnostics business, including:
| ● | The Food, Drug and Cosmetic Act, as supplemented by various other statutes; | |
| ● | The Prescription Drug Marketing Act of 1987, the amendments thereto, and the regulations promulgated thereunder and contained in 21 C.F.R. Parts 203 and 205; | |
| ● | CLIA and State licensing requirements; | |
| ● | Manufacturing and promotion laws; | |
| ● | Medicare billing and payment regulations applicable to clinical laboratories; | |
| ● | The Federal Anti-Kickback Statute, which prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for, or recommending of an item or service that is reimbursable, in whole or in part, by a Federal healthcare program; | |
| ● | The Federal Stark physician self-referral law (and state equivalents), which prohibits a physician from making a referral for certain designated health services covered by the Medicare program, including laboratory and pathology services, if the physician or an immediate family member has a financial relationship with the entity providing the designated health services, unless the financial relationship falls within an applicable exception to the prohibition; | |
| ● | HIPAA, which established comprehensive federal standards with respect to the privacy and security of protected health information and requirements for the use of certain standardized electronic transactions, and amendments made in 2013 to HIPAA under the Health Information Technology for Economic and Clinical Health Act, which strengthen and expand HIPAA privacy and security compliance requirements, increase penalties for violators, extend enforcement authority to state attorneys general, and impose requirements for breach notification; |
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| ● | The Federal Civil Monetary Penalties Law, which prohibits, among other things, the offering or transfer of remuneration to a Medicare or state healthcare program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a state healthcare program, unless an exception applies; | |
| ● | The Federal False Claims Act, which imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment to the federal government; | |
| ● | Other Federal and State fraud and abuse laws, prohibitions on self-referral, fee-splitting restrictions, prohibitions on the provision of products at no or discounted cost to induce physician or patient adoption, and false claims acts, which may extend to services reimbursable by any third-party payor, including private insurers; | |
| ● | The prohibition on reassignment of Medicare claims, which, subject to certain exceptions, precludes the reassignment of Medicare claims to any other party; | |
| ● | The rules regarding billing for diagnostic tests reimbursable by the Medicare program, which prohibit a physician or other supplier from marking up the price of the technical component or professional component of a diagnostic test ordered by the physician or other supplier and supervised or performed by a physician who does not “share a practice” with the billing physician or supplier; and | |
| ● | State laws that prohibit other specified practices related to billing such as billing physicians for testing that they order, waiving coinsurance, co-payments, deductibles, and other amounts owed by patients, and billing a State Medicaid program at a price that is higher than what is charged to other payors. |
We have implemented policies and procedures designed to comply with these laws and regulations. We periodically conduct internal reviews of our compliance with these laws. Our compliance is also subject to governmental review. The growth of our business may increase the potential of violating these laws, regulations or our internal policies and procedures. The risk of our being found in violation of these or other laws and regulations is further increased by the fact that many have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Violations of Federal or State regulations may incur investigation or enforcement action by the FDA, Department of Justice, State agencies, or other legal authorities, and may result in substantial civil, criminal, or other sanctions. Any action brought against us for violation of these or other laws or regulations, 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 our operations are found to be in violation of any of these laws and regulations, we may be subject to civil and criminal penalties, damages and fines, we could be required to introduce new products,
reintroduce older products, supplementrefund payments received by us, we could face possible exclusion from Medicare, Medicaid and other Federal or State healthcare programs and we could even be required to cease our operations. Any of the foregoing consequences could have a material adverse effect on our business, financial condition and results of operations.
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A failure to comply with Federal and State laws and regulations pertaining to our payment practices could result in substantial penalties.
We retain healthcare practitioners as key opinion leaders providing consultation in various aspects of our business. These arrangements, like any arrangement that includes compensation to a healthcare provider, may trigger Federal or State anti-kickback and Stark Law liability. Our arrangements are designed to meet available safe harbors and exceptions provided in the anti-kickback laws and Stark Laws, respectively. However, there are no guarantees that the Federal or State governments will find that these arrangements are designed properly or that they do not trigger liability under Federal and State laws. Under existing sales efforts, raise promotional
barriers to entry for competitorslaws, all arrangements must have a legitimate purpose and demonstrate the incremental sales impact
of detailing a particular product. Whilecompensation must be fair market value. These terms require some subjective analysis and there is littlelimited available case law or guidance for the application of these laws to the CLIA laboratory industry. Safe harbors in the anti-kickback laws do not necessarily equate to exceptions in the Stark Law, and there is no guarantee that the government will agree with our payment practices with respect to the relationships between our laboratories and the healthcare providers. A failure to comply with Federal and State laws and regulations pertaining to our payment practices could result in substantial penalties and adversely affect our business, financial condition and results of operations.
If we use hazardous materials in a manner that causes contamination or injury, we could be liable for resulting damages.
We are subject to Federal, State and local laws, rules and regulations governing the use, discharge, storage, handling and disposal of biological material, chemicals and waste. We cannot eliminate the risk of accidental contamination or injury to employees or third parties from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages, remediation costs and any related penalties or fines, and any liability could exceed our resources or any applicable insurance coverage we may have. The cost of compliance with these laws and regulations may become significant, and our failure to comply may result in substantial fines or other consequences, and either could have a significant impact on our operating results.
Security breaches, loss of data regardingand other disruptions to us or our third-party service providers could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation.
Our business requires that we and our third-party service providers collect and store sensitive data, including legally protected health information, personally identifiable information about patients, credit card information, and our proprietary business and financial information. We face a number of risks relative to our protection of, and our service providers’ protection of, this critical information, including loss of access, inappropriate disclosure and inappropriate access, as well as risks associated with our ability to identify and audit such events. The secure processing, storage, maintenance and transmission of this critical information are vital to our operations and business strategy, and we devote significant resources to protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers or viruses or otherwise breached due to employee error, malfeasance or other activities. While we have not experienced any such attack or breach, if such event would occur and cause interruptions in our operations, our networks would be compromised and the CSO industry,information we store on those networks could be accessed by unauthorized parties, publicly disclosed, lost or stolen. Unauthorized access, loss or dissemination could disrupt our operations, including our ability to process tests, provide test results, bill payors or patients, process claims, provide customer assistance services, conduct research and development activities, collect, process and prepare company financial information, provide information about our solution and other patient and physician education and outreach efforts through our website, manage the Company believes that there are approximately
eight CSOs currently operatingadministrative aspects of our business and damage our reputation, any of which could adversely affect our business. In addition, the interpretation and application of consumer, health-related and data protection laws in the United States. States are often uncertain, contradictory and in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our practices. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices, systems and compliance procedures in a manner adverse to our business.
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If we are sued for product liability or errors and omissions liability, we could face substantial liabilities that exceed our resources.
The Companymarketing, sale and use of our molecular diagnostic tests could lead to product liability claims if someone were to allege that the molecular diagnostic test failed to perform as it was designed. We may also believesbe subject to liability for errors in the results we provide to physicians or for a misunderstanding of, or inappropriate reliance upon, the information we provide. A product liability or errors and omissions liability claim could result in substantial damages and be costly and time consuming for us to defend. Although we maintain product liability and errors and omissions insurance, we cannot be certain that 17our insurance would fully protect us from the financial impact of defending against these types of claims or any judgments, fines or settlement costs arising out of such claims. Any product liability or errors and omissions liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. Additionally, any product liability lawsuit could cause injury to our reputation or cause us to suspend sales of our products and solutions. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.
We may need to increase the size of our organization, and we may experience difficulties in managing this growth.
We are a small company with approximately 63 employees. Future growth will impose significant added responsibilities on members of management, including the need to identify, attract, retain, motivate and integrate highly skilled personnel. We may increase the number of employees in the future depending on the progress and growth of our business Our future financial performance and our ability to sell our existing molecular diagnostic tests and develop and commercialize new molecular diagnostic tests and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to:
| ● | manage our clinical studies effectively; | |
| ● | integrate additional management, administrative, laboratory and regulatory personnel; | |
| ● | maintain sufficient administrative, accounting management and laboratory information systems and internal accounting controls; and | |
| ● | hire and train additional qualified personnel. |
We may not be able to accomplish these tasks, and our failure to accomplish any of them could harm our financial results. We may need to reduce the size of our organization in order to become profitable and we may experience difficulties in managing these reductions.
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Billing for our diagnostic tests is complex, and we must dedicate substantial time and resources to the billing process to be paid for our molecular diagnostic tests.
Billing for clinical laboratory testing services is complex, time consuming and expensive. Depending on the billing arrangement and applicable law, we bill various payors, including Medicare, insurance companies and patients, all of which have different billing requirements. To the extent laws or contracts require us to bill patient co-payments or co-insurance, we must also comply with these requirements. We may also face increased risk in our collection efforts, including write-offs of doubtful accounts and long collection cycles, which could have a material adverse effect on our business, results of operations and financial condition. Among others, the following factors make the billing process complex:
| ● | differences between the list price for our molecular diagnostic tests and the reimbursement rates of payors; | |
| ● | compliance with complex Federal and State regulations related to billing Medicare; | |
| ● | disputes among payors as to which party is responsible for payment; | |
| ● | differences in coverage among payors and the effect of patient co-payments or co-insurance; | |
| ● | differences in information and billing requirements among payors; | |
| ● | incorrect or missing billing information; and | |
| ● | the resources required to manage the billing and claims appeals process. |
As we grow and introduce new tests, we will need to add new codes to our billing process as well as our financial reporting systems. Failure or delays in effecting these changes in external billing and internal systems and processes could negatively affect our revenue and cash flow. Additionally, our billing activities require us to implement compliance procedures and oversight, train and monitor our employees or contractors, challenge coverage and payment denials, assist patients in appealing claims, and undertake internal audits to evaluate compliance with applicable laws and regulations as well as internal compliance policies and procedures. Payors also conduct external audits to evaluate payments, which add further complexity to the billing process. These billing complexities, and the related uncertainty in obtaining payment for our diagnostic solution, could negatively affect our revenue and cash flow, our ability to achieve profitability, and the consistency and comparability of our results of operations.
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We rely on a third party to process and transmit claims to payors, and any delay in either could have an adverse effect on our revenue.
We rely on a third-party provider to provide overall processing of claims and to transmit the actual claims to payors based on the specific payor billing format. If claims for our molecular diagnostic tests are not submitted to payors on a timely basis, or if we are required to switch to a different provider to handle claim submissions, we may experience delays in our ability to process these claims and receipt of payments from payors, which could have a material adverse effect on our business, financial condition and results of operations.
Enacted healthcare reform legislation may increase our costs, impair our ability to adjust our pricing to match any such increased costs, and therefore could materially and adversely affect our business, financial condition and results of operations.
PPACA entails sweeping healthcare reforms with staggered effective dates from 2010 through 2018, although certain of these effective dates have been delayed by action of the 50 largestcurrent administration. While some guidance has been issued under PPACA over the past several years, many provisions in PPACA require the issuance of additional guidance from the U.S. Department of Labor, the Internal Revenue Service, the U.S. Department of Health & Human Services, and State governments. This reform includes, but is not limited to: the implementation of a small business tax credit; required changes in the design of our healthcare policy including providing insurance coverage to part-time workers working on average thirty (30) or more hours per week; “grandfathering” provisions for existing policies; “pay or play” requirements; a “Cadillac plan” excise tax; and specifically required “essential benefits,” that must be included in “qualified plans,” which benefits include coverage for laboratory tests.
Effective January 1, 2014, each State was required to participate in the PPACA marketplace and make health insurance coverage available for purchase by eligible individuals through a website. While these websites were subject to significant administrative issues leading up to their inception dates (and, in some cases, thereafter), it is currently estimated that in excess of 11 million individuals nationwide had enrolled in health insurance coverage through these exchanges as of the end of 2015. It is unclear, however, how many of these individuals are becoming insured after previously not having health insurance coverage, versus maintaining their plans purchased on the exchanges in 2014 or switching from other health insurance plans.
PPACA also requires “Applicable Manufacturers” to disclose to the Secretary of the Department of Health & Human Services drug sample distributions and certain payments or transfers of value to covered recipients (physicians and teaching hospitals) on an annual basis. “Applicable Manufacturers” and “Applicable Group Purchasing Organizations” must also disclose certain physician ownership or investment interests. The data submitted will ultimately be made available on a public website. Based upon the structure of our relationship with our clients, we may be included in the definition of “Applicable Manufacturer” for purposes of the disclosure requirements or may provide services that include the transfer of drug samples and/or other items of value to covered recipients. As such, we may be required to disclose or provide information that is subject to disclosure. There may be certain risks and penalties associated with the failure to properly make such disclosures, including but not limited to the specific civil liabilities set forth in PPACA, which allows for a maximum civil monetary penalty per “Applicable Manufacturer” of $1,150,000 per year. There may be additional risks and claims made by third parties derived from an improper disclosure that are difficult to ascertain at this time.
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In June 2012, the United States Supreme Court upheld the constitutionality of key provisions of PPACA. PPACA contains numerous other initiatives that impact the pharmaceutical 3
Common Stockindustry. These include, among other things:
| ● | increasing existing price rebates in Federally funded healthcare programs; | |
| ● | expanding rebates, or other pharmaceutical company discounts, into new programs; | |
| ● | imposing a new non-deductible excise tax on sales of certain prescription pharmaceutical products by prescription drug manufacturers and importers; | |
| ● | increasing requirements on employer-sponsored health insurance plans, generally, and imposing taxes on certain high-cost employer-sponsored plans; | |
| ● | creating an independent commission to propose changes to Medicare with a particular focus on the cost of biopharmaceuticals in Medicare Part D; and | |
| ● | increasing oversight by the FDA of pharmaceutical research and development processes and commercialization activities. |
While PPACA may increase the number of patients who have insurance coverage, its cost containment measures could also adversely affect reimbursement for any of our molecular diagnostic tests. Cost control initiatives also could decrease the price that we receive for any molecular diagnostic tests we may develop in the future. If our molecular diagnostic tests are not considered cost-effective or if we are unable to generate adequate third-party reimbursement for the users of our molecular diagnostic tests, then we may be unable to maintain revenue streams sufficient to realize our targeted return on investment for our molecular diagnostic tests.
We are currently unable to determine the long-term, direct or indirect impact of such legislation on our business. Since the effect of many of the provisions of PPACA may not be determinable for a number of years, we do not expect PPACA to have a material adverse impact on our near term results of operations. However, healthcare reform as mandated and implemented under PPACA and any future Federal or State mandated healthcare reform could materially and adversely affect our business, financial condition and operations by increasing our operating costs, including our costs of providing health insurance to our employees, decreasing our revenue, impeding our ability to attract and retain customers, requiring changes to our business model, or causing us to lose certain current competitive advantages.
However, following the 2016 U.S. general election, a single party now leads the executive branch and holds majorities in both the U.S. Senate and House of Representatives. The President of the United States has announced that he favors repealing PPACA in 2017, and leaders of the Republication-controlled federal legislature also have expressed a desire to repeal PPACA. The scope and timing of any legislation to repeal, amend, replace, or reform PPACA is uncertain, but if such legislation were to become law, it could have a significant impact on the U.S. healthcare system.
On January 20, 2017, the new administration signed an executive order directing federal agencies to exercise existing authorities to reduce burdens associated with PPACA pending further action by Congress. On the same day, the White House issued a regulatory freeze memo under which rules and guidance published but not yet effective must be frozen for 60 days pending review; rules and guidance submitted for publication but not yet published must be withdrawn; and rules and guidance not yet submitted for publication must not be submitted without further direction from the Administration. Since then, further executive orders and statements from the White House and Congress have addressed potential regulatory changes that could affect us and our customers. Changes to, or repeal of, PPACA may continue to affect coverage, reimbursement, and utilization of laboratory services, as well as administrative requirements, in ways that are currently unpredictable.
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Changes in governmental regulation could negatively impact our business operations and increase our costs.
The pharmaceutical, biotechnology and healthcare industries are subject to a high degree of governmental regulation. Significant changes in these regulations affecting our business could result in the imposition of additional restrictions on our business, additional costs to us in providing our molecular diagnostic tests to our customers or otherwise negatively impact our business operations. Changes in governmental regulations mandating price controls and limitations on patient access to our products could also reduce, eliminate or otherwise negatively impact our sales.
If we do not increase our revenues and successfully manage the size of our operations, our business, financial condition and results of operations could be materially and adversely affected.
The majority of our operating expenses are personnel-related costs such as employee compensation and benefits, reagents and disposable supplies as well as the cost of infrastructure to support our operations, including facility space and equipment. We continuously review our personnel to determine whether we are fully utilizing their services. If we believe we are not in a position to fully utilize our personnel, we may make further reductions to our workforce. If we are unable to achieve revenue growth in the future or fail to adjust our cost infrastructure to the appropriate level to support our revenues, our business, financial condition and results of operations could be materially and adversely affected.
We may acquire businesses or assets or make investments in other companies or molecular diagnostic technologies that could harm our operating results, dilute our stockholders’ ownership, increase our debt or cause us to incur significant expense.
As part of our strategy, we may pursue acquisitions of synergistic businesses or molecular diagnostic assets. If we make any further acquisitions, we may not be able to integrate these acquisitions successfully into our existing business, and we could assume unknown or contingent liabilities. Any future acquisition by us also could result in significant write-offs or the incurrence of debt and contingent liabilities, any of which could harm our operating results and financial condition. Integration of an acquired company or business will also likely require management resources that otherwise would be available for ongoing development of our existing business. We may not identify or complete these transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated benefits of any acquisition. To finance any acquisitions or investments, we may choose to issue shares of our common stock as consideration, which would dilute the ownership of our stockholders. If the price of our common stock is low or volatile, we may not be able to acquire other companies for stock. Alternatively, it may be necessary for us to raise additional funds for these activities through public or private financings. Additional funds may not be available on terms that are favorable to us, or at all. If these funds are raised through the sale of equity or convertible debt securities, dilution to our stockholders could result. Consummating an acquisition poses a number of risks including:
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| ● | we may not be able to accurately estimate the financial impact of an acquisition on our overall business; | |
| ● | an acquisition may require us to incur debt or other obligations, incur large and immediate write-offs, issue capital stock potentially dilutive to our stockholders or spend significant cash, or may negatively affect our operating results and financial condition; | |
| ● | if we spend significant funds or incur additional debt or other obligations, our ability to obtain financing for working capital or other purposes could decline; | |
| ● | worse than expected performance of an acquired business may result in the impairment of intangible assets; | |
| ● | we may be unable to realize the anticipated benefits and synergies from acquisitions as a result of inherent risks and uncertainties, including difficulties integrating acquired businesses or retaining key personnel, partners, customers or other key relationships, and risks that acquired entities may not operate profitably or that acquisitions may not result in improved operating performance; | |
| ● | we may fail to successfully manage relationships with customers, distributors and suppliers; | |
| ● | our customers may not accept new molecular diagnostic tests from our acquired businesses; | |
| ● | we may fail to effectively coordinate sales and marketing efforts of our acquired businesses; | |
| ● | we may fail to combine product offerings and product lines of our acquired businesses timely and efficiently; | |
| ● | an acquisition may involve unexpected costs or liabilities, including as a result of pending and future shareholder lawsuits relating to acquisitions or exercise by stockholders of their statutory appraisal rights, or the effects of purchase accounting may be different from our expectations; | |
| ● | an acquisition may involve significant contingent payments that may adversely affect our future liquidity or capital resources; | |
| ● | accounting for contingent payments requires significant judgment and changes to the assumptions used in determining the fair value of our contingent payments could lead to significant volatility in earnings; | |
| ● | acquisitions and subsequent integration of these companies may disrupt our business and distract our management from other responsibilities; and | |
| ● | the costs of an unsuccessful acquisition may adversely affect our financial performance. |
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Additional risks of integration of an acquired business include:
| ● | differing information technology, internal control, financial reporting and record-keeping systems; | |
| ● | differences in accounting policies and procedures; | |
| ● | unanticipated additional transaction and integration-related costs; | |
| ● | facilities or operations of acquired businesses in remote locations and the inherent risks of operating in unfamiliar legal and regulatory environments; and | |
| ● | new products, including the risk that any underlying intellectual property associated with such products may not have been adequately protected or that such products may infringe on the proprietary rights of others. |
If our information technology and communications systems fail or we experience a significant interruption in their operation, our reputation, business and results of operations could be materially and adversely affected.
The efficient operation of our business is dependent on our information technology and communications systems. Increasingly, we are also dependent upon our ability to electronically interface with our customers. The failure of these systems to operate as anticipated could disrupt our business and result in decreased revenue and increased overhead costs. In addition, we do not have complete redundancy for all of our systems and our disaster recovery planning cannot account for all eventualities. Our information technology and communications systems, including the information technology systems and services that are maintained by third party vendors, are vulnerable to damage or interruption from natural disasters, fire, terrorist attacks, malicious attacks by computer viruses or hackers, power loss or failure of computer systems, Internet, telecommunications or data networks. If these systems or services become unavailable or suffer a security breach, we may expend significant resources to address these problems, and our reputation, business and results of operations could be materially and adversely affected.
We have and may continue to experience goodwill and other intangible asset impairment charges.
We are required to evaluate goodwill and the carrying value of intangibles at least annually, and between annual tests if events or circumstances warrant such a test. As of December 31, 2016 and March 31, 2017 a substantial portion of our total assets are comprised of goodwill and other intangible assets. For the year ended December 31, 2015, we recorded a goodwill impairment charge of $15.7 million pertaining to the acquisition of RedPath in October 2014 and during the third quarter of 2016, we recorded an impairment charge of $3.4 million related to changes in our development strategy for products acquired from Asuragen.
We review the recoverability of long-lived assets and finite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized by reducing the recorded value of the asset to its fair value measured by future discounted cash flows. This analysis requires estimates of the amount and timing of projected cash flows and, where applicable, judgments associated with, among other factors, the appropriate discount rate. Such estimates are critical in determining whether any impairment charge should be recorded and the amount of such charge if an impairment loss is deemed to be Offered.......................................... ____________Shares
Common Stocknecessary. During the fourth quarter of 2016, we reviewed the recoverability of long-lived assets and finite-lived intangible assets and concluded that no further finite-lived intangible assets were impaired.
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RISKS RELATING TO THE ASSET SALE
We may not be able to fund the remaining obligations of our previously sold CSO business, which could have a material adverse effect on our business and results of operations.
In December 2015, we sold substantially all of our CSO business to a third party strategic acquirer, pursuant to an Asset Purchase Agreement, dated as of October 30, 2015, by and between us and the purchaser of substantially all of our CSO business (the “CSO Acquirer“) , or the Asset Purchase Agreement, for a total cash payment of $28.5 million, or the Asset Sale, including an initial upfront cash payment of $25.5 million and $3.0 million of a working capital adjustment. We used a significant portion of the net proceeds received at the closing of the Asset Sale to pay the balance of the outstanding loan under the Credit Agreement, dated October 31, 2014, by and among us, SWK Funding LLC and the financial institutions party thereto from time to time as lenders, and related fees. As a result of the Asset Sale, not all of our CSO obligations were assumed by the CSO Acquirer . These obligations consist of accounts payable, costs relating to the closeout of the portion of the CSO business that principally related to the provision of services for multiple non-competing brands for different clients, or the ERT Unit, which the CSO Acquirer did not acquire in the Asset Sale, and termination of various vendor contracts that had been associated with the CSO business. As such, we continue to negotiate terms and pay some of these obligations, but may not be able to satisfy all of these remaining obligations. If we are unable to satisfy all our remaining CSO obligations, our business and results of operations could be materially and adversely affected. As of June 1, 2017, our current remaining CSO obligations were up to $2.6 million, in aggregate.
The Asset Purchase Agreement exposes us to contingent liabilities that could have a material adverse effect on our financial condition.
We have agreed to indemnify the CSO Acquirer for damages resulting from or arising out of any inaccuracy or breach of any representation, warranty or covenant of ours in the Asset Purchase Agreement against any and all liabilities of ours not assumed by the CSO Acquirer in the Asset Sale and for certain other matters. Significant indemnification claims by the CSO Acquirer could have a material adverse effect on our financial condition. We will not be obligated to indemnify the CSO Acquirer for any breach of certain of the representations and warranties by us under the Asset Purchase Agreement until the aggregate amount of claims for indemnification exceed $250,000. In the event that claims for indemnification exceed this threshold, we will be obligated to indemnify the CSO Acquirer for any damages or loss resulting from such breach up to 25% of the total purchase price paid or due and payable by the CSO Acquirer to us. Claims for indemnification for breaches of covenants made by us under the Asset Purchase Agreement and for breaches of representations and warranties classified as fundamental representations or any provision of the Asset Purchase Agreement relating to taxes will not be subject to the deductible or aggregate liability cap described above. The Asset Purchase Agreement also allows the CSO Acquirer to withhold monies due against an earn-out payment if indemnification claims are asserted. In addition, under the Asset Purchase Agreement, we will retain all of our debts and liabilities not assumed by the CSO Acquirer .
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RISKS RELATING TO OUR INTELLECTUAL PROPERTY
If we breach the Asuragen License Agreement or the CPRIT License Agreement, it could have a material adverse effect on our sales and commercialization efforts for miRInform ®thyroid and pancreas cancer diagnostic tests and other tests in development for thyroid cancer, and the sale of diagnostic devices and the performance of certain services relating to thyroid cancer.
We currently license certain patents and know-how from Asuragen relating to (i) miRInform® thyroid and pancreas cancer diagnostic tests and other tests in development for thyroid cancer, or the Asuragen License Agreement, and (ii) the sale of diagnostic devices and the performance of certain services relating to thyroid cancer, or the CPRIT License Agreement. Under the Asuragen License Agreement, we are obligated to pay royalties on the future net sales of the miRInform® pancreas platform for a period of ten years following a qualifying sale, on the future net sales of the miRInform®thyroid platform through August 13, 2024 and on certain other thyroid diagnostics tests for a period of ten years following a qualifying sale. Under the CPRIT License Agreement, we are obligated to pay 5% of net sales on sales of diagnostic devices and the performance of services relating to thyroid cancer, subject to a maximum deduction of 1.5% for royalties paid to third parties. Both of the Asuragen License Agreement and the CPRIT License Agreement continue until terminated by (i) mutual agreement of the parties or (ii) either party in the event of a material breach of the respective agreement by the other party. If we materially breach or fail to perform any provision under the CPRIT License Agreement, Asuragen will have the right to terminate our license, and upon the effective date of such termination, our right to practice the licensed patent rights would end. To the extent such licensed patent rights relate to our molecular diagnostic tests currently on the market, we would expect to exercise all rights and remedies available to us, including attempting to cure any breach by us, and otherwise seek to preserve our rights under the patent rights and other technology licensed to us, but we may not be able to do so in a timely manner, at an acceptable cost to us or at all. Any uncured, material breach under these license agreements could result in our loss of rights to practice the patent rights licensed to us under these license agreements, and to the extent such patent rights and other technology relate to our molecular diagnostic tests currently on the market, it could have a material adverse effect on our sales and commercialization efforts for miRInform® thyroid and pancreas cancer molecular diagnostic tests and other tests in development for thyroid cancer, and the sale of molecular diagnostic tests and the performance of certain services relating to thyroid cancer.
If we are unable to protect our intellectual property effectively, our business would be harmed.
We rely on patent protection as well as trademark, trade secret and other intellectual property rights protection and contractual restrictions to protect our proprietary technology. If we fail to protect our intellectual property, third parties may be able to compete more effectively against us and we may incur substantial litigation costs in our attempts to recover or restrict use of our intellectual property. While we apply for patents covering our products and technologies and uses thereof, we may fail to apply for patents on important products and technologies in a timely fashion or at all, or we may fail to apply for patents in relevant jurisdictions. Others could seek to design around our current or future patented technologies. We may not be successful in defending any challenges made against our patents or patent applications. Any successful third-party challenge to our patents could result in the unenforceability or invalidity of such patents and increased competition to our business. The outcome of patent litigation can be uncertain and any attempt by us to enforce our patent rights against others may not be successful, or, if successful, may take substantial time and result in substantial cost, and may divert our efforts and attention from other aspects of our business.
Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. If we were to enforce a claim that a third-party had illegally obtained and was using our trade secrets, it would be expensive and time consuming, and the outcome would be unpredictable. Further, competitors could willfully infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies that arguably fall outside of our intellectual property rights. Others may independently develop similar or alternative products and technologies or replicate any of our products and technologies. If our intellectual property does not adequately protect us against competitors’ products and methods, our competitive position could be adversely affected, as could our business and the results of our operations. To the extent our intellectual property offers inadequate protection, or is found to be Outstanding afterinvalid or unenforceable, we would be exposed to a greater risk of competition. If our intellectual property does not provide adequate coverage of our competitors’ products, our competitive position could be adversely affected, as could our overall business. Both the Offering................... ____________Shares (1)
Usepatent application process and the process of Proceeds..................................................... Workingmanaging patent disputes can be time consuming and expensive.
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Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our molecular diagnostic tests.
As is the case with other molecular diagnostics companies, our success is heavily dependent on intellectual property, particularly on obtaining and enforcing patents. Obtaining and enforcing patents of molecular diagnostics tests, like our molecular diagnostic tests in our PancraGEN® and miRInform® platforms, involves both technological and legal complexity, and is therefore costly, time-consuming and inherently uncertain. From time-to-time the U.S. Supreme Court, other Federal courts, the U.S. Congress or the United States Patent and Trademark Office, or the USPTO, may change the standards of patentability and any such changes could have a negative impact on our business. For instance, on October 30, 2008, the Court of Appeals for the Federal Circuit issued a decision that methods or processes cannot be patented unless they are tied to a machine or involve a physical transformation. The U.S. Supreme Court later reversed that decision inBilski v. Kappos , finding that the “machine-or-transformation” test is not the only test for determining patent eligibility. The Court, however, declined to specify how and when processes are patentable. On March 30, 2012, in the caseMayo Collaborative Services v. Prometheus Laboratories, Inc., the U.S. Supreme Court reversed the Federal Circuit’s application ofBilski and invalidated a patent focused on a process for identifying a proper dosage for an existing therapeutic because the patent claim embodied a law of nature. On July 30, 2012, the USPTO released a memorandum entitled “2012 Interim Procedure for Subject Matter Eligibility Analysis of Process Claims Involving Laws of Nature,” with guidelines for determining patentability of diagnostic or other processes in line with theMayodecision. On June 13, 2013, inAssociation for Molecular Pathology v. Myriad Genetics, the Supreme Court held that a naturally occurring DNA segment is a product of nature and not patent eligible merely because it has been isolated. The Supreme Court did not address the patentability of any innovative method claims involving the manipulation of isolated genes. On March 4, 2014, the USPTO released a memorandum entitled “2014 Procedure For Subject Matter Eligibility Analysis Of Claims Reciting Or Involving Laws Of Nature/Natural Principles, Natural Phenomena, And/Or Natural Products.” This memorandum provides guidelines for the USPTO’s new examination procedure for subject matter eligibility under 35 U.S.C. §101 for claims embracing natural products or natural principles. On June 12, 2015, the Federal Circuit issued a decision inAriosa v. Sequenomholding that a method for detecting a paternally inherited nucleic acid of fetal origin performed on a maternal serum or plasma sample from a pregnant female were unpatentable as directed to a naturally occurring phenomenon. On July 30, 2015, the USPTO released a Federal Register Notice entitled, “July 2015 Update on Subject Matter Eligibility .” This Notice updated the USPTO guidelines for the USPTO’s procedure for subject matter eligibility under 35 U.S.C. §101 for claims embracing natural products or natural principles phenomenon. On May 4, 2016, the USPTO released life science examples that were intended to be used in conjunction with the USPTO guidance on subject matter eligibility. Although the guidelines and examples do not have the force of law, patent examiners have been instructed to follow them. What constitutes a law of nature and a sufficient inventive concept remains uncertain, and it is possible that certain aspects of molecular diagnostics tests would be considered natural laws and, therefore, ineligible for patent protection. Some aspects of our technology involve processes that may be subject to this evolving standard and we cannot guarantee that any of our pending or issued claims will be patentable or upheld as valid as a result of such evolving standards. In addition, patents we own or license that issued before these recent cases may be subject to challenge in court or before the USPTO in view of these current legal standards. Accordingly, the evolving interpretation and application of patent laws in the United States governing the eligibility of diagnostics for patent protection may adversely affect our ability to obtain patents and may facilitate third-party challenges to any owned and licensed patents. Changes in either the patent laws or in interpretations and application of patent laws may also diminish the value of our existing intellectual property or intellectual property that we continue to develop. We cannot predict the breadth of claims that may be allowed or enforceable in our patents or in third-party patents.
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We may be involved in litigation related to intellectual property, which could be time-intensive and costly and may adversely affect our business, operating results or financial condition.
On April 18, 2017, we received a letter from Rosetta Genomics Ltd. (“Rosetta”), stating that Rosetta expected to shortly be granted patents that cover the ThyraMIR® miRNA Gene Expression Classifier marketed and sold by a subsidiary of the Company. Such patents were subsequently issued on May 16, 2017 as US Patent Nos. 9,650,680 and 9,650,679. In the letter, Rosetta indicated an interest in discussing the terms of a royalty-bearing license agreement to cover our continuing sale of the ThyraMIR® miRNA Gene Expression Classifier. Based upon available information, we do not believe the Rosetta patents cover the sale or use of the ThyraMIR® miRNA Gene Expression Classifier. However, patent litigation is inherently risky, and no assurances can be made that if Rosetta were to assert its patents against the Company, that the Company would prevail. In the event that Rosetta were to bring an action against us alleging patent infringement and prevail against us, Rosetta could be entitled to relief, including preliminary or permanent injunctive relief to prohibit the sale or marketing of our ThyraMIR Gene Expression Classifier, and monetary damages in the form of lost profits or royalties for our sale of the ThyraMIR® miRNA Gene Expression Classifier, which could have a material adverse effect on our business, financial condition and results of operations.
It is possible that we may receive notices of claims of direct or indirect infringement or misappropriation or misuse of other parties’ proprietary rights from time to time and some of these claims may lead to litigation. We cannot assume that we will prevail in such actions, or that other actions alleging misappropriation or misuse by us of third-party trade secrets, infringement by us of third-party patents and trademarks or other rights, or the validity of our patents, trademarks or other rights, will not be asserted or prosecuted against us. We might not have been the first to make the inventions covered by each of our pending patent applications and we might not have been the first to file patent applications for these inventions. No assurance can be given that other patent applications will not have priority over our patent applications. If third parties bring these proceedings against our patents, we could incur significant costs and experience management distraction. Litigation may be necessary for us to enforce our patents and proprietary rights or to determine the scope, coverage and validity of the proprietary rights of others. Defending any litigation, and particularly patent litigation, is expensive and time-consuming, and the outcome of any litigation or other proceeding is inherently uncertain and might not be favorable to us. It is also possible that we might not be able to obtain licenses to technology that we require on acceptable terms or at all. In addition, if we resort to legal proceedings to enforce our intellectual property rights or to determine the validity, scope and coverage of the intellectual property or other proprietary rights of others, the proceedings could be burdensome and expensive, even if we were to prevail. Any litigation that may be necessary in the future could result in substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition and operating results.
In the event of a successful claim of infringement against us, we may be required to pay damages and ongoing royalties, and obtain one or more licenses from third parties, or be prohibited from selling our products. We may not be able to obtain these licenses on acceptable terms, if at all. We could incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our financial results. An unfavorable outcome of patent litigation may significantly impact our ability to generate future revenues and impair our ability to continue as a going concern. In addition, our agreements with some of our customers, suppliers or other entities with whom we do business require us to defend or indemnify these parties to the extent they become involved in infringement claims, including the types of claims described above. If we are required or agree to defend or indemnify third parties in connection with any infringement claims, we could incur significant costs and expenses that could have a material adverse effect on our business, financial condition, and results of operations.
RISKS RELATING TO OUR CORPORATE STRUCTURE AND OUR COMMON STOCK
We do not meet one of The Nasdaq Capital Market continued listing requirements and therefore, we risk delisting, which may decrease our stock price and make it harder for our stockholders to trade our stock.
Our common stock is currently listed for trading on The Nasdaq Capital Market. As previously disclosed in our Current Report on Form 8-K dated October 5, 2016, Heinrich Dreismann, Ph.D . a member of our Board who was also a member of our Audit Committee resigned effective as of September 30, 2016. As a result, we are not currently in compliance with NASDAQ Listing Rule 5605(c)(2)(A), which requires the Audit Committee be comprised of at least three independent members. We intend to appoint an additional independent director to our Board and to the Audit Committee prior to the end of the applicable cure period which is the sooner of the Company’s annual meeting of stockholders or October 2, 2017. We were previously not in compliance with the NASDAQ minimum bid price and stockholder equity requirements. We effected a one-for-ten reverse split of our issued and outstanding common stock on December 28, 2016 and on January 13, 2017, we were notified by NASDAQ that we had regained compliance with the minimum bid price requirement. On April 10, 2017, we received written notice from NASDAQ that we were in compliance with the NASDAQ stockholder equity requirements.
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Our common stock currently remains listed on The Nasdaq Capital Market under the symbol “IDXG.” There can be no assurance that we will be able to regain or maintain compliance with the NASDAQ continued listing requirements, or that our common stock will not be delisted from The Nasdaq Capital Market in the future. If our common stock is delisted by NASDAQ, it could lead to a number of negative implications, including an adverse effect on the price of our common stock, increased volatility in our common stock, reduced liquidity in our common stock, the loss of federal preemption of state securities laws and greater difficulty in obtaining financing. In addition, delisting of our common stock could deter broker-dealers from making a market in or otherwise seeking or generating interest in our common stock, could result in a loss of current or future coverage by certain sell-side analysts and might deter certain institutions and persons from investing in our securities at all. Delisting could also cause a loss of confidence of our customers, collaborators, vendors, suppliers and employees, which could harm our business and future prospects.
If our common stock is delisted by NASDAQ in the future, our common stock may be eligible to trade on the OTC Bulletin Board, OTC QB or another over-the-counter market. Any such alternative would likely result in it being more difficult for us to raise additional capital through the public or private sale of equity securities and for investors to dispose of, or obtain accurate quotations as to the market value of, our common stock. In addition, there can be no assurance that our common stock would be eligible for trading on any such alternative exchange or markets. For these reasons and others, delisting could adversely affect the price of our securities and our business, expansion purposes, investmentfinancial condition and results of operations.
We have a substantial number of authorized common and preferred shares available for future issuance that could cause dilution of our stockholders’ interest, adversely impact the rights of holders of our common stock and cause our stock price to decline.
We have a total of 100,000,000 shares of common stock and 5,000,000 shares of preferred stock authorized for issuance. As of June 1, 2017, we had 91,211,396 shares of common stock and 5,000,000 shares of preferred stock available for issuance. As of June 1, 2017, we have reserved 660,492 shares of our common stock for issuance upon the exercise of outstanding awards under our stock incentive plan, of which 184,647 are subject to stockholder approval with respect to their grant and an increase in Any weakness in our disclosure controls and procedures and our internal controls could have a material adverse effect on us. Our senior management has identified material weaknesses in our disclosure controls and procedures and our internal controls over financial reporting. Management is currently addressing these control weaknesses, but we cannot assure you that our corrective actions will be sufficient or timely and we cannot assure you that additional material weaknesses will not be identified in the future. Any such failure could adversely affect our ability to report financial results on a timely and accurate basis, which could have other material effects on our business, reputation, results of operations, financial condition or liquidity. Material weaknesses in internal controls over financial reporting or disclosure controls and procedures could also cause investors to lose confidence in our reported financial information which could have an adverse effect on the trading price of our securities. We have anti-takeover defenses that could delay or prevent an acquisition and could adversely affect the price of our common stock. Our certificate of incorporation, as amended, and amended and restated bylaws include provisions, such as providing for three classes of directors, which may make it more difficult to remove our directors and management and may adversely affect the price of our common stock. In addition, our certificate of incorporation, as amended, authorizes the issuance of “blank check” preferred stock, which allows our Board to create one or more classes of preferred stock with rights and preferences greater than those afforded to the holders of our common stock. This provision could have the effect of delaying, deterring or preventing a future takeover or a change in control, unless the takeover or change in control is approved by our Board. We are also subject to laws that may have a similar effect. For example, Section 203 of the General Corporation Law of the State of Delaware prohibits us from engaging in a business combination with an interested stockholder for a period of three years from the date the person became an interested stockholder unless certain conditions are met. As a result of the foregoing, it will be difficult for another company to acquire us and, therefore, could limit the price that possible investors might be willing to pay in the future for shares of our common stock. In addition, the rights of our common stockholders will be subject to, and may be adversely affected by, the rights of holders of any class or series of preferred stock that may be issued in the future and in this offering. We have not declared any cash dividends on our capital stock and do not intend to declare or pay any cash dividends in the foreseeable future. Future earnings, if any, will be used to finance the future operation and growth of our business. As a result, capital appreciation, if any, will be your sole source of gain. We have never paid cash dividends on our capital stock. We do not currently anticipate paying cash dividends on our common stock in the foreseeable future and we may not have sufficient funds legally available to pay dividends. Even if the funds are legally available for distribution, we may nevertheless decide not to pay any dividends. We presently intend to retain all earnings for our operations. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future. Our quarterly and annual operating Our quarterly and annual operating results may vary as a result of We believe that quarterly, and in certain instances annual, comparisons of Our stock price is volatile and could be further affected by events not within our control, and an investment in our common stock could suffer a decline in value. During the first five complete months of 2017, our common stock traded at *The prices of our common stock listed above have been adjusted to reflect a one-for-ten reverse split on our issued and outstanding We may be subject to securities litigation, which is expensive and The market price of our securities may be volatile, and in the past companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business. The indemnification rights provided to our directors, officers and employees may result in substantial expenditures by us and may discourage lawsuits against its directors, officers, and employees. Our certificate of incorporation, as infrastructure and other
general corporate purposes,
including potential
acquisitions. See 'Use of
Proceeds.'
Proposed Nasdaq National Market Symbol.............................. PDII
- ------------------
(1) Excludes (i) ___________ shares of Common Stock issuable upon the exercise
of stock options outstanding on December 31, 1997, at a weighted average
exercise price of $___________ per share and (ii) ___________ additional
shares of Common Stock reserved for future grants under the Company's 1998
Stock Option Plan. See 'Management -- 1998 Stock Option Plan.'
4
SUMMARY FINANCIAL DATA
STATEMENT OF OPERATIONS DATA:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
Revenue................................................ $8,226 $8,250 $18,398 $33,015 $54,542
Program expenses....................................... 4,886 5,339 15,427 26,886 43,057
------ ------ ------- ------- -------
Gross profit........................................... 3,340 2,911 2,971 6,129 11,485
Compensation expense................................... 1,945 1,673 2,124 3,191 5,121(1)
Bonus to majority shareholder(2)....................... 440 200 425 1,500 2,243
Stock grant expense(3)................................. -- -- -- -- 4,470
Other general, selling and administrative expenses..... 844 826 1,159 1,650 2,755
------ ------ ------- ------- -------
Total general, selling and administrative expenses..... 3,229 2,699 3,708 6,341 14,589
------ ------ ------- ------- -------
Operating income (loss)................................ 111 212 (737) (212) (3,104)
Other income, net...................................... 17 16 70 98 155
------ ------ ------- ------- -------
Income (loss) before provision for taxes............... 128 228 (667) (114) (2,949)
Pro forma provision for (benefit from) income
taxes(4)............................................. 51 91 (121) -- --
------ ------ ------- ------- -------
Pro forma net income (loss)(4)......................... $ 77 $ 137 $ (546) $ (114) $(2,949)
------ ------ ------- ------- -------
------ ------ ------- ------- -------
Pro forma net income (loss) per share(4)............... $
-------
-------
Pro forma weighted average number of shares outstanding..........................................
-------
-------
OTHER FINANCIAL DATA:
Adjustedin the plan, and there are no additional shares available for future grants of awards under our stock incentive plan. We may seek financing that could result in the issuance of additional shares of our capital stock and/or rights to acquire additional shares of our capital stock. We may also make acquisitions that result in issuances of additional shares of our capital stock. Those additional issuances of capital stock could result in substantial dilution of our existing stockholders. Furthermore, the book value per share of our common stock may be reduced. This reduction would occur if the exercise price of any issued warrants, the conversion price of any convertible notes or the conversion ratio of any issued preferred stock is lower than the book value per share of our common stock at the time of such exercise or conversion. Additionally, new investors in any subsequent issuances of our securities could gain rights, preferences and privileges senior to those of holders of common stock.-46- -47- income (loss)(5).................... $ 551 $ 412 $ (312) $ 1,288 $ 3,609
Adjusted net income (loss)(4)(5)....................... 341 257 (145) 832 2,258
OTHER OPERATING DATA:
Numberresults may vary, which may cause the price of detail programs.............................. 8 9 10 13 15
Numberour common stock to fluctuate.clients...................................... 6 7 7 8 12
Average sizea number of detail program......................... $1,028 $ 917 $ 1,840 $ 2,540 $ 3,636
Numberfactors, including:● the commencement, delay, cancellation or completion of sales and marketing programs; ● regulatory developments; ● uncertainty about when sales of our molecular diagnostic tests will be recognized; ● timing and amount of expenses for implementing new programs and accuracy of estimates of resources required for ongoing programs; ● adoption of and coverage and reimbursement for our molecular diagnostic tests; ● accounting for impairment of contingent liabilities which are recorded in operation; ● timing and integration of any acquisitions; and ● changes in regulations related to diagnostics, pharmaceutical, biotechnology and healthcare companies. sales representativesour financial results may not necessarily be meaningful and should not be relied upon as an indication of future performance. Fluctuations in quarterly and annual results could materially and adversely affect the market price of our common stock in a manner unrelated to our long-term operating performance.enda low of period:
Full-time............................................ -- -- -- 29 633
Part-time............................................ 107 107 393 709 362
------ ------ ------- ------- -------
Total................................................ 107 107 393 738 995
------ ------ ------- ------- -------
------ ------ ------- ------- -------
See footnotes on following page
5
BALANCE SHEET DATA:
AS OF DECEMBER 31, 1997
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED(6)
------- --------------
(IN THOUSANDS)
Cash$1.66 and cash equivalents........................................................... $ 5,760 $
Working capital..................................................................... 129
Total assets........................................................................ 13,691
Total long-term debt................................................................ --
Shareholders' equity (deficit)...................................................... 676
- ------------------
(1) Includes bonus compensation of $237,000 paid to Charles T. Saldarini, the
Company's President, Chief Executive Officer and a minority shareholder. It
is expected that, in addition to his base salary, Mr. Saldarini may receive
cash bonuses in future periods as determined by the Compensation Committee.
See 'Management -- Executive Compensation.'
(2) The Company has been treated as an S Corporation under subchapter S of the
Internal Revenue Code of 1986, as amended (the 'Code') since January 1, 1991
and under the corresponding provisions of the tax laws of the State of New
Jersey since January 1, 1994. Historically, as an S Corporation, the Company
made annual bonus payments to its majority shareholder based on the
Company's estimated profitability and working capital requirements. With the
exception of the distribution to be declared immediatley prior to the
Offering, the Company does not expect to pay such bonuses in future periods.
See 'Dividend Policy.'
(3) On January 1, 1997, the Company issued shares of its Common Stock to Charles
T. Saldarini, its current President and Chief Executive Officer. As a
result, prior to the Offering, Mr. Saldarini owns 15.0% of the Common Stock
outstanding. For financial accounting purposes, a non-recurring, non-cash
compensation expense was charged in the first quarter of 1997. See
'Principal Shareholders,' 'Management,' 'Certain Transactions' and note 12
to the Company's Financial Statements.
(4) As an S Corporation, the Company has not been subject to Federal or New
Jersey corporate income taxes, other than a New Jersey state corporate
income tax of approximately 2%. Rather, the income of the Company has been
taxed at the shareholder level. Upon consummation of this Offering, the
Company will no longer be treated as an S Corporation, and, accordingly,
will be subject to Federal and state corporate income taxes. Pro forma
provision for income taxes, net income, net income per share and adjusted
net income for all periods presented reflect a provision for income taxes as
if the Company had been taxed as a C Corporation for all periods.
(5) Adjusted to eliminate bonus to majority shareholder and stock grant expense.
This presentation illustrates the Company's results of operations on an
adjusted basis to reflect that the Company does not intend to pay bonuses to
its majority shareholder or incur stock grant expense in future periods.
These presentations should not be construed as an alternative to operating
income or net income/(loss) (as determined in accordance with generally
accepted accounting principles) as presented herein.
(6) Adjusted to reflect the receipt of the estimated net proceeds of this
Offering and the pro forma effect of the estimated final distribution to the
Company's existing shareholders immediately prior to this Offering of
approximately $_____ million reflecting shareholders' equity as of the date
of such distribution. See 'Dividend Policy,' 'S Corporation Termination' and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
6
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
risk factors, in addition to the other information contained in this Prospectus,
in evaluating an investment in the shares of Common Stock offered hereby.
DEPENDENCE ON OUTSOURCING BY PHARMACEUTICAL COMPANIES
The Company's revenue is highly dependent on sales and marketing
expenditures by pharmaceutical companies for the sale and distribution of
pharmaceutical products. The Company has benefited to date from the growing
trend of pharmaceutical companies to outsource sales and marketing programs to
CSOs. There can be no assurance that this trend in outsourcing will continue as
pharmaceutical companies may elect to perform such services internally. In
particular, the trend in the pharmaceutical industry toward consolidation, by
merger or otherwise, may result in a reduction in the use of CSOs. A significant
change in the direction of the outsourcing trend generally, or a trend in the
pharmaceutical industry not to use, or to reduce the use of, outsourced
marketing services, such as those provided by the Company, would have a material
adverse effect on the Company. See 'Business -- The CSO Industry.'
CUSTOMER CONCENTRATION
The Company's revenue and profitability are highly dependent on its
relationships with several large pharmaceutical companies. In 1995, the
Company's four largest clients accounted for approximately 42%, 17%, 15% and
10%, respectively, or 84%, of its revenue. In 1996, the Company's four largest
clients accounted for approximately 30%, 21%, 17% and 16%, respectively, or 84%,
of its revenue. In 1997, the Company's four largest clients, Pfizer, Glaxo
Wellcome, Astra Merck and Novartis, accounted for approximately 25%, 22%, 19%
and 10%, respectively, or 76%, of its revenue. The Company is likely to continue
to experience a high degree of concentration of business. Such concentration may
become greater as a result of consolidation within the pharmaceutical industry.
The loss or significant reduction of business from any significant customer,
including as a result of further consolidation in the pharmaceutical industry,
could have a material adverse effect on the Company's business and results of
operations. See 'Business -- Clients and Contracts.'
DEPENDENCE ON THE PHARMACEUTICAL INDUSTRY
Substantially all of the Company's revenue to date has been generated from
providing product detailing services to pharmaceutical companies. The Company
could be materially and adversely affected by unfavorable developments in the
pharmaceutical industry generally or any reduction in expenditures for, or
future outsourcing of, promotional, marketing and sales activities by
pharmaceutical companies or a shift in marketing focus away from detailing.
Promotional, marketing and sales expenditures by pharmaceutical companies have
in the past been, and could in the future be, negatively impacted by, among
other things, governmental reform or private market initiatives intended to
reduce the cost of pharmaceutical products or by governmental, medical
association or pharmaceutical industry initiatives designed to regulate the
manner in which pharmaceutical companies promote their products. See
'Business -- The CSO Industry.'
LACK OF PROFITABILITY
For the years ended 1995, 1996 and 1997, the Company had net losses of
$667,000, $114,000 and $2,949,000, respectively. At December 31, 1997, the
Company had negative retained earnings of $3,416,000. While the Company's net
losses in 1995 and 1996 were primarily due to expenses incurred in connection
with the expansion of the Company's business and bonus payments to its majority
shareholder and the Company's negative retained earnings and net loss for 1997
were due to a non-cash, non-recurring compensation expense relating to stock
granted to the Company's President and Chief Executive Officer, Charles T.
Saldarini, in the first quarter of 1997, the Company must nonetheless continue
to replace and/or expand existing programs and obtain new clients in order to
achieve sustained profitability. There can be no assurance that the Company will
be able to continue to generate increased revenue or achieve profitable
operations. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations.'
RISKS ASSOCIATED WITH THE NATURE OF CONTRACTS
The Company's contracts are generally for terms of six months to one year
and are subject to renewal upon expiration. In addition, a single contract may
account for a significant portion of the Company's total revenue. The Company's
contracts may be terminated by the client at any time for any reason. Also,
contracts typically contain significant penalties if the Company fails to meet
state performance benchmarks. While the cancellation
7
of certain of the Company's contracts by a client without cause may result in
the imposition of penalties on such client, such penalties may not act as an
adequate deterrent to the termination of such contracts. In addition, there can
be no assurance that such penalties will offset the lost revenue or the costs
incurred by the Company as a result of any such termination. Furthermore, all of
the Company's sales representatives are employees rather than independent
contractors. Accordingly, upon the termination of a particular contract, unless
the Company can immediately transfer the sales force to a new program, it either
must continue to compensate those employees, without realizing any related
revenue, or terminate their employment. If the Company terminates their
employment, it may incur significant expenses relating to such termination,
including the cost of recruiting and hiring replacement sales personnel.
Finally, substantially all of the Company's contracts are 'fixed fee'
arrangements. Accordingly, if the Company underestimates the costs associated
with the services to be provided pursuant to a particular contract, or if there
are unanticipated increases in the Company's operating or administrative
expenses, the overall profitability of the Company and the margins on a
particular contract may be adversely affected. The failure to obtain new
contracts to replace expiring contracts, the cancellation or delay of an
existing contract, the failure to satisfy the minimum performance standards set
forth in a contract, the inability of the Company to transfer a sales force to a
new program upon the termination of program, or the underestimation of costs
associated with a particular contract could have a material adverse effect on
the Company's business and results of operations. See 'Business -- Clients and
Contracts.'
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's results of operations have been subject to quarterly
fluctuations. In the future, quarterly operating results may fluctuate as a
result of a number of factors, including the commencement, delay, cancellation
or completion of programs; the mix of services provided; the timing of start-up
expenses for new services; the accuracy of estimates of resources required for
ongoing programs; the timing and integration of acquisitions; changes in
regulations related to pharmaceutical companies; and general economic
conditions. The Company believes that quarterly comparisons of its financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance. In addition, fluctuations in quarterly results
could affect the market price of the Common Stock in a manner unrelated to the
long term operating performance of the Company. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quarterly Results.'
MANAGEMENT OF GROWTH
The Company has recently experienced rapid growth in the number of its
employees, the size of its programs and the scope of its operations. This growth
has placed and will continue to place a strain on operational, human and
financial resources. The Company's ability to manage such growth effectively
will depend upon its ability to enhance its management team and its ability to
attract and retain skilled employees. The Company's success will also depend on
the ability of its officers and key employees to continue to implement and
improve its operational, management information and financial control systems,
and to expand, train and manage its workforce. There can be no assurance that
the Company will be able to manage its growth effectively. Failure to manage
growth effectively could have a material adverse effect on the Company's
business and results of operations. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations' and 'Business.'
POSSIBLE HEALTHCARE REFORM; IMPACT OF MANAGED HEALTHCARE PROGRAMS
Healthcare reform measures have been considered by Congress and other
Federal and state bodies during recent years. The intent of the proposals
generally has been to reduce healthcare costs and the growth of total healthcare
expenditures and expand healthcare coverage for the uninsured. Although
comprehensive healthcare reform has been considered, only limited proposals have
been enacted. Comprehensive healthcare reform may be considered again and
efforts to enact reform bills are likely to continue. Implementation of
government healthcare reform may adversely affect promotional and marketing
expenditures by pharmaceutical companies, which could decrease the business
opportunities available to the Company. The Company is unable to predict the
likelihood of such legislation or similar legislation being enacted into law or
the effects that any such legislation would have on its business, results of
operations and financial condition.
The primary trend in the United States healthcare industry is toward cost
containment. In recent years, managed care providers have been able to exercise
greater influence through managed treatment and hospitalization patterns, a
shift from reimbursement on a cost basis to per capita limits for patient
treatment and
8
the use of formularies (lists of preapproved products that a physician may
prescribe). The increasing use of managed care, centralized purchasing
decisions, consolidations among and integration of healthcare providers are
continuing to affect purchasing and usage patterns in the healthcare system.
Decisions regarding the use of pharmaceutical products are increasingly being
consolidated into group purchasing organizations, regional integrated delivery
systems and similar organizations and are becoming more economically focused,
with decision makers taking into account the cost of the product and whether a
product reduces the cost of treatment. There can be no assurance the Company
will not be adversely affected by cost containment measures. Government or
private initiatives to further contain pharmaceutical pricing could have a
material adverse effect on the pharmaceutical industry, and thus on the Company.
See 'Business -- The CSO Industry.'
GOVERNMENT REGULATION
The healthcare industry is subject to extensive regulation. Various laws,
regulations and guidelines promulgated by government, industry and professional
bodies affect, among other matters, the provision, licensing, labeling,
marketing, promotion, sale and distribution of healthcare services and products,
including pharmaceutical products. In addition, the Company is subject to the
rules and regulations promulgated by the Equal Employment Opportunity Commission
and similar state entities, which govern its recruiting and hiring practices and
its relationship with its employees. It is possible that additional laws,
regulations and guidelines or changes in current laws, regulations or guidelines
may be adopted in the future. The failure of the Company or its clients to
comply with such laws, regulations and guidelines, or any change in applicable
laws, regulations and guidelines could, among other things, limit or prohibit
certain business activities of the Company or its clients, subject the Company
or its clients to adverse publicity, increase the cost of regulatory compliance
or subject the Company or its clients to monetary fines or other penalties. Such
actions could have a material adverse effect on the Company's business, results
of operations, and financial condition. See 'Business -- Government and Industry
Regulation.'
FRAUD AND ABUSE LAWS
The healthcare industry is subject to various Federal and state laws
pertaining to healthcare fraud and abuse including prohibitions on the payment
or acceptance of kickbacks or other remuneration in return for the purchase or
lease of products which are paid for by Medicare or Medicaid. Sanctions for
violating these laws include criminal penalties and civil sanctions, including
fines and penalties, and possible exclusion from Medicare, Medicaid and other
Federal healthcare programs. Although the Company believes its business
arrangements are outside the scope of such Federal and state fraud and abuse
laws, there can be no assurance that the Company's practices will not be
challenged under these laws in the future or that such a challenge would not
have a material adverse effect on the Company's business, financial condition
and results of operations. See 'Business -- Government Regulation.'
ABILITY TO ATTRACT AND RETAIN EXPERIENCED SALES REPRESENTATIVES
The success and growth of the Company's business depends upon its ability
to attract and retain qualified and experienced sales representatives. There is
intense competition for experienced pharmaceutical sales representatives and
there can be no assurance the Company will be able to continue to attract and
retain such qualified personnel. The Company's inability to attract and retain
qualified sales representatives would have a material adverse effect on the
Company's business and results of operations. See 'Business -- Program
Description.'
COMPETITION; INDUSTRY CONSOLIDATION
The Company primarily competes with in-house sales and marketing
departments of pharmaceutical companies, other CSOs and other third party
providers to the pharmaceutical industry, many of which possess substantially
greater capital, personnel and other resources than the Company. In addition to
the in-house sales forces of pharmaceutical companies, the Company's current
major competitors include CSOs such as Innovex Limited, a subsidiary of
Quintiles Transnational Corp., and the various sales and marketing affiliates of
Snyder Communications, Inc. As a result of competitive pressures, various sales
and marketing organizations providing services to the pharmaceutical industry
are consolidating and are becoming targets of global organizations. This trend
is likely to produce increased competition among CSOs for both clients and
acquisition candidates and increased competitive pressures on smaller providers.
If the trend in the pharmaceutical industry towards consolidation continues,
pharmaceutical companies may have excess in-house sales force capacity and may,
as a result, reduce or eliminate their use of CSOs. There are relatively few
barriers to entry into the CSO industry and
9
there can be no assurance that, as the CSO industry continues to evolve,
additional competitors with greater resources than the Company will not enter
the industry or that the Company's customers will not choose to conduct more of
their sales services internally, with other CSOs or with organizations that can
provide a broader range of sales and marketing services. Although the Company
intends to monitor industry trends and respond accordingly, there can be no
assurance that the Company will be able to anticipate and successfully respond
to such trends. Increased competition may lead to price and other forms of
competition that may have a material adverse effect on the Company's business
and results of operations. See 'Business -- Competition.'
POTENTIAL LIABILITY
The Company is engaged in the business of detailing pharmaceutical
products. Such activities could expose the Company to risk of liability for
personal injury or death to persons using such products, although the Company
does not commercially market or sell the products to end-users. While the
Company has not been subject to any claims or incurred any liabilities due to
such claims, there can be no assurance that substantial claims or liabilities
will not arise in the future. The Company seeks to reduce its potential
liability through measures such as contractual indemnification provisions with
clients (the scope of which may vary from client to client, and the performances
of which are not secured) and reliance on insurance maintained by clients. The
Company, however, could also be held liable for errors and omissions of its
employees in connection with the services it performs that are outside the scope
of any indemnity. The Company could be materially and adversely affected if it
were required to pay damages or incur defense costs in connection with a claim
that is outside the scope of the indemnification agreements; if the indemnity,
although applicable, is not performed in accordance with its terms; or if the
Company's liability exceeds the amount of applicable insurance or indemnity. The
Company currently does not carry product liability insurance and is not insured
against the errors and omissions of its employees. See 'Business--Liability and
Insurance.'
POTENTIAL EMPLOYEE CLAIMS
The success of the Company's business is dependent on its ability to field
a high-quality sales force relatively quickly. As part of its recruiting and
hiring process, the Company conducts a thorough screening process, drug testing
and rigorous interviews. In addition, the Company must continually evaluate its
personnel and, when necessary, terminate some of its employees with or without
cause. Accordingly, the Company is subject to lawsuits relating to wrongful
termination, discrimination and harassment. The Company maintains employment
practice liability insurance, which insures it against claims made by its
employees with respect to matters relating to their employment. There can be no
assurance, however, that the Company will continue to maintain such policy or
that the scope or limits of such policy will cover asserted claims. The Company
could be materially and adversely affected if it were required to pay damages or
incur defense costs in connection with a claim by an employee that is outside
the scope of coverage of such policy. See 'Business -- Liability and Insurance.'
DEPENDENCE ON KEY PERSONNEL
The Company depends on a number of key executives, including Charles T.
Saldarini, its President and Chief Executive Officer, and Steven K. Budd, its
Chief Operating Officer. The loss of the services of any of the Company's key
executives could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company does not maintain
'key man' life insurance policies on any of its executives although it intends
to obtain a $5 million policy on the life of Charles T. Saldarini. There can be
no assurance that the Company will be able to obtain such insurance on terms
acceptable to the Company, if at all. See 'Management.'
CONTROL BY EXISTING SHAREHOLDER
Following completion of this Offering, assuming the Underwriters'
over-allotment option is not exercised, John P. Dugan, Chairman of the Board of
Directors of the Company, will beneficially own approximately ___% (or ___% if
the over-allotment option is exercised in full) of the Company's outstanding
Common Stock (excluding shares issuable upon the exercise of options). As a
result, Mr. Dugan will have the ability to determine the election of all of the
Company's directors, and to determine the outcome of most corporate actions
requiring shareholder approval, including the merger of the Company with or into
another company, the sale of all or substantially all of the Company's assets
and amendments to the Company's Certificate of Incorporation (the 'Certificate
of Incorporation'). In addition, Mr. Dugan will have the power to delay, defer
or prevent a change in control of the Company. See 'Principal Shareholders.'
10
ACQUISITION RISKS
As part of its business strategy, the Company will evaluate new acquisition
opportunities. Acquisitions involve numerous risks, including difficulties in
the assimilation of the operations and products or services of the acquired
companies, the expenses incurred in connection with the acquisition and
subsequent assimilation of operations and products or services, the diversion of
management's attention from other business concerns and the potential loss of
key employees of the acquired company. Acquisitions of companies outside the
United States also may involve the additional risks of assimilating differences
in international business practices and overcoming language differences as well
as the risks inherent in conducting international business, including exposure
to currency fluctuations, difficulties in complying with a variety of foreign
laws, unexpected changes in regulatory requirements, difficulties in staffing
and managing foreign operations and potentially adverse tax consequences. There
can be no assurance that the Company will successfully identify, complete or
integrate any future acquisitions, or that acquisitions, if completed, will
contribute favorably to the Company's operations and future financial condition.
The Company may also face increased competition for acquisition opportunities,
which may inhibit the Company's ability to consummate suitable acquisitions on
terms favorable to the Company. See 'Use of Proceeds' and 'Business -- Growth
Strategy.'
UNSPECIFIED USE OF PROCEEDS
None of the net proceeds that the Company will receive from this Offering
have been designated for any specific purpose. As a consequence, the Company's
management will have broad discretion with respect to the use of such proceeds.
The principal purposes of the Offering are to obtain additional working capital
for business expansion purposes, investment in infrastructure, to facilitate the
Company's access to public equity markets and to enhance the Company's ability
to use its Common Stock as consideration for possible acquisitions and as a
means of attracting and retaining key employees. Net proceeds from this Offering
will also be available for general corporate purposes, including replenishment
of working capital used to make the final distribution to the Company's existing
shareholders. A portion of the net proceeds may also be used to acquire or
invest in complementary businesses, products or services; however, there are no
commitments or agreements with respect to any such transaction at the present
time. See 'Use of Proceeds,' 'Dividend Policy' and 'S Corporation Termination.'
NO PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market for the
Common Stock will develop or, if one does develop, that it will be maintained.
The initial public offering price, which will be established by negotiations
between the Company and representatives of the Underwriters, may not be
indicative of prices that will prevail in the trading market for the Common
Stock. The market price of the Common Stock could be subject to wide
fluctuations in response to variations in operating results from quarter to
quarter, changes in earnings estimates by analysts, market conditions in the
industry and general economic conditions. Furthermore, the stock market has
experienced significant price and volume fluctuations unrelated to the operating
performance of particular companies. These market fluctuations may have an
adverse effect on the market price of the Common Stock. See 'Underwriters.'
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Common Stock of the Company in the
public market, or the prospect of such sales, could have a material adverse
effect on the market price of the Common Stock. Immediately following the
Offering, the Company will have outstanding _______ shares of Common Stock
(excluding ______ shares reserved for issuance upon the exercise of outstanding
stock options). The _______ shares of Common Stock offered hereby (________ if
the Underwriters' over-allotment option is exercised in full) will be eligible
for public sale without restriction under the Securities Act of 1933, as amended
(the 'Securities Act') by persons other than 'affiliates' (as that term is
defined in Rule 144 under the Securities Act) of the Company. All of the
remaining ________ shares of Common Stock outstanding will be 'restricted
securities' within the meaning of Rule 144 and may not be resold in the absence
of registration under the Securities Act or pursuant to exemptions from such
registration including, among others, the exemption provided by Rule 144 under
the Securities Act. Taking into consideration the effect of the 180-day
'lock-up' agreements covering all of the restricted shares and options to
purchase an additional _______shares held by executive officers, such restricted
shares will be eligible for sale upon the expiration of the lock-up agreements,
subject to the provisions of Rule 144 or Rule 701 under the Securities Act.
11
The Company intends to register on Form S-8 under the Securities Act as
soon as practicable after the effective date of the Offering, ______ shares of
Common Stock issued or reserved for issuance under the Company's 1998 Stock
Option Plan. This registration will be effective upon filing. As of December 31,
1997, there were outstanding options for the purchase of ______ shares of Common
Stock. Shares registered and issued pursuant to such registration statement will
be freely tradable except to the extent that the holders thereof are deemed to
be 'affiliates' of the Company, in which case the transferability of such shares
will be subject to the volume limitations set forth in Rule 144 under the
Securities Act. See 'Management -- 1998 Stock Option Plan,' 'Description of
Capital Stock,' 'Shares Eligible for Future Sale' and 'Underwriting.'
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of shares of Common Stock pursuant to the Offering will
experience immediate and substantial dilution of the net tangible book value per
share of Common Stock from the initial public offering price. At the initial
public offering price of $____ per share, purchasers in the Offering will incur
dilution of $____ per share. Additional dilution is also likely to occur upon
exercise of options granted by the Company. See 'Dilution.'
NO DIVIDENDS
Except for a final distribution to its shareholders immediately prior to
the Offering, the Company does not expect to declare or pay any dividends in the
foreseeable future. Instead, the Company intends to retain all earnings, if any,
in order to expand its operations. The payment of dividends, if any, in the
future is within the discretion of the Company's Board of Directors and will
depend upon the Company's earnings, if any, its capital requirements and
financial condition and other relevant factors. See 'Dividend Policy' and 'S
Corporation Termination.'
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER, BYLAW AND OTHER PROVISIONS
The Company's Board of Directors is authorized to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the Company's
shareholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any shares of
Preferred Stock that may be issued in the future. While the Company has no
present intention to issue shares of Preferred Stock, such issuance, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company. In addition, such Preferred Stock may have other rights, including
economic rights senior to the Common Stock, and, as a result, the issuance
thereof could have a material adverse effect on the market value of the Common
Stock. The Certificate of Incorporation provides for a classified Board of
Directors and members of the Board of Directors may be removed only for cause
upon the affirmative vote of holders of at least a majority of the shares of
capital stock of the Company entitled to vote. Furthermore, the Company is
subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law (the 'DGCL'), which prohibits the Company from engaging in a
'business combination' with an 'interested stockholder' for a period of three
years after the date of the transaction in which such person first becomes an
'interested stockholder,' unless the business combination is approved in a
prescribed manner. The application of these provisions could have the effect of
delaying or preventing a change of control of the Company. Certain other
provisions of the Certificate of Incorporation could also have the effect of
delaying or preventing changes of control or management of the Company, which
could adversely affect the market price of the Company's Common Stock. See
'Description of Capital Stock. '
12
USE OF PROCEEDS
The net proceeds to the Company from the sale of the ______ shares of
Common Stock being offered by the Company hereby are estimated to be $___
million ($____ million if the Underwriters' over-allotment option is exercised
in full), after deducting the underwriting discount and commissions and
estimated offering expenses payable by the Company. The principal purposes of
the offering of shares by the Company are to obtain additional working capital
for business expansion purposes investment in infrastructure, to facilitate the
Company's access to the public equity markets and to enhance the Company's
ability to use its Common Stock as consideration for possible acquisitions and
as a means of attracting and retaining key employees. Net proceeds from this
Offering will also be available for general corporate purposes, including
replenishment of working capital used to make the final distribution to the
Company's existing shareholders immediately prior to this Offering. A portion of
the net proceeds may also be used to acquire or invest in complementary
businesses, products or services; however, there are no commitments or
agreements with respect to any such transaction at the present time. Pending use
of the net proceeds for the above purposes, the Company intends to invest such
funds in short-term, interest-bearing, investment-grade obligations. See
'Dividend Policy.'
DIVIDEND POLICY
The Company does not expect to declare or pay any cash or stock dividends
on its Common Stock in the foreseeable future and intends to retain future
earnings for the expansion of its business. Any future determination to pay cash
dividends will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, the Company's results of operations, financial
condition, contractual restrictions and such other factors deemed relevant by
the Board.
Historically, as an S Corporation, the Company has made special bonus
compensation payments to its shareholders based on its estimated profitability
and working capital requirements. Immediately prior to this Offering, the
Company will declare a final distribution estimated to be $___________ million
to its existing shareholders reflecting the aggregate shareholders' equity as of
the date of such distribution. Investors purchasing Common Stock in this
Offering will not receive any portion of such distribution and the Company will
not make any additional distributions of this kind in the future. See 'Use of
Proceeds' and 'S Corporation Termination.'
S CORPORATION TERMINATION
The Company has been treated as an S Corporation for Federal income tax
purposes since January 1, 1991 and for purposes of the tax laws of the State of
New Jersey since January 1, 1994. As a result, the income of the Company has
been taxed at the shareholder level. Concurrent with the completion of this
Offering, the Company's S Corporation election will be terminated and the
Company will be subject to Federal and state corporate income taxation as a C
Corporation.
13
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1997 and as adjusted to reflect (i) the sale by the Company of
_______ shares of Common Stock in the Offering at the initial public offering
price of $__________ per share, after deducting underwriting discounts and
commissions and estimated expenses, and application of the estimated net
proceeds thereof and (ii) the final distribution to the Company's shareholders
immediately prior to the Offering. This table should be read in conjunction with
the Company's audited Financial Statements, including the notes thereto, which
appear elsewhere in this Prospectus.
AS OF
DECEMBER 31, 1997
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
Long-term obligations, less current portion.......................................... $ -- $ --
Shareholders' equity.................................................................
Preferred shares, $.01 par value, 5,000,000 shares authorized;
no shares issueda high of $14.25. During 2016, our common stock traded at a low of $0.70 and outstanding................................................ -- --
Common shares, $.01 par value, 30,000,000 shares authorized;
_________a high of $19.80. The trading price of our common stock has been and will continue to be subject to:● general volatility in the trading markets; ● significant fluctuations in our quarterly operating results; ● significant changes in our cash and cash equivalent reserves; ● announcements regarding our business or the business of our competitors; ● announcements regarding our equity offerings; ● strategic actions by us or our competitors, such as acquisitions or restructurings; ● industry and/or regulatory developments; ● changes in revenue mix; ● changes in revenue and revenue growth rates for us and for the industries in which we operate; ● changes in accounting standards, policies, guidance, interpretations or principles; and ● statements or changes in opinions, ratings or earnings estimates made by brokerage firms or industry analysts relating to the markets in which we operate or expect to operate. actual; ________ issuedshares of common stock effected on December 28, 2016.-48- outstanding,could divert our management’s attention.adjusted(1).....................................................
Additional paid-in capital......................................................... 4,194
Retained earnings.................................................................. (3,416)
Deferred Compensation.............................................................. (102)
-------- -----------
Total shareholders' equity.........................................................
Total capitalization................................................................. $ $
-------- -----------
-------- -----------
- ------------------
(1) Excludes (i) _____ shares of Common Stock issuable upon exercise of stock
options outstanding on December 31, 1997 at a weighted average exercise
price of $_______ per share and (ii) ______ additional shares of Common
Stock reserved for future grants under the Company's 1998 Stock Option Plan.
See 'Management -- 1998 Stock Option Plan.'
14
DILUTION
At December 31, 1997, the net tangible book value of the Company was $__
million, and the pro forma net tangible book value per share of Common Stock was
$________ (after giving effect to the final distribution estimated to be $______
million and the estimated $______ of deferred income tax benefits arising upon
termination of the Company's S Corporation status). See 'Dividend Policy' and 'S
Corporation Termination' and note 14 to the Company's Financial Statements.
After giving effect to the sale by the Company of _______ shares of Common Stock
in the Offering at the initial public offering price of $_______ per share and
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company, the pro forma net tangible book value of the
Company at December 31, 1997 would have been $___ million or $____ per share.
This represents an immediate increase in net tangible book value of $____ per
share to existing shareholders of the Company and an immediate dilution of
$______ per share to new investors purchasing shares in this Offering.
The following table illustrates such per share dilution:
- ------------------
(1) Pro forma net tangible book value per share of Common Stock is determined by
dividingpurchasing securities in this offering at the assumed combined public offering price.
| -59- |
The following table illustrates this dilution on a per share basis:
| Assumed combined public offering price per share and accompanying common warrant | $ | 1.75 | ||||
| Historical net tangible book deficit per share as of March 31, 2017 | $ | (1.63 | ) | |||
| Pro forma increase in net tangible book value per share attributable to investors in this offering | $ | 1.06 | ||||
| Pro forma increase in net tangible book value per share attributable to issuance of common stock(1) | $ | 0.88 | ||||
| As adjusted net tangible book value per share after this offering | $ | .31 | ||||
| Dilution per share to investors participating in this offering | $ | 1.44 |
(1) Shares issued in April as a result of the debt exchange.
The discussion and table above assume (i) no sale of pre-funded warrants, which, if sold, would reduce the The foregoing discussion and The above table is based on 8,788,604 shares of common stock outstanding as of June 1, 2017, gives effect to note conversions in March and 7,428,571 shares of common stock initially issuable upon the exercise of the common warrants to be issued pursuant to this prospectus. [The information above assumes that the underwriters do not exercise their over-allotment option. If the underwriters exercise their over-allotment option in full, the as adjusted net tangible book value will increase to $0.39 per share, representing an immediate increase to existing stockholders of $0.08 per share and an immediate dilution of $1.36 per share to new investors. ] To the extent that outstanding options or warrants, new options are issued under our equity incentive plan, or we issue additional shares of common stock in the future, there may be further dilution to investors participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders. SECURITY OWNERSHIP OF The following table shows, as of June 1, 2017, the number of shares of our common stock beneficially owned by: (i) each stockholder who is known by us to own beneficially in excess of 5% of our outstanding common stock; (ii) each of our current directors; (iii) each of our named executive officers; and (iv) all directors and executive officers as a group. Except as otherwise indicated, the persons listed below have sole voting and investment power with respect to all shares of common stock owned by them and all information with respect to beneficial ownership has been furnished to us by the respective stockholder. The address of the * Represents less than 1% of shares of common stock outstanding. (1) Beneficial ownership and percentage ownership are determined in accordance with the rules and regulations of the Description of Capital Stock The following description of our common stock summarizes the material terms and provisions of the common stock that we may issue in connection with this offering. It may not contain all the information that is important to you. For the complete terms of our common stock, please refer to our Certificate of Incorporation, as amended (the “amended certificate of incorporation”) and our amended and restated bylaws, which are filed as exhibits to the registration statement which includes this prospectus. The Delaware General Corporation Law (“DGCL”) may also affect the terms of these securities. Common Stock On December 22, 2015, we filed a certificate of amendment to our certificate of incorporation with the Secretary of State of the State of Delaware to increase the number of authorized shares of common stock from 40,000,000 to 100,000,000, par value $0.01 per share. Additionally, on December 28, 2016, we filed a certificate of amendment to our certificate of incorporation, or the Certificate of Amendment, to effectuate a one-for-ten reverse split of our issued and outstanding common stock. At the effective time of the reverse split, every 10 shares of common stock issued and outstanding were automatically combined into one share of issued and outstanding common stock, without any change in the par value per share. As of June 1, 2017, 8,788,604 shares of our common stock were outstanding. The following is qualified in its entirety by reference to our certificate of incorporation, as amended, and our amended and restated bylaws, and by the provisions of applicable law. A copy of our certificate of incorporation, as amended, and our amended and restated bylaws are included as exhibits to our most recent Annual Report on Form 10-K which is incorporated herein by reference. A copy of the Certificate of Amendment was filed as Exhibit 3.1 to our Current Report on Form 8-K filed on December 28, 2016. Holders of our common stock are entitled to one vote for each share on all matters submitted to a vote of stockholders, and do not have cumulative voting rights. Generally, in matters other than the election of directors, the affirmative vote of a majority of the votes cast authorizes such an action, except where Delaware General Corporation Law prescribes a different percentage of votes or a different exercise of voting power. For the election of directors, directors are elected by a plurality of the votes of the shares present in person or represented by proxy and entitled to vote. Holders of our common stock are entitled to receive, as, when and if declared by our board of directors from time to time, such dividends and other distributions in cash, stock or property from our assets or funds legally available for such purposes, subject to any preferential dividend or other rights of any then outstanding preferred stock. No preemptive, conversion, or other subscription rights apply to our common stock. All outstanding shares of our common stock are fully paid and non-assessable. In the event of our liquidation, dissolution or winding up, holders of our common stock are entitled to share ratably in the assets available for distribution, subject to any preferential or other rights of any then outstanding preferred stock. The voting, dividend and liquidation rights of the holders of our common stock are subject to and qualified by the rights of the holders of the preferred stock. Listing. Our common stock is listed on The Nasdaq Capital Market under the symbol “IDXG.” Transfer Agent and Registrar.The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, LLC. Its address is 6201 15th Avenue, Brooklyn, NY 11219. Pre-Funded Warrants The following summary of certain terms and provisions of pre-funded warrants that are being offered hereby is not complete and is subject to, and qualified in its entirety by, the provisions of the pre-funded warrant, the form of which is filed as an exhibit to the registration statement of which this prospectus forms a part. Prospective investors should carefully review the terms and provisions of the form of pre-funded warrant for a complete description of the terms and conditions of the pre-funded warrants. Duration and Exercise Price.Each pre-funded warrant offered hereby will have an initial exercise price per share equal to $0.01. The pre-funded warrants will be immediately exercisable and may be exercised at any time until the pre-funded warrants are exercised in full. The exercise price and number of shares of common stock issuable upon exercise is subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our common stock and the exercise price. The pre-funded warrants will be issued separately from the accompanying common warrants, and may be transferred separately immediately thereafter. Exercisability.The pre-funded warrants will be exercisable, at the option of each holder, in whole or in part, by delivering to us a duly executed exercise notice accompanied by payment in full for the number of shares of our common stock purchased upon such exercise (except in the case of a cashless exercise as discussed below). A holder (together with its affiliates) may not exercise any portion of the pre-funded warrant to the extent that the holder would own more than 4.99 % of the outstanding common stock immediately after exercise, except that upon at least 61 days’ prior notice from the holder to us, the holder may increase the amount of ownership of outstanding stock after exercising the holder’s pre-funded warrants up to 9.9 % of the number of shares of our common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the pre-funded warrants. Purchasers of pre-funded warrants in this offering may also elect prior to the issuance of the pre-funded warrants to have the initial exercise limitation set at 9.9% of our outstanding common stock. No fractional shares of common stock will be issued in connection with the exercise of a pre-funded warrant. In lieu of fractional shares, we will either pay the holder an amount in cash equal to the fractional amount multiplied by the exercise price or round up to the next whole share. Cashless Exercise. If, at the time a holder exercises its pre-funded warrants, a registration statement registering the issuance of the shares of common stock underlying the pre-funded warrants under the Securities Act is not then effective or available and an exemption from registration under the Securities Act is not available for the issuance of such shares, then in lieu of making the cash payment otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of shares of common stock determined according to a formula set forth in the pre-funded warrants. Transferability.Subject to applicable laws, a pre-funded warrant may be transferred at the option of the holder upon surrender of the pre-funded warrant to us together with the appropriate instruments of transfer. Exchange Listing. We do not intend to list the pre-funded warrants on any securities exchange or nationally recognized trading system. Right as a Stockholder. Except as otherwise provided in the pre-funded warrants or by virtue of such holder’s ownership of shares of our common stock, the holders of the pre-funded warrants do not have the rights or privileges of holders of our common stock, including any voting rights, until they exercise their pre-funded warrants. Common Warrants The following summary of certain terms and provisions of common warrants that are being offered hereby is not complete and is subject to, and qualified in its entirety by, the provisions of the common warrants, the form of which is filed as an exhibit to the registration statement of which this prospectus forms a part. Prospective investors should carefully review the terms and provisions of the form of common warrant for a complete description of the terms and conditions of the common warrants. Book-entry Form.Pursuant to a warrant agency agreement between us and American Stock Transfer & Trust Company, LLC, as warrant agent, the common warrants will be issued in book-entry form and shall initially be represented only by one or more global warrants deposited with the warrant agent, as custodian on behalf of The Depository Trust Company, or DTC, and registered in the name of Cede & Co., a nominee of DTC, or as otherwise directed by DTC. Each whole common warrant is exercisable to purchase one share of our common stock at an exercise price of $[●] per share at any time for up to five years after the date of the closing of this offering. The common warrants issued in this offering will be governed by the terms of a global warrant held in book-entry form. The holder of a common warrant will not be deemed a holder of our underlying common stock until the common warrant is exercised, except as set forth in the common warrant. Duration. The common warrants will be immediately exercisable and will expire on the fifth anniversary of the original issuance date. The exercise price and number of shares of common stock issuable upon exercise is subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our common stock and the exercise price. The common warrants will be issued separately from the common stock, and may be transferred separately immediately thereafter. A common warrant to purchase one share of our common stock will be issued for every one share of common stock or pre-funded warrant purchased in this offering. Exercisability. The common warrants will be exercisable, at the option of each holder, in whole or in part, by delivering to us a duly executed exercise notice accompanied by payment in full for the number of shares of our common stock purchased upon such exercise (except in the case of a cashless exercise as discussed below). A holder (together with its affiliates) may not exercise any portion of the common warrant to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, except that upon at least 61 days’ prior notice from the holder to us, the holder may increase the amount of ownership of outstanding stock after exercising the holder’s common warrants up to 9.9% of the number of shares of our common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the common warrants. No fractional shares of common stock will be issued in connection with the exercise of a common warrant. In lieu of fractional shares, we will either pay the holder an amount in cash equal to the fractional amount multiplied by the exercise price or round up to the next whole share. Cashless Exercise. If, at the time a holder exercises its common warrants, a registration statement registering the issuance of the shares of common stock underlying the common warrants under the Securities Act is not then effective or available and an exemption from registration under the Securities Act is not available for the issuance of such shares, then in lieu of making the cash payment otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of shares of common stock determined according to a formula set forth in the common warrants. Transferability. Subject to applicable laws, a common warrant may be transferred at the option of the holder upon surrender of the common warrant to us together with the appropriate instruments of transfer. Exchange Listing. We do not intend to list the common warrants on any securities exchange or nationally recognized trading system. Right as a Stockholder. Except as otherwise provided in the common warrants or by virtue of such holder’s ownership of shares of our common stock, the holders of the common warrants do not have the rights or privileges of holders of our common stock, including any voting rights, until they exercise their common warrants. Certain Effects of Authorized but Unissued Stock We have shares of common stock and preferred stock available for future issuance without stockholder approval. We may issue these additional shares for a variety of corporate purposes, including future public or private offerings to raise additional capital or to facilitate corporate acquisitions or for payment as a dividend on our capital stock. The existence of unissued and unreserved preferred stock may enable our Board to issue shares of preferred stock with terms that could render more difficult or discourage a third-party attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise, thereby protecting the continuity of our management. In addition, if we issue additional preferred stock, the issuance could adversely affect the voting power of holders of common stock and the likelihood that holders of common stock will receive dividend payments or payments upon liquidation. Anti-Takeover Effects of Provisions of Our Charter Documents Our amended certificate of incorporation provides for our Board to be divided into three classes serving staggered terms, Class I, Class II, and Class III. As of the date Approximately one-third of our Board will be elected each year. The provision for a classified board could prevent a party who acquires control of a majority of the Our amended certificate of incorporation requires that certain amendments to the amended certificate of incorporation and amendments by the stockholders of our bylaws require the affirmative vote of at least 75% of the shares of capital stock of the Company issued and outstanding and entitled to vote generally in the election of directors. These provisions could discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company and could delay changes in management. Our amended and restated bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual stockholders meeting, including Our amended and restated bylaws provide that only our Board, the chairperson of the board, the President or the Chief Executive Officer may call a special meeting of stockholders. Because our stockholders do not have the right to call a special meeting, a stockholder could not force stockholder consideration of a proposal over the opposition of our Board by calling a special meeting of stockholders prior to such time as a majority of our Board, the chairperson of the board, the President or the Chief Executive Officer believed the matter should be considered or until the next annual meeting provided that the requestor met the notice requirements. The restriction on the ability of stockholders to call a special meeting means that a proposal to replace the board also could be delayed until the next annual stockholders meeting. Our amended certificate of incorporation does not allow stockholders to act by written consent without a meeting if a class of capital stock is registered under Section 12 of the Exchange Act. Without the availability of stockholder’s actions by written consent, a holder controlling a majority of our capital stock would not be able to amend our bylaws or remove directors without holding a stockholders’ meeting. Anti-Takeover Effects of Provisions of Delaware Law We are subject to the provisions of Section 203 of the DGCL, or Section 203. Under Section 203, we would generally be prohibited from engaging in any business combination with any interested stockholder for a period of three years following the time that this stockholder became an interested stockholder unless: Under Section 203, a “business combination” includes: In general, Section 203 defines an interested stockholder as an entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person. Limitation of Liability and Indemnification Our amended certificate of incorporation provides that our directors shall not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability for breach of the director’s duty of loyalty to us or our stockholders, for acts or omissions not in good faith or involving intentional misconduct or a knowing violation of law, for payment of dividends or approval of stock purchases or redemptions that are prohibited by the DGCL, or for any transaction from which the director derived an improper personal benefit. Under the DGCL, our directors have a fiduciary duty to us that is not eliminated by this provision of the amended certificate of incorporation and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available. This provision also does not affect our directors’ responsibilities under any other laws, such as federal securities laws or state or federal environmental laws. Section 145 of the DGCL empowers a corporation to indemnify its directors and officers against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by them in connection with any action, suit or proceeding brought by third parties by reason of the fact that they were or are directors or officers of the corporation, if they acted in good faith, in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe that their conduct was unlawful. The DGCL provides further that the indemnification permitted thereunder shall not be deemed exclusive of any other rights to which the directors and officers may be entitled under the corporation’s bylaws, any agreement, a vote of stockholders or otherwise. Our amended certificate of incorporation provides that, to the fullest extent permitted by Section 145 of the DGCL, we shall indemnify any person who is or was a director or officer of us, or is or was serving at our request as a director, officer or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against the expenses, liabilities or other matters referred to in or covered by Section 145 of the DGCL. Our amended and restated bylaws provide that we will indemnify any person who was or is a party or threatened to be made a party to any proceeding by reason of the fact that such person is or was a director or officer of us or is or was serving at our request as a director, officer or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise to the fullest extent permitted by the DGCL. In addition, we have entered into indemnification agreements with each of our directors and our executive officers. Pursuant to the indemnification agreements, we have agreed to indemnify and hold harmless these directors and officers to the fullest extent permitted by the DGCL. The agreements generally cover expenses that a director or officer incurs or amounts that a director or officer becomes obligated to pay because of any proceeding to which he or she is made or threatened to be made a party or participant by reason of his or her service as a current or former director, officer, employee or agent of the Company. The agreements also provide for the advancement of expenses to the directors and officers subject to specified conditions. There are certain exceptions to our obligation to indemnify the directors and officers, including any intentional malfeasance or act where the director or officer did not in good faith believe he or she was acting in our best interests, with respect to “short-swing” profit claims under Section 16(b) of the 1934 Act and, with certain exceptions, with respect to proceedings that he or she initiates. Section 145 of the DGCL also empowers a corporation to purchase insurance for its officers and directors for such liabilities. We maintain liability insurance for our officers and directors. We have entered into an underwriting agreement dated June [●] , 2017 with Maxim Group LLC as the representative (the “representative”) of the underwriters named below and the lead book-running manager of this offering. Subject to the terms and conditions of the underwriting agreement, the underwriters have agreed to purchase the number of our securities set forth opposite their respective names below. Number of The underwriting agreement provides that the obligations of the underwriters to pay for and accept delivery of the shares of our common stock and accompanying common warrants and/or pre-funded warrants and accompanying common warrants are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock and/or pre-funded warrants and common warrants offered hereby if any of such securities are purchased. We have granted the underwriters an over-allotment option. This option, which is exercisable for up to 45 days after the date of this prospectus, permits the underwriters to purchase up to 1,114,286 shares of common stock and/or common warrants exercisable for up to 1,114,286 shares of common stock at the public offering price, less the underwriting discount, to cover over-allotments, if any. The underwriters have severally agreed that, to the extent the over-allotment option is exercised, they will each purchase a number of additional shares of common stock and/or common warrants proportionate to the underwriter’s initial amount reflected in the foregoing table. The underwriters have advised us that they do not intend to confirm sales to any account over which they exercise discretionary authority. Underwriting Commissions and Discount and Expenses We have agreed to pay the underwriters a cash fee equal to 7.5% of the gross proceeds raised in this offering; provided, that, in the event an investor is introduced by us (“Company Investor(s)”), such cash fee shall be reduced to four percent (4.0%) solely with respect to any and all proceeds received from a Company Investor. Notwithstanding the foregoing, it is understood and agreed that the maximum aggregate gross proceeds that Company Investors may invest is capped at 5% of the final aggregate size of this offering. The representative of the underwriters, Maxim Group LLC, has advised us that the underwriters propose to offer the shares of common stock and accompanying common warrants directly to the public at the public offering price set forth on the cover of this prospectus. After the offering to the public, the offering price and other selling terms may be changed by the representative without changing the proceeds we will receive from the underwriters. The following table summarizes the public offering price, underwriting commissions and proceeds before expenses to us assuming no exercise of the underwriters’ option to purchase up to an additional 15% of the shares of common stock and/or common warrants sold in this offering. The underwriting commissions are equal to the public offering price per share less the amount per share the underwriters pay us for the shares and/or common warrants . We have also agreed to issue to the representative warrants to purchase a number of shares of common stock equal to an aggregate of 4% of the total number of shares of common stock sold in this offering. The warrants will have an exercise price equal to 120% of the public offering price in this offering and may be exercised on a cashless basis. The warrants are not exercisable for six (6) months after the effective date of the registration statement of which this prospectus forms a part and will expire five (5) years after such date. The warrants may not be sold, transferred, assigned, pledged or hypothecated for a period of six (6) months following the effective date, except that they may be assigned, in whole or in part, to any successor, officer or partner of Maxim (or to officers or partners of any such successor), and to members of the underwriting syndicate or selling group in compliance with FINRA Rule 5110(g). The warrants will provide for standard anti-dilution protection in accordance with FINRA Rule 5110(f)(2)(G). We estimate the total expenses payable by us for this offering to be approximately $1,450,000 which amount includes (i) the underwriting discount of $975,000 ( $1,121,250 if the underwriters’ over-allotment option is exercised in full) assuming an underwriting discount of 7.5%, and (ii) reimbursement of the accountable expenses of the representative up to a maximum of $100,000 including the legal fees of the representative being paid by us, regardless of whether the offering is consummated, and (iii) other estimated company expenses of approximately $455,000 which includes legal, accounting, printing costs and various fees associated with the registration and listing of our shares. We provided an advance of $20,000 to the representative for its anticipated out-of-pocket expenses related to this offering; the representative will return any portion of the advance not offset by actual expenses. The securities we are offering are being offered by the underwriters subject to certain conditions specified in the underwriting agreement. Over-allotment Option We have granted to the underwriters an option exercisable not later than 45 days after the date of this prospectus to purchase up to a number of additional shares of common stock and/or common warrants not to exceed 15% of the number of shares of common stock and common warrants sold in the offering at the public offering price per share of common stock set forth on the cover page hereto less the underwriting discounts and commissions. The underwriters may exercise the option solely to cover overallotments, if any, made in connection with this offering. If any additional shares of common stock and/or common warrants are purchased pursuant to the over-allotment option, the underwriters will offer these shares of common stock and/or common warrants on the same terms as those on which the other securities are being offered. Determination of Offering Price Our common stock is currently traded on The Nasdaq Capital Market under the symbol “IDXG.” On June 12, 2017 the closing price of our common stock was $1.75 per share. There is a material disparity between the offering price of the shares of our common stock being offered under this prospectus and the market price of the common stock at the date of this prospectus. We believe that the market price of our common stock at the date of this prospectus is not the appropriate offering price for the shares of our common stock because the market price is affected by a number of factors. The public offering price was determined by negotiation by us and Maxim Group LLC, as representative of the underwriters. The principal factors considered by us and the representative in determining the public offering price included: The offering price stated on the cover page of this prospectus should not be considered an indication of the actual value of the shares of common stock and accompanying common warrants sold in this offering. That price is subject to change as a result of market conditions and other factors and we cannot assure you that the shares of common stock and accompanying common warrants sold in this offering can be resold at or above the public offering price. Lock-up Agreements Our officers and directors are expected to agree with the representative to be subject to a lock-up period of 180 days following the closing of this offering. This means that, during the applicable lock-up period, such persons may not offer for sale, contract to sell, sell, distribute, grant any option, right or warrant to purchase, pledge, hypothecate or otherwise 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. Certain limited transfers are permitted during the lock-up period if the transferee agrees to these lock-up restrictions. We have also agreed, in the underwriting agreement, to similar lock-up restrictions on the issuance and sale of our securities for 120 days following the closing of this offering, subject to certain exceptions. The lock-up period is subject to an additional extension to accommodate for our reports of financial results or material news releases. The representative may, in its sole discretion and without notice, waive the terms of any of these lock-up agreements. Subsequent Equity Sales We have granted Maxim Group LLC a right of first refusal for a period of twelve (12) months from the date of commencement of sales pursuant to this prospectus to act as lead placement agent and/or lead managing underwriter for any and all future public or private equity or equity-linked offering (excluding strategic investor financings, mergers and acquisitions, commercial debt, lines of credit, and equipment financings ) undertaken by the Company, its subsidiary(ies), or any successor thereto, with a minimum of seventy percent (70%) of the economics in such subsequent offering(s ) Price Stabilization, Short Positions and Penalty Bids In connection with this offering, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of our common stock. Specifically, the underwriters may over-allot in connection with this offering by selling more shares of common stock than are set forth on the cover page of this prospectus. This creates a short position in our common stock for the underwriters’ own account. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares of common stock over-allotted by the underwriters is not greater than the number of shares of common stock that they may purchase in the over-allotment option. In a naked short position, the number of shares of common stock involved is greater than the number of shares of common stock in the over-allotment option. To close out a short position, the underwriters may elect to exercise all or part of the over-allotment option. The underwriters may also elect to stabilize the price of our common stock or reduce any short position by bidding for, and purchasing, common stock in the open market. The underwriters may also impose a penalty bid. This occurs when a particular underwriter or dealer repays selling concessions allowed to it for distributing a security in this offering because the underwriter repurchases that security in stabilizing or short covering transactions. Finally, the underwriters may bid for, and purchase, shares of our common stock in market making transactions, including “passive” market making transactions as described below. These activities may stabilize or maintain the market price of our common stock at a price that is higher than the price that might otherwise exist in the absence of these activities. The underwriters are not required to engage in these activities, and may discontinue any of these activities at any time without notice. These transactions may be effected on The Nasdaq Capital Market, in the over-the-counter market, or otherwise. In connection with this offering, the underwriters and selling group members, if any, or their affiliates may engage in passive market making transactions in our common stock immediately prior to the commencement of sales in this offering, in accordance with Rule 103 of Regulation M under the Exchange Act. Rule 103 generally provides that: Our Relationships with the Underwriters The underwriters and their affiliates have engaged, and may in the future engage, in investment banking transactions and other commercial dealings in the ordinary course of business with us or our affiliates. The underwriters and their affiliates have received, or may in the future receive, customary fees and commissions for these transactions. Maxim Group LLC acted as the placement agent in connection with the Registered Direct Offerings completed on December 22, 2016, January 6, 2017 and January 25, 2017 and the Private Placement completed concurrently with the January 25, 2017 offering. In its role as placement agent, Maxim Group LLC received an aggregate of $815,380 in placement agent fees. Additionally, in connection with the Registered Direct Offerings, we granted Maxim Group LLC a right of first refusal to act as lead managing underwriter and book runner for any and all future public and private equity and debt offerings of ours for a period of twelve (12) months from the closing of the Registered Direct Offering ending on December 22, 2017. On February 8, 2017, we completed a CMPO to sell 1,200,000 shares of its common stock at a price of $3.00 per share. In addition, we granted the underwriters an option to purchase up to an additional 108,000 shares of our common stock, solely for the purpose of covering over-allotments, if any. The underwriters exercised the over-allotment option in full. The CMPO resulted in gross proceeds to us of approximately $3.9 million, and a placement agency fee to Maxim Group LLC of approximately $313,920. In connection with the exchange offer of our non-convertible notes for convertible notes and their subsequent conversion into common stock described in “Prospectus Summary – Recent Business Developments-Note Exchange and Subsequent Conversion”, we paid Maxim Group LLC a cash fee of $726,513. In addition, in the ordinary course of their business activities, the underwriters and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) for their own account and for the accounts of their customers. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments. Indemnification We have agreed to indemnify the underwriters against liabilities relating to the offering arising under the Securities Act and the Exchange Act, liabilities arising from breaches of some or all of the representations and warranties contained in the underwriting agreement, and to contribute to payments that the underwriters may be required to make for these liabilities. The underwriting agreement will be filed as an exhibit to our Current Report on Form 8-K to be filed with the SEC in connection with this offering. Electronic Distribution A prospectus in electronic format may be made available on a website maintained by the representative of the underwriters and may also be made available on a website maintained by other underwriters. The underwriters may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives of the underwriters to underwriters that may make Internet distributions on the same basis as other allocations. In connection with the offering, the underwriters or syndicate members may distribute prospectuses electronically. No forms of electronic prospectus other than prospectuses that are printable as Adobe® PDF will be used in connection with this offering. Other than the prospectus in electronic format, the information on any underwriter’s website and any information contained in any other website maintained by an underwriter is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or any underwriter in its capacity as underwriter and should not be relied upon by investors. Foreign Regulatory Restrictions on Purchase of Securities Offered Hereby Generally No action has been or will be taken in any jurisdiction (except in the United States) that would permit a public offering of the securities offered by this prospectus, or the possession, circulation or distribution of this prospectus or any other material relating to us or the securities offered hereby in any jurisdiction where action for that purpose is required. Accordingly, the securities offered hereby may not be offered or sold, directly or indirectly, and neither of this prospectus nor any other offering material or advertisements in connection with the securities offered hereby may be distributed or published, in or from any country or jurisdiction except in compliance with any applicable rules and regulations of any such country or jurisdiction. Each of the underwriters may arrange to sell securities offered by this prospectus in certain jurisdictions outside the United States, either directly or through affiliates, where they are permitted to do so. Certain legal matters relating to the issuance of the securities offered by this prospectus will be passed upon for us by Pepper Hamilton LLP, New York, New York. Certain legal matters in connection with this offering will be passed upon for the underwriter by Ellenoff Grossman & Schole LLP, New York, New York. The financial statements and schedules as of December 31, 2016 and 2015 and for each of the two years in the period ended December 31, WHERE YOU CAN FIND MORE INFORMATION We have filed a registration statement on Form S-1 with the SEC covering the securities we are offering by this prospectus. This prospectus does not include all of the information contained in the registration statement. You should refer to We file annual, quarterly and other periodic reports, proxy statements and other information with the Securities and Exchange Commission. You can read our Securities and Exchange Commission filings, including this registration statement, over the Internet at the Securities and Exchange Commission’s website at www.sec.gov. You may also read and copy any document we file with the Securities and Exchange Commission at its public reference facilities at 100 F Street NE, Washington, D.C. 20549. You may also obtain copies of these documents at prescribed rates by writing to the Public Reference Section of the Securities and Exchange Commission at 100 F Street NE, Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the public reference facilities. Our Internet address iswww.interpacediagnostics.com. There we make available free of charge, on or through the investor relations section of our website, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with the Securities and Exchange Commission. The information found on our website is not part of this prospectus and investors should not rely on any such information in deciding whether to invest. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE We have elected to incorporate the following documents into this prospectus, together with all exhibits filed therewith or incorporated therein by reference, to the extent not otherwise amended or superseded by the contents of this prospectus: In addition, we incorporate by reference in this prospectus any future filings we make with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act (excluding any information furnished and not filed with the SEC) after the date on which the registration statement that includes this prospectus was initially filed with the SEC (including all such documents we may file with the SEC after the date of the initial registration statement and prior to the effectiveness of the registration statement) and until all offerings under this prospectus are terminated. Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for all purposes to the extent that a statement contained in this prospectus, or in any other subsequently filed document which is also incorporated or deemed to be incorporated by reference, modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this prospectus. You may request a copy of these filings (other than an exhibit to a filing unless that exhibit is specifically incorporated by reference into that filing) at no cost by writing or telephoning us at the following address or telephone number: Interpace Diagnostics Group, Inc. Copies of these filings are also available through the “Investors” section of our website at www.interpacediagnostics.com. For other ways to obtain a copy of these filings, please refer to “Prospectus Summary—Available Information.” 7,428,571Shares of Common Stock Pre-funded Warrants to Purchase Shares Common Warrants to PROSPECTUS Sole Book - Running Manager Maxim Group LLC Co-Manager WestPark Capital, Inc. ____________, 2017 PART II Information Not Required in ITEM 13. OTHER EXPENSES OF Company's net tangible book value at December 31, 1997 of
$_____ million by the pro forma number of shares of Common Stock
outstanding.
(2) Dilution per share to new investors is determined by subtracting pro forma
net tangible book value per share after the Offering from the initial public
offering price per share.
The computations in the table above exclude: (i) ______ shares of Common
Stock issuable upon the exercise of stock options outstanding at December 31,
1997 at a weighted average exercise price of $________ per share and (ii) _____
additional shares of Common Stock reserved for future grants under the Company's
1998 Stock Option Plan. See 'Management -- 1998 Stock Option Plan.'
15
SELECTED FINANCIAL DATA
The selected financial data set forth below for the five years ended
December 31, 1993, 1994, 1995, 1996 and 1997 have been derived from the
Company's Financial Statements and the notes thereto. Balance sheets at December
31, 1996 and 1997 and the statements of income, of shareholders' equity and of
cash flows for the three years ended December 31, 1995, 1996 and 1997 and notes
thereto appear elsewhere in this Prospectus and have been audited by Coopers &
Lybrand L.L.P., independent accountants. The selected financial data for the
years ended December 31, 1993 and 1994 have been derived from the Company's
unaudited Financial Statements which have been prepared by the Company in
accordance with generally accepted accounting principles and includes all
adjustments that management considers necessary for a fair presentation of the
data for such periods. The Company's unaudited Financial Statements for the
years ended December 31, 1993 and 1994 have not been included in this
Prospectus. The selected financial data set forth below should be read in
conjunction with, and are qualified by reference to 'Management's Discussion and
Analysis of Financial Condition and Results of Operations' and the Company's
audited Financial Statements and related notes appearing elsewhere in this
Prospectus.
STATEMENT OF OPERATIONS DATA:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
Revenue................................................ $8,226 $8,250 $18,398 $33,015 $54,542
Program expenses....................................... 4,886 5,339 15,427 26,886 43,057
------ ------ ------- ------- -------
Gross profit........................................... 3,340 2,911 2,971 6,129 11,485
Compensation expense................................... 1,945 1,673 2,124 3,191 5,121(1)
Bonus to majority shareholder(2)....................... 440 200 425 1,500 2,243
Stock grant expense(3)................................. -- -- -- -- 4,470
Other general, selling and administrative expenses..... 844 826 1,159 1,650 2,755
------ ------ ------- ------- -------
Total general, selling and administrative expenses..... 3,229 2,699 3,708 6,341 14,589
------ ------ ------- ------- -------
Operating income (loss)................................ 111 212 (737) (212) (3,104)
Other income, net...................................... 17 16 70 98 155
------ ------ ------- ------- -------
Income (loss) before provision for taxes............... 128 228 (667) (114) (2,949)
Pro forma provision for (benefit from) income
taxes(4)............................................. 51 91 (121) -- --
------ ------ ------- ------- -------
Pro forma net income (loss)(4)......................... $ 77 $ 137 $ (546) $ (114) $(2,949)
------ ------ ------- ------- -------
------ ------ ------- ------- -------
Pro forma net income (loss) per share(4)...............
-------
-------
Pro forma weighted average number of shares outstanding..........................................
-------
-------
OTHER FINANCIAL DATA:
Adjusted operating income (loss)(5).................... $ 551 $ 412 $ (312) $ 1,288 $ 3,609
Adjusted net income (loss)(4)(5)....................... 341 257 (145) 832 2,258
OTHER OPERATING DATA:
Number of detail programs.............................. 8 9 10 13 15
Number of clients...................................... 6 7 7 8 12
Average size of detail program......................... $1,028 $ 917 $ 1,840 $ 2,540 $ 3,636
Number of sales representatives at end of period:
Full-time............................................ -- -- -- 29 633
Part-time............................................ 107 107 393 709 362
------ ------ ------- ------- -------
Total................................................ 107 107 393 738 995
------ ------ ------- ------- -------
------ ------ ------- ------- -------
See footnotes on following page
16
BALANCE SHEET DATA:
AS OF DECEMBER 31,
-----------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ -------
(IN THOUSANDS)
Cashcommon stock that we are offering on a one-for-one basis and cash equivalents.......................................... $1,701 $ 611 $ 240 $2,403 $ 5,760
Working capital.................................................... (63) 130 (591) (873) 129
Total assets....................................................... 2,243 6,975 5,881 8,322 13,691
Total long-term debt............................................... -- -- -- -- --
Shareholders' equity (deficit)..................................... 76 304 (363) (478) 676
- ------------------
(1) Includes bonus compensation of $237,000 paid to Charles T. Saldarini, the
Company's President, Chief Executive Officer and a minority shareholder. It
is expected that, in addition to his base salary, Mr. Saldarini may receive
cash bonuses in future periods as determined by the Compensation Committee.
See 'Management -- Executive Compensation.'
(2) The Company has been treated as an S Corporation under subchapter S of the
Code since January 1, 1991 and under the corresponding provisions of the tax
laws of the State of New Jersey since January 1, 1994. Historically, as an S
Corporation, the Company made annual bonus payments to its majority
shareholder based on the Company's estimated profitability and working
capital requirements. With the exception of the distribution to be declared
immediately prior to the Offering, the Company does not expect to pay such
bonuses in future periods. See 'Dividend Policy.'
(3) On January 1, 1997, the Company issued shares of its Common Stock to Charles
T. Saldarini, its current President and Chief Executive Officer. As a
result, prior to the Offering, Mr. Saldarini owns 15.0% of the Common Stock
outstanding. For financial accounting purposes, a non-recurring, non-cash
compensation expense was charged in the first quarter of 1997. See
'Principal Shareholders,' 'Management,' 'Certain Transactions' and note 12
to the Company's Financial Statements.
(4) As an S Corporation, the Company has not been subject to Federal or New
Jersey corporate income taxes, other than a New Jersey state corporate
income tax of approximately 2%. Rather, the income of the Company has been
taxed at the shareholder level. Upon consummation of this Offering, the
Company will no longer be treated as an S Corporation, and, accordingly,
will be subject to Federal and state corporate income taxes. Pro forma
provision for income taxes, net income, net income per share and adjusted
net income for all periods presented reflect a provision for income taxes as
if the Company had been taxed as a C Corporation for all periods.
(5) Adjusted to eliminate bonus to majority shareholder and stock grant expense.
This presentation illustrates the Company's results of operations on an
adjusted basis to reflect that the Company does not intend to pay bonuses to
its majority shareholder or incur stock grant expense in future periods.
These presentations should not be construed as an alternative to operating
income or net income/(loss) (as determined in accordance with generally
accepted accounting principles) as presented herein.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the Company's
Financial Statements and the notes thereto appearing elsewhere in this
Prospectus and contains trend analysis and other forward-looking statements that
involve substantial risks and uncertainties. The Company's actual results could
differ materially from those expressed or implied in the forward-looking
statements as a result of certain factors, including those set forth under 'Risk
Factors' and elsewhere in this Prospectus.
OVERVIEW
The Company is a leading provider of comprehensive customized solutions on
an outsourced basis to the United States pharmaceutical industry. The Company
believes it has achieved this leadership position based on its 10 years of
industry experience and its relationships with many of the pharmaceutical
industry's largest companies. Since inception, the Company has designed
customized product detailing programs for approximately 25 clients, including
Pfizer, Inc., Astra Merck Inc., Glaxo Wellcome Inc. and Johnson & Johnson, Inc.
Such programs have been designed to promote more than 70 different products,
including such leading prescription medications as Prilosec(Registered),
Wellbutrin(Registered) and Cardura(Registered), as well as a number of
well-known OTC products such as Bayer(Registered) Aspirin, Pepcid AC(Registered)
and Monistat 5(Registered), to hospitals, pharmacies and physicians in
approximately 20 different specialties. The Company's primary objective is to
enhance its leadership position in the growing CSO industry and to become the
premier supplier of comprehensive sales solutions to the pharmaceutical industry
and other segments of the healthcare market.
The Company has demonstrated strong internal growth generated by securing
new business from leading pharmaceutical companies and by renewing and expanding
programs with existing clients. The Company believes that it is one of the
largest CSOs operating in the United States measured both by revenue and number
of sales representatives used in programs. Revenue increased from $8.3 million
in 1994 to $54.5 million in 1997, a compounded annual growth rate of
approximately 87.7%. Gross profit increased from $2.9 million in 1994 to $11.5
million in 1997, a compounded annual growth rate of 58.0%. In addition, the
number of sales representatives (part-time and full-time) employed by the
Company has increased from approximately 100, as of December 31, 1993 to
approximately 1,000 as of December 31, 1997. Over that same period, the
Company's mix between part-time and full-time representatives shifted from 100%
part-time to 45% part-time. At December 31, 1997 the Company was in the process
of hiring in excess of 150 new sales representatives to meet its obligations
under new and existing programs.
Historically, the Company has derived a significant portion of program
revenue from a limited number of major clients. In 1995, the Company's four
largest clients accounted for approximately 42%, 17%, 15% and 10%, respectively,
or a total 84%, of its revenue. In 1996, the Company's four largest clients
accounted for approximately 30%, 21%, 17% and 16%, respectively, or a total 84%,
of its revenue. In 1997, the Company's four largest clients accounted for
approximately 25%, 22%, 19% and 10%, respectively, or a total 76%, of its
revenue. Concentrations of business in the CSO industry are not uncommon and the
Company believes that pharmaceutical companies will continue to outsource larger
projects as the CSO industry grows and continues to demonstrate an ability to
successfully implement large programs. Accordingly, the Company is likely to
continue to experience significant client concentration in future periods.
The Company is engaged by its clients to design and implement product
detailing programs for both prescription and OTC pharmaceutical products. Given
the customized nature of the Company's business, it utilizes a variety of
contract structures with its clients. Generally, contracts provide for a fee to
be paid based on the Company delivering a specified package of services.
Contracts typically include performance benchmarks, such as a minimum number of
sales representatives or a minimum number of calls. Under certain contracts, the
Company may be entitled to additional compensation based upon the success of the
program and/or subject to penalties for failing to meet stated performance
benchmarks. The Company typically receives a portion of its fee upon
commencement of the program to reflect the costs of implementing such program.
In addition, contracts typically provide that the Company is entitled to a fee
for each sales representative hired by the client during or at the conclusion of
a program.
The Company's contracts generally are for terms of six months to one year
and are subject to renewal upon expiration. These contracts are terminable by
the client for any reason upon 30 to 90 days notice. The Company's contracts
typically provide for termination payments by the client upon a termination
without cause. While the
18
cancellation of certain of the Company's contracts by a client without cause may
result in the imposition of penalties on such client, such penalties may not act
as an adequate deterrent to the termination of any such contracts. In addition,
there can be no assurance that such penalties will offset the lost revenue or
the costs incurred by the Company as a result of the termination of such
contracts. Despite such payments, the loss or termination of one or more
contracts could adversely affect the Company's future revenue and profitability.
Contracts may also be terminated for cause based on, among other things, the
Company's failure to meet stated performance benchmarks. In such event, the
Company may be obligated to pay penalties. To date, no programs have been
terminated for cause.
Generally, the Company recognizes revenue under the percentage of
completion method pursuant to which revenue is recorded as costs are incurred.
Revenue includes estimated earned fees or profits and is calculated based on the
relationship between direct program costs actually incurred, other than initial
direct program costs (as described below), and the estimated total of such
costs. Program costs consist of costs associated with the execution of a
detailing program. There are two significant categories of program costs:
personnel costs and initial direct program costs. Personnel costs, which
consititute the largest portion of program expenses, include all labor related
costs, such as salaries, bonuses, fringe benefits and payroll taxes for the
sales representatives and managers who are directly responsible for the
rendering of services in connection with a particular program. Initial direct
program costs are those costs associated with the recruitment and training of
the sales representatives in connection with a particular program, and are
deferred and recognized over the life of such program.
Estimated revenue and program costs are reviewed and revised periodically
throughout the life of each program. Any adjustment to a program's revenue
resulting from such revisions is recorded on a cumulative basis in the period in
which the revisions are made. In the period in which it is determined that a
loss will result from the performance of a program, or that the Company will
incur a penalty in connection with such program, the entire amount of the
estimated ultimate loss or penalty is charged against such program's revenue.
The Company manages program expenses by carefully establishing and monitoring
program budgets and timetables and by closely tracking staffing requirements for
programs in progress and anticipated programs. The status of each program in
progress is reviewed regularly by program managers and senior management to
ensure client satisfaction and to monitor performance relative to internal
financial and operating expectations. The number of sales representatives
assigned to a program varies according to the size, complexity, duration and
demands of the program.
General, selling and administrative expense include compensation expense,
bonus to majority shareholder, stock grant expense and other general, selling
and administrative expenses. Compensation expense consists primarily of salaries
and related fringe benefits for senior management and other administrative,
marketing, finance, information technology and human resources personnel who are
not directly involved with the execution of a particular program. Bonus to
majority shareholder reflects the cash bonus paid to the Company's majority
shareholder and Chairman of the Board, John P. Dugan. With the exception of the
final distribution declared immediately prior to the Offering, it is not
expected that the Company will pay bonuses to Mr. Dugan in any future periods.
See 'Dividend Policy.' Stock grant expense reflects the non-cash, non-recurring
charges related to the grant of _____ shares of Common Stock to the Company's
President and Chief Executive Officer, Charles T. Saldarini. As a result, prior
to the Offering, Mr. Saldarini owns 15.0% of the issued and outstanding Common
Stock of the Company. Finally, other general, selling and administrative
expenses include corporate overhead such as facilities costs, depreciation and
amortization expenses and professional services fees. The Company plans to
relocate to a new leased facility by the end of the second quarter of 1998 to
accommodate its growth. The Company anticipates increased rent and certain
one-time costs associated with such relocation. General, selling and
administrative expenses (excluding bonus to majority shareholder and stock grant
expense) as a percentage of revenue have generally declined as the Company has
spread its overhead expenses across its expanding revenue base. The Company
anticipates that general, selling and administrative expenses will continue to
decline as a percentage of revenue as its business grows, although such expenses
are expected to increase on an absolute basis.
Prior to 1995, no single program implemented by the Company required more
than 60 sales representatives. At the end of 1994, the Company entered into an
agreement for a program that required in excess of 150 sales representatives.
The Company believes that this represented the beginning of a trend in the
industry towards larger programs. In order to meet the demands of this program
and future programs, both in terms of increased number of sales representatives
and the additional administrative requirements attendant thereto, the Company
19
made a significant investment in hiring additional administrative and management
personnel for recruiting, hiring and improving its management information
systems. As a result of these additional expenditures, the Company recorded an
operating loss in 1995. However, the additional investment in infrastructure and
information technology has enabled the Company to continue to pursue larger
contracts, which has accounted for a substantial portion of the Company's growth
beginning in 1995. The Company will continue to make such investments in future
years to maintain its high standards of quality and operating efficiency.
The Company has been treated as an S Corporation for Federal income tax
purposes since January 1, 1991 and for New Jersey state income tax purposes
since January 1, 1994. Accordingly, the Company's income has been taxed directly
at the shareholder level rather than at the corporate level. Concurrent with the
completion of this Offering, the Company's S Corporation election will terminate
and the Company will be subject to corporate income taxation as a C Corporation.
For each of the periods in which the Company was an S Corporation, the statement
of income data in the 'Selected Financial Data' table reflects a provision for
income taxes on a pro forma basis as if the Company had been taxed as a C
Corporation during such periods.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain statement
of operations data as a percentage of revenue. The trends illustrated in this
table may not be indicative of future results.
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1995 1996 1997
----- ----- ----- -----
Revenue............................................................... 100.0% 100.0% 100.0% 100.0%
Program expenses...................................................... 64.7 83.9 81.4 78.9
----- ----- ----- -----
Gross profit.......................................................... 35.3 16.1 18.6 21.1
Compensation expense.................................................. 20.3 11.5 9.7 9.4
Bonus to majority shareholder......................................... 2.4 2.3 4.5 4.1
Stock grant expense................................................... 0.0 0.0 0.0 8.2
Other general, selling and administrative expenses.................... 10.0 6.3 5.0 5.0
----- ----- ----- -----
Total general, selling and administrative expenses.................... 32.7 20.1 19.2 26.7
----- ----- ----- -----
Operating income (loss)............................................... 2.6 (4.0) (0.6) (5.6)
Other income, net..................................................... 0.2 0.4 0.3 0.3
----- ----- ----- -----
Income (loss) before provision for taxes.............................. 2.8 (3.6) (0.3) (5.3)
Pro forma provision for (benefit from) income taxes................... 1.1 (0.6) 0.0 0.0
----- ----- ----- -----
Pro forma net income (loss)........................................... 1.7% (3.0)% (0.3)% (5.3)%
----- ----- ----- -----
----- ----- ----- -----
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenue. Revenue for 1997 was $54.5 million, an increase of 65.2% over
1996 revenue of $33.0 million. Revenue in 1997 was generated from 15 programs
for 12 clients while 1996 revenue was generated from 13 programs for eight
clients. Average program size increased to $3.6 in 1997 from $2.5 in 1996.
Approximately $46.9 million, or 85.9% of 1997 revenue, was derived from seven
clients; those seven clients generated $31.0 million, or approximately 93.8% of
1996 revenue.
Program expenses. Program expenses for 1997 were $43.1 million, an
increase of 60.1% over program expenses of $26.9 million for 1996. As a
percentage of revenue, program expenses decreased to 78.9% for 1997 from 81.4%
for 1996. This decrease was primarily attributable to the Company continuing to
realize efficiencies as a result of the investments in infrastructure and
process improvements which were implemented in 1995 and 1996.
Compensation expense. Compensation expense for 1997 was $5.1 million
compared to $3.2 million for 1996. This increase was due to an increase in the
number of management and administrative personnel in 1997 over the 1996 number
necessitated by the expansion of the Company's business. As a percentage of
revenue, compensation expense was 9.4% for 1997 compared to 9.7% for 1996.
Bonus to majority shareholder. Bonus to majority shareholder for 1997 was
$2.2 million compared to $1.5 million for 1996.
20
Stock grant expense. In the first quarter of 1997, the Company incurred
non-recurring, non-cash charges of $4.5 million related to stock issued to
Charles T. Saldarini, the Company's President and Chief Executive Officer.
Other general, selling and administrative expenses. Other general, selling
and administrative expenses were $2.8 million for 1997, an increase of 67.0%
over other general, selling and administrative expenses of $1.7 million for
1996. As a percentage of revenue, other general, selling and administrative
expenses were 5.0% for 1997 and 1996.
Operating loss. Loss from operations for 1997 was $3.1 million compared to
$212,000 for 1996. Before bonus to majority shareholder and stock grant expense,
operating income for 1997 was $3.6 million or 6.6% of revenue, compared to $1.3
million, or 3.9% of revenue, for 1996.
Other income, net. Other income, primarily net interest income, for 1997
was $155,000, an increase of 58.2% over net other income of $98,000 for 1996,
due to the greater availability of funds for investment.
Pro forma net loss. Pro forma net loss for 1997 was $2.9 million compared
to a pro forma net loss of $114,000 for 1996. Pro forma net loss for both
periods assumes the Company was taxed for Federal and state income tax purposes
as a C Corporation, with no tax benefits assumed for the net operating losses in
1997 and 1996.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenue. Revenue for 1996 was $33.0 million, an increase of 79.4% over
1995 revenue of $18.4 million. Revenue in 1996 was generated from 13 programs
for eight clients while 1995 revenue was generated from 10 programs for seven
clients. Average program size increased to $2.5 million in 1996 from $1.8
million in 1995. Substantially all of 1996 revenue, or 99.3%, was derived from
clients that accounted for $17.8 million, or 97.0%, of 1995 revenue.
Program expenses. Program expenses for 1996 were $26.9 million, an
increase of 74.3% over program expenses of $15.4 million for 1995. As a
percentage of revenue, however, program expenses decreased to 81.4% in 1996 from
83.9% in 1995. This decrease was primarily attributable to the Company beginning
to realize operating efficiencies as a result of the investments in
infrastructure and process improvement begun in 1995.
Compensation expense. Compensation expense in 1996 was $3.2 million
compared to $2.1 million in 1995. This increase was attributable to an increase
in the number of management and administrative personnel employed by the Company
in 1996 as compared to 1995 necessitated by the expansion of the Company's
business. As a percentage of revenue, compensation expense was 9.7% for 1996
compared to 11.5% for 1995.
Bonus to majority shareholder. Bonus to majority shareholder for 1996 was
$1.5 million compared to $425,000 for 1995.
Stock grant expense. There were no compensatory stock grants in either
period.
Other general, selling and administrative expenses. Other general, selling
and administrative expenses were $1.7 million in 1996 compared to $1.2 million
in 1995, an increase of 42.4%. As a percentage of revenue, other general,
selling and administrative expenses were 5.0% in 1996 compared to 6.3% in 1995.
Operating loss. Operating loss decreased to $212,000 in 1996 from $737,000
in 1995. Before bonus to majority shareholder, operating income in 1996 was $1.3
million compared to an operating loss of $312,000 in 1995.
Other income, net. Other income, primarily net interest income, was
$98,000 in 1996, an increase of 40.1% over other income of $70,000 in 1995, due
to the greater availability of funds for investment.
Pro forma net loss. Pro forma net loss for the year ended December 31,
1996 was $114,000 compared to $546,000 for the prior year. Pro forma net loss
for both periods assumes the Company was taxed for Federal and state income tax
purposes as a C Corporation, with no tax benefits assumed for the net operating
loss in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of funds has been cash flow from operations.
Contracts generally provide for advance payments which typically fund the
initial costs of a program. To date, the Company's cash flow has been sufficient
to provide funds for working capital and capital expenditures.
The Company has a $500,000 line of credit (the 'Credit Line') from a
commercial bank under which interest only is payable monthly on the outstanding
balance at a floating rate equal to 1% above the prime rate of
21
interest as published from time to time by The Wall Street Journal. In addition,
the Company has obtained a commitment from the bank for a $1 million line of
credit, the proceeds of which are to be used exclusively for capital
expenditures (the 'CAPEX Line'). The CAPEX Line would be for a term of nine
months and would bear interest payable monthly at a floating rate of interest
equal to 0.75% above the prime rate of interest. At the end of the nine months,
any outstanding balance is payable in 60 equal monthly installments of principal
and interest computed at the rate of 0.75% above the prime rate on the date of
conversion. The Credit Line and the CAPEX Line will be secured by a lien on all
of the assets of the Company and will be personally guaranteed by John P. Dugan,
the Company's majority shareholder and Chairman of the Board. The notes
evidencing the Credit Line and the CAPEX Line and the related security
agreements will contain covenants, representations and other provisions
customarily found in commercial loan documentation.
As of December 31, 1997, the Company had cash and cash equivalents of $5.8
million and working capital of $129,000. In addition, the Company paid a cash
bonus aggregating $2.2 million to its majority shareholder John P. Dugan in
1997. Immediately prior to this Offering, the Company anticipates that it will
distribute approximately $____ million to its existing shareholders. See
'Dividend Policy.'
For the year ended December 31, 1997, the Company generated $3.4 million of
net cash from operating activities as compared to $2.8 million of net cash
generated during the prior year. The increase in cash flow occurred despite the
loss generated from operations due to the positive effect of non-cash expenses
for depreciation and the stock grant to Charles T. Saldarini. In January 1997,
the Company issued shares of its Common Stock to its President and Chief
Executive Officer, Charles T. Saldarini. As a result, prior to the Offering, Mr.
Saldarini owns 15% of the outstanding shares of Common Stock. Such issuance
resulted in non-recurring, non-cash charges for the first quarter of 1997 in the
amount of $4.5 million.
For the years ended December 31, 1997 and 1996, net cash used in investing
activities was $94,000 and $641,000, respectively. The primary use of cash in
both years was for investment in computer equipment in connection with the
expansion of the Company's business and in connection with advances to Boomer &
Son, Inc., a corporation that prior to 1998 was wholly-owned by John P. Dugan,
the Company's Chairman of the Board. See 'Certain Transactions.'
Net cash provided by financing activities was $79,000 in 1997 as a result
of a $100,000 equipment loan provided by a commercial financial institution, net
of repayments. The Company expects to repay the balance of this loan in 1998.
There were no financing activities in 1996 or 1995.
The Company has budgeted approximately $1.2 million for capital
expenditures in 1998, to be funded through cash generated from operations and
the CAPEX Line. During 1997, the Company's capital expenditures were $290,000.
Where the Company bills clients for services before they have been
completed, billed amounts are recorded as billings in excess of costs, or
deferred revenue, and are recorded as income when earned. When services are
performed in advance of billing, the value of such services is recorded as
unbilled costs and accrued profits. As of December 31, 1997 and 1996, the
Company had $6.1 million and $3.9 million, respectively, of deferred revenue and
$5.0 million and $2.4 million, respectively, of unbilled costs and accrued
profits. Substantially all deferred and unbilled costs and accrued profits are
earned or billed, as the case may be, within 12 months of the end of the
respective period.
The Company believes that the net proceeds from the sale of the Common
Stock offered hereby, together with cash flows from operations and existing cash
balances will be sufficient to meet its working capital and capital expenditure
requirements for the foreseeable future.
QUARTERLY RESULTS
The Company's results of operations have been and are expected to be
subject to quarterly revenue fluctuations. Such fluctuations result from a
number of factors including, among other things, the timing of commencement,
completion or cancellation of major programs. In the future, revenue may
fluctuate as a result of such factors and a number of additional factors,
including delays or costs associated with acquisitions, government regulatory
initiatives and conditions in the healthcare industry generally. The Company
believes that because of such fluctuations, quarterly comparisons of its
financial results cannot be relied upon as an indication of future performance.
The following table sets forth unaudited quarterly operating results for
the eight quarters ended December 31, 1997. The Company believes that this
unaudited information has been prepared on the same basis
22
as the annual Financial Statements and includes all adjustments consisting only
of normal, recurring adjustments, necessary for a fair presentation of the
information for the quarters presented, when read in conjunction with the
Company's Financial Statements and notes thereto included elsewhere in this
Prospectus.
QUARTERLY STATEMENT OF OPERATIONS DATA:
QUARTER ENDED
------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1996 1996 1996 1997 1997 1997
--------- -------- ------------- ------------ --------- -------- -------------
(IN THOUSANDS)
Revenue........................ $ 5,370 $7,289 $ 9,351 $ 11,005 $10,775 $ 12,501 $14,703
Program expenses............... 4,316 5,963 7,539 9,068 8,612 10,053 11,651
--------- -------- ------ ------------ --------- -------- -------------
Gross profit................... 1,054 1,326 1,812 1,937 2,163 2,448 3,052
Compensation expense(1)........ 700 762 872 857 1,303 1,218 1,261
Bonus to majority
shareholder(2)............... 375 375 375 375 561 561 561
Stock grant expense(3)......... -- -- -- -- 4,470 -- --
Other general, selling and
administrative expenses...... 328 317 365 640 681 638 743
--------- -------- ------ ------------ --------- -------- -------------
Total general, selling and
administrative expenses...... 1,403 1,454 1,612 1,872 7,015 2,417 2,565
--------- -------- ------ ------------ --------- -------- -------------
Operating income (loss)........ (349) (128) 200 65 (4,852) 31 487
Other income................... -- 9 16 73 11 38 61
--------- -------- ------ ------------ --------- -------- -------------
Net income (loss).............. $ (349) $ (119) $ 216 $ 138 $(4,841) $ 69 $ 548
--------- -------- ------ ------------ --------- -------- -------------
--------- -------- ------ ------------ --------- -------- -------------
DECEMBER 31,
1997
------------
Revenue........................ $ 16,563
Program expenses............... 12,741
------------
Gross profit................... 3,822
Compensation expense(1)........ 1,339
Bonus to majority
shareholder(2)............... 560
Stock grant expense(3)......... --
Other general, selling and
administrative expenses...... 693
------------
Total general, selling and
administrative expenses...... 2,592
------------
Operating income (loss)........ 1,230
Other income................... 45
------------
Net income (loss).............. $ 1,275
------------
------------
- ------------------
(1) Compensation expense for 1997 includes bonus compensation of $237,000 paid
to Charles T. Saldarini, the Company's President, Chief Executive Officer
and a minority shareholder. It is expected that, in addition to his base
salary, Mr. Saldarini may receive cash bonuses in future periods as
determined by the Compensation Committee. See 'Management -- Executive
Compensation.'
(2) Historically, as an S Corporation, the Company has made annual bonus
payments to its majority shareholder based on its estimated profitability
and working capital requirements. With the exception of the distribution to
be declared immediately prior to the Offering, the Company does not expect
to pay such bonuses in future periods. See 'Dividend Policy.'
(3) On January 1, 1997, the Company issued shares of its Common Stock to Charles
T. Saldarini, its current President and Chief Executive Officer. As a
result, prior to the Offering, Mr. Saldarini owns 15.0% of the Common Stock
outstanding. For financial accounting purposes, a non-recurring, non-cash
compensation expense was charged in the first quarter of 1997. See
'Principal Shareholders,' 'Management,' 'Certain Transactions' and note 12
to the Company's Financial Statements.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, was issued in June 1997 and is effective for fiscal years
beginning after December 15, 1997. This pronouncement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The Company will adopt this
pronouncement in 1998 and does not expect its implementation will have a
material effect on the Company's Financial Statements as currently presented.
Statement of Financial Accounting Standards No. 131, Disclosures About
Segments of an Enterprise and Related Information, was also issued in June 1997
and is effective for fiscal periods beginning after December 15, 1997. This
pronouncement establishes the way in which publicly held business enterprises
report information about operating segments in annual financial statements and
interim reports to shareholders. As the Company operates in a single business
segment the implementation of this standard is not expected to significantly
impact the Company's Financial Statements as currently presented.
23
BUSINESS
INTRODUCTION
The Company is a leading provider of comprehensive customized sales
solutions on an outsourced basis to the United States pharmaceutical industry.
The Company believes it has achieved this leadership position based on its 10
years of industry experience and its relationships with many of the
pharmaceutical industry's largest companies. Since inception, the Company has
designed customized product detailing programs for approximately 25 clients,
including Pfizer, Inc., Astra Merck Inc., Glaxo Wellcome Inc. and Johnson &
Johnson, Inc. These programs have been designed to promote more than 70
different products, including such leading prescription medications as
Prilosec(Registered), Wellbutrin(Registered) and Cardura(Registered), as well as
a number of OTC products such as Bayer(Registered) Aspirin, Pepcid
AC(Registered) and Monistat 5(Registered), to hospitals, pharmacies and
physicians in approximately 20 different specialties. The Company's primary
objective is to enhance its leadership position in the growing CSO industry and
to become the premier supplier of comprehensive sales solutions to the
pharmaceutical industry and other segments of the healthcare market.
The Company is engaged by its clients on a contractual basis to design and
implement product detailing programs for both prescription and OTC
pharmaceutical products. Such programs typically include three phases: design,
execution and assessment. In the program design phase, the Company works with
the client to understand needs, define objectives, select targets and determine
appropriate staffing. Program execution involves recruiting, hiring, training
and managing a sales force, which performs detail calls promoting the particular
client's pharmaceutical products. Assessment, the last phase of the program,
involves measurement of sales force performance and program success relative to
the goals and objectives outlined in the program design phase.
The Company has demonstrated strong internal growth generated by securing
new business from leading pharmaceutical companies and renewing and expanding
programs with existing clients. The Company believes that it is one of the
largest CSOs operating in the United States measured both by revenue and total
number of sales representatives used in programs. Revenue and gross profit grew
at compound annual rates of 87.7% and 58.0% respectively, between 1994 and 1997.
The number of sales representatives (both full-time and part-time) employed by
the Company has increased from approximately 100 as of December 31, 1993 to
approximately 1,000 as of December 31, 1997. Over that same period, the
Company's mix between part-time and full-time representatives shifted from 100%
part-time to 45% part-time. The Company has also experienced a consistently high
renewal rate among its clients. For example, for 1997, approximately 86% of the
Company's revenue was generated from clients that had contributed to the
Company's 1996 revenue.
The Company believes that because of the benefits of outsourcing,
pharmaceutical companies have made a strategic decision to continue to outsource
a significant portion of their sales and marketing activities. The Company
believes that the trend toward the increased use of CSOs by pharmaceutical
companies will continue due to the following industry dynamics: (i)
pharmaceutical companies will continue to expand their product portfolios and as
a result will need to add sales force capacity, (ii) pharmaceutical companies
will continue to face margin pressures and will seek to maintain flexibility by
converting fixed costs to variable costs, and (iii) the availability of
qualified CSOs will provide an incentive to pharmaceutical companies to continue
to outsource this function.
The Company believes that it is well positioned to benefit from these
growth opportunities. Through its 10 years of providing service to the United
States pharmaceutical industry, the Company has demonstrated that it is a
high-quality, results-oriented provider of detailing services. In addition, the
Company maintains a highly qualified sales force as a result of a rigorous
recruiting process and training programs that are comparable to those of the
pharmaceutical companies. The Company believes that one of its biggest
competitive advantages is its ability to provide customized solutions to its
clients. Finally, as one of the largest CSOs, the Company has achieved the size
and demonstrated the ability to perform large detailing programs and execute
several programs simultaneously.
In order to leverage its competitive advantages, PDI's growth strategy
emphasizes: (i) enhancing its leadership position in the growing CSO market by
maintaining its historic focus on high-quality contract sales services and by
continuing to build and invest in the Company's core competencies and
operations; (ii) expanding both its relationship with existing clients and its
selling efforts to capture new clients; (iii) offering
24
additional promotional, marketing and educational services and further
developing its existing detailing services; (iv) entering new geographic
markets; and (v) investigating and pursuing appropriate acquisitions of
detailing or detailing-related companies.
PRODUCT DETAILING
Pharmaceutical companies incur substantial expenses in connection with
their sales and marketing activities. The Company estimates, based on industry
data, that in 1996 pharmaceutical companies in the United States expended
approximately $6.7 billion on promotional spending, including product detailing,
event spending, journal advertising, and, more recently, direct-to-consumer
advertising. The primary targets of this promotional activity are persons making
product selection decisions, including physicians and others legally authorized
to prescribe or dispense drug therapies. The Company estimates that, on average,
product detailing represents approximately 60% of a pharmaceutical company's
total promotional spending. According to Scott-Levin, pharmaceutical companies
in the United States spent approximately $4.5 billion on product detailing in
1996.
The Company believes that product detailing is a highly effective means of
influencing the prescribing patterns of the targeted prescribers and, therefore,
it is the most commonly employed strategy to promote pharmaceutical products.
Product detailing involves face-to-face meetings between a sales representative
and a targeted prescriber. The target of a product detail is usually a physician
identified because of his or her specialty or prescribing patterns. However,
other legally authorized prescribers -- such as nurse practitioners, physician
assistants or pharmacists -- may also be targets for detailing. Detailing
generally occurs in physician offices and hospitals, although conventions and
trade association meetings may also provide an appropriate forum. The sales
representative is required to possess a high level of product knowledge, as well
as other technical and therapeutic expertise. The interaction itself involves a
technical review of the product's legally authorized indications and usage, role
in disease treatment, mechanism of action, side effects, dosing, drug
interactions, cost and availability (i.e., the 'details'). The sales
representative and the targeted prescriber will also typically discuss the types
of patients best suited for the particular product and how and when such
patients will best benefit from the product's use. Competitive products and
their relative strengths and weaknesses in contrast to the product being
detailed may also be discussed.
Product detailing takes place in the context of a personal sales call
during which a sales representative typically will detail one to three products.
The amount of time devoted to each product detailed during a call depends upon
that product's detail position ('slot') within the call. A call may last as long
as eight to ten minutes or may be as short as one to two minutes, depending upon
a number of factors, principally the target prescriber's availability. Product
detailing typically takes place in selling cycles of four to eight weeks, during
which period the sales representative will attempt to call each targeted
prescriber in his or her geographic territory at least once. A single program
may have three to 12 cycles. The repeat interactions between the sales
representative and the targeted prescriber are intended to establish trust
between the sales representative and the targeted prescriber, influence the
prescribing pattern of the physician, obtain market share for new products,
maintain market share for existing products and build barriers to entry against
competing products.
THE CSO INDUSTRY
OVERVIEW
The CSO industry provides outsourced physician detailing programs to
pharmaceutical, medical device and diagnostic companies. CSOs have evolved from
providing detailing support for OTC products into a full-service industry
handling some of the leading ethical pharmaceutical compounds. Since the early
1990's, the pharmaceutical industry in the United States has increasingly used
CSOs to provide the detailing service required to introduce new products,
reintroduce older products, supplement existing sales efforts, raise promotional
barriers to entry for competitors and demonstrate the incremental sales impact
of detailing a particular product. While there is little available data
regarding the CSO industry, the Company believes that there are approximately
eight CSOs currently operating in the United States. The Company also believes
that only 17 of the 50 largest pharmaceutical companies in the United States,
measured by healthcare revenue, currently use CSOs. Finally, the Company
estimates that contract revenues for the CSO industry in the United States
increased from approximately $80 million in 1995 to $185 million in 1996 and
$325 million in 1997.
25
The CSO industry emerged in the 1980's in the United Kingdom, where
regulatory and cost containment pressure, the Company believes, led
pharmaceutical companies to search for a more efficient method of promoting new
and existing products. Pharmaceutical companies discovered that CSOs were an
effective tool for shifting high fixed costs to variable costs by enabling them
to outsource their sales and marketing activities as a supplement to their own
internal sales efforts. The Company believes that similar regulatory and cost
containment dynamics have, and will continue, to shape the demand for contract
sales services in the United States. In response to cost and margin pressures
brought on by managed care in the early 1990's, the pharmaceutical companies in
the United States reduced the size of their internal sales forces. According to
Med Ad News, a leading medical advertising and communications trade publication,
since 1994 pharmaceutical companies have expanded their internal sales forces.
The Company estimates that at the end of 1997, the largest 50 pharmaceutical
companies in the United States employed approximately 50,000 full-time sales
representatives, a 19% increase since 1994. During this period the number of
sales representatives utilized by CSOs in the United States has also increased
from approximately 1,100 as of December 31, 1994 to approximately 6,300 at the
end of 1997. At the end of 1994, 1995, 1996 and 1997 the Company estimates that
the number of sales representatives utilized by the CSO industry in the United
States represented approximately 2.6%, 4.3%, 7.6% and 11.2%, respectively, of
the combined number of CSO and in-house pharmaceutical sales representatives
utilized by such pharmaceutical companies in those years. In addition, during
this period, the Company believes that the portion of full-time sales
representatives employed or used by the CSO industry has increased.
TRENDS AFFECTING GROWTH
The Company believes that because of the benefits of outsourcing,
pharmaceutical companies have made a strategic decision to continue to outsource
a significant portion of their sales and marketing activities. The Company
believes that the trend toward the increased use of CSOs by pharmaceutical
companies will continue because of the following industry dynamics:
Expanding product portfolios. The Company believes that the ability of
pharmaceutical companies to remain competitive and profitable depends upon their
ability to introduce new drugs. According to Pharmaceutical Research and
Manufacturers of America, an industry trade group ('PhRMA'), the pharmaceutical
industry spent $18.9 billion on research and development in 1997, an increase of
11.8% over 1996 research and development expenditure of $16.9 billion. In
addition, in 1996, the United States Food and Drug Administration (the 'FDA')
approved for sale 131 new drugs and drug indications. In 1994, 1995, 1996 and
1997, the FDA approved 22, 28, 53 and 39 new molecular entities, respectively,
as a result of its expedited review and approval procedures. As a result, the
pharmaceutical industry will require additional sales force capacity that, the
Company believes, will increase the demand for CSO services.
Margin pressures. The potential for implementation of national healthcare
reform in the early 1990s and the growing influence of managed care and
healthcare cost containment initiatives throughout the 1990s has created
pressure to reduce the rate of price increases for pharmaceutical products.
According to IMS America, a healthcare marketing information company ('IMS'),
prices for prescription products rose, on average, only 1.6% in 1996, and 1.9%
in 1995. These pressures have forced the pharmaceutical industry to focus on
increasing unit growth while reducing fixed operating costs. CSOs provide the
support necessary to increase unit growth while converting high fixed costs to
variable costs.
Increased use of drug therapies. The amount spent on prescription drugs
and the number of prescriptions filled has been steadily increasing. According
to IMS, in 1996 over $85.3 billion was spent on prescription drugs compared to
$77.4 billion in 1995. In addition, according to IMS, approximately 2.4 billion
prescriptions were filled in 1996 compared to 2.3 billion prescriptions in 1995.
The Company believes that this trend toward increased use of drug therapies will
continue as it is attributable to a number of factors that are not expected to
change over the near term, including the expedited FDA review process, an aging
population, an expanded portfolio of pharmaceutical products, the efficacy of
drug therapy and the lower cost of drug therapy relative to hospitalization and
medical procedures. As managed care programs have proliferated, an increasing
number of consumers benefit from low co-pay arrangements with respect to
prescription drugs. As a result, consumers consider prescription medication a
less expensive, relatively non-invasive alternative for treating illness and are
26
increasingly likely to comply with their drug therapies. As the use of drug
therapies increases, so does the importance of product detailing.
Importance of flexibility. Pharmaceutical companies are outsourcing a
variety of their activities in order to maximize flexibility and reduce fixed
costs. The desire to maximize flexibility and reduce fixed costs is a major
factor in the increasing utilization of CSOs. Flexibility and adaptability in
sales and marketing are crucial for balancing cost containment pressures against
pricing pressure and expanded research and development expenditures. CSOs
enhance flexibility by maximizing the ability of pharmaceutical companies to
deploy their human resources more efficiently. Similarly, by using CSOs, it is
possible to convert the high fixed cost of building, training, deploying and
maintaining a sales force (i.e., salaries and other employee-related costs) into
a variable cost.
Availability of qualified CSOs; ability to demonstrate success. The
Company believes that the pharmaceutical industry will continue to utilize CSOs
as the CSO industry further demonstrates its ability to quickly mobilize trained
professional sales forces capable of supplementing the work and replicating the
results of the internal sales forces of the pharmaceutical companies. In
addition, the recent development of sophisticated prescription tracking systems
and advances in information technology have enabled pharmaceutical companies to
measure the impact of product detailing on sales and to assess the efficacy of
both internal and third party sales forces in ways that were not possible a few
years ago. Consequently, the Company believes that CSOs are becoming an
increasingly important resource advantage in the overall marketing and sales
efforts of pharmaceutical companies.
Need to maximize return on investment. The pharmaceutical industry is
characterized by intense competition, due, in part, to an increasing number of
products. In addition, as a result of managed care, government initiatives to
reduce healthcare costs and market forces, the pharmaceutical industry is
experiencing lower margins and increased pressure to contain price increases. To
maximize and deliver acceptable returns on investment (mostly in the form of
research and development expenditures), pharmaceutical companies must ensure
that their products are fully supported by sales and marketing efforts during
their entire life cycles. As the effective lives of drugs are threatened by
patent expirations and competition from new compounds, pharmaceutical companies
employ various strategies, including outsourcing sales efforts, to enable
products to achieve their maximum sales potential.
In addition, the Company believes that other sectors of the healthcare
industry will contribute to the growth of CSOs. For example, the United States
biotechnology industry has grown rapidly in the last decade and is developing
significant numbers of new therapies that are now entering clinical trials.
Generally, these companies do not have the internal resources to market and sell
their products. Accordingly, the Company believes that, as biotechnology
products receive the necessary regulatory approvals, this industry will be
looking to outsource various functions, particularly sales and marketing.
COMPANY'S COMPETITIVE ADVANTAGES
The Company believes that a significant market opportunity exists for CSOs
that can provide high-quality sales solutions across a variety of sales,
marketing and therapeutic applications and that have demonstrated a willingness
and ability to respond to the particular needs of clients.
Reputation for quality. Virtually every program designed by the Company
has met or exceeded the goals established at the beginning of the program. The
Company believes that these results have earned it a reputation in the industry
as a high-quality, results-oriented provider of detailing services. The
Company's success is illustrated by its long-standing relationship with such
'blue chip' clients as Pfizer, Astra Merck, Glaxo Wellcome and Johnson &
Johnson.
High-quality sales force. The Company's overall commitment to quality is
evidenced by its recruiting, hiring and training processes. The Company believes
that its recruiting and hiring process is one of the most comprehensive,
challenging, rigorous, selective and professional processes in the industry and
that its training programs are comparable to those designed by pharmaceutical
companies to train their internal sales forces. The Company offers its sales
representatives a compensation package that it believes is competitive with
compensation packages that the major pharmaceutical companies offer to their own
sales forces. Many of the Company's competitors use independent contractors as
sales representatives who are compensated based on the
27
number of calls or on an hourly basis. All of the Company's personnel, including
sales representatives, managers and recruiting coordinators, are employees
rather than independent contractors. The Company believes that its treatment of
its sales representatives as employees and its compensation system are important
factors in its ability to attract and retain talented sales personnel. The
Company has found that a base salary and incentive bonus compensation package is
best suited for a results-oriented program and for achieving program objectives,
while a per call or hourly compensation structure emphasizes the number of
details rather than the quality of the detailing effort.
Ability to design customized solutions. The Company believes that its
ability to innovate and to provide a dedicated, vertically integrated sales
force custom-designed to meet the specific needs of a client is a principal
competitive advantage. Such customization includes the size, profile (i.e.,
part-time versus full-time), experience, training, geographic deployment and
allocation of the sales force against the targeted prescribers and the number of
calls for each targeted prescriber, the particular compensation package for the
sales force and field and database management support, such as in-house
territory mapping, physician satisfaction surveys, call reporting services and
regulatory compliance services. In particular, the Company believes that its
ability to provide full-time, part-time or a combination of full-time and
part-time sales representatives, constitutes a competitive advantage. Finally,
the Company's management and data information systems enable it to provide its
clients with information and services most of its competitors cannot, and thus
reduces the time and expense its clients would otherwise have to devote to a
product detailing program.
Size and infrastructure. The Company believes that its size,
organizational structure and overall resources enable it to implement multiple
programs simultaneously and to implement large programs that smaller CSOs may be
precluded from executing. The Company has made substantial investments in all of
its personnel and management information systems in order to be able to
successfully implement a variety of large and small programs simultaneously.
GROWTH STRATEGY
The Company's objective is to enhance its leadership position in the
growing CSO industry and to become the premier supplier of comprehensive
customized sales solutions to the pharmaceutical industry and other segments of
the healthcare market. The following are the principal elements of the Company's
growth strategy:
Enhance leadership position in growing CSO industry. The Company believes
that its leadership position in the growing CSO industry is a result of its
competitive advantages. The Company is committed to maintaining its position as
a leader and innovator in the growing CSO industry by further developing its
core competencies -- recruiting, hiring and training, sales management,
information and data management, human resources and financial management. As
the CSO market expands, the Company is well positioned to sustain its growth.
Strengthen relationships with existing clients. Leveraging the past
success of its programs, the Company will actively seek to expand and renew
existing programs with existing clients and seek to capture new programs from
its existing clients by identifying new opportunities with such clients.
Expand client base. The Company believes that a significant opportunity
exists among pharmaceutical companies that do not currently utilize CSOs. The
Company has provided services to 11 of the 50 largest pharmaceutical companies
in the United States, measured by healthcare revenues. The Company believes that
33 of such companies do not currently use any CSOs. The Company will seek to
expand its client base by targeting pharmaceutical companies that are not
currently clients and which have attractive product portfolios. In addition,
future initiatives may focus on other sectors of the healthcare market that
could benefit from the Company's services, such as biotechnology companies and
medical device manufacturers.
Provide additional services. As a leading provider of physician detailing
programs, the Company believes that it has an established platform from which to
offer complementary promotional and marketing services to its clients. The
Company will leverage its core competencies to further develop its specialized
sales forces to meet the needs of its clients.
28
Enter new geographic markets. The Company will look for opportunities to
provide promotional services in markets outside the United States. This
expansion may be in the form of strategic joint ventures or acquisitions or by
building a presence using the Company's own internal resources.
Pursue strategic acquisitions. The Company intends to explore strategic
acquisitions in complementary and existing business areas. The Company believes
that by acquiring other CSOs and/or sales and marketing companies it may be able
to accelerate the development of a broader array of services or expand existing
services more efficiently and rapidly than developing these service capabilities
internally. In addition, the Company may pursue acquisitions in order to enter
new markets, where it currently has no presence.
PROGRAM DESCRIPTION
The Company's customized detailing programs typically contain three basic
elements: design, execution and assessment. In the program design phase, the
Company undertakes to understand the needs and objectives of the client,
identifies, defines and ranks the proposed target audience and determines
appropriate staffing. In the program execution phase, the Company recruits,
hires, trains and manages the sales force. Finally, in the program assessment
phase, the Company measures the performance of the sales force and the success
of the program relative to the goals and objectives of the program. While each
program relies on the same basic core competencies, programs are custom-designed
to provide significant strategic advantages to the client by taking into account
the geographic, marketing and scheduling needs of the client, the product itself
and the profile of the target audience.
PROGRAM DESIGN
Prior to entering into a contract and usually in response to a request for
a proposal, the Company sets forth the details of a program in a comprehensive
proposal. The purpose of the proposal is to create an overall approach to the
program, which helps the Company establish a 'plan of action' for launch and
subsequent implementation. Among other things, the Company will use the proposal
to clarify the goals of the program and to analyze any data supplied by the
client in connection with its request. For example, as part of its pre-program
assessment, the Company will analyze the target physician list provided by the
client, which can include the names of 100,000 or more physicians, for the
purpose of targeting the most productive physicians in the most efficient
manner. The Company ranks the targeted prescribers based on statistical data
such as number of prescriptions written, prior coverage for the product and for
the general pharmaceutical class to which such product belongs, as well as the
product and class history among the proposed audience. The proposal incorporates
the Company's recommendations regarding territory mapping and the allocation of
sales representatives and sales managers within such territories. This results
in more efficient use of sales representatives, better target audience
penetration, reduced sales force turnover and, ultimately, maximum impact on
sales. This process is also instrumental in structuring compensatory
arrangements and payment terms.
Staffing requirements. In the program design phase, the Company identifies
the assets to be committed to the program (i.e., divisional managers, district
managers, field managers and sales representatives), the profile of the sales
representatives (i.e., part-time and full-time), training requirements, the
deployment of the sales force in terms of geography, the number of details per
call and the number of times each target will be called over a defined period of
time ('call-back frequency'). In determining staffing requirements, the Company
takes into account a number of considerations, including the preferences of the
client, the size of the individual territories, the number of targeted
physicians in a given territory, the call-back frequency and the cost
effectiveness of a full-time or part-time representative. The Company believes
that its ability to provide both full-time and part-time sales representatives
is important to providing its clients with a customized sales force able to meet
the goals of the sales program in a cost effective manner.
Deployment strategy. In the program design phase, the Company performs
'territory mapping'-- i.e., a plan to deploy the sales force over the geographic
region in which the targeted prescribers are located. The Company analyzes the
physician target list for the purpose of grouping the targets according to
selected criteria. The Company believes that its mapping and territory
deployment analysis gives it a competitive advantage over other CSOs in pricing
contracts and ensuring the success of the program.
29
Return on investment models. The goal of any program is to maximize
results from the promotional dollars spent by the client. Accordingly, in
connection with its pre-program assessment and analysis, the Company develops a
Return on Investment ('ROI') model for the program. The model can be used to
establish goals for the program and enables clients to clearly quantify the
value of the services provided by the Company. The ROI model has the ability to
project program effectiveness in incremental net sales, and may ultimately be a
key factor in demonstrating why a program should be renewed or expanded. The ROI
model is based on a confidential set of data and is considered proprietary by
the Company.
PROGRAM EXECUTION
The Company believes that its ability to recruit quickly on a national
basis, the quality of its training programs, the experience of its management
and its data and management information systems provide clients with a highly
effective sales force designed to meet a program's needs.
Recruiting and hiring. Recruiting and hiring the best qualified sales
personnel quickly is vital to ensure positive program results and minimize
turnover. The Company maintains a disciplined and efficient recruiting process
that is managed by a National Manager of Recruiting overseeing a staff of 10,
including five regional Recruiting Managers. This structure facilitates
recruiting on a region by region basis, thus saving time and money.
The Company has developed a multi-step recruiting and hiring process that
it believes is comprehensive, rigorous, selective and professional. The Company
maintains a database of resumes of qualified, potential sales representatives.
The Company has also developed a relationship with a national recruiting firm in
the healthcare field and maintains an extensive referral system. Placing
advertisements in local publications through the services of a single source
provides cost and process control over the Company's recruitment efforts. The
recruiting and hiring process includes preliminary screening procedures,
background checks where required by the client, reference checks, drug testing
and a rigorous interview process during which candidates are required to sit for
multiple interviews with different sales managers. Typically, one to three
percent of the initial applicants screened in connection with a program are
hired. The result is an experienced, highly-qualified and motivated sales force.
All of the Company's field sales personnel, including sales
representatives, managers and recruiting coordinators, are employees rather than
independent contractors. In addition, the Company offers its sales
representatives a compensation package that it believes is competitive with
compensation packages offered by the major pharmaceutical companies. The
compensation package offered by the Company includes a base salary and
performance-based incentives that relate to the specific goals of the program,
as well as fringe benefits, including a car allowance and, for full-time sales
representatives, health insurance coverage. The Company believes that its
treatment of its sales representatives as employees and its compensation system
are important factors in its ability to attract and retain talented sales
personnel. The Company has found that a base salary and incentive bonus
compensation package is best suited for a results-oriented program and for
achieving program objectives, while a per call or hourly compensation structure
emphasizes the number of details rather than the quality of the detailing
effort. In addition, treating its sales representatives as employees enhances
the Company's ability to direct and manage the daily activities of its field
force and integrate with its clients' sales teams. It also allows the Company to
provide career advancement opportunities -- a powerful motivational tool.
Training. The Company's Training and Development Department consists of a
National Training and Development Manager, a Director of Sales, Training and
Development and six dedicated Training Managers. In connection with each
program, the Company undertakes the training of the district managers and the
sales representatives with respect to the products being detailed. The training
programs are designed jointly by the Company and the client and are comparable
to the training programs employed by the client for its own internal sales
force. The client will either participate with the Company in the training, or
train the Company's managers who will then implement the training program. Each
sales representative is required to complete one to two weeks of home study and
attend a three day to three week training seminar. Typically, training involves
written material as well as seminars and other presentations which all sales
representatives are required to attend. All training programs dedicate time to
workshops and interactive role playing. The Company's sales representatives use
the same manuals and materials and must pass the same product knowledge tests as
the client's in-house sales
30
representatives. In-field training continues at the local level as determined by
the National Sales Manager of the program.
Sales management. The Company's sales programs are supervised by two Vice
Presidents who report to the Chief Operating Officer. Each Vice President
manages four to six programs and is responsible for the overall execution of
each program, including the performance of the entire sales force
(representatives and managers), monitoring the product sales generated and
client satisfaction. Each program has a dedicated National Sales Manager, field
managers (Division and District Managers) and sales representatives. A National
Sales Manager may also have several Regional Managers reporting to him. Programs
may also have one or more dedicated program trainers. Division Managers
(full-time) and District Managers (part-time) are responsible for the direct
supervision of the field sales representatives. A Division Manager normally
manages ten to twelve representatives, while a District Manager usually manages
six to eight.
PROGRAM ASSESSMENT
Data and information management and reporting. The Company's database
management group and call reporting center monitor each program. The operations
area handles hundreds of thousands of detail call reports per year, producing
all related reports for the sales teams, management and the client. This
comprehensive operations support frees up client and management resources that
would otherwise be burdened. Each sales representative is required to file call
activity reports on a daily basis. The reports reflect the sales
representative's activities since his last report including the number of calls,
the number of details as well as a confirmation signature from the target
prescriber. To date, the Company's call reporting system has been a paper based
system. However, the Company has recently instituted a program whereby certain
sales representatives will be given palm top computers. This program will
facilitate the submission of call activity reports and reduce the time required
to produce management reports.
The Company has developed several management tools to maximize the
effectiveness of its sales forces. These management tools can be used to track
the overall effectiveness of the program as well as the performance of
individual sales representatives. One such tool is the Integrated Sales and
Activity Report ('ISA'), which allows the sales representatives to tailor
strategies and to evaluate the effectiveness of their sales efforts. The ISA is
generally produced bi-monthly and compares the current period to the prior
period. The report can be customized to reflect progress made toward a specific
goal or target for purposes of evaluating a program.
Physician satisfaction surveys. In connection with each program, the
Company develops a program-specific physician satisfaction survey ('PSS'). The
PSS is periodically sent out to selected members of the target audience,
depending on the size of the program. The PSS solicits comments on a variety of
topics relating to the call, including the professionalism of the sales
representative and current prescribing patterns. Finally, the survey asks the
physician to confirm his signature. These surveys are an indispensable tool,
both for determining the effectiveness of the program designed by the Company
and assessing the performance of the Company's sales force.
Product sample tracking. Federal laws and regulations require that
detailed records be kept concerning the distribution of pharmaceutical product
samples. These record keeping requirements are the responsibility of the
manufacturer. The Company has developed a sample tracking system that it
believes complies with such laws and regulations. As part of its services, the
Company performs this function on the client's behalf.
Quantitative analysis. At the conclusion of each program the Company
prepares a case study for the client that documents the results of the program
relative to the goals established at the outset of the program as well as the
ROI.
SPECIALIZED DETAILING FORCES AND SERVICES
In addition to the traditional, custom-designed, client-dedicated,
long-term (one year or longer) detailing sales force program, the Company has
developed specialized detailing forces and services, described below, to address
varying needs of the pharmaceutical industry. While these services do not
currently represent a material portion of the Company's business, they are
considered important to the Company's future growth.
31
Strike Force. Strike Force is a sales force designed for fast roll-out and
short time frames (six months or less). Strike Force is generally used in
situations where the client requires short-term detailing support and faster
penetration of the target audience. Examples of applications for Strike Force
include seasonal brands, new product launches, conversion from prescription to
OTC and gaps in product coverage. For example, Strike Force was used by one
client to launch a new formulation of its children's cough and cold product. The
main objective was to increase pediatrician awareness and recommendations during
the cough and cold season.
Share Force. Share Force is a sales force designed to detail up to three
products from the same or different manufacturers to the same target audience.
The Share Force program offers clients flexibility in terms of pricing
(depending on the slotting) and program length, as well as access to
pre-targeted high volume prescribers. The Company assembles a sales team
targeted at a fixed list of physicians within a specialty that it believes to
represent a high volume prescribing audience. These physicians are selected and
profiled through the use of prescription data to ensure that they represent the
most productive physicians (in terms of prescriptions written) within multiple
therapeutic categories. Fees are determined by the detail position, or priority,
given to a particular product (known as 'slotting'). The Company has commenced
marketing Share Force but has not yet deployed any such force.
Staffing Services. The Company acts as a recruiting and placement agency,
using its skills in recruiting and hiring to help a client build its own
internal sales force. The Company performs all screening, checking, testing and
interviewing functions and then refers the most qualified candidates to the
client for final approval. The Company typically receives a fee for each sales
representative hired by the client.
Sales Force Build. Sales Force Build is a variation on Staffing Services.
The Company assembles a customized, client-dedicated sales force, designed at
the outset of a program with the specific intent that the client will hire the
sales representatives either at the conclusion of the program or at a
pre-determined time. In addition to the program fees, the Company receives a
placement fee for those sales representatives hired by the client.
Convention Plus. The Company provides custom-designed teams for trade show
and convention management support. Instead of staffing conventions with its own
sales representatives, which results in lost sales calls, the client engages the
Company to manage every aspect of the convention including registration, set-up,
staffing and reporting. The team can be built exclusively for one client or
shared by several clients.
CLIENTS AND CONTRACTS
CLIENTS
The Company believes that its relationships with its clients, which include
many of the largest pharmaceutical companies in the United States, are among its
most important strategic assets and competitive advantages. The Company has
enjoyed long-standing relationships with many of these clients, and a high
percentage of its clients either renew their programs or enter into new
contracts with the Company for new programs. The Company believes that the
quality and stability of its client base promotes the consistency of its core
business and that the scope and complexity of its clients' marketing needs
present opportunities for expansion into new areas. There can be no assurance,
however, that the Company's clients will continue to renew or expand their
relationship with the Company.
During 1997, the Company executed 15 detailing programs for 12 clients. In
1997, Pfizer, Glaxo Wellcome, Astra Merck and Novartis accounted for 25%, 22%,
19% and 10%, respectively, of the Company's revenue. Collectively, these four
clients accounted for approximately 76% of the Company's revenue. The loss of
any one of the foregoing clients could have a material adverse impact on the
Company's business. In 1996, Pfizer, Astra Merck, Novartis and Johnson & Johnson
each accounted for 10% or more of the Company's revenue. Collectively, these
clients accounted for approximately 84% of the Company's revenue. In 1995, one
program accounted for more than 42% of the Company's revenue and three other
programs each accounted for 10% or more of the Company's revenue. Collectively,
these four programs represented approximately 84% of the Company's revenue. In
1994, two programs each accounted for more than 30% of the Company's revenue and
another program accounted for 10% or more of the Company's revenue. Together,
the three programs represented approximately 83% of the Company's revenue.
32
CONTRACTS
Given the customized nature of the Company's business, it utilizes a
variety of contract structures with its clients. Generally, contracts provide
for a fee to be paid based on the Company delivering a specified package of
services. Contracts typically include performance benchmarks, such as a minimum
number of sales representatives or a minimum number of calls. In certain
instances, the Company may be entitled to additional compensation based upon the
success of the program and/or subject to penalties for failing to meet stated
performance benchmarks. The Company typically receives a portion of its fee upon
commencement of the program to reflect the costs of implementing such program.
In addition, contracts typically provide that the Company is entitled to a fee
for each sales representative hired by the client during or at the conclusion of
a program.
The Company's contracts generally are for terms of six months to one year
and are subject to renewal upon expiration. However, the Company's contracts are
terminable by the client for any reason upon 30 to 90 days notice. The Company's
contracts typically provide for termination payments by the client upon a
termination without cause. While the cancellation of certain of the Company's
contracts by a client without cause may result in the imposition of penalties on
such client, such penalties may not act as an adequate deterrent to the
termination of any such contracts. In addition, there can be no assurance that
such penalties will offset the lost revenue or the costs incurred by the Company
as a result of such termination. The loss or termination of a large contract or
the loss of multiple contracts could adversely affect the Company's future
revenue and profitability. Contracts may also be terminated for cause if the
Company fails to meet stated performance benchmarks. To date, no programs have
been terminated for cause.
The Company's contracts typically contain cross-indemnification provisions
between the Company and its client. Typically, the client will indemnify the
Company against product liability and related claims arising from the sale of
the product and the Company indemnifies the clients with respect to the errors
and omissions of the Company's sales representatives in the course of their
detailing activities. To date, the Company has not asserted, nor has there been
asserted against the Company, any claim for indemnification pursuant to a
contract.
MARKETING AND BUSINESS DEVELOPMENT
Most of the Company's revenue is derived from renewals and extensions of
existing programs and new programs with existing clients. The Company derives
new business from responses to 'requests for proposals' from pharmaceutical
companies that the Company believes are the result of its promotional and
advertising efforts. Recently, the Company has increasingly engaged in proactive
efforts to generate more business from new and prospective clients. The Company
has implemented a sales process that is designed to leverage its results-
oriented image through case studies, references, ROI models and comprehensive
proposals. The Company also has implemented an enhanced marketing and new
business development process for the purpose of improving its ability to secure
more contracts both within the pharmaceutical industry and in other healthcare
markets. This new business development process relies on the use of a dedicated
sales and marketing team.
The Company seeks to promote awareness of its capabilities to senior level
executives, product managers and sales managers of both its existing and
potential clients so that when situations arise where additional product
detailing services are needed, those prospects are already aware of the Company
and its image as a high-quality, results-oriented firm. In order to build and
sustain awareness of its services, a combination of trade journal advertising,
mailings, and a public relations campaign are utilized. The Company advertises
in publications such as Pharmaceutical Executive and Med Ad News. The marketing
department maintains a proprietary mailing list of over 3,000 pharmaceutical
industry personnel including CEOs, vice presidents and marketing, sales and
product managers. In addition to its ongoing monthly mailings, the Company also
conducts specialized mailings in response to contacts received from specific
companies or about specific developments within the industry. The public
relations campaign also involves interviews in trade journals and other
publications and speaking engagements for the Company's executives.
33
COMPETITION
The primary competitive factor affecting contract sales services is the
ability to quickly hire, train, deploy and manage qualified sales
representatives to implement simultaneously several large product detailing
programs. The Company also competes with other CSOs on the basis of such factors
as its reputation, quality of its services, experience of management,
performance record, customer satisfaction, ability to respond to specific client
needs, integration skills and price. The Company believes it competes favorably
with respect to each of these factors.
The Company primarily competes with in-house sales and marketing
departments of pharmaceutical companies, other CSOs and other third party
providers to the pharmaceutical industry, many of which possess substantially
greater capital, personnel and other resources than the Company. In addition to
the in-house sales forces of pharmaceutical companies, the Company's current
major competitors include CSOs such as Innovex Limited, a subsidiary of
Quintiles Transnational Corp., and the various sales and marketing affiliates of
Snyder Communications, Inc. As a result of competitive pressures, various sales
and marketing organizations providing services to the pharmaceutical industry
are consolidating and are becoming targets of global organizations. This trend
is likely to produce increased competition among CSOs for both clients and
acquisition candidates and increased competitive pressures on smaller providers.
If the trend in the pharmaceutical industry towards consolidation continues,
pharmaceutical companies may have excess in-house sales force capacity and may,
as a result, reduce or eliminate their use of CSOs. There are relatively few
barriers to entry into the CSO industry and there can be no assurance that, as
the CSO industry continues to evolve, additional competitors with greater
resources than the Company will not enter the industry or that the Company's
customers will not choose to conduct more of their sales services internally,
with other CSOs or with organizations that can provide a broader range of sales
and marketing services. Although the Company intends to monitor industry trends
and respond accordingly, there can be no assurance that the Company will be able
to anticipate and successfully respond to such trends. Increased competition may
lead to price and other forms of competition that may have a material adverse
effect on the Company's business and results of operations.
GOVERNMENT AND INDUSTRY REGULATION
The healthcare industry is subject to extensive regulation. Various laws,
regulations and guidelines promulgated by government, industry and professional
bodies affect, among other matters, the provision, licensing, labeling,
marketing, promotion, sale and reimbursement of healthcare services and
products, including pharmaceutical products. It is also possible that additional
or amended laws, regulations or guidelines could be adopted in the future.
The pharmaceutical industry is subject to extensive federal regulation and
oversight by the FDA. For instance, the Federal Food, Drug and Cosmetic Act, as
supplemented by various other statutes, regulates, among other matters, the
approval, labeling, advertising, promotion, sale and distribution of drugs,
including the practice of providing product samples to physicians. Under this
statute, the FDA asserts its authority to regulate all promotional activities
involving prescription drugs. In addition, the sale or distribution of
pharmaceuticals may also be subject to the Federal Trade Commission Act
('FTCA'). Finally, the Prescription Drug Marketing Act ('PDMA') regulates the
ability of pharmaceutical companies to provide physicians with free samples of
their products. Essentially, the PDMA requires extensive record keeping and
labeling of such samples for tracing purposes. Accordingly, the business of the
Company and its clients, to the extent such business involves promotion and
marketing of pharmaceutical products, are subject to the extensive regulation
governing the pharmaceutical industry, and there can be no assurance that the
Company will not be subject to increased regulatory scrutiny in the future.
In addition, some of the services that the Company may provide in the
future are affected by various guidelines promulgated by industry and
professional organizations. For example, certain ethical guidelines promulgated
by the American Medical Association ('AMA') govern, among other matters, the
receipt by physicians of gifts from health-related entities. These guidelines
govern the honoraria, and other items of pecuniary value, which AMA member
physicians may receive, directly or indirectly, from pharmaceutical companies.
Similar guidelines and policies have been adopted by other professional and
industry organizations, such as PhRMA.
34
The healthcare industry is subject to federal and state laws pertaining to
healthcare fraud and abuse. In particular, certain federal and state laws
prohibit manufacturers, suppliers and providers from offering or giving or
receiving kickbacks or other remuneration in connection with ordering or
recommending purchase or rental of healthcare items and services. The federal
anti-kickback statute provides both civil and criminal penalties for, among
other things, offering or paying any remuneration to induce someone to refer
patients to, or to purchase, lease, or order (or arrange for or recommend the
purchase, lease, or order of), any item or service for which payment may be made
by Medicare or certain federally-funded state healthcare programs (e.g.,
Medicaid). This statute also prohibits soliciting or receiving any remuneration
in exchange for engaging in any of these activities. The prohibition applies
whether the remuneration is provided directly or indirectly, overtly or
covertly, in cash or in kind. Violations of the law can result in numerous
sanctions, including criminal fines, imprisonment, and exclusion from
participation in the Medicare and Medicaid programs.
Several states also have referral, fee splitting and other similar laws
that may restrict the payment or receipt of remuneration in connection with the
purchase or rental of medical equipment and supplies. State laws vary in scope
and have been infrequently interpreted by courts and regulatory agencies, but
may apply to all healthcare items or services, regardless of whether Medicare or
Medicaid funds are involved.
The failure of the Company or its clients to comply with, or any change in,
the applicable regulatory requirements or professional organization or industry
guidelines could, among other things, limit or prohibit the Company or its
clients from conducting certain business activities, subject the Company or its
clients to adverse publicity, increase the costs of regulatory compliance or
subject the Company or its clients to monetary fines or other penalties. Any
such actions could have a material adverse affect on the Company.
LIABILITY AND INSURANCE
Liability Insurance. Participants in the healthcare industry are subject
to lawsuits alleging malpractice, product liability and other legal theories,
many of which can involve large claims and significant legal costs. As a
provider of product detailing services to the pharmaceutical industry, the
Company is subject to the risk of being named as a party in such lawsuits. As a
result of its contract sales services, the Company believes that it may become
involved in litigation regarding the products distributed by its personnel, with
the attendant risks of significant legal costs, substantial damage awards and
adverse publicity. Even if such claims ultimately prove to be without merit,
defending against them can result in adverse publicity, diversion of
management's time and attention and substantial expenses, which could have a
material adverse effect on the Company.
The Company maintains general liability insurance, which it believes to be
adequate in amount and coverage for the current size and scope of its operations
although there can be no assurance of that fact. However, the policies
maintained by the Company do not insure it against the errors and omissions of
its employees. The Company may seek increased insurance coverage as well as
insurance for the errors and omissions of its employees in connection with
expanding its service offerings, although the Company has not experienced
difficulty in obtaining insurance coverage in the past, there can be no
assurance that the Company will obtain increased or additional insurance
coverage on acceptable terms or at all. In addition, although the Company's
clients may indemnify the Company for the client's negligent conduct, such
indemnification may not be adequate in light of all of the potential litigation
risks facing the Company. In addition, the Company is often required to
indemnify its clients in the event of the Company's negligence. The Company,
therefore, could be held responsible for losses incurred in connection with the
performance of its services or otherwise and could incur substantial costs in
connection with legal proceedings associated with the performance of its
services or the pharmaceutical products with respect to which it provides
services.
Employment Practice Liability Insurance. Because the nature of the
Company's business is heavily dependent on its sales force, the Company has
obtained employment practice liability insurance, which insures the Company
against claims made by employees or former employees relating to their
employment, i.e., wrongful termination, sexual harassment, etc. To date, the
Company has not made any claims under this policy. There can be no assurance,
however, that the coverage maintained by the Company will be sufficient to cover
all future claims or will continue to be available in adequate amounts or at a
reasonable cost.
35
LEGAL PROCEEDINGS
From time to time the Company is involved in litigation incidental to its
business. The Company is not currently a party to any pending litigation which,
if decided adversely to the Company, would have a material adverse effect on the
business, financial condition or results of operations of the Company and the
Company is not aware of any material threatened litigation.
FACILITIES AND EMPLOYEES
The Company's corporate headquarters are currently located in Mahwah, New
Jersey, in approximately 11,000 square feet of space occupied under a lease
which expires on April 29, 1998. The Company has entered into a new lease for
approximately 27,000 square feet in Upper Saddle River, New Jersey. The new
lease is to take effect on May 1, 1998 and is for a term of 66 months with an
option to extend for an additional five years. In addition, the Company has a
right of first offer with respect to additional space as it becomes available.
Total base rent payable during the term of the new lease is approximately $3.0
million. Additional rent is payable with respect to increases in certain
operating costs over base year amounts.
As of December 31, 1997, the Company had approximately 1,165 employees. The
Company has approximately 70 people working at its headquarters in Mahwah, New
Jersey, 995 sales representatives, and 100 field sales managers. The Company is
not party to a collective bargaining agreement with a labor union and considers
its relations with its employees to be good.
36
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and principal position, of
the Directors, Director Nominees, executive officers and key employees of the
Company:
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------------
John P. Dugan(1)(2)................. 62 Chairman(ii) no exercise of the Boardunderwriter’s option to purchase up to 1,114,286 additional shares of Directorscommon stock and/or common warrants to purchase up to 1,114,286 shares of common stock.Directortable do not take into account further dilution to investors in this offering that could occur upon the exercise of Strategic Planning
Charles T. Saldarini................ 34 President, Chief Executive Officeroutstanding options and Director
Bernard C. Boyle.................... 53 Chief Financial Officer, Executive Vice President, Secretarywarrants, including the pre-funded warrants and Treasurer
Steven K. Budd...................... 41 Chief Operating Officercommon warrants offered in this offering, having a per share exercise price less than the public offering price per share in this offering.Executive Vice President
Robert Wynne........................ 47 Vice President -- Account Sales
Cherie Aldana....................... 50 Vice President -- Human Resources
John M. Pietruski ( )............... 64 Director Nominee
Jan Martens Vecsi( )................ 53 Director Nominee
Gerald J. Mossinghoff( )............ 62 Director Nominee
- ------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
John P. Dugan is the founder and Chairman of the Board of Directors of the
Company and Director of Strategic Planning. He served as its President from
inception until January 1995 and as its Chief Executive Officer from inception
until November 1997. In 1972, Mr. Dugan founded Dugan Communications, a medical
advertising agency that later became known as Dugan Farley Communications
Associates Inc. ('DFC') and served as its President until 1990. In 1990 Mr.
Dugan acquired sole control of the Company, which was then a wholly-owned
subsidiary of DFC. Mr. Dugan was a founder and served as the President of the
Medical Advertising Agency Association from 1983 to 1984. Mr. Dugan also served
on the Board of Directors of the Pharmaceutical Advertising Council (now known
as the Healthcare Marketing Communications Council, Inc.) and was its President
from 1985 to 1986. Mr. Dugan received an M.B.A. from Boston University in 1964.
Charles T. Saldarini is the President and Chief Executive Officer of the
Company and a Director. Mr. Saldarini became President in January 1995 and Chief
Executive Officer in November 1997. Prior to January 1995 Mr. Saldarini was
Chief Operating Officer of the Company. Mr. Saldarini joined the Company in 1987
as a sales manager. Mr. Saldarini received an A.B. in political science from
Syracuse University in 1985.
Bernard C. Boyle has served as the Company's Executive Vice President and
Chief Financial Officer since March 1997 when he joined the Company. In 1990,
Mr. Boyle founded BCB Awareness, Inc., a firm that provided management advisory
services to the Company, among others, and served as its President until March
1997. During that period he was also a partner in Boyle & Palazzolo, Partners,
an accounting firm that also provided services to the Company. From 1982 through
1990 he served as Controller and then Chief Financial Officer and Treasurer of
William Douglas McAdams, Inc., an advertising agency. From 1966 through 1971,
Mr. Boyle was employed by the national accounting firm of Coopers & Lybrand
L.L.P. as supervisor/senior audit staff. Mr. Boyle received a B.B.A. in
Accounting from Manhattan College in 1965 and an M.B.A. in Corporate Finance
from New York University in 1972.
Steven K. Budd served the Company as a consultant from December 1995 to
April 1996 when he joined as Vice President -- Account Group Sales. He became
Executive Vice-President in July 1997 and Chief Operating Officer in January
1998. Prior to joining the Company, from April through December 1995, Mr. Budd
was an independent consultant. From January 1994 through April 1995, Mr. Budd
was employed by Innovex, Inc., a competing CSO, as a Director of New Business
Development. From 1989 through December 1993, Mr. Budd was employed by
Professional Detailing Network ('PDN'), a competing CSO, as a Vice President
with responsibility for building sales teams and developing marketing
strategies. Mr. Budd received a B.A. in History and Education from Susquehanna
University in 1978.
37
Robert Wynne joined the Company in August 1990 as a Regional Sales Manager
based in Chicago, Illinois. He currently serves as Vice President -- Account
Sales, a position he has held since December 1994. From 1984 through 1990, Mr.
Wynne was employed by Carnation Nutritional Products Co. and the McNeil Consumer
Products Company, Professional Division, an affiliate of Johnson & Johnson, as a
sales representative and trainer. Mr. Wynne received a B.S. in Secondary
Education from the University of Minnesota in 1972 and an M.S. in Management of
Human Resources from National College of Education in 1985.
Cherie Aldana joined the Company in 1988. Initially, she was employed as
Accounting Manager responsible for financial, payroll, benefits and personnel.
In 1990 she was promoted to Director of Human Resources and in January 1996 to
Vice President -- Human Resources. Ms. Aldana received a B.S. in Accounting from
York College in 1972 and has received certification as a Professional of Human
Resources from the Human Resources Certification Institute, a division of the
Society of Human Resource Management.
Gerald J. Mossinghoff has been nominated to become a director of the
Company immediately upon consummation of this Offering. Mr. Mossinghoff is a
former Assistant Secretary of Commerce and Commissioner of Patents and
Trademarks of the Department of Commerce (1981 to 1985) and served as President
of Pharmaceutical Research and Manufacturers of America from 1985 to 1996. Since
1997 he has been Senior Counsel to the law firm of Oblon, Spivak, McClelland,
Maier and Newstadt of Arlington, Virginia. Mr. Mossinghoff has been a visiting
professor of Intellectual Property Law at the George Washington University Law
School since 1997 and Adjunct Professor of Law at George Mason University School
of Law since 1997. Mr. Mossinghoff served as United States Ambassador to the
Diplomatic Conference on the Revision of the Paris Convention from 1982 to 1985
and as Chairman of the General Assembly of the United Nations World Intellectual
Property Organization from 1983 to 1985. He is also a former Deputy General
Counsel of the National Aeronautics and Space Administration (1976 to 1981). Mr.
Mossinghoff received an Electrical Engineering degree from St. Louis University
in 1957 and a Juris Doctor degree with Honors from the George Washington
University Law School in 1961. He is a member of the Order of the Coif and is a
Fellow in the National Academy of Public Administration. He is the recipient of
many honors, including NASA's Distinguished Service Medal and the Secretary of
Commerce Award for Distinguished Public Service.
John M. Pietruski has been nominated to become a director of the Company
immediately upon consummation of this Offering. Since 1990 Mr. Pietruski has
been the Chairman of the Board of Texas Biotechnology Corp., a pharmaceutical
research and development company. He is a retired Chairman of the Board and
Chief Executive Officer of Sterling Drug Inc. With Sterling Drug Inc. from 1977
to his retirement in 1988, he also held the positions of Executive Vice
President, President and Chief Operating Officer. Mr. Pietruski is a member of
the Boards of Directors of Hershey Foods Corporation, GPU, Inc., Lincoln
National Corporation and McKesson Corporation. Mr. Pietruski graduated Phi Beta
Kappa with a B.S. in Business Administration with honors from Rutgers University
in 1954 and currently serves as a regent of Concordia College.
Jan Martens Vecsi has been nominated to become a director of the Company
immediately upon consummation of this Offering. Ms. Vecsi is the sister-in-law
of John P. Dugan, the Chairman of the Board of the Company. Ms. Vecsi was
employed by Citibank, N.A. from 1967 through 1996 when she retired. Starting in
1986 she served as the Senior Human Resources Officer and Vice President of the
Citibank Private Bank. Ms. Vecsi received a B.A. in Psychology and Elementary
Education from Immaculata College in 1965.
The Board of Directors of the Company is divided into three classes as
nearly equal in number as possible. Each year the shareholders will elect the
members of one of the three classes to a three-year term of office. Ms. Vecsi
serves in the class whose term expires in 1999; Messrs. Saldarini and Pietruski
serve in the class whose term expires in 2000; and Messrs. Dugan and Mossinghoff
serve in the class whose term expires in 2001.
The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee reviews the scope and results of the audit and other
services provided by the Company's independent accountants and internal controls
of the Company. The Compensation Committee is responsible for the approval of
compensation arrangements for officers of the Company and the review of the
Company's compensation plans and policies.
38
EXECUTIVE COMPENSATION
Summary Compensation. The following table presents certain information
concerning compensation paid or accrued for services rendered to the Company in
all capacities during the year ended December 31, 1997, for the Chief Executive
Officer and the other four executive officers of the Company whose aggregate
annual base salary and bonus for 1997 exceeded $100,000 (collectively, the
'Named Executive Officers').
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SHARESApril 2017 and excludes:● Shares of our common stock that may be issued upon exercise of pre-funded warrants, if any, and common warrants issued in this offering; ● 68,000 shares of our common stock issuable upon the settlement of restricted stock units, or RSUs, issued to our employees and directors; ● 84,963 shares of common stock issuable upon settlement of stock appreciation rights, or SARs, issued to certain executive officers and members of senior management, at a weighted average exercise price of $42.91 per share, of which 84,963 shares of common stock are vested and exercisable; ● 507,529 shares of common stock issuable upon exercise of outstanding options under the 2014 Plan, of which 184,647 are subject to stockholder approval with respect to their grant and of an increase in the number of shares in the 2014 Plan; and ● 955,000 shares of common stock issuable upon the exercise of warrants outstanding at a weighted average exercise price of $4.69 per share. ● -60- ------------------------------------ COMMON
OTHER STOCK
ANNUAL UNDERLYING ALL OTHER
NAMEBENEFICIAL OWNERS AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- ---------------------------------------------- -------- -------- ------------ ------------ ------------
John P. Dugan
ChairmanMANAGEMENTBoard and Former Chief
Executive Officer(1)........................ $125,000 -- $ 26,441 -- $2,243,000(1)
Charles T. Saldarini
President and Chief Executive Officer....... $120,000 $237,000(2) $ 9,724 -- $4,050,000(3)
Steven K. Budd
Chief Operating Officer and
Executive Vice President.................... $112,613 $ 48,000 $ 8,396 --
Bernard C. Boyle
Chief Financial Officer,
Executive Vice President,
Secretary and Treasurer..................... $105,000(4) $ 18,000 $ 1,155 --
Robert Wynne
Vice President--Account Sales............... $102,000 $ 18,000 $ 1,155 -- --
- ------------------
(1) Mr. Dugan was the Chief Executive Officer of the Company until November
1997. All other compensation represents the bonus payment to Mr. Dugan as
the majority shareholder of the Company. Such compensation was based on the
Company's estimated profitability and working capital requirements. As the
Company will no longer qualify as an S Corporation after the Offering, itpersons listed below is
not expected that Mr. Dugan will receive bonus payments after the Offering
in future periods.
(2) Reflects a bonus paid to Mr. Saldarini, President and Chief Executive
Officer and a minority shareholder of the Company. In addition to the final
distribution in connection with the termination of the Company's S
Corporation status, in the future Mr. Saldarini, as President and Chief
Executive Officer, may receive cash bonuses as determined by the
Compensation Committee.
(3) Represents the value of Common Stock issued to Mr. Saldarini in January 1997
as reported by the Company for financial accounting purposes.
(4) Mr. Boyle joined the Company in March 1997. $15,000 of his salary represents
amounts paid to Mr. Boyle's consulting company prior to the commencement of
his employment.
Option Grants. The following table sets forth certain information regarding
options granted by the Company to the Named Executive Officers during 1997.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-------------------------------------------------------- POTENTIAL
PERCENT OF REALIZABLE VALUE
TOTAL AT ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK
SHARES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION ------------------
NAME GRANTED (#) YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ---------------------------------------- ------------- ---------- ----------- ---------- ------- -------
John P. Dugan........................... -- -- -- -- -- --
Charles T. Saldarini.................... -- -- -- -- -- --
Steven K. Budd.......................... 58.3% $ 12/31/05 $ $
Bernard C. Boyle........................ 41.7% $ 12/31/05 $ $
Robert Wynne............................ -- -- -- -- -- --
39
Option Exercises and Year-End Option Values. The following table provides
information with respect to options exercised by the Named Executive Officers
during 1997 and the number and value of unexercised options held by the Named
Executive Officers as of December 31, 1997.
AGGREGATED OPTION EXERCISE IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT FISCAL MONEY OPTIONS AT FISCAL
YEAR-END (#) YEAR-END ($)(1)
SHARES ACQUIRED VALUE REALIZED --------------------------------- ----------------------------
NAME ON EXERCISE (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- --------------- --------------- --------------- --------------- ----------- -------------
John P. Dugan............. -- -- -- -- -- --
Charles T. Saldarini...... -- -- -- -- -- --
Steven K. Budd............ -- --
Bernard C. Boyle.......... -- --
Robert Wynne.............. -- -- -- -- -- --
- ------------------------
(1) For the purposes of this calculation, value is based upon the difference
between the exercise price and $_____ per share, the fair market value of
the Common Stock as determined by the Board of Directors.
EMPLOYMENT CONTRACTS
In January 1998, the Company entered into an employment agreement with John
P. Dugan providing for his employment as Chairman of the Board and Director of
Strategic Planning. The Agreement provides for an annual salary of $125,000 and
no cash bonuses and for participation in all executive benefit plans.
In _________ 199__, the Company entered into an employment agreement with
Charles T. Saldarini providing for his employment, effective upon the closing of
this Offering, as President and Chief Executive Officer for a term expiring on
___________ _____, 200_. The Agreement provides for an annual base salary of
$_________ and for participation in all executive benefit plans. The agreement
also provides, among other things, that, if his employment is terminated without
cause (as defined in the agreement), the Company will pay him an amount equal to
the salary which would have been payable to him over the unexpired term of his
employment agreement.
The Company has also entered into employment agreements with each of
Messrs. Boyle and Budd, providing for their respective employment, effective
upon the closing of this Offering, as Chief Financial Officer and Chief
Operating Officer, for terms expiring on ______ __, 200_. The agreements provide
for an annual base salary of $_____ for Mr. Boyle and $__________ for Mr. Budd
and for their participation in all executive benefit plans. Each agreement also
provides, among other things, that, if employment is terminated by the Company
without cause (as defined), the Company will pay the employee an amount equal to
the salary which would have been payable over the unexpired term of the
employment agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Prior to this Offering, the Company has had no separate Compensation
Committee or other committee performing equivalent functions. As a result,
compensation matters were performed by the Board of Directors or senior
management. None of the Directors expected to serve on the Compensation
Committee is an employee of the Company, and neither the Chief Executive Officer
nor any other executive officer will serve on the Compensation Committee. No
Director or executive officer of the company is a Director or executive officer
of any other corporation that has a director or executive officer who is also a
Director of the Company.
1998 STOCK OPTION PLAN
In __________, 1998, in order to attract and retain persons necessary for
the success of the Company, the Company adopted its 1998 Stock Option Plan (the
'Plan') covering up to __________ of its Common Shares, pursuant to which
officers, directors and key employees of the Company and consultants to the
Company are eligible to receive incentive and/or non-qualified stock options.
The Plan, which expires in October 2008, will be administered by the Board of
Directors or a committee designated by the Board of Directors. The selection of
participants, allotment of shares, determination of price and other conditions
relating to the purchase of options will be determined by the Board of
Directors, or a committee thereof, in its sole discretion. Incentive stock
options granted under the Plan are exercisable for a period of up to 10 years
from the date of grant at an exercise price which is not less than the fair
market value of the Common Stock on the date of the grant, except that the term
of an incentive stock option granted under the Plan to a shareholder owning more
than 10% of the
40
outstanding Common Stock may not exceed five years and its exercise price may
not be less than 110% of the fair market value of the Common Stock on the date
of the grant. At February 1, 1998 options for an aggregate of ________ shares,
exercisable at a price of $______ per share during a ten-year period had been
granted to Bernard C. Boyle and Steven K. Budd, and were outstanding under the
Plan. These options are exercisable for one-third of the shares covered thereby
as of the earlier of June 30, 1998 or the completion of this Offering and for an
additional one-third of the shares covered thereby each year thereafter. No
other options have been granted or exercised under the Plan. However,
immediately after the consummation of the Offering, the Company intends to grant
approximately __________ incentive stock options to approximately __________
employees. Such options will, generally, vest over three years and will be
exercisable at the public offering price. Options for ________ shares will be
granted to each of the Company's three outside directors upon their taking
office immediately following the closing of the Offering.
COMPENSATION OF DIRECTORS
Each non-employee member of the Board of Directors will receive an annual
director's fee of $_____ plus $______ for each meeting attended and
reimbursement for travel costs and other out-of-pocket expenses incurred in
attending each Directors' meeting. In addition, committee members will receive
$__________ for each committee meeting attended. Additionally, pursuant to the
1998 Stock Option Plan each non-employee Director upon election to the Board
will receive options to purchase _____ shares of Common Stock exercisable at the
fair market value on the date of grant and additionally will receive automatic
grants of options to purchase ______ shares of Common Stock at the beginning of
each calendar year. See '-- 1998 Stock Option Plan.'
401(K) PLAN
The Company maintains a retirement plan (the '401(k) Plan') intended to
qualify under Sections 401(a) and 401(k) of the Code. The 401(k) Plan is a
defined contribution plan that covers employees of the Company at least 21 years
of age, who have been employed by the Company for at least one year. Employees
may contribute up to 15% of their annual wages (subject to an annual limit
prescribed by the Code) as pre-tax salary deferral contributions. Effective
January 1, 1997, the Company committed to make mandatory contributions to the
401(k) Plan to match employee contributions up to a maximum of 2% of each
participating employee's annual wages. The Company's contribution to the 401(k)
Plan for 1997 was approximately $172,000.
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION
The DGCL authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their shareholders for monetary
damages for breach of directors' fiduciary duty of care. The Company's
Certificate of Incorporation limits the liability of directors of the Company to
the Company or its shareholders to the fullest extent permitted by Delaware law.
See 'Description of Capital Stock -- Certain Provisions of the Company's
Certificate of Incorporation and Bylaws.'
The Company's Certificate of Incorporation provides mandatory
indemnification rights to any officer or Director of the Company who, by reason
of the fact that he or she is an officer or Director of the Company, is involved
in a legal proceeding of any nature. Such indemnification rights include
reimbursement for expenses incurred by such officer or Director in advance of
the final disposition of such proceeding in accordance with the applicable
provisions of the DGCL. Insofar as indemnification for liabilities under the
Securities Act may be provided to officers and Directors or persons controlling
the Company, the Company has been informed that in the opinion of the Securities
and Exchange Commission (the 'Commission'), such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
There is no pending litigation or proceeding involving a Director, officer,
employee or agent of the Company in which indemnification by the Company will be
required or permitted. The Company is not aware of any threatened litigation or
proceeding that may result in a claim for such indemnification.
41
CERTAIN TRANSACTIONS
During 1997, Boomer & Son, Inc. ('B&S'), a corporation which prior to 1998
was wholly-owned by John P. Dugan, the Company's Chairman of the Board, provided
advertisement production and placement services to the Company. Mr. Dugan is not
actively involved in B&S's business. The Company purchased advertising in the
amount of $1.6 million through B&S at stated advertising rates set by the
periodicals and publications in which advertisements were placed. B&S received a
commission from the publications for its placement services. In addition, in
1997 B&S repaid approximately $196,000 of advances made to it by the Company in
1996. At December 31, 1997 the net amount due from B&S was approximately
$27,000. See note 8 to the Company's Financial Statements. The Company
anticipates that this amount will be repaid prior to the Offering.
At the end of 1997 Mr. Dugan transferred his interest in B&S to his son and
daughter-in-law. The Company and B&S propose to enter into an agreement pursuant
to which B&S will continue to place advertising on behalf of the Company with
various media. As of February 1, 1998 the total amount of advertising placed by
B&S on behalf of the Company in 1998 was approximately $180,000. The Company
believes that the amounts paid to B&S were no less favorable than would be
available in an arms-length negotiated transaction with an unaffiliated entity.
See note 8 to the Company's Financial Statements.
The Company and Charles T. Saldarini entered into an employment agreement
as of January 1, 1997, which provided for, among other things, an outright grant
of shares of Common Stock to Mr. Saldarini. As a result of such grant, Mr.
Saldarini owns 15.0% of the outstanding shares of Common Stock immediately prior
to the Offering. In connection with such grant, the Company incurred a non-cash,
non-recurring expense of $4.5 million for financial reporting purposes.
The Company has been subject to taxation under Subchapter S of the Code
since January 1, 1991 and under the corresponding provisions of the tax laws of
the State of New Jersey since January 1, 1994. As a result, the net income of
the Company, for Federal and New Jersey state income tax purposes, has been
reported by and taxable directly to the Company's shareholders rather than to
the Company. In 1996, the Company paid approximately $1.5 million to Mr. Dugan,
its Chief Executive Officer and sole shareholder as bonus compensation. In 1997,
the Company paid an aggregate of approximately $2.48 million of bonus
compensation to its shareholder-employees, Mr. Dugan and Charles T. Saldarini,
its President. The Company's S Corporation tax status will terminate upon the
consummation of this Offering. Immediately prior to this Offering, the Company
will make a final distribution (consisting of an aggregate of approximately
$______ million in cash payments) to its shareholders. This payment represents
the shareholders' equity in the Company prior to the conversion date.
42
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information known to the Company
regarding the beneficial ownership of Common Stock as of December 31, 1997 and
as adjusted to reflect the sale of the shares offered hereby, by (i) each person
known to the Company to be the beneficial owner of more than 5% of its
outstanding shares of Common Stock, (ii) each Director and Director Nominee of
the Company, (iii) each Named Executive Officer and (iv) all Directors, Director
Nominees and Named Executive Officers of the Company as a group. Except as
otherwise indicated, the persons or entities listed below have sole voting and
investment power with respect to all shares of Common Stock owned by them.
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(2)
NUMBER OF SHARES ---------------------------------
NAME AND ADDRESS(1) BENEFICIALLY OWNED(2) BEFORE OFFERING AFTER OFFERING
- ------------------------------------------------------------ --------------------- --------------- --------------
John P. Dugan............................................... 85.0%
Charles T. Saldarini........................................ 15.0%
Steven K. Budd.............................................. (3) * *
Bernard C. Boyle............................................ (4) * *
John M. Pietruski........................................... (5) -- *
Jan Martens Vecsi........................................... (5) -- *
Gerald J. Mossinghoff....................................... (5) -- *
All Officers, Directors and Director Nominees as a group (9
persons).................................................. (6) 100.0%
--------------------- --------------- --------------
- ------------------
* Less than 1%.
(1) The addresses of Messrs. Dugan and Saldarini are c/o Interpace Diagnostics Group, Inc., Morris Corporate Center One, 300 Interpace Parkway, Building A, Parsippany, New Jersey 07054. On December 28, 2016, the Company 599 MacArthur Boulevard, Mahwah, New Jersey
07430-2326.
(2) Pursuanteffected a one-for-ten reverse split of the issued and outstanding shares of its common stock in order to achieve the requisite increase in the market price of its common stock to be in compliance with the NASDAQ minimum bid price requirement. At the effective time of the reverse split, every 10 shares of common stock issued and outstanding were automatically combined into one share of issued and outstanding common stock, without any change in the par value per share. The share totals below reflect that split. The percentage of beneficial ownership is based on 8,788,604 shares of common stock outstanding on June 1, 2017.Name of Beneficial Owner Number of Shares Beneficially Owned (1) Percent of Shares Outstanding Executive officers and directors: Jack E. Stover (2) 87,871 (6) * James Early (3) 10,827 (7) * Stephen J. Sullivan (4) 24,115 (8) * Joseph Keegan (5) 7,590 (9) * All directors and executive officers as a group (4 persons) 130,403 (6)(7)(8)(9) 1.5 % 5% stockholders: John P. Dugan 486,987 (10) 5.5 % -61- Commission,SEC and include voting or investment power with respect to shares of stock. This information does not necessarily indicate beneficial ownership for any other purpose. In computing the Company's Common Stocknumber of shares beneficially owned by a person and the percentage ownership of that person, we include shares underlying common stock derivatives, such as options, RSUs and SARs that a person has the right to acquire within 60 days of the date hereof pursuant to the exercise of stock options are deemed to be
outstanding for the purpose of computing the percentage ownership of such person butJune 1, 2017. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person.
(3) Represents ____(2) Currently serves as our President and Chief Executive Officer and as a member of the Board. (3) Currently serves as our Chief Financial Officer, Secretary and Treasurer. (4) Currently serves as Chairman of the Board. (5) Member of the Board. (6) Includes 6,666 RSUs that would vest immediately upon retirement and 69,346 shares issuable pursuant to options exercisable within 60 days of June 1, 2017. (7) Includes 10,827 shares issuable pursuant to options exercisable within 60 days of June 1, 2017. (8) Includes 6,666 RSUs that would vest immediately upon retirement and 4,333 shares issuable pursuant to options exercisable within 60 days of June 1, 2017. (9) Includes 3,333 shares issuable pursuant to options exercisable within 60 days of June 1, 2017. (10) Includes 62,500 shares of our common stock held by Mr. Dugan’s spouse, which may be deemed to be beneficially owned by Mr. Dugan. -62- -63- -64- -65- hereof.
(4) Represents ____ shares issuable pursuantof this prospectus, there is no Class II director. We intend to options exercisable within 60 daysappoint an additional independent director to our Board and to the Audit Committee, who will be a Class II director, prior to the sooner of the date hereof.
(5) Represents ____ shares issuable pursuant to options exercisable within 60 daysCompany’s annual meeting of stockholders or October 2, 2017.date hereof.
(6) Includes ____ shares issuable pursuant to options exercisable within 60 daysoutstanding voting stock from obtaining control of the Board until the second annual stockholders meeting following the date hereof.
Allthe acquirer obtains the controlling stock interest. The classified Board provision could discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of Interpace and could increase the likelihood that incumbent directors will retain their positions. Our amended certificate of incorporation provides that directors may be removed only with cause by the affirmative vote of the holders of at least two-thirds of the shares of Common Stock set forth in the above table are subject
to agreements prohibiting the sale, assignment or transfer for 180 days from the
date of this Prospectus without the prior written consent of Morgan Stanley &
Co. Incorporated. See 'Underwriting.'
43
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 30,000,000 shares of
Common Stock, par value of $.01 per share ('Common Stock'), and 5,000,000 shares
of Preferred Stock, par value of $.01 per share ('Preferred Stock'). Upon
completion of the Offering, there will be ________ shares of Common Stock
outstanding and no shares of Preferred Stock outstanding. As of December 31,
1997, there were outstanding ________ shares of Common Stock held of record by
two stockholders. In addition, at December 31, 1997, there were outstanding
options to purchase ______ shares of Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to the
preferences that may be applicable to any outstanding Preferred Stock, the
holders of Common Stock are entitled to receive dividends as and when declared
by the Board of Directors out of funds legally available for dividends, and, in
the event of liquidation, dissolution or winding up of the Company, to share
ratably in all assets remaining after the payment of liabilities. The Common
Stock has no preemptive, conversion or other subscription rights. All
outstanding shares of Common Stock are fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized to issue the undesignated Preferred
Stock in one or more series, to determine the powers, preferences and rights,
and the qualifications, limitations or restrictions, granted to or imposed upon
any wholly unissued series of undesignated Preferred Stock, and to fix the
number of shares constituting any series and the designation of such series,
without any further vote or action by the shareholders. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company and may adversely affect the voting and other
rights of the holders of Common Stock.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
The Company's Certificate of Incorporation limits the liability of
directors of the Company to the fullest extent permitted under Section 102(b)(7)
of the DGCL. To this end, no director of the Company will be liable to the
Company or to its shareholders for monetary damages for breach of fiduciary duty
as a director, except for liability for (i) any breach of the director's duty of
loyalty to the Company or its shareholders, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of the law,
(iii) any willful or negligent payment of an unlawful dividend, stock purchase,
or redemption or (iv) any transaction from which the director derived an
improper personal benefit.
The Certificate of Incorporation provides that the Board of Directors
consist of three classes of directors serving for staggered three-year terms. As
a result, one-third of the Company's Board of Directors will be elected each
year. In accordance with the DGCL, directors serving on classified boards of
directors may only be removed from office for cause. The Certificate of
Incorporation provides that shareholders may take such action only by the
affirmative vote of at least 66 2/3% of the voting stock outstanding.
The Company's Bylaws provide that only the Board of Directors may call a
special meeting of shareholders and that shareholders must follow an advance
notification procedure for certain shareholder nominations of candidates and for
certain other shareholder business to be conducted at the annual meeting. These
provisions could, under certain circumstances, operate to delay, defer or
prevent a change in control of the Company.
These provisions could delay or frustrate the removal of incumbent
directors or a change in control of the Company. The provisions also could
discourage, impede or prevent a merger, tender offer or proxy contest, even if
such event would be favorable to the interests of shareholders.
SECTION 203 OF THE DGCL
As a corporation organized under the laws of the State of Delaware, the
Company is subject to Section 203 of the DGCL which restricts certain business
combinations between the Company and an 'interested stockholder' (in general, a
shareholder owning 15% or more of the Company's outstanding voting stock) or its
44
affiliates or associates for a period of three years following the date on which
the shareholder becomes an 'interested stockholder.' The restrictions do not
apply if (i) the corporation has elected in its certificate of incorporation not
to be governed by the Delaware anti-takeover law (the Company has not made such
an election), (ii) prior to a person qualifying as an 'interested stockholder,'
the Board of Directors approves either the business combination or the
transaction which would cause such individual to become an 'interested
stockholder,' (iii) upon consummation of the transaction in which any person
becomes an 'interested stockholder,' such person owns at least 85% of the voting stock of the Company outstanding at the time the transaction commences
(excluding shares owned by certain employee stock ownership plans and persons
who are both directors and officers of the Company) or (iv) on or subsequent to
the date on which a person becomes an 'interested stockholder,' the business
combination is both approved by the Board of Directors and authorized at an
annual or special meeting of the Company's shareholders, without written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock not owned by the 'interested stockholder.'
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is American
Stock Transfer & Trust Company.
45
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering there has been no market for the Common Stock of the
Company. The Company can make no prediction as to the effect, if any, that sales
of shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of significant amounts of the
Common Stock in the public market, or the perception that such sales may occur,
could adversely affect prevailing market prices. See 'Risk Factors -- Shares
Eligible for Future Sale.'
Upon completion of the Offering, the Company will have __________ shares of
Common Stock outstanding (excluding _________ shares reserved for issuance upon
the exercise of outstanding stock options) (________ shares of Common Stock
outstanding if the Underwriters' over-allotment option is exercised in full). Of
these shares, the _________ shares offered hereby will be freely tradable
without restrictions or further registration under the Securities Act, except
for any shares purchased by 'affiliates' of the Company, as that term is defined
in Rule 144 under the Securities Act ('Affiliates'), which will be subject to
the resale limitations imposed by Rule 144, as described below. The remaining
__________ shares of Common Stock held by existing shareholders are 'restricted
securities' within the meaning of Rule 144 and may not be resold in the absence
of registration under the Securities Act or pursuant to exemptions from such
registration including, among others, the exemption provided by Rule 144 under
the Securities Act ('Restricted Shares'). Restricted Shares may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rule 144 or 701 promulgated under the Securities Act, which
rules are summarized below. All officers, directors, shareholders and option
holders of the Company have agreed not to offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly (or enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of), any shares of Common Stock or any securities convertible into
or exercisable or exchangeable for shares of Common Stock, for a period of 180
days after the date of this Prospectus, without the prior written consent of
Morgan Stanley & Co. Incorporated. Morgan Stanley & Co. Incorporated may in its
sole discretion choose to release a certain number of these shares from such
restrictions prior to the expiration of such 180 day period. As a result of such
contractual restrictions and the provisions of Rule 144 and 701, the Restricted
Shares will be available for sale in the public market as follows: (i) no such
shares will be eligible for immediate sale on the date of this Prospectus; and
(ii) all of such shares will be eligible for sale upon expiration of the lock-up
agreements 180 days after the date of this Prospectus, subject to the volume
limitations and other conditions of Rule 144 described below.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are required to
be aggregated) whose restricted securities have been outstanding for at least
one year, including a person who may be deemed an 'affiliate' of the Company,
may only sell a number of shares within any three-month period which does not
exceed the greater of (i) one percent of the then outstanding shares of the
Company's Common Stock (approximately ________ shares after the Offering,
_________ if the over-allotment option is exercised in full) or (ii) the average
weekly trading volume in the Company's Common Stock in the four calendar weeks
immediately preceding such sale. Sales under Rule 144 are also subject to
certain requirements as to the manner of sale, notice and the availability of
current public information about the Company. A person who is not an affiliate
of the issuer, has not been an affiliate within three months prior to the sale
and has owned the restricted securities for at least two years is entitled to
sell such shares under Rule 144(k) without regard to any of the limitations
described above.
Beginning 90 days after the date of this Prospectus, certain shares issued
or issuable upon the exercise of options granted by the Company prior to the
date of this Prospectus will also be eligible for sale in the public market
pursuant to Rule 701 under the Act. In general, Rule 701 permits resales of
shares issued pursuant to certain compensatory benefit plans and contracts
commencing 90 days after the issuer becomes subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended, in reliance
upon Rule 144, but without compliance with certain restrictions of Rule 144,
including the holding period requirements. As of December 31, 1997, the Company
has granted options covering _______ shares of Common Stock which have not been
exercised and which become exercisable at various times in the future. Any
shares of Common Stock issued upon the exercise of these options will be
eligible for sale pursuant to Rule 701.
46
The Company intends to file a registration statement under the Securities
Act covering _______ shares of Common Stock reserved for issuance under the 1998
Stock Option Plan. Such registration statement is expected to be filed and
become effective as soon as practicable after the effective date of this
Offering. Accordingly, shares registered under such registration statement will,
subject to Rule 144 volume limitations applicable to Affiliates, be available
for sale in the open market unless such shares are subject to vesting
restrictions with the Company.
UNDERWRITERS
Under the terms and subject to the conditions in the Underwriting Agreement
dated the date hereof (the 'Underwriting Agreement'), the Underwriters named
below (the 'Underwriters'), for whom Morgan Stanley & Co. Incorporated, William
Blair & Company, L.L.C. and Hambrecht & Quist LLC are serving as Representatives
(the 'Representatives'), have severally agreed to purchase, and the Company has
agreed to sell to the Underwriters, severally, the respective number of shares
of Common Stock set forth opposite the names of such Underwriters below:
NUMBER
NAME OF SHARES
- --------------------------------------------------------------------------------------- ----------
Morgan Stanley & Co. Incorporated......................................................
William Blair & Company, L.L.C.........................................................
Hambrecht & Quist LLC..................................................................
----------
Total.............................................................................
----------
----------
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all the shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any such shares are
taken.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price which represents a concession
not in excess of $ a share under the public offering price. Any Underwriter may
allow, and such dealers may reallow, a concession not in excess of $ a share to
other Underwriters or to certain other dealers. After the initial offering of
the shares of Common Stock, the offering price and other selling terms may from
time to time be varied by the Underwriters.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of the Prospectus, to purchase up to _________ additional shares
of Common Stock at the public offering price set forth on the cover page hereof,
less underwriting discounts and commissions. The Underwriters may exercise such
option to purchase solely for the purpose of covering over-allotments, if any,
made in connection with the offering of the shares of Common Stock offered
hereby. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares of
Common Stock offered by the Underwriters hereby.
47
See 'Shares Eligible for Future Sale' for a description of certain
arrangements by which all of the Company's executive officers and directors and
certain other existing shareholders have agreed not to sell or otherwise dispose
of Common Stock or convertible securities of the Company for up to 180 days
after the date of this Prospectus without the prior written consent of Morgan
Stanley & Co. Incorporated. The Company has agreed in the Underwriting Agreement
that it will not, directly or indirectly, without the prior written consent of
Morgan Stanley & Co. Incorporated, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, lend or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exchangeable for Common
Stock, for a period of 180 days after the date of this Prospectus, except under
certain circumstances.
At the request of the Company, the Underwriters have reserved for sale at
the initial public offering price up to _________ shares offered hereby for
officers, directors, employees and certain other persons associated with the
Company. The number of shares available for sale to the general public will be
reduced to the extent such persons purchase such reserved shares. Any reserved
shares not so purchased will be offered by the Underwriters to the general
public on the same basis as the other shares offered hereby.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales in excess of five percent of the total number of shares
of Common Stock offered hereby to accounts over which they exercise
discretionary authority.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
Application has been made to list the Common Stock for quotation on the
Nasdaq National Market under the symbol 'PDII.'
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may overallot in
connection with the Offering, creating a short position in the Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
Common Stock in the offering, if the syndicate repurchases previously
distributed Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities, and may
cease any of these activities at any time.
PRICE OF THE OFFERING
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiations between the Company and the Representatives. Among the factors
considered in determining the initial public offering price will be the future
prospects of the Company and its industry in general; revenue, earnings and
certain other financial and operating information of the Company in recent
periods; and certain ratios, market prices of securities and certain financial
operating information of companies engaged in activities similar to those of the
Company. The estimated initial public offering price range set forth on the
cover page of this Prospectus is subject to change as a result of market
conditions or other factors.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Morse, Zelnick, Rose & Lander, LLP, 450 Park Avenue, New York, New
York 10022 and for the Underwriters by Ropes & Gray, One International Place,
Boston, Massachusetts 02110. Certain matters relating to rules and regulations
promulgated by the FDA and other regulatory matters will be passed upon for the
Company by Farkas & Manelli, P.L.L.C., 1233 20th Street, N.W. Suite 700,
Washington, D.C. 20036-2396.
48
EXPERTS
The balance sheets as of December 31, 1997 and 1996 and the statements of
operations, cash flows and shareholders' equity for each of the three years in
the period ended December 31, 1997 included in this Prospectus, have been
included herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
'Commission') a Registration Statement on Form S-1 under the Securities Act,
with respect to the Common Stock offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus, which is part of the
Registration Statement, omits certain information, exhibits, schedules and
undertakings set forth in the Registration Statement. For further information
pertaining to the Company and the Common Stock, reference is made to such
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents or provisions of any documents
referred to herein are not necessarily complete, and in each instance where a
copy of the document has been filed as an exhibit to the Registration Statement,
reference is made to the exhibit so filed. The Registration Statement may be
inspected without charge at the office of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of the Registration Statement may be
obtained from the Commission at prescribed rates from the Public Reference
Section of the Commission at such address, and at the Commission's regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048,
and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. In addition, registration statements and certain other filings made with
the Commission through its Electronic Data Gathering, Analysis and Retrieval
('EDGAR') system are publicly available through the Commission's site on the
Internet's World Wide Web, located at http://www.sec.gov. The Registration
Statement, including all exhibits thereto and amendments thereof, has been filed
with the Commission through EDGAR.
49
INDEX TO FINANCIAL STATEMENTS
PAGE
----
PROFESSIONAL DETAILING, INC.:
Report of Independent Accountants..................................................................... F-2
Balance Sheets........................................................................................ F-3
Statements of Operations.............................................................................. F-4
Statements of Cash Flows.............................................................................. F-5
Statements of Shareholders' Equity.................................................................... F-6
Notes to Financial Statements......................................................................... F-7
F-1
After the merger discussed in Note 2 to the Financial Statements is effected, we
will be in a position to render the following report.
/s/ Coopers & Lybrand L.L.P.
Parsippany, New Jersey
February 3, 1998
REPORT OF INDEPENDENT ACCOUNTANTS
------------------------
To the Stockholders and
Board of Directors of Professional Detailing, Inc.:
We have audited the accompanying balance sheets of Professional Detailing,
Inc. as of December 31, 1997 and 1996, and the related statements of operations,
cash flows and shareholders' equity for each of the three years in the period
ended December 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the finanicial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as 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 Professional Detailing, Inc.
as of December 31, 1997 and 1996, and the results of their operations and their
cash flows for the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Parsippany, New Jersey
February 3, 1998, except as
to the information presented
in Note 2, for which the date
is .
F-2
PROFESSIONAL DETAILING, INC.
BALANCE SHEETS
DECEMBER 31,
----------------------------------------
PRO FORMA
1996 1997 1997
---------- ----------- -----------
(UNAUDITED)
ASSETS
Current Assets:
Cash and Cash Equivalents............................................ $2,403,011 $ 5,759,918 $ 5,084,197
Contract Payments Receivable......................................... 3,037,566 2,073,356 2,073,356
Unbilled Costs and Accrued Profits on Contracts in Progress.......... 2,372,518 4,986,454 4,986,454
Receivable from Affiliates, net...................................... 84,327 27,161 27,161
Other Current Assets................................................. 30,000 297,032 297,032
---------- ----------- -----------
Total Current Assets............................................ 7,927,422 13,143,921 12,468,200
Net Property, Plant & Equipment:................................... 395,062 547,377 547,377
---------- ----------- -----------
Total Assets......................................................... $8,322,484 $13,691,298 $13,015,577
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable..................................................... $ 608,895 $ 473,832 $ 473,832
Notes Payable........................................................ -- 68,365 68,365
Accrued Incentives................................................... 2,905,506 2,806,839 2,806,839
Accrued Salaries and Wages........................................... 896,202 1,417,789 1,417,789
Unearned Contract Revenue............................................ 3,925,853 6,131,322 6,131,322
Other Accrued Expenses............................................... 463,754 2,117,330 2,117,330
---------- ----------- -----------
Total Current Liabilities....................................... 8,800,210 13,015,477 13,015,477
---------- ----------- -----------
Commitments and Contingencies
Shareholders' Equity:
Capital Stock, no par value;
2,500 shares authorized; shares issued and outstanding 1996 -- 100; 1997 -- 100........................................... 100 100 100
Additional Paid-In Capital........................................... -- 4,193,852 101,822
Retained Deficit..................................................... (467,486) (3,416,309) --
Deferred Compensation................................................ -- (101,822) (101,822)
Shareholder Loan..................................................... (10,340) -- --
---------- ----------- -----------
Total Shareholders' Equity...................................... (477,726) 675,821 100
---------- ----------- -----------
Total Liabilities & Equity........................................... $8,322,484 $13,691,298 $13,015,577
---------- ----------- -----------
---------- ----------- -----------
The accompanying notes are an integral part of these financial statements
F-3
PROFESSIONAL DETAILING, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
Revenue............................................................. $18,398,554 $33,014,960 $54,541,818
Less: Program Expenses,and entitled to vote generally in the election of directors.related party amountsproposed nominations of $0,
$671,810 and $1,564,606persons for election to our Board. At an annual stockholders meeting, stockholders may only consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of our Board. Stockholders may also consider a proposal or nomination by a person who was a stockholder of record on the record date for the periodsmeeting, who is entitled to vote at the meeting and who has given to the Secretary of the Company timely written notice, in proper form, of his or her intention to bring that business before the annual stockholders meeting. The amended and restated bylaws do not give our Board the power to approve or disapprove stockholder nominations of candidates or proposals regarding other business to be conducted at a special or annual meeting of the stockholders. However our bylaws may have the effect of precluding the conduct of business at a meeting if the proper procedures are not followed. These provisions may also discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of the Company.-66- ● prior to this time, our Board approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; ● upon completion 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 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 our Board and authorized at a special or annual stockholders meeting, 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. -67- ● 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; ● any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder, subject to limited exceptions; ● 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. -68- Underwriters Number of
SharesNumber of
Pre-funded Warrants
Common WarrantsMaxim Group LLC WestPark Capital, Inc. Total -69- Per
SharePer Pre-
Funded
WarrantPer Common
WarrantTotal Per
Share and
Accompanying
Common
WarrantTotal Per
Pre-Funded
Warrant and
Accompanying
Common
WarrantPublic offering price $ $ $ $ $ Underwriting discount to be paid to the underwriters by us $ $ $ $ $ Proceeds to us (before expenses) $ $ $ $ $ -70- -71- ● the recent trading history of our common stock on the Nasdaq Capital Market, including market prices and trading volume of our common stock; ● the current market price of our common stock on the Nasdaq Capital Market; ● the recent market prices of, and demand for, publicly traded common stock of generally comparable companies; ● the information set forth or incorporated by reference in this prospectus and otherwise available to the representative; ● our past and present financial performance and an assessment of our management; ● our prospects for future earnings and the present state of our products; ● the current status of commercialized molecular diagnostic tests and product developments by our competitors; ● our history and prospects, and the history and prospects of the industry in which we compete; ● the general condition of the securities markets at the time of this offering; and ● other factors deemed relevant by the representative and us. -72- -73- ● a passive market maker may not effect transactions or display bids for our common stock in excess of the highest independent bid price by persons who are not passive market makers; ● net purchases by a passive market maker on each day are generally limited to 30% of the passive market maker’s average daily trading volume in our common stock during a specified two-month prior period or 200 shares of common stock, whichever is greater, and must be discontinued when that limit is reached; and ● passive market making bids must be identified as such. -74- -75- 1995,
19962016 incorporated by reference in the registration statement of which this prospectus forms a part have been so included in reliance on the reports of BDO USA, LLP, an independent registered public accounting firm (the report on the financial statements contains an explanatory paragraph regarding the Company's ability to continue as a going concern) incorporated by reference, given on the authority of said firm as experts in auditing and 1997, respectively....................................... 15,427,428 26,886,445 43,057,196
----------- ----------- -----------
Gross Profit........................................................ 2,971,126 6,128,515 11,484,622
Compensation Expense................................................ 2,124,470 3,190,984 5,120,969
Bonusaccounting.Majority Shareholder....................................... 425,000 1,500,000 2,243,000the registration statement and its exhibits for additional information. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete and you should refer to the exhibits filed as part of the registration statement for copies of the actual contract, agreement or other document.-76- ● our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017, as filed with the SEC on May 12, 2017; ● our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on March 31, 2017; ● our Annual Report on Form 10-K/A for the year ended December 31, 2016, as filed with the SEC on April 28, 2017; and ● our Current Reports on Form 8-K or Form 8-K/A filed with the SEC on January 3, 2017, January 5, 2017, January 6, 2017, January 20, 2017, January 25, 2017, February 3, 2017, March 23, 2017, March 27, 2017, April 3, 2017, April 13, 2017 April 18, 2017, and May 15, 2017, excluding any portions of any Current Report on Form 8-K or Form 8-K/A that are not deemed “filed” pursuant to the General Instructions of Form 8-K. -77-
Morris Corporate Center I, Building A
300 Interpace Parkway, Parsippany, NJ 07054
(855) 776-6419-78- 
Grant Expense................................................. -- -- 4,470,000
Other General, Selling & Administrative Expenses.................... 1,158,475 1,650,049 2,754,522
----------- ----------- -----------
Total General, Selling & Administrative Expenses.................... 3,707,945 6,341,033 14,588,491
----------- ----------- -----------
Operating Loss...................................................... (736,819) (212,518) (3,103,869)
Other Income, Net................................................... 69,981 98,072 155,046
----------- ----------- -----------
Net Loss............................................................ $ (666,838) $ (114,446) $(2,948,823)
----------- ----------- -----------
----------- ----------- -----------
Pro Forma Data (unaudited) (see note 3)
Net Loss, as reported............................................. (666,838) (114,446) (2,948,823)
Pro Forma Income Tax Benefit........................................ 120,969 -- --
----------- ----------- -----------
Pro Forma Net Loss.................................................. $ (545,869) $ (114,446) $(2,948,823)
----------- ----------- -----------
----------- ----------- -----------
Pro Forma Net Income (Loss) Per Share...............................
-----------
-----------
Pro Forma Weighted AverageOutstanding.......................
-----------
-----------
The accompanying notes are an integral part of these financial statements
F-4
PROFESSIONAL DETAILING, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
----------- ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss From Operations.............................................. $ (666,838) $ (114,446) $(2,948,823)
Adjustmentsof Common Stockreconcile net loss to net cash provided by/(used
in) operating activities:
Depreciation................................................... 85,040 104,531 137,852
Non-Cash Compensation Expense --Purchase 7,428,571 Shares of Common Stock Grant to Officer........ -- -- 4,050,000
Non-Cash Compensation Expense -- Stock Options................. -- -- 42,030
Other changesassets and liabilities:
(Increase) decrease in contract payments receivable............ 2,779,325 (188,033) 964,210
(Increase) decrease in unbilled costs.......................... (2,138,421) 138,271 (2,613,936)
(Increase) decrease in other current assets.................... 136,354 22,253 (267,032)
Increase (decrease) in trade accounts payable.................. 538,152 55,743 (135,063)
Increase in accrued liabilities................................ 825,228 2,522,659 422,920
Increase (decrease) in unearned contract revenue............... (1,721,519) (382,536) 2,205,469
Increase (decrease) in payable to affiliate.................... -- 284,877 (138,859)
Increase (decrease) in other current liabilities............... (68,947) 360,107 1,653,576
----------- ---------- -----------
Net Cash Provided By/(Used In) Operating Activities................... (231,626) 2,803,426 3,372,344
----------- ---------- -----------
CASH FLOWS PROVIDED BY/(USED IN) INVESTING ACTIVITIES
Purchase of equipment.......................................... (139,415) (271,503) (290,167)
Advances to affiliate.......................................... -- (369,204) --
Repayments of advances from affiliate.......................... -- -- 196,025
----------- ---------- -----------
Net Cash Provided By/(Used In) Investing Activities................... (139,415) (640,707) (94,142)
----------- ---------- -----------
CASH FLOWS PROVIDED BY/(USED IN) FINANCING ACTIVITIES
Proceeds from issuance of note payable.............................. -- -- 100,000
Payments on note payable............................................ -- -- (31,635)
Repayment of shareholder loan....................................... -- -- 10,340
----------- ---------- -----------
Net Cash Provided By/(Used In) Financing Activities................... -- -- 78,705
----------- ---------- -----------
Net Increase/(Decrease) In Cash And Cash Equivalents.................. (371,041) 2,162,719 3,356,907
Cash And Cash Equivalents -- Beginning 611,333 240,292 2,403,011
----------- ---------- -----------
Cash And Cash Equivalents -- Ending $ 240,292 $2,403,011 $ 5,759,918
----------- ---------- -----------
----------- ---------- -----------
Cash Paid for Interest................................................ -- -- $ 7,179
----------- ---------- -----------
----------- ---------- -----------
The accompanying notes are an integral part of these financial statements
F-5
PROFESSIONAL DETAILING, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
COMMON STOCK
-------------------- ADDITIONAL
OUTSTANDING DEFERRED SHAREHOLDER PAID IN RETAINED
SHARES AMOUNT COMPENSATION LOAN CAPITAL EARNINGS/(DEFICIT)
----------- ------ ------------ ----------- ---------- ------------------
Balance -- December 31, 1994........ 100 $100 -- (10,340) -- 313,798
Net loss for the year ended December
31, 1995.......................... -- -- -- -- -- (666,838)
----------- ------ ------------ ----------- ---------- ------------------
Balance -- December 31, 1995........ 100 $100 $ -- $ (10,340) $ -- $ (353,040)
Net loss for the year ended December
31, 1996.......................... -- -- -- -- -- (114,446)
----------- ------ ------------ ----------- ---------- ------------------
Balance -- December 31, 1996........ 100 100 -- (10,340) -- (467,486)
Stock Grant......................... -- -- -- -- 4,050,000 --
Deferred Compensation-Stock
Options........................... -- -- (101,822) -- 143,852 --
Repayment of shareholder loan....... -- -- -- 10,340 -- --
Net income for the year ended
December 31, 1997................. -- -- -- -- -- (2,948,823)
----------- ------ ------------ ----------- ---------- ------------------
Balance -- December 31, 1997........ 100 $100 $ (101,822) $ 0 $4,193,852 $ (3,416,309)
----------- ------ ------------ ----------- ---------- ------------------
----------- ------ ------------ ----------- ---------- ------------------
The accompanying notes are an integral part of these financial statements
F-6
PROFESSIONAL DETAILING, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Professional Detailing, Inc. (the 'Company') is a leading provider of
comprehensive customized sales solutions on an outsourced basis to the United
States pharmaceutical industry.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results could differ from those estimates. Significant estimates include
revenues and costs associated with the contracts, which are used for purposes of
applying the percentage-of-completion method.
Revenue Recognition
Revenue is earned primarily by performing services under contracts with
clients and is recognized under the percentage of completion method. Revenue
includes estimated fees or profits to be earned pursuant to contracts calculated
on the basis of the relationship between program costs, excluding initial direct
program costs, and total estimated program costs, excluding initial direct
program costs. There are two significant categories of program costs: (i)
initial direct program costs, which are associated with the recruitment and
formal training of the sales representatives and managers so that they are
qualified to properly render the services specified in the contracts and (ii)
personnel costs, which are salaries and related fringe benefits for the
representatives and managers who are responsible for the direct performance of
the activities specified in the contracts. Initial direct costs associated with
the recruitment and training of representatives are deferred and recognized over
the life of the corresponding contracts.
Estimated revenue and costs are reviewed and revised periodically
throughout the lives of the contracts, with adjustment to profits resulting from
such revisions being recorded on a cumulative basis in the period in which the
revisions are made. In the period in which it is determined that a loss results
from the performance of a contract, the entire amount of the estimated ultimate
loss is charged against income.
The Company must continually replace its contracts with new contracts to
sustain its revenue. In addition, many of the Company's contracts may be
canceled or delayed by clients upon notice. Contracts generally may be
terminated for a variety of reasons, including failure to meet certain
performance standards. Finally, the Company's contracts typically contain
onerous penalties if the Company fails to meet certain performance standards.
The failure to obtain new contracts or the cancellation or delay of existing
contracts or the failure to satisfy the minimum performance standards set forth
in contracts could have a material adverse effect on the Company's business and
results of operations.
Fair Value of Financial Instruments
The book values of cash and cash equivalents, contract payments receivable,
accounts payable and other financial instruments approximate their fair values
principally because of the short-term maturities of these instruments. The fair
value of the Company's note payable is estimated based on the current rates
offered to the Company for debt of similar terms and maturities. Under this
method, the fair value of the Company's note payable was not significantly
different than the book value of December 31, 1997.
Unbilled Costs and Accrued Profits and Unearned Contract Revenue
In general, contractual provisions including predetermined payment
schedules, the achievement of contract milestones or submission of appropriate
billing detail establish prerequisites for billings. Unbilled costs and accrued
profits arise when services have been rendered but clients have not been billed.
These amounts are classified as a current asset. Normally, the clients agree to
pay the Company a portion of the fee due under a
F-7
PROFESSIONAL DETAILING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
contract in advance of performance of services because of large recruiting and
employee development costs associated with the beginning of a contract. The
excess of amounts billed over revenue recognized represents unearned contract
revenue, which is classified as a current liability.
Cash and Cash Equivalents
Cash and cash equivalents consist of unrestricted cash accounts and
Certificates of Deposit with a maturity of three months or less at the date of
purchase.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The estimated useful
lives of asset classifications are seven years for furniture and fixtures and
five years for office equipment and computer equipment. Depreciation is computed
using the straight-line method, and the cost of leasehold improvements is
amortized over the shorter of the estimated service lives or the terms of the
related leases. Repairs and maintenance are charged to expense as incurred. Upon
disposition, the asset and related accumulated depreciation are relieved and any
gains or losses are reflected in operations.
Stock Based Compensation
Statement of Financial Accounting Standard No. 123, 'Accounting for
Stock-Based Compensation' allows companies a choice of measuring employee
stock-based compensation expense based on the fair value method of accounting or
based upon the intrinsic value approach under APB Opinion No. 25. The Company
has elected to measure compensation expense based upon the intrinsic value
approach under APB Opinion No. 25.
Advertising
The Company recognizes advertising costs as incurred. The total amounts
charged to advertising expense were $242,408, $87,104 and $159,206 for the years
ended December 31, 1995, 1996 and 1997, respectively.
Income Taxes
The Company elected to be taxed under Subchapter S of the Internal Revenue
Code of 1986, as amended effective January 1, 1991 and under the corresponding
provisions of the laws of the State of New Jersey effective January 1, 1994.
Consequently, the Company has not been subject to Federal or New Jersey state
income taxes, other than a New Jersey corporate income tax of approximately 2%.
2. ANTICIPATED MERGER (UNAUDITED)
In connection with a contemplated initial public offering, Professional
Detailing, Inc., a New Jersey corporation (the 'New Jersey Entity') will merge
with and into Professional Detailing, Inc., a Delaware corporation (the
'Delaware Entity'). As a result of the merger, each outstanding share of the New
Jersey Entity's Common Stock will convert into shares of the Delaware Entity's
Common Stock. In addition, each outstanding option to purchase Common Stock of
the New Jersey Entity will convert into an option to purchase Common Stock of
the Delaware Entity at a for ratio.
3. PRO FORMA NET INCOME (LOSS) PER SHARE (UNAUDITED)
Pro forma net income (loss) per share was calculated using the pro forma
weighted average number of shares of common stock and dilutive common stock
equivalent shares ('CSEs') from stock options using the treasury stock method
assuming a price of $__ per share. Pursuant to the Securities and Exchange
Commission SAB Topic 4-D, common stock and CSEs issued at prices below the
expected public offering price during the
F-8
PROFESSIONAL DETAILING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PRO FORMA NET INCOME (LOSS) PER SHARE (UNAUDITED)--(CONTINUED)
period prior to the Company's planned offering have been included in the
computation of pro forma weighted average number of shares regardless of whether
they are dilutive and as if they were outstanding from the beginning of the
period.
The following unaudited table shows the calculation of pro forma weighted
average shares outstanding as of December 31, 1997:
#ProspectusSHARES
-----------
Common Stock..............................................................................
Stock Options.............................................................................
-----------
Pro Forma Weighted Average Shares Outstanding.............................................
-----------
-----------
Under the requirements of Statement of Financial Accounting Standards
('SFAS') No. 128, 'Earnings Per Share', basic net income (loss) per share is
computed using the weighted average number of shares of common stock outstanding
during the period and diluted net income (loss) per share is computed in a
manner similar to which pro forma weighted average shares outstanding as of
December 31, 1997 is calculated above with the exception that common stock
equivalents would be included from the date of issuance and, in any event, only
if they were dilutive.
Had the Company calculated basic and diluted earnings per share pursuant to
the requirements of SFAS No. 128, basic and diluted earnings per share would
have been the following for the period ended December 31, 1997:
DECEMBER 31, 1997
-----------------
Basic earnings per share.............................................................
Diluted earnings per share...........................................................
4. PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment consists of the following:
DECEMBER 31,
----------------------
1996 1997
-------- ----------
Furniture and fixtures........................................................ $ 38,175 $ 81,759
Office equipment.............................................................. 176,366 217,796
Computer equipment............................................................ 600,200 805,353
Leasehold improvements........................................................ 18,693 18,693
-------- ----------
Total Property, Plant and Equipment........................................... 833,434 1,123,601
Less accumulated depreciation and amortization................................ 438,372 576,224
-------- ----------
Property, Plant and Equipment, net............................................ $395,062 $ 547,377
-------- ----------
-------- ----------
5. OPERATING LEASES
The Company leases facilities and certain equipment under agreements
classified as operating leases. Lease expense under these agreements for the
twelve months ended December 31, 1995, 1996 and 1997 were $139,070, $165,020 and
$182,353, respectively. The Company's facilities lease expires on April 29,
1998. The Company has entered into a new lease to take effect May 1, 1998 for a
term of 66 months with an option to extend for an additional five years.
F-9
PROFESSIONAL DETAILING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. OPERATING LEASES--(CONTINUED)
The following is a schedule by year of the future minimum lease payments as
of December 31, 1997 required under these agreements:
1998...................................................................................... $ 368,506
1999...................................................................................... 581,954
2000...................................................................................... 558,075
2001...................................................................................... 550,688
2002...................................................................................... 550,687
Thereafter................................................................................ 525,656
------------
Total..................................................................................... $ 3,135,566
------------
------------
6. SIGNIFICANT CUSTOMERS
During 1995, 1996 and 1997, the Company had several significant customers
for which it provided services under specific contractual arrangements. ISSUANCE AND DISTRIBUTION
The following table sets forth the revenue generated by customers who accounted for more
than 10% of the Company's revenue during each of the periods presented.
| Item | Amount to be paid | |||
| SEC registration fee | $ | 4,636 | ||
| FINRA filing fee | $ | 2,840 | ||
| Printing expenses | 25,000 | |||
| Legal fees and expenses | 275,000 | |||
| Accounting fees and expenses | 50,000 | |||
| Transfer Agent fees and expenses | 5,000 | |||
| Miscellaneous expenses | 0 | |||
| Total | 362,476 | |||
* Total................................................................................... $ *
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ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following summarizes the securities that we sold within the past three years without registering the securities under the Securities Act. All of these sales were made in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended.
On October 31, 2014, we issued an interest-free Note to RedPath Equityholder Representative, LLC (the “Equityholder Representative”), on behalf of the equityholders of RedPath (the “Equityholders”), at the closing of the Agreement 2.1and Plan of Merger (the “Agreement”), dated October 31, 2014, to acquire RedPath Integrated Pathology, Inc. (“RedPath”) for $11.0 million to be paid in eight equal consecutive quarterly installments beginning October 1, 2016. We also entered into the Contingent Consideration Agreement between Professional Detailing,with the Equityholder Representative.We agreed to issue to the Equityholders 500,000 shares of our common stock, par value $0.01, upon acceptance for publication of a specified article related to PathFinderTG ® for the management of Barrett’s esophagus, and an additional 500,000 shares of the Company’s Common Stock upon the commercial launch of PathFinderTG ® for the management of Barrett’s esophagus.
On January 20, 2017, we entered into a placement agency agreement with Maxim Group LLC in connection with the registered direct public offering of 855,000 shares of our common stock, par value $0.01 per share. In a concurrent private placement, we agreed to sell through Maxim Group LLC as placement agent warrants to purchase 855,000 shares of common stock (the “Concurrent Warrants”) with an exercise price of $4.69 per Concurrent Warrant. The combined purchase price for one common share and one Concurrent Warrant was $4.69.
In March 29, 2017 we agreed to issue 5-year warrants for an aggregate 100,000 shares of our common stock at an exercise price of $4.69 to the former RedPath equity shareholders (our former secured creditors) in exchange for the termination of future royalty and milestone payments related to sales of certain of our products arising out of our acquisition of Redpath Integrated Pathology Inc., in October 2014.
On April 18, 2017, we entered into an amendment and exchange agreement with an institutional investor, and agreed to exchange $3,547,775 of our senior secured note, dated March 23, 2017, for $3,547,775 of our senior secured convertible note, dated April 18, 2017. The senior secured convertible note is identical in all material respects to our senior secured convertible note dated March 23, 2017 except for the initial conversion price and requiring stockholder approval to adjust the conversion price or the right to substitute the variable price for the conversion price, which provisions have been waived by the investor. The initial conversion price of the senior secured convertible note was $2.20.
Between March 23, 2017 and April 18, 2017, we issued 3,795,429 shares of our common stock upon conversion of our senior secured convertible notes. As a result, the outstanding amount of our senior secured convertible notes was reduced to zero.
| Amount of Senior | ||||||||||||
| Date of | Secured Convertible Note | Shares of company | Conversion price | |||||||||
| Conversion | so converted | stock issued | per share | |||||||||
| March 23, 2017 | $ | 122,000 | 50,000 | $ | 2.44 | |||||||
| March 28, 2017 | 25,000 | 10,248 | 2.44 | |||||||||
| March 29, 2017 | 1,275,000 | 522,648 | 2.44 | |||||||||
| March 30, 2017 | 2,799,663 | 1,147,638 | 2.44 | |||||||||
| April 3, 2017 | 200,000 | 81,992 | 2.44 | |||||||||
| April 18, 2017 | 900,000 | 369,126 | 2.44 | |||||||||
| April 18, 2017 | 3,547,775 | 1,613,777 | 2.20 | |||||||||
| Totals | $ | 8,869,438 | 3,795,429 | |||||||||
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
See the Exhibit Index included following the signature page of this registration statement.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, or the Act, 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 Act 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 Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
| (1) | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
(i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
| (2) | That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment 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. | |
| (3) | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. | |
| (4) | That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: |
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
| (5) | For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. | |
| (6) | For the purpose of determining any liability under the Securities Act of 1933, 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. |
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Parsippany, State of New Jersey, corporation,on June 13, 2017.
| INTERPACE DIAGNOSTICS GROUP, INC. | ||
| By: | /s/ Jack E. Stover | |
| Jack E. Stover | ||
| President and Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, this amendment has been signed by the following persons in the capacities and Professional
Detailing Inc., a Delaware corporation*
3.1 Certificateas of Incorporationthe dates indicated.
| Signature | Title | Date | ||
| /s/ Jack E. Stover | President, Chief Executive Officer, | June 13, 2017 | ||
| Jack E. Stover | and Director | |||
| (Principal Executive Officer) | ||||
/s/ James E. Early | Chief Financial Officer | June 13, 2017 | ||
James E. Early | (Principal Financial Officer and Principal Accounting Officer) | |||
| /s/ Jack E. Stover * | Director | June 13, 2017 | ||
| Joseph Keegan, PhD | ||||
| /s/ Jack E. Stover * | Director | June 13, 2017 | ||
StephenJ. Sullivan |
* Pursuant to power of Professional Detailing, Inc.
3.2 By-Laws of Professional Detailing, Inc.
4.1 Specimen Certificate Representing the Common Stock*
5.1 Form of Opinion of Morse, Zelnick, Rose & Lander, LLP*
10.1 1998 Stock Option Plan*
10.2 Office Lease between IB Brell, L.P. (Landlord) and Professional Detailing, Inc. (Tenant) and
amendment thereto
10.3 Employment Agreement between the Company and Charles T. Saldarini*
10.4 Employment Agreement between the Company and John P. Dugan*
10.5 Employment Agreement between the Company and Steven K. Budd*
10.6. Employment Agreement between the Company and Bernard C. Boyle*
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Morse, Zelnick, Rose & Lander, LLP (included in Exhibit 5.1)*
23.3 Consent of Farkas & Manelli, P.L.L.C.
24 Power of Attorney (included in signature page)
27 Financial Data Schedule
99.1 Consent of Director Nominee (John M. Pietruski)
99.2 Consent of Director Nominee (Jan Martens Vecsi)
99.3 Consent of Director Nominee (Gerald J. Mossinghoff)