As filed with the Securities and Exchange Commission on January 27, 2020
Registration No. 333-235911
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION ON JANUARY 10, 2001
REGISTRATION NO. 333-51960
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TRANSGENOMIC,
PRECIPIO, INC.
(Exact
(Exact name of Registrantregistrant as specified in its charter)
| Delaware | 3826 | 91-1789357 | ||
(State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification Number) |
4 Science Park
New Haven, Connecticut 06511
(203) 787-7888
(Address, including zip code and telephone number, including area code, of Registrant'sregistrant’s principal executive offices)
COLLIN J. D'SILVA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
12325 EMMET STREET
OMAHA, NEBRASKA 68164
(402) 452-5400
(Name,
Ilan Danieli
Chief Executive Officer
Precipio, Inc.
4 Science Park
New Haven, Connecticut 06511
(203) 787-7888
(Name, address, including zip code and telephone number, including area code, of agent for service)
Please address a copy
Copies to:
Thomas A. Rose
Sichenzia Ross Ference LLP
1185 Avenue of all communications to:
STEVEN P. AMEN, ESQ.
KUTAK ROCK LLP
1650 FARNAM STREET
OMAHA, NEBRASKA 68102
(402) 346-6000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
January 15, 2001
the Americas, 37th Floor
New York, NY 10036
(212) 930-9700
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 check the following box. /X/
box:¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
offering:¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
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 deliveryoffering:¨
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 Exchange Act.
| Large Accelerated Filer | ¨ | Accelerated Filer | ¨ | |||
| Non-Accelerated Filer | x | Smaller Reporting Company | x | |||
| Emerging Growth Company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.¨
CALCULATION OF REGISTRATION FEE
| Title of Each Class of Securities to be Registered | Proposed Maximum Aggregate Offering Price(1) | Amount of Registration Fee(2) | ||||||
| Common Stock, $0.01 par value per share | $ | 1,749,242 | $ | 227.05 | ||||
| (1) | Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. |
| (2) | Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price. |
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is expectednot complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to be made pursuantsell these securities and it is not soliciting an offer to Rule 434,
checkbuy these securities in any state where the following box. / /
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THE INFORMATION IN THIS offer or sale is not permitted.
Subject to Completion
Preliminary Prospectus dated January 27, 2020
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 BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND NO ONE IS SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER IS SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS DATED JANUARY 10, 2001
3,195,047 SHARES
[LOGO]
COMMON STOCK
Shares
Common Stock
Our common stock is listed on The holders of 3,195,047 sharesNASDAQ Capital Market under the symbol “PRPO.” The last reported sale price of our common stock on January 13, 2020 was $1.91 per share.
This prospectus relates to the offer and sale of up to 920,654 shares of common stock, par value $0.01, of Precipio, Inc., a Delaware corporation, by Lincoln Park Capital Fund, LLC, or Lincoln Park or the Selling Stockholder.
The shares of common stock being offered by the Selling Stockholder have been or may be issued pursuant to the purchase agreement dated September 7, 2018 that we entered into with Lincoln Park. See “The Lincoln Park Transaction” for a description of that agreement and “Selling Stockholder” for additional information regarding Lincoln Park. The prices at which Lincoln Park may sell some or all of
thesethe shares under this prospectus. These stockholders may sell shares atwill be determined by the
then prevailing market price for our common stock at the time of the sale,shares or at
other prices. in negotiated transactions.
We are not selling any securities under this prospectus and will not receive any of the proceeds from the sale of these
shares by these stockholders.
In July 2000, we sold 5,152,000the Selling Stockholder.
The Selling Stockholder may sell the shares of common stock described in this prospectus in a number of different ways and at varying prices. See “Plan of Distribution” for more information about how the Selling Stockholder may sell the shares of common stock being registered pursuant to this prospectus. The Selling Stockholder is an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act of 1933, as amended.
We will pay the expenses incurred in registering the shares, including legal and accounting fees. See “Plan of Distribution”.
Investing in our common stock involves a high degree of risk. See “Risk Factors” on page 8 in this prospectus to read about the factors you should consider before buying shares of our common stock in our initial
public offering. stock.
We may amend or supplement this prospectus from time to time by filing amendments or supplements as required. You should read the entire prospectus and any amendments or supplements carefully before you make your investment decision.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
The underwritersdate of our initial public offering are not
underwriting any of the shares being sold by the selling stockholders. Prior to
our initial public offering, there was no public market for our common stock.
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Our common stockthis prospectus is listed on the Nasdaq National Market under the symbol
TBIO.
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The selling stockholders are offering the common stock as described under
"Plan of Distribution."
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INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
January 15, 2001
TABLE OF CONTENTS
You should rely only on the information contained in this prospectus or in any free writing prospectus we file with the Securities and Exchange Commission. We have not authorized anyone to provide you with information different from that contained in this prospectus or any free writing prospectus. We take no responsibility for, and can provide no assurance, as to the reliability of any other information that others may give you. The information contained in this prospectus is accurate only as of the date on the front cover of this prospectus, or other earlier date stated in this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, financial condition, results of operations and prospects may have changed since such date.
For investors outside of the United States: we have not done anything that would permit this offering outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.
This summary does not contain all of the information you should consider before buying shares of our common stock. You should read the entire prospectus carefully, especially the “Risk Factors” and our Quarterly Report on form 10-Q for the third quarter ended September 30, 2019, filed with the SEC on November 13, 2019 and our financial statements and the related notes our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on April 16, 2019, before deciding
whether to invest in shares of our common stock.
2
SHARES TO BE SOLD BY SELLING STOCKHOLDERS
Common Stock offered by Selling Stockholders................ 3,195,047 shares
Common Stock outstanding.................................... 21,205,566 shares
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The
Overview
Precipio, Inc., and its subsidiaries, (collectively, “we”, “us”, “our”, the “Company” or “Precipio”) is a cancer diagnostics company providing diagnostic products and services to the oncology market. We have built and continue to develop a platform designed to eradicate the problem of misdiagnosis by harnessing the intellect, expertise and technologies developed within academic institutions, and delivering quality diagnostic information to physicians and their patients worldwide. We operate a cancer diagnostic laboratory located in New Haven, Connecticut and have partnered with a number of shares outstanding doesinstitutions to capture the expertise, experience and technologies developed within academia so that we can provide a better standard of cancer diagnostics and aim to solve the growing problem of cancer misdiagnosis. We also operate a research and development facility in Omaha, Nebraska which will focus on further development of various technologies, among them ICE-COLD-PCR, or ICP, the patented technology described further below, which was exclusively licensed to us by Dana-Farber Cancer Institute, Inc., or Dana-Farber, at Harvard University, in addition to IV-Cell, and HemeScreen, further discussed below. The research and development center focuses on the development of these technologies, which we believe will enable us to commercialize these and other technologies developed with our current and future academic partners. Our platform connects patients, physicians and diagnostic experts residing within academic institutions. Launched in 2017, the platform facilitates the following relationships:
| · | Patients: patients may search for physicians in their area and consult directly with academic experts that are on the platform. Patients may also have access to new academic discoveries as they become commercially available. |
| · | Physicians: physicians can connect with academic experts to seek consultations on behalf of their patients and may also provide consultations for patients in their area seeking medical expertise in that physician’s relevant specialty. Physicians will also have access to new diagnostic solutions to help improve diagnostic accuracy. |
| · | Academic Experts: academic experts on the platform can make themselves available for patients or physicians seeking access to their expertise. Additionally, these experts have a platform available to commercialize their research discoveries. |
We intend to continue updating our platform to allow for patient-to-patient communications and allow individuals to share stories and provide support for one another, to allow physicians to consult with their peers to discuss and share challenges and solutions, and to allow academic experts to interact with others in academia on the platform to discuss their research and cross-collaborate.
Industry
We believe that there is currently a significant problem with unaddressed rates of misdiagnosis across numerous disease states (particularly in cancer) due to an inefficient and commoditized industry. We believe that the diagnostic industry focuses primarily on competitive pricing and test turnaround times, at the expense of quality and accuracy. Increasingly complex disease states are met with eroding specialization rather than increased expertise. According to a study conducted by the National Coalition of Health, this results in an industry with cancer misdiagnosis rates up to 28%, which is failing to meet the needs of physicians, patients and the healthcare system as a whole. New technologies offer improved accuracy; however, many are either inaccessible or are not include (i) 106,754 shareseconomically practical for clinical use. Despite much publicity of the industry transitioning from fee-per-service to value-based payments, this transition has not yet occurred in diagnostics. When a patient is misdiagnosed, physicians end up administering incorrect treatments, often creating adverse effects rather than improving outcomes. We believe that Insurance Providers, Medicare and Medicaid waste valuable dollars on the application of incorrect treatments and can incur substantial downstream costs. Most importantly however, patients pay the ultimate price of misdiagnosis with increased morbidity and mortality. According to a report by Pinnacle Health, the estimated cost of misdiagnosis within the healthcare system is $5 billion annually. We believe that the academic path of specialization produces the critical expertise necessary to correctly diagnose disease and that academic institutions have an unlocked potential to address this problem. Our solution is to create an exclusive platform that harnesses academic expertise and proprietary technologies to deliver the highest standard of diagnostic accuracy and patient care. Physicians, hospitals, payers and, most importantly, patients all benefit from more accurate diagnostics.
1
Market
As a services and technology commercialization company, we currently participate in two components within the U.S. domestic oncology diagnostics market. The first is the clinical pathology services market, which is estimated to reach a $26.1 billion annual market by 2024 with a compound annual growth rate of 6.16%. The second component is the liquid biopsy reagents/kits market. According to the Piper Jaffray report from September 2015, the domestic oncology liquid biopsy market estimate is over $28 billion per year and includes screening, therapy selection, treatment monitoring and recurrence. The current market size for colon, lung and melanoma is 426,000 new cases per year and over 2.5 million people living with cancer, creating a potential market opportunity of $8.2 billion. We believe additional opportunities exist in clinical trials searching for low cost and high quality solutions for patient selection and treatment monitoring.
Our Platform
Our platform is designed to provide physicians and their patients, access to necessary academic expertise and technology in order to better provide diagnoses. To our knowledge, we are the only company focused on addressing the issue of diagnostic accuracy with an innovative, robust and scalable business model by:
| · | Providing physicians and their patients access to world-class academic experts and technologies; |
| · | Leveraging the largest network of academic experts by adding numerous leading academic institutions to our platform; |
| · | Allowing payers to benefit from quality-based outcomes to their patients and increase the likelihood of cost savings; and |
| · | Enabling cross-collaboration between physicians and academic institutions to advance research and discovery. |
Our customers are oncologists who biopsy their patients in order to confirm or rule out the presence of cancer. After our customers send the samples to us, we conduct all the technical tests at our New Haven facility. We then transmit the test results to pathologists who have access to our laboratory information system from their respective offices, enabling them to review and render their diagnostic interpretation of the test results for reporting. We have developed a proprietary algorithm that is applied to each sample submitted to us for testing, resulting in our ability to render a more precise and accurate diagnosis. The final results are prepared by pathologists and integrated into the final report by us, and are then delivered electronically through our portal to the referring clinician. The patient’s insurance is billed for the services; we are paid for the technical work done at our laboratory; and the pathologists are paid by us for their diagnostic interpretation.
Our Technology
| 1. | ICE-COLD-PCR |
ICP technology was developed at Harvard and is licensed exclusively to us by Dana-Farber. ICP is a unique, proprietary, patented specimen enrichment technology that increases the sensitivity of molecular based tests from approximately 90-95% to 99.99%. Traditional molecular testing is done on tumor biopsies. These tests are typically conducted at disease onset, when the patient undergoes a biopsy. In the typical course of treatment, a patient is rarely re-biopsied, and therefore, genetic information is based solely on the initial biopsy. Tumors are known to shed cells into the patient’s bloodstream where they circulate alongside normal cells; however, existing testing methodologies are not sufficiently sensitive to differentiate between tumor and normal cells. The increased sensitivity provided by ICP allows for testing of genetic mutations that occur within tumors to be conducted on peripheral blood samples, termed liquid biopsies. This technical capability enables physicians to test for genetic mutations through a simple blood test rather than an invasive biopsy extracted from the actual tumor. The results of such tests can be used for diagnosis, prognosis and therapeutic decisions. The technology is encapsulated within a chemical (reagent) used during the specimen preparation process, which enriches (amplifies) the tumor DNA detected within the blood sample while suppressing the normal DNA. In addition to offering this technology as a clinical service, we are developing panels that will be sold as reagent to other laboratories to enable this testing in their facilities, thereby improving their test sensitivity and more accurate diagnoses via liquid biopsies. The business model of selling reagents to other laboratories expands the reach and impact of our technology while eliminating the reimbursement risks from running the tests in-house.
Gene sequencing is performed on tissue biopsies taken surgically from the tumor site in order to identify potential therapies that will be more effective in treating the patient. There are several limitations to this process. First, surgical procedures have several limitations, including:
| · | Cost: surgical procedures are usually performed in a costly hospital environment. |
| · | Surgical access: various tumor sites are not always accessible (e.g. brain tumors), in which cases no biopsy is available for diagnosis. |
| · | Risk: patient health may not permit undergoing an invasive surgery; therefore, a biopsy cannot be obtained at all. |
| · | Time: the process of scheduling and coordinating a surgical procedure often takes time, delaying the start of patient treatment. |
Second, there are several tumor-related limitations that provide a challenge to obtaining such genetic information from a tumor:
| · | Tumors are heterogeneous by nature: a tissue sample from one area of the tumor may not properly represent the tumor’s entire genetic composition; thus, the diagnostic results from a tumor may be incomplete and non-representative. |
| · | Metastases: in order to accurately test a patient with metastatic disease, ideally an individual biopsy sample should be taken from each site (if those sites are even known). These biopsies are very difficult to obtain; therefore, physicians often rely on biopsies taken only from the primary tumor site. |
We license the ICP technology from Dana-Farber through a license agreement referred to herein as the License Agreement. The License Agreement grants us an exclusive license to the ICP technology, subject to a non-exclusive license granted to the U.S. government, in the areas of mutation detection using Sanger (di-deoxy) sequencing and mitochondrial DNA analysis for all research, diagnostic, prognostic and therapeutic uses in humans, animals, viruses, bacteria, fungi, plants or fossilized material. The License Agreement also grants us a non-exclusive license in the areas of mutation detection using DHPLC, surveyor-endonuclease-based mutation detection and second generation sequencing techniques. We paid Dana-Farber an initial license fee and are required to make milestone payments with respect to the first five licensed products or services we develop using the licensed technology, as well as royalties ranging from high single to low double digits on net sales of licensed products and services for sales made by us and sales made to any distributors. The License Agreement remains in effect until we cease to sell licensed products or services under said agreement. Dana-Farber has the right to immediately terminate the License Agreement if (i) we cease to carry on our business with respect to licensed products and services, (ii) we fail to make any payments under the License Agreement (subject to a cure period), (iii) we fail to comply with due diligence obligations under the License Agreement (subject to a cure period), (iv) we default in our obligations to procure and maintain insurance as required by the License Agreement, (v) any of our officers is convicted of a felony relating to the manufacture, use, sale or importation of licensed products under the License Agreement, (vi) we materially breach any provision of the License Agreement (subject to a cure period), or (vii) we or Dana-Farber become insolvent. We may terminate the License Agreement for convenience upon 180 days’ prior written notice.
| 2. | IV-Cell |
The diagnostic process of hematopoietic diseases involves conducting cell-culture tests by the cytogenetic laboratory to imitate in-vivo conditions. The four groups of cell lineages cultured are:
| · | Myeloid cells – indicating myeloid neoplasms (MDS, AML, CML) |
| · | B-cells – indicating B-cell neoplasms (B-cell lymphoma, mantle cell lymphoma) |
| · | T-cells – indicating T-cell neoplasms (T-cell lymphoma) |
| · | Plasma cells – indicating plasma cell neoplasms (multiple myeloma) |
The cytogeneticist must decide up front which cell lineage to select to be cultured. In most cases, due to specimen limitation, low cellularity, or cell viability, the cytogeneticist can select only one of the above cell lines to culture. Often, the initial clinical suspicion is not in line with the final diagnosis determined by the pathologist based on the rest of the work up. Our internal data has shown that this occurs in approximately 50% of bone marrow biopsies. If the wrong cell lineage is selected, the diagnosis may be compromised (or return a false negative diagnosis) because the lab will be culturing and investigating the wrong cells (essentially “going down the wrong path”).
We have developed IV-Cell, a proprietary culture media that addresses the problem of selective culturing – by creating a universal media that enables simultaneous culturing of all 4 hematopoietic cell lineages. This ensures that no cell lineage is missed in the diagnostic process, and the technician is able to select any of the 4 lineages during the culturing process. Our Company’s proprietary cell-culture media represents a significant advancement over an inefficient and decades-old method employed throughout the cytogenetics diagnostics market. IV-Cell was validated in our laboratory in parallel with existing reagents available on the market and has successfully demonstrated superior results. Subsequently, IV-Cell has been used at our laboratory for the past 12 months on >500 clinical specimens, producing superior diagnostic results. IV-Cell also produces chromosomes with an average band resolution of 500, approximately 25% higher than achieved with standard culture media.
This is a key component of both obtaining critical diagnostic and prognostic information to efficiently arrive at an accurate diagnosis of various blood and bone marrow-related cancers. Currently available media on the market require manual, up-front selection of one target cell lineage, thereby reducing the likelihood of a correct result.
Precipio designed the IV-Cell media to deliver a higher resolution of the chromosome bands, enabling a deeper look at the chromosomes, and resulting in faster and more accurate analysis. IV-Cell includes all necessary components required to conduct the cell culturing including fetal bovine serum and all necessary mitogens in pre-mixed format, ready to use by the cytogenetics laboratory without the need for any reconstitution or preparation. With the use of only one complete media, The Company’s IV-Cell provides a reduction in the cost of reagent purchasing, inventory management and quality control tasks instead of current industry use of multiple cell culture media types that require reconstitution and further preparation before use.
IV-Cell is commercialized on an RUO (“Research Use Only”) basis, and FDA clearance or approval is not currently required for clinical use, to cancer cytogenetics labs, which enables laboratories to culture multiple cell lineages simultaneously, thereby increasing the likelihood of selecting the correct one for analysis. We intend to commercialize this technology by providing major laboratories with access to the media. This can be achieved via a direct supply contract, whereby we will contract with a manufacturer (under license) to produce the media, and supply it to laboratories.
| 3. | HemeScreen |
Each year, an estimated 140,000 patients are diagnosed with diseases in the MPN or MDS blood cancer categories. The National Comprehensive Cancer Network (the “NCCN”) guidelines require that these patients be tested for genetic mutations in four key genes:
| · | JAK2 (V617F) |
| · | JAK2 (exon 12) |
| · | CALR |
| · | MPL |
The clinical significance of these mutations is substantial to patient treatment. A positive result in either of the JAK2 mutations indicates the patient may be eligible for a targeted therapy. A positive result in the CALR or MPL gene indicates a good prognosis, meaning the disease is less aggressive, and the physician may therefore choose to treat the patient in a less aggressive manner. The results of these genetic tests are critical to determining a treatment plan, and therefore both the importance, and the speed of which the results are delivered, may significantly impact patient care.
At the current reimbursement levels (approximately $600 for full panel at Medicare rates) and given the costs to run the tests, laboratories running the test in house must either batch samples to gain efficiency, or send the test out to another reference laboratory. Most hospital laboratories don’t have the volume and patient frequency to economically justify running the test, and therefore send the test out. This has created an industry average turnaround time for results of between 2-4 weeks (depending on the lab providing the test).
We have developed and patented a proprietary screening panel for all 4 genes in one rapid scanning panel. The test screens for the presence of these mutations in a very economic manner. Due to the improved economics, laboratories can reduce the batch requirements for the test while still enjoying a positive economic model and reducing the turnaround time for results, providing improved clinical service to physicians.
We offer two HemeScreen commercial options:
1. Reference send-out to the Company. We offer an average of a 2-day TAT for the test, lower than the industry average of approximately 2 weeks.
2. The Company to provide the reagents on an RUO (Research Use Only) basis), and a laboratory can set up the test In-house test as an LDT (Laboratory Developed Test).
At an average reimbursement rate of approximately $600 per test, the US Market Revenue Potential is approximately $84M/year, in addition to international demand.
Our Products & Services
Our initial product offering consists of clinical diagnostic services harnessing the expertise of pathologists from premier academic institutions and the commercialization and application of our various technologies. Our clinical diagnostic services focus on the diagnosis of different hematopoietic or blood-related cancers and the delivery of an accurate diagnosis to oncologists, with demonstrated superior results through the harnessing of subspecialized academic pathologists. We intend to enter into additional partnerships with premiere academic institutions during 2019 that will potentially broaden and strengthen our academic expert network, although there is no guarantee that such partnership opportunities will be available. Our cutting-edge liquid biopsy technology, ICP, enables detection of abnormalities in blood samples down to as low as .01%. Our proprietary cytogenetics media IV-Cell enables laboratories to arrive at more accurate results while reducing inventory and other operating costs. Our proprietary HemeScreen panel enables hospitals and laboratories to run an important genetic mutation test at a lower cost, resulting in faster results delivered to physicians and their patients. Our customers are oncologists, hospitals, reference laboratories, and pharma and biotech companies. We believe that these technologies enable our customers to achieve more accurate results for their patients, with improved economics as well as clinical outcomes.
We built and obtained CLIA certification to operate our New Haven laboratory. The laboratory is approximately 3,000 square feet and has several sub-departments such as flow cytometry, immuno-histochemistry, cytogenetics, and molecular testing. The laboratory is currently operated by five lab technicians and is supervised by a laboratory manager and a medical director. Our laboratory is inspected every two years by a Connecticut state-appointed inspector, and once approved, we are issued upona CLIA-certificate. Furthermore, the exerciselaboratory supervisor and medical director must conduct a self-inspection every two years (rotating with the state inspection) and must submit those results to the state department of outstanding warrants, (ii) 261,904health. Current active laboratory certifications can be found on http://www.precipiodx.com/accreditations.html
The laboratory operations are governed by Standard Operating Procedure manuals, or SOPs, which detail each aspect of the laboratory environment including the work flow, quality control, maintenance, and safety. These SOPs are reviewed and approved annually and signed off by the laboratory manager and medical director.
Recent Developments
None.
Corporate Information
We were incorporated under the laws of the State of Delaware in March 1997. Our principal executive office is located at 4 Science Park, New Haven, Connecticut, 06511, and our telephone number is (203) 787-7888. Our website address is www.precipiodx.com. We do not incorporate the information on or accessible through our website into this prospectus, and you should not consider any information on, or that can be accessed through, our website as part of this prospectus. Our current and future annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other filings with the SEC are available, free of charge, through our website as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC. Our SEC filings can be accessed through the investors section of our website. The information contained on, or accessible through, our website is not intended to be part of this prospectus or any report we file with, or furnish to, the SEC and incorporated by reference herein. Our common stock trades on the NASDAQ Capital Market, or NASDAQ, under the symbol “PRPO.”
| Common stock to be offered by the Selling Stockholder hereunder | 920,654 shares we may sell to Lincoln Park under the Purchase Agreement from time to time after the date of this prospectus; | |
| Common stock outstanding prior to this offering | 8,018,117 shares as of January 9, 2020 | |
| Common stock to be outstanding after giving effect to the issuance of 920,654 shares under the Purchase Agreement registered hereunder | 8,938,771 shares | |
| Use of Proceeds | This prospectus relates to shares of our common stock that may be offered and sold from time to time by Lincoln Park. We will receive no proceeds from the sale of shares of common stock by Lincoln Park in this offering. We may receive up to $10,000,000 aggregate gross proceeds under the Purchase Agreement from any sales we make to Lincoln Park pursuant to the Purchase Agreement. We have previously received $8,250,758 in aggregate gross proceeds from prior sales of 3,226,667 shares under the Purchase Agreement. We have $1,749,242 of gross proceeds remaining from any sales to Lincoln Park under the Purchase Agreement and any proceeds that we receive from such sales will be used for working capital and general corporate purposes. See “Use of Proceeds.” | |
| Risk factors | This investment involves a high degree of risk. See “Risk Factors” for a discussion of factors you should consider carefully before making an investment decision. | |
| Symbol on The NASDAQ Capital Market | “PRPO” | |
Purchase Agreement with Lincoln Park
On September 7, 2018, we entered into a purchase agreement with Lincoln Park, which we refer to in this prospectus as the Purchase Agreement, pursuant to which Lincoln Park has agreed to purchase from us up to an aggregate of $10,000,000 of our common stock (subject to certain limitations) from time to time over the term of the Purchase Agreement. Additionally, on September 7, 2018, we entered into a registration rights agreement with Lincoln Park, which we refer to in this prospectus as the Registration Rights Agreement, pursuant to which we are required to file with the SEC a registration statement that includes this prospectus to register for resale under the Securities Act of 1933, as amended, or the Securities Act, the shares of common stock heldthat have been or may be issued to Lincoln Park under the Purchase Agreement. Pursuant to the terms of the Purchase Agreement, we issued 40,000 shares of our common stock to Lincoln Park as consideration for its commitment to purchase shares of our common stock under the Purchase Agreement, which we refer to in treasurythis prospectus as the Commitment Shares.
We do not have the right to commence any sales of our common stock to Lincoln Park under the Purchase Agreement until certain conditions set forth in the Purchase Agreement, all of which are outside of Lincoln Park’s control, have been satisfied, including that the SEC has declared effective the registration statement that includes this prospectus. Thereafter, we may, from time to time and (iii)at our sole discretion, on any single business day on which the closing price of our common stock is not less than $1.50 per share (subject to adjustment for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction as provided in the Purchase Agreement), direct Lincoln Park to purchase shares of our common stock in amounts up to 30,000 shares, which amounts may be increased to up to 36,666 shares depending on the market price of our common stock at the time of sale and subject to a maximum commitment by Lincoln Park of $1,000,000 per single purchase, which we refer to in this prospectus as “regular purchases”, plus other “accelerated amounts” and/or “additional accelerated amounts” under certain circumstances. We will control the timing and amount of any sales of our common stock to Lincoln Park. The purchase price of the shares that we could issuemay be sold to Lincoln Park in regular purchases under the Purchase Agreement will be based on the market price of our employeecommon stock option plan.preceding the time of sale as computed under the Purchase Agreement. The purchase price per share will be equitably adjusted for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the business days used to compute such price. We may at any time in our sole discretion terminate the Purchase Agreement without fee, penalty or cost upon one business day notice. There are no restrictions on future financings, rights of first refusal, participation rights, penalties or liquidated damages in the Purchase Agreement or Registration Rights Agreement, other than a prohibition on our entering into certain types of transactions that are defined in the Purchase Agreement as “Variable Rate Transactions”. Lincoln Park may not assign or transfer its rights and obligations under the Purchase Agreement.
As of January 9, 2020, there were 8,018,117 shares of our common stock outstanding, of which 7,876,750 shares were held by non-affiliates. As of the date of this prospectus, we have outstanding
options to purchase 4,034,881already received approximately $8.3 million from the sale of 3,226,667 shares of common stock at exercise prices ranging
from $5.00 to $13.00 per share. WeLincoln Park which were registered pursuant to registration statements on Form S-1A (File No. 333-227364) filed on September 13, 2018, registration statement on Form S-1 (333-229478) filed on February 1, 2019 and registration statement on Form S-1 (333-233175) filed on August 9, 2019. Although the Purchase Agreement provides that we may issue options to acquiresell up to 1,774,150$10,000,000 of our common stock to Lincoln Park, only 920,654 additional shares of our common stock are being offered under this plan.
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SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATAprospectus, which may be issued to Lincoln Park, if and when we sell shares to Lincoln Park under the Purchase Agreement. Depending on the market prices of our common stock at the time we elect to issue and sell shares to Lincoln Park under the Purchase Agreement, we may need to register additional shares of our common stock in order to receive aggregate gross proceeds equal to the $10,000,000 total commitment available to us under the Purchase Agreement. We have previously received $8,250,758 in aggregate gross proceeds from prior sales of 3,226,667 shares under the Purchase Agreement. We have $1,749,242 of gross proceeds remaining from any sales to Lincoln Park under the Purchase Agreement. If all of the 920,654 shares offered by Lincoln Park under this prospectus were issued and outstanding as of January 9, 2020, such shares would represent approximately 10.3% of the total number of shares of our common stock outstanding and approximately 10.5% of the total number of outstanding shares held by non-affiliates, in each case as of the date hereof. If we elect to issue and sell more than the 920,654 shares offered under this prospectus to Lincoln Park, which we have the right, but not the obligation, to do, we must first register for resale under the Securities Act any such additional shares, which could cause additional substantial dilution to our stockholders. The summarynumber of shares ultimately offered for resale by Lincoln Park is dependent upon the number of shares we sell to Lincoln Park under the Purchase Agreement.
Under applicable rules of The NASDAQ Capital Market, in no event may we issue or sell to Lincoln Park under the Purchase Agreement more than 19.99% of the shares of our common stock outstanding immediately prior to the execution of the Purchase Agreement which limitation we refer to as the Exchange Cap, unless (i) we obtain stockholder approval to issue shares of common stock in excess of the Exchange Cap or (ii) the average price of all applicable sales of our common stock to Lincoln Park under the Purchase Agreement equals or exceeds $7.092 (which represents the closing consolidated historical financial databid price of our common stock on September 7, 2018, plus an incremental amount to account for our 1997, 1998issuance of the Commitment Shares to Lincoln Park), such that issuances and 1999sales of our common stock to Lincoln Park under the Purchase Agreement would be exempt from the Exchange Cap limitation under applicable NASDAQ rules. On December 20, 2018, we received the requisite approval of our shareholders to issue shares of common stock in excess of the Exchange Cap.
The Purchase Agreement also prohibits us from directing Lincoln Park to purchase any shares of common stock if those shares, when aggregated with all other shares of our common stock then beneficially owned by Lincoln Park and its affiliates, would result in Lincoln Park and its affiliates having beneficial ownership, at any single point in time, of more than 4.99% of the then total outstanding shares of our common stock, as calculated pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and Rule 13d-3 thereunder, which limitation we refer to as the Beneficial Ownership Cap.
Issuances of our common stock in this offering will not affect the rights or privileges of our existing stockholders, except that the economic and voting interests of each of our existing stockholders will be diluted as a result of any such issuance. Although the number of shares of common stock that our existing stockholders own will not decrease, the shares owned by our existing stockholders will represent a smaller percentage of our total outstanding shares after any such issuance to Lincoln Park.
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all of the other information contained in this prospectus, including our financial statements and the related notes in our Quarterly report on form 10Q for the fiscal yearsquarter ended September 30, 2019, filed with the SEC on November 13, 2019 and our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on April 16, 2019, before deciding to invest in our common stock. If any of the following risks actually occur, our business, prospects, operating results and financial condition could suffer materially, the trading price of our common stock could decline and you could lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.
Risks Related to Our Business and Strategy
There is substantial doubt about our ability to continue as a going concern.
Our independent registered public accounting firm has issued an opinion on our consolidated financial statements included in our Annual Report on Form 10-K, incorporated by reference, that states that the consolidated financial statements were prepared assuming we will continue as a going concern. Our consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America applicable for a going concern, which assume that we will realize our assets and discharge our liabilities in the ordinary course of business. We have incurred substantial operating losses and have used cash in our operating activities for the past few years. For the year ended December 31, 2018, we had a net loss of $15.7 million, negative working capital of $12.0 million and net cash used in operating activities of $6.8 million. For the nine months ended September 30, 2019, we had a net loss of $9.5 million, negative working capital of $1.7 million and net cash used in operating activities of $7.0 million. We are not current in making payments to all lenders and vendors. Our consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern. We also cannot be certain that additional financing, if needed, will be available on acceptable terms, or at all, and our failure to raise capital when needed could limit our ability to continue our operations. There remains substantial doubt about the Company’s ability to continue as a going concern.
To date, we have experienced negative cash flow from development of our diagnostic technology, as well as from the costs associated with establishing a laboratory and building a sales force to market our products and services. We expect to incur substantial net losses for the foreseeable future to further develop and commercialize our diagnostic technology. We also expect that our selling, general and administrative expenses will continue to increase due to the additional costs associated with market development activities and expanding our staff to sell and support our products. Our ability to achieve or, if achieved, sustain profitability is based on numerous factors, many of which are beyond our control, including the market acceptance of our products, competitive product development and our market penetration and margins. We may never be able to generate sufficient revenue to achieve or, if achieved, sustain profitability.
Because of the numerous risks and uncertainties associated with further development and commercialization of our diagnostic technology and any future tests, we are unable to predict the extent of any future losses or when we will become profitable, if ever. We may never become profitable and you may never receive a return on an investment in our securities. An investor in our securities must carefully consider the substantial challenges, risks and uncertainties inherent in the development and commercialization of tests in the medical diagnostic industry. We may never successfully commercialize our diagnostic technology or any future tests, and our business may fail.
We will require significant additional financing to sustain our operations and without it we will not be able to continue operations.
At September 30, 2019, we had a working capital deficit of $1.7 million. We had an operating cash flow deficit of $7.0 million for the nine months ended September 30, 19992019 and 2000 is
derived from our consolidated financial statements$6.8 million for these periods. The
unaudited statements of operations data for the nine months ended September 30,
2000, may not be indicative of the results of operations for a full year. You
should read this summary data along with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," our consolidated financial
statements and notes thereto and the unaudited pro forma financial information
and notes thereto, included elsewhere in this prospectus.
To facilitate ongoing operations and product development, on September 7, 2018, the Company entered into the LP Purchase Agreement pursuant to which Lincoln Park has agreed to purchase up to an aggregate of operations
had this transaction occurred$10,000,000 of common stock of the Company (subject to certain limitations) from time to time over the term of the LP Purchase Agreement.
On December 20, 2018 the Company obtained shareholder approval of the $10,000,000 Lincoln Park Purchase Agreement. Per the terms of the LP Purchase Agreement, we may direct Lincoln Park to purchase up to $10,000,000 worth of shares of our common stock under our agreement over a 24-month period generally in amounts up to 30,000 shares of our common stock, which may be increased to up to 36,666 shares of our common stock depending on the date specified, nor are they indicativemarket price of our future resultscommon stock at the time of operations. You should read this summary along withsale and subject to a maximum commitment by Lincoln Park of $1,000,000 per regular purchase, on any business day on which the closing price of our consolidated financial statements and notes thereto, our unaudited pro forma
financial information and notes thereto, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewherecommon stock is not less than $1.5 per share (subject to adjustment for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction as provided in this
prospectus.
The extent we rely on Lincoln Park as a company focused on life sciences
technologies and applications and are at a relatively early stagesource of development
in this business. Our future financial performance will depend on the growth in
demand for automated DNA separation and analysis enabling technologies. The
genomics market is new and emerging, is rapidly evolving, is characterized by an
increasing number of market entrants, and will be subject to frequent and
continuing changes in standards, customers' preferences and technology. As a
result, our business is subject to all of the risks inherent in the development
of a new business enterprise, such as the need:
- to develop a market for our products;
- to obtain enough capital to support the expenses of developing and
commercializing our products; and
- to attract and retain qualified management, sales, technical and
scientific staffs.
We expect that it will be a number of years, if ever, before we will achieve
profitability from the sale of our products. Our future operating resultsfunding will depend on a number of factors including, the prevailing market price of our common stock and the extent to which we are able to secure working capital from other sources. If obtaining sufficient funding from Lincoln Park were to prove unavailable or prohibitively dilutive, we will need to secure another source of funding in order to satisfy our working capital needs. Even if we sell all $10,000,000 under the Purchase Agreement to Lincoln Park, we may still need additional capital to fully implement our business, operating and development plans. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequences could be a material adverse effect on our business, operating results, financial condition and prospects. As of January 9, 2020, we have already received approximately $8.3 million from the sale of 3,226,667 shares of common stock to Lincoln Park.
We will need to raise substantial additional capital to commercialize our diagnostic technology, and our failure to obtain funding when needed may force us to delay, reduce or eliminate our product development programs or collaboration efforts or force us to restrict or cease operations.
As of September 30, 2019, our cash balance was $1.7 million and our working capital was approximately negative $1.7 million. Due to our recurring losses from operations and the expectation that we will continue to incur losses in the future, we will be required to raise additional capital to complete the development and commercialization of our current product candidates and to pay off our obligations. To date, to fund our operations and develop and commercialize our products, we have relied primarily on equity and debt financings. When we seek additional capital, we may seek to sell additional equity and/or debt securities or to obtain a credit facility, which we may not be able to do on favorable terms, or at all. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance and investor sentiment. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue the development and/or commercialization of one or more of our product candidates, restrict or cease our operations or obtain funds by entering into agreements on unattractive terms.
We have incurred losses since our inception and expect to incur losses for the foreseeable future. We cannot be certain that we will achieve or sustain profitability.
We have incurred losses since our inception and expect to incur losses in the future. As of September 30, 2019, we had a net loss of $9.5 million, negative working capital of $1.7 million and net cash used in operating activities of $7.0 million. To date, we have experienced negative cash flow from development of our diagnostic technology, as well as from the costs associated with establishing a laboratory and building a sales force to market our products and services. We expect to incur substantial net losses for the foreseeable future to further develop and commercialize our diagnostic technology. We also expect that our selling, general and administrative expenses will continue to increase due to the additional costs associated with market development activities and expanding our staff to sell and support our products. Our ability to achieve or, if achieved, sustain profitability is based on numerous factors, many of which are beyond our control, including the market acceptance of our products, competitive product development and our market penetration and margins. We may never be able to generate sufficient revenue to achieve or, if achieved, sustain profitability.
Because of the numerous risks and uncertainties associated with further development and commercialization of our diagnostic technology and any future tests, we are unable to predict the extent of any future losses or when we will become profitable, if ever. We may never become profitable and you may never receive a return on an investment in our securities. An investor in our securities must carefully consider the substantial challenges, risks and uncertainties inherent in the development and commercialization of tests in the medical diagnostic industry. We may never successfully commercialize our diagnostic technology or any future tests, and our business may fail.
We have been, and may continue to be, subject to costly litigation.
We have been, and may continue to be, subject to legal proceedings. Due to the nature of our business and our lack of sufficient capital resources to pay our obligations on a timely basis, we may be subject to a variety of regulatory investigations, claims, lawsuits and other proceedings in the ordinary course of our business. The results of these legal proceedings cannot be predicted with certainty due to the uncertainty inherent in litigation, including the effects of discovery of new evidence or advancement of new legal theories, the difficulty of predicting decisions of judges and juries and the possibility that decisions may be reversed on appeal. Such litigation has been, and in the future, could be, costly, time-consuming and distracting to management, result in a diversion of resources and could materially adversely affect our business, financial condition and operating results.
In addition, we may settle some litigation through the issuance of equity securities which may result in significant dilution to our stockholders.
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The commercial success of our product candidates will depend upon the degree of market acceptance of these products among physicians, patients, health care payors and the medical community and on our ability to successfully market our product candidates.
Our products may never gain significant acceptance in the marketplace and, therefore, may never generate substantial revenue or profits for us. Our ability to achieve commercial market acceptance for our existing and future products will depend on several factors, including:
| · | our ability to convince the medical community of the clinical utility of our products and their potential advantages over existing diagnostics technology; |
| · | the willingness of physicians and patients to utilize our products; and |
| · | the agreement by commercial third-party payors and government payors to reimburse our products, the scope and amount of which will affect patients’ willingness or ability to pay for our products and will likely heavily influence physicians’ decisions to recommend our products. |
In addition, physicians may rely on guidelines issued by industry groups, such as the NCCN, medical societies, such as the College of American Pathologists, or CAP, or other key oncology-related organizations before utilizing any diagnostic test. Although we have a study underway to demonstrate the clinical utility of our existing products, none of our products are, and may never be, listed in any such guidelines.
We believe that publications of scientific and medical results in peer-reviewed journals and presentations at leading conferences are critical to the broad adoption of our products. Publication in leading medical journals is subject to a peer-review process, and peer reviewers may not consider the results of studies involving our products sufficiently novel or worthy of publication. The failure to be listed in physician guidelines or to be published in peer-reviewed journals could limit the adoption of our products. Failure to achieve widespread market acceptance of our products would materially harm our business, financial condition, and results of operations.
If we cannot compete successfully with our competitors, including new entrants in the market, we may be unable to increase or sustain our revenue or achieve and sustain profitability.
The medical diagnostic industry is intensely competitive and characterized by rapid technological progress. We face significant competition from competitors ranging in size from diversified global companies with significant research and development resources to small, specialized firms whose narrower product lines may allow them to be more effective in deploying related PCR technology in the genetic diagnostic industry. Our closest competitors fall largely into two groups, consisting of companies that specialize in oncology and offer directly competing services to our diagnostic services, offering their services to oncologists and pathology departments within hospitals, as well as large commercial companies that offer a wide variety of laboratory tests that range from simple chemistry tests to complex genetic testing. The technologies associated with the molecular diagnostics industry are evolving rapidly and there is intense competition within such industry. Certain molecular diagnostics companies have established technologies that may be competitive to our product candidates and any future tests that we develop. Some of these tests may use different approaches or means to obtain diagnostic results, which could be more effective or less expensive than our tests for similar indications. Moreover, these and other future competitors have or may have considerably greater resources than we do in terms of technology, sales, marketing, commercialization and capital resources. These competitors may have substantial advantages over us in terms of research and development expertise, experience in clinical studies, experience in regulatory issues, brand name exposure and expertise in sales and marketing as well as in operating central laboratory services. Many of these organizations have financial, marketing and human resources greater than ours; therefore, there can be no assurance that we can successfully compete with present or potential competitors or that such competition will not have a materially adverse effect on our business, financial position or results of operations.
In July 2017, we commenced a study to demonstrate the impact of academic pathology expertise on diagnostic accuracy. There is no assurance that this study, or other studies or trials we may conduct, will demonstrate favorable results. If the results of this study, or other studies or trials we may conduct, demonstrate unfavorable or inconclusive results, customers may choose our competitors’ products over our products and our commercial opportunities may be reduced or eliminated.
We believe that many of our competitors spend significantly more on research and development-related activities than we do. Our competitors may discover new diagnostic tools or develop existing technologies to compete with our diagnostic technology. Our commercial opportunities will be reduced or eliminated if these competing products are more effective, are more convenient or are less expensive than our product candidates.
We may not be able to develop new products or enhance the capabilities of our systems to keep pace with rapidly changing technology and customer requirements, which could have a material adverse effect on our business and operating results.
Our success depends on our ability to develop new products and applications for our diagnostic technology in existing and new markets, while improving the performance and cost-effectiveness of our systems. New technologies, techniques or products could emerge that might offer better combinations of price and performance than our current or future products and systems. Existing or future markets for our products, as well as potential markets for our diagnostic product candidates, are characterized by rapid technological change and innovation. It is critical to our success that we anticipate changes in technology and customer requirements and successfully introduce new, enhanced and competitive technologies to meet our customers’ and prospective customers’ needs on a timely and cost-effective basis. At the same time, however, we must carefully manage the introduction of new products. If customers believe that such products bywill offer enhanced features or be sold for a more attractive price, they may delay purchases until such products are available. We may also have excess or obsolete inventory of older products as we transition to new products and our experience in managing product transitions is very limited. If we do not successfully innovate and introduce new technology into our product lines or effectively manage the transitions to new product offerings, our revenues and results of operations will be adversely impacted.
Competitors may respond more quickly and effectively than we do to new or changing opportunities, technologies, standards or customer requirements. We anticipate that we will face increased competition in the future as existing companies and competitors our abilitydevelop new or improved products and as new companies enter the market with new technologies.
We are subject to adapt our
technology to the commercial needsconcentrations of revenue risk and concentrations of credit risk in accounts receivable.
We have had certain customers whose revenue individually represented 10% or more of our customers and to developments in the
genomics industry, and the timing and extenttotal revenue, or whose accounts receivable balances individually represented 10% or more of our researchtotal accounts receivable.
For the three months ended September 30, 2019, two customers represented approximately 29% of our total revenue and development
efforts. Our limited operating history infor the life sciences industry makes
accurate predictionthree months ended September 30, 2018 one customer accounted for 17% of future operations difficult. If our operating results
fail to meet the expectations of securities analysts or investors, our stock
price could decline.
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE.
We experienced losses from operations of $8.3 million duringtotal revenue. For the nine months ended September 30, 2000, $6.9 million2019 and 2018, one customer accounted for 23% and 36% of our total revenue, respectively. We expect to maintain the relationship with these customers, however, the loss of, or significant decrease in fiscal 1999, $2.0 milliondemand from, any of our top customers could have a material adverse effect on our business, results of operations and financial condition.
At September 30, 2019 and December 31, 2018, one customer accounted for 10% and 23% of our total accounts receivable, respectively, and another customer accounted for 11% and less than 10% our total accounts receivable, respectively. The business risks associated with this concentration, including increased credit risks for these and other customers and the possibility of related bad debt write-offs, could negatively affect our margins and profits. Additionally, the loss of any of our top customers, whether through competition or consolidation, or a disruption in fiscal
1998sales to such a customer, could result in a decrease of the Company’s future sales, earnings and $3.2 millioncash flows. Generally, we do not require collateral or other securities to support our accounts receivable and while we are directly affected by the financial condition of our customers, management does not believe significant credit risks exist at September 30, 2019.
We currently depend on the services of pathologists and the loss of the services of these pathologists would adversely impact our ability to develop, commercialize and deliver our products.
We currently depend on the services of pathologists to review and render their diagnostic interpretation of our test results and to prepare the final diagnostic results that we integrate into our final report for our customers. Although we are in fiscal 1997. These lossesthe process of adding new academic partners, it would be difficult to replace the services provided by the pathologists at our current partner if their services became unavailable to us for any reason prior to adding other academic partners. If this academic partner does not successfully carry out its contractual duties or obligations and meet expected deadlines; if this partner needs to be replaced, or if the quality or accuracy of the services provided by the pathologists at this partner were mostly duecompromised for any reason, we would likely not be able to researchprovide our services in a manner expected by our customers, and our financial results and the commercial prospects for our products could be harmed. The loss of the services of these pathologists would severely harm our ability to develop, commercialize and deliver our products, and our business, financial condition and operating results would be materially adversely affected.
We may experience temporary disruptions and delays in processing biological samples at our facilities.
We may experience delays in processing biological samples caused by software and other errors. Any delay in processing samples could have an adverse effect on our business, financial condition and results of operations.
We depend upon a limited number of key personnel, and if we are not able to retain them or recruit additional qualified personnel, the commercialization of our product candidates and any future tests that we develop could be delayed or negatively impacted.
Our success is largely dependent upon the continued contributions of our officers and employees. Our success also depends in part on our ability to attract and retain highly qualified scientific, commercial and administrative personnel. In order to pursue our test development expenses and commercialization strategies, we will need to attract and hire additional personnel with specialized experience in a number of disciplines, including assay development, laboratory and clinical operations, sales and marketing, expenses related to the
developmentbilling and marketing of our WAVE System. In order to continue to enhance
our WAVE System and related products, develop new products, increase the pace of
installations and expand our marketing, sales and customer support service
staffs, we expect to incur significant increases in our expenses over the next
several years. As a result, we could continue to incur lossesreimbursement. There is intense competition for the forseeable
future and may never be profitable.
OUR TECHNOLOGY AND PRODUCTS ARE RELATIVELY NEW AND MAY NOT GAIN MARKET
ACCEPTANCE AMONG GENOMICS RESEARCHERS.
Our WAVE System and other automated DNA separation and analysis products are
relatively new products. Market acceptance of our products is dependent upon
factors, some of which are not in our control, such as continued growthpersonnel in the genomics industry, the availability and price of competing
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products and technologies, the success of our sales efforts, and the acceptance
of our product by the academic and research community, such as biologists,
geneticists and biochemists, who are more familiar with the existing,
traditional methods of DNA separation and analysis. Our products must compete
against well-established techniques, such as gel and capillary electrophoresis
and sequencing-based technologies. We cannot be certain that our products will
replace or compete successfully against existing products or that our products
will achieve market acceptance. If our products do not achieve market
acceptance,fields in which we may not achieve profitability.
WE WILL NEED TO REFINE OUR WAVE SYSTEM TO ALLOW IT TO MEET THE REQUIREMENTS OF
COMMERCIAL USERS.
Our WAVE System is relatively new and has been developed primarily for basic
genomics research applications. The WAVE System will require significant
enhancements to its capacity and software in order for it to be adapted to
commercial applications such as diagnostic research and drug development. The
adaptation of the current WAVE System for these commercial applications will
require additional research and development work that may be expensive and
time-consuming. We cannot assure you that we will be able to make the necessary
improvements to the WAVE System for use in commercial applications.operate. If we are unable to completeattract new employees and retain existing employees, the furtherdevelopment and commercialization of our product candidates and any future tests could be delayed or negatively impacted. If any of them becomes unable or unwilling to continue in their respective positions, and we are unable to find suitable replacements, our business and financial results could be materially negatively affected.
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We will need to increase the size of our organization, and we may experience difficulties in managing growth.
We are a small company with 45 full-time employees as of September 30, 2019. 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 of our development of diagnostic technology. Our future financial performance and our ability to commercialize our product candidates 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:
| · | integrate additional management, administrative, manufacturing and regulatory personnel; |
| · | maintain sufficient administrative, accounting and management information systems and 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 currently have limited experience in marketing products. If we are unable to establish marketing and sales capabilities and retain the WAVE Systemproper talent to execute on our sales and marketing strategy, we may not be able to successfully market it for commercial applications and this will limit our
future revenues.
IF ETHICAL AND OTHER CONCERNS SURROUNDING THE USE OF GENETIC INFORMATION BECOME
WIDESPREAD, WE MAY HAVE LESS DEMAND FOR OUR PRODUCTS.
Genetic testing has raised ethical issues regarding confidentiality and the
appropriate uses of the resulting information. For these reasons, governmental
authorities may call for limits on or regulation of the use of genetic testing
or prohibit testing for genetic predisposition to disease, particularly for
those thatgenerate product revenue.
We have no known cure. Any of these scenarios could reduce the potential
markets fordeveloped limited experience in marketing our products which could limitand services. We intend to continue to develop our future revenues.
WE HAVE A LIMITED SALES FORCE AND LIMITED EXPERIENCE WITH DIRECT MARKETING OF
OUR PRODUCTS WHICH COULD LIMIT OUR ABILITY TO EFFECTIVELY PENETRATE NEW MARKETS.
Our directin-house marketing organization and sales force, which will require significant capital expenditures, management resources and time. We will have to compete with other diagnostic companies to recruit, hire, train and retain marketing and sales personnel.
If we are unable to further grow our internal sales, marketing and distribution capabilities, we may not be sufficiently largepursue collaborative arrangements regarding the sales and marketing of our product candidates or knowledgeable to
successfully penetrate the market. Wefuture products, however, we may not be able to expand our direct sales
force to meet our commercial objectives. In addition, our sales force may not be
able to address complex scientific and technical issues raised by our customers.
Our customer support personnel may also lack the broad range of technical
expertise required to adequately service and support our products in the field.
THE SALE OF OUR PRODUCTS INVOLVES A LENGTHY SALES CYCLE WHICH MAKES OUR REVENUES
DIFFICULT TO FORECAST.
Our ability to obtain customers for our WAVE System and related accessories
depends in large part on the perception that our products can help accelerate
basic genomics research, diagnostic testing and related applicationsestablish or maintain such as
drug discovery and development efforts. A WAVE System sells for between $60,000
to $100,000 depending on its features and accessories. For many potential
customers, who are often constrained by limited research budgets, this will be a
large capital outlay. Additionally, the sales cycle is often three to six months
long due to the need to educate potential customers as to the benefits and use
of our WAVE System. We also need to effectively communicate the benefits of our
WAVE System to a variety of constituencies within potential customer groups,
including research and development personnel and key management. We may expend
substantial funds and sales effort with no assurance that a sale will result.
Due to the lengthy sales cycle required, our revenues could be difficult to
forecast.
8
OUR BUSINESS MAY EXPERIENCE LONG COLLECTION PERIODS WHICH COULD HAVE A NEGATIVE
IMPACT ON OUR LIQUIDITY.
We have experienced in the past, and may experience in the future,
collection periods of up to a year or more in connection with sales of our WAVE
System. Some customers delay payment due to the large capital outlay associated
with a purchase of the WAVE System. Other clients in the academic and research
fields are accustomed to longer payment periods than commercial buyers. In
general, our overseas customers pay less promptly than is customary in the
United States. In addition, because we are in the early stages of
commercialization of the WAVE System, we sometimes agree to provide extended
payment terms in order to make a sale. Our typical accounts receivable terms are
30 to 60 days. Longer collection periods may have a negative impact on our
liquidity. As of September 30, 2000, our accounts receivable equaled
$5.5 million. Balances subject to extended terms were approximately $251,000, of
which approximately $66,000 was due more than 1 year from September 30, 2000.
WE MAY NEED TO RAISE ADDITIONAL FUNDING WHICH MAY NOT BE AVAILABLE.
To date, we have financed our operations primarily from the proceeds of a
$77.3 million public offering of common stock, a $10,000,000 private offering of
common stock, a $12,000,000 issuance of convertible notes and borrowings under
our $5 million bank line of credit. We will continue to need substantial amounts
of cash for research and development and to expand our sales and marketing
infrastructure. We expect our capital and operating expenses to increase over
the next several years as we expand this infrastructure and our research and
development activities. The amount of additional capital which we will need to
raise will depend on many factors, including:
- the level of our research and development activities;
- market acceptance of our products and technologies;
- the level of our sales and marketing expenses;
- expenditures in connection with alliances and license agreements and in
acquiring new businesses and technologies;
- costs incurred in enforcing and defending our patent claims and other
intellectual property rights; and
- the cost of financing the purchase of additional capital equipment and
development tools.
We may need to raise the additional capital in the future through bank
financings or strategic investments. Additional financing may not be available
to us when we need it, or, if available, we cannot assure that we will be able
to obtain such financing on terms favorable to us or our stockholders. If we
raise additional capital by issuing equity securities, the issuance of such
securities would result in ownership dilution to our stockholders.
OUR WAVE SYSTEM INCLUDES HARDWARE COMPONENTS AND INSTRUMENTS MANUFACTURED BY A
SINGLE SUPPLIER AND IF WE WERE NO LONGER ABLE TO OBTAIN THESE COMPONENTS AND
INSTRUMENTS OUR ABILITY TO MANUFACTURE OUR PRODUCTS COULD BE IMPAIRED.
We currently rely on a single supplier, Hitachi Instruments, Inc., to
provide the basic instrument used in our WAVE System. While other suppliers of
instrumentation and computer hardware are available, we believe that our
arrangement with Hitachi offers strategic advantages. If we were required to
seek alternative sources of supply, it could be time consuming or expensive or
require significant and costly modification of our WAVE System. Also, if we were
unable to obtain instruments from Hitachi in sufficient quantities or in a
timely manner, our ability to manufacture our products could be impaired, which
could limit our future revenues.
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OUR CHROMATOGRAPHIC COLUMNS, A CORE COMPONENT OF THE WAVE SYSTEM, ARE
MANUFACTURED AT A SINGLE FACILITY WHICH IS LOCATED IN AN EARTHQUAKE-PRONE AREA.
All of our proprietary DNASep columns are manufactured at our manufacturing
facility in San Jose, California, which is located in an earthquake-prone area.
In the event our manufacturing facility or equipment was affected by man-made or
natural disasters, we would be unable to manufacture our products for sale or
meet customer demand or sales projections. If our manufacturing operations were
curtailed or ceased for any significant period of time, it could limit our
future revenues.
WE FACE, AND WILL CONTINUE TO FACE, INTENSE COMPETITION, BOTH IN THE U.S. AND
ABROAD, FROM COMPANIES THAT ARE ENGAGED IN THE DEVELOPMENT OF PRODUCTS THAT
ANALYZE DNA AND PROVIDE GENETIC INFORMATION.
The market for our products is highly competitive. Our principal competitors
include other biotechnology companies that provide alternative technologies and
products for the separation and analysis of DNA. Many of our competitors have
greater financial, operational, sales and marketing resources and more
experience in research and development and commercialization than we have.
Moreover, some of our competitors have greater name recognition than we do and
provide more conventional technologies and products with which some of our
customers and potential customers may have more familiarity or experience. In
order to effectively compete against alternative technologies we will need to
demonstrate the superior performance, speed, capabilities and cost effectiveness
of our WAVE System.
The genomics industry is characterized by extensive research efforts and
rapid technological progress. To remain competitive, we will be required to
continue to expand and enhance the functionality of our DNA separation and
analysis equipment and to offer comprehensive DNA analysis, and complimentary
applications and solutions, with greater ease of use. This will include the need
to increase the WAVE System's capacity and to develop new instrumentation,
software and application kits to allow the system to provide a broader range of
DNA and RNA separation and analysis applications. New products may require
additional development work, enhancement, testing, or further refinement before
they can be made commercially available and, therefore, we could experience
significant delays in the development and manufacture of our products. Even
after new products are made commercially available, unforeseen technical
difficulties could arise, requiring additional expenditures by us to correct
such difficulties and possibly resulting in further delays. We cannot be certain
that new products will be successfully developed at all. If our products have
performance, reliability or quality shortcomings, then we may experience reduced
orders, higher development costs, delays in collecting accounts receivable and
additional warranty and service expenses, and our reputation as a reliable
provider of quality products could be harmed. In addition, new developments are
expected to continue in DNA analysis, and we cannot assure you that our WAVE
System will not be made obsolete by more effective or less expensive
technologies. Because of rapid technological change, we may be required to
expend greater amounts in the development of new products, which in turn will
require greater revenues to recoup such expenditures. We cannot assure you that
we will be able to make the necessary enhancements to our technology or products
to compete successfully with new technologies that may emerge.
WE RECENTLY SOLD THE ASSETS RELATED TO OUR NON-LIFE SCIENCES INSTRUMENT PRODUCT
LINE WHICH HAVE HISTORICALLY GENERATED MOST OF OUR REVENUES AND EARNINGS.
In addition to our DNA separation and analysis products, we have produced
and sold various non-life sciences products. Until 1999, most of our revenues
and profits came from these non-life sciences products. We have decided to focus
our resources on our new automated DNA separation and analysis products and
technologies and during the second quarter of 2000 we sold the assets related to
our non-life sciences product line. As a result, we will no longer generate
revenues from the sale of these products. The future growth of our company will
be entirely dependent on the sale of our WAVE
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System and associated DNA separation products and technologies. You should keep
this fact in mind when reviewing our financial statements. Because of the change
in our product offerings, our historic financial statements will not necessarily
indicate our future financial performance.
OUR PATENTS MAY NOT PROTECT US FROM OTHERS USING OUR TECHNOLOGY WHICH COULD HARM
OUR BUSINESS AND COMPETITIVE POSITION.
Our business and competitive position are dependent upon our ability to
protect our proprietary technology. While we currently hold a number of domestic
and foreign patents and licenses, the issuance of a patent is not conclusive as
to its validity or enforceability, nor does it provide the patent holder with
freedom to operate without infringing the patent rights of others. Our patents
or licenses could be challenged by litigation and, if the outcome of such
litigation were adverse to us, our competitors could be free to use our
technology. As a result, the invalidation of key patents owned by or licensed to
us or non-approval of pending patent applications could increase competition for
our products.
We may not be able to obtain additional patents for our technology,collaborative arrangements, or if we are able to do so, patentsthey may not providehave effective sales forces. Any revenue we receive will depend upon the efforts of such third parties, which may not be successful. We may have little or no control over the marketing and sales efforts of such third parties and our revenue from product sales may be lower than if we had commercialized our product candidates ourselves. We also face competition in our search for third parties to assist us with substantialthe sales and marketing efforts of our product candidates.
Cybersecurity risks could compromise our information and expose us to liability, which may harm our ability to operate effectively and may cause our business and reputation to suffer.
Cybersecurity refers to the combination of technologies, processes and procedures established to protect information technology systems and data from unauthorized access, attack, or damage. We rely on our information systems to provide security for processing, transmission and storage of confidential information about our patients, customers and personnel, such as names, addresses and other individually identifiable information protected by the Health Insurance Portability and Accountability Act, (“HIPAA”), other privacy laws. Cyber-attacks are increasingly more common, including in the health care industry. The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and changing requirements. Compliance with changes in privacy and information security laws and with rapidly evolving industry standards may result in our incurring significant expense due to increased investment in technology and the development of new operational processes.
We have not experienced any known attacks on our information technology systems that compromised any confidential information. We maintain our information technology systems with safeguard protection against cyber-attacks including passive intrusion protection, firewalls and virus detection software. However, these safeguards do not ensure that a significant cyber-attack could not occur. Although we have taken steps to protect the security of our information systems and the data maintained in those systems, it is possible that our safety and security measures will not prevent the systems’ improper functioning or damage or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks.
Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches can create system disruptions or shutdowns or the unauthorized disclosure of confidential information. If personal information or protected health information is improperly accessed, tampered with or disclosed as a result of a security breach, we may incur significant costs to notify and mitigate potential harm to the affected individuals, and we may be commercially beneficial. Our patent applications may not protect our products
becausesubject to sanctions and civil or criminal penalties if we are found to be in violation of the following reasons:
- we cannot be certain that anyprivacy or security rules under HIPAA or other similar federal or state laws protecting confidential personal information. In addition, a security breach of our pending patent applications will
result in additional issued patents;
- we may develop additional proprietary technologies that are not
patentable;
- we cannot be certain that any patents issuedinformation systems could damage our reputation, subject us to liability claims or licensed to us will
provideregulatory penalties for compromised personal information and could have a basis for commercially viable products;
- we cannot be certain that any patents issued or licensed to us will not be
challenged or circumvented or invalidated by third parties; and
- we cannot be certain that any patents issued to others will not have anmaterial adverse effect on our business, financial condition and results of operations.
Our ability to do business.
Patent law relatinguse net operating loss carryforwards to the scope of claims in the technology fields in which
we operateoffset future taxable income for U.S. federal tax purposes is still evolving. The degree of future protection for our
proprietary rights is uncertain. Furthermore, we cannot be certainsubject to limitation and risk that others
will not independently develop similar or alternative products or technology,
duplicate any of our products, or, if patents are issued to us, design around
the patented products developed by us. In addition, we could incur substantial
costs in litigation if we are required to defend ourselves in patent suits
brought by third parties or if we initiate such suits.
WE CANNOT BE CERTAIN THAT OTHER MEASURES TAKEN TO PROTECT OUR INTELLECTUAL
PROPERTY WILL BE EFFECTIVE.
We rely upon trade secret protection, copyright and trademark laws,
non-disclosure agreements and other contractual provisions for some of our
confidential and proprietary information that is not subject matter for which
patent protection is being sought. Such measures, however, may not provide
adequate protection for our trade secrets or other proprietary information. If
they do not protect our rights, third parties could use our technology andfurther limit our ability to competeutilize our net operating losses.
Under U.S. federal income tax law, a corporation’s ability to utilize its net operating losses, or NOLs, to offset future taxable income may be significantly limited if it experiences an “ownership change” as defined in Section 382 of the Internal Revenue Code, as amended. In general, an ownership change will occur if there is a cumulative change in a corporation’s ownership by “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. A corporation that experiences an ownership change will generally be subject to an annual limitation on the use of its pre-ownership change NOLs equal to the value of the corporation immediately before the ownership change, multiplied by the long-term tax-exempt rate (subject to certain adjustments). The annual limitation for a taxable year generally is increased by the amount of any “recognized built-in gains” for such year and the amount of any unused annual limitation in a prior year. On December 22, 2017, a law commonly known as the Tax Cuts and Jobs Act, or the TCJ Act, was enacted in the market would be reduced. While we require employees,
academic collaborators and consultants to enter into confidentiality and/or
intellectual property assignments where appropriate, anyUnited States. Certain provisions of the followingTCJ Act impact the ability to utilize NOLs generated in 2018 and forward; any limitation to our annual use of NOLs could still occur:
- proprietary informationrequire us to pay a greater amount of U.S. federal (and in some cases, state) income taxes, which could reduce our after-tax income from operations for future taxable years and adversely impact our financial condition.
Reimbursement and Regulatory Risks Relating to Our Business
Governmental payers and health care plans have taken steps to control costs.
Medicare, Medicaid and private insurers have increased their efforts to control the costs of health care services, including clinical testing services. They may reduce fee schedules or limit/exclude coverage for certain types of tests that we perform. Medicaid reimbursement varies by state and is subject to administrative and billing requirements and budget pressures. We expect efforts to reduce reimbursements, impose more stringent cost controls and reduce utilization of testing services will continue. These efforts, including changes in laws or regulations, may have a material adverse impact on our business.
Changes in payer mix could have a material adverse impact on our net sales and profitability.
Testing services are billed to physicians, patients, government payers such as Medicare, and insurance companies. Tests may be billed to different payers depending on a particular patient’s medical insurance coverage. Government payers have increased their efforts to control the cost, utilization and delivery of health care services as well as reimbursement for laboratory testing services. Further reductions of reimbursement for Medicare and Medicaid services or changes in policy regarding coverage of tests or other requirements for payment, such as prior authorization or a physician or qualified practitioner’s signature on test requisitions, may be implemented from time to time. Reimbursement for the laboratory services component of our business is also subject to statutory and regulatory reduction. Reductions in the reimbursement rates and changes in payment policies of other third party payers may occur as well. Such changes in the past have resulted in reduced payments as well as added costs and have decreased test utilization for the clinical laboratory industry by adding more complex new regulatory and administrative requirements. As a result, increases in the percentage of services billed to government payers could have an adverse impact on our net sales.
Our laboratories require ongoing CLIA certification.
The Clinical Laboratory Improvement Amendments of 1988, or CLIA, extended federal oversight to virtually all clinical laboratories by requiring that they be certified by the federal government or by a federally-approved accreditation agency. The CLIA requires that all clinical laboratories meet quality assurance, quality control and personnel standards. Laboratories must also undergo proficiency testing and are subject to inspections.
The sanctions for failure to comply with the CLIA requirements include suspension, revocation or limitation of a laboratory’s CLIA certificate, which is necessary to conduct business, cancellation or suspension of the laboratory’s approval to receive Medicare and/or Medicaid reimbursement, as well as significant fines and/or criminal penalties. The loss or suspension of a CLIA certification, imposition of a fine or other penalties, or future changes in the CLIA law or regulations (or interpretation of the law or regulations) could have a material adverse effect on us.
We believe that we are in compliance with all applicable laboratory requirements, but no assurances can be given that our laboratories will pass all future certification inspections.
Failure to comply with HIPAA could be disclosed or others may gain access to
such information;
- others may independently develop substantially equivalent proprietarycostly.
HIPAA and associated regulations protect the privacy and security of certain patient health information and techniques;
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- we may not have adequate remediesestablish standards for any breach; or
- we may not be able to meaningfully protect our trade secrets.
WE ARE DEPENDENT UPON OUR LICENSED TECHNOLOGIES AND MAY NEED TO OBTAIN
ADDITIONAL LICENSES IN THE FUTURE TO OFFER OUR PRODUCTS AND REMAIN COMPETITIVE.
We have acquired or licensed key components of our technologies from third
parties. If these agreements were to terminate prematurely or if we breach the
terms of any licenses or otherwise fail to maintain our rights to such
technology, we may lose the right to manufacture or sell our products. In
addition, we may need to obtain licenses to additional technologieselectronic health care transactions in the future in orderUnited States. These privacy regulations establish federal standards regarding the uses and disclosures of protected health information. Our laboratories are subject to keep our products competitive.HIPAA and its associated regulations. If we fail to license or
otherwise acquirecomply with these laws and regulations we could suffer civil and criminal penalties, fines, exclusion from participation in governmental health care programs and the loss of various licenses, certificates and authorizations necessary technologies, we may not be able to develop new
products that we need to remain competitive.
THE PROTECTION OF INTELLECTUAL PROPERTY IN FOREIGN COUNTRIES IS UNCERTAIN.
We have sold approximately 50% ofoperate our WAVE Systems to customers located
outside the U.S. The patent and other intellectual property laws of some foreign
countries may not protect our intellectual property rights to the same extent as
U.S. laws. We may need to bring proceedings to defend our patent rights or to
determine the validity of our competitors' foreign patents. These proceedings
could result in substantial cost and diversion of our efforts. Finally, some of
our patent protection in the U.S. is not available to us in foreign countries
due to the laws of those countries.
OUR PRODUCTS COULD INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS WHICH
COULD REQUIRE US TO PAY SUBSTANTIAL ROYALTIES.
There are a significant number of U.S. and foreign patents and patent
applications submitted for technologies in, or related to, our area ofpatient testing business.
As a result, any application or exploitation of our technology could infringe
patents or proprietary rights of others and any licenses that we might need as a
result of such infringement might not be available to us on commercially
reasonable terms, if at all. This may lead others to assert patent infringement
or other intellectual property claims against us. We may have to pay substantial
damages, including treble damages, for past infringement if it is ultimately
determined that our products infringe on another party's intellectual property
rights. We could also be prohibitedincur liabilities from selling our products before we obtain a
license, which, if available at all, may require usthird party claims.
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Our failure to pay substantial
royalties. Even if a claim is without merit, defending a lawsuit takes
significant time, may be expensivecomply with any applicable government laws and may divert management attention from
other business concerns. Any public announcements relatedregulations or otherwise respond to litigationclaims relating to improper handling, storage or interference proceedings initiated or threatened against us could cause our
stock price to decline.
WE DEPEND ON ATTRACTING AND RETAINING KEY EMPLOYEES.
We are highly dependent on the principal membersdisposal of our management staff and
research and development group, including Collin J. D'Silva, our Chief Executive
Officer. We have entered into employment agreements with Mr. D'Silva and other
executive officers, but not with all of our other key employees. The loss of
services of any of these individuals could seriously harm our product
development and commercialization efforts for our new life sciences products.
Our future success will also depend on our ability to attract, hire and
retain additional personnel, including sales and marketing personnel, technical
support and customer service staff and application scientists. There is intense
competition for qualified personnel in our industry, especially for experienced
personnel in the areas of chemistry and molecular biology, software and electric
engineering, manufacturing and marketing, and there can be no assurancehazardous chemicals that we will be able to continue to attract and retain such personnel. Failure to
attract and retain key personnel could reduce
12
our ability to continue development of our DNA separation and analysis
technology and to successfully market our products.
WE WILL NEED TO EFFECTIVELY MANAGE OUR GROWTH IF WE ARE TO SUCCESSFULLY
IMPLEMENT OUR STRATEGY.
The number of employees and scope of our business operations are expected to
grow as we continue the commercialization of our WAVE System. This growthuse may place a strain on our management and operations. Our ability to manage our
growth will depend on the ability of our officers and key employees to continue
to implement and improve our operational, management information and financial
control systems and to expand, train and manage our work force both in the U.S.
and abroad. We may be required to open non-U.S. offices in addition to our
current U.K., Japan and satellite European offices, which could result in
additional burdens on our systems and resources. Our inability to manage our
growth effectively couldadversely affect our ability to pursue business opportunities and
expand our business.
OUR FAILURE TO COMPLY WITH ANY APPLICABLE GOVERNMENT REGULATIONS OR OTHERWISE
RESPOND TO CLAIMS RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF
HAZARDOUS CHEMICALS WHICH WE USE MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
results of operations.
Our research and development and manufacturingcommercial activities involve the controlled use of hazardous materials and chemicals, including acetonitrile.chemicals. We are subject to federal, state, local and localinternational laws and regulations governing the use, storage, handling and disposal of hazardous materials and waste products. If we fail to comply with applicable laws or regulations, we could be required to pay penalties or be held liable for any damages that result and this liability could exceed our financial resources. We cannot assure yoube certain that accidental contamination or injury will not occur. Any such accident could damage our research and manufacturing facilities and operations, resulting in delays and increased costs.
RISKS RELATED TO THIS OFFERING
WE ARE CONTROLLED BY A SMALL GROUP OF OUR EXISTING STOCKHOLDERS, WHOSE INTERESTS
MAY DIFFER FROM OTHER STOCKHOLDERS.
Our directors, executive officers
We may become subject to the Anti-Kickback Statute, Stark Law, False Claims Act, Civil Monetary Penalties Law and principal stockholdersmay be subject to analogous provisions of applicable state laws and their
affiliates beneficially own approximately 50%could face substantial penalties if we fail to comply with such laws.
There are several federal laws addressing fraud and abuse that apply to businesses that receive reimbursement from a federal health care program. There are also a number of similar state laws covering fraud and abuse with respect to, for example, private payors, self-pay and insurance. Currently, we receive a substantial percentage of our outstanding common stock.revenue from private payors and from Medicare. Accordingly, they collectivelyour business is subject to federal fraud and abuse laws, such as the Anti-Kickback Statute, the Stark Law, the False Claims Act, the Civil Monetary Penalties Law and other similar laws. Moreover, we are already subject to similar state laws. We believe we have operated, and intend to continue to operate, our business in compliance with these laws. However, these laws are subject to modification and changes in interpretation, and are enforced by authorities vested with broad discretion. Federal and state enforcement entities have significantly increased their scrutiny of healthcare companies and providers which has led to investigations, prosecutions, convictions and large settlements. We continually monitor developments in this area. If these laws are interpreted in a manner contrary to our interpretation or are reinterpreted or amended, or if new legislation is enacted with respect to healthcare fraud and abuse, illegal remuneration, or similar issues, we may be required to restructure our affected operations to maintain compliance with applicable law. There can be no assurances that any such restructuring will be possible or, if possible, would not have a significantmaterial adverse effect on our results of operations, financial position, or cash flows.
Anti-Kickback Statute
A federal law commonly referred to as the “Anti-Kickback Statute” prohibits the knowing and willful offer, payment, solicitation or receipt of remuneration, directly or indirectly, in return for the referral of patients or arranging for the referral of patients, or in return for the recommendation, arrangement, purchase, lease or order of items or services that are covered, in whole or in part, by a federal healthcare program such as Medicare or Medicaid. The term “remuneration” has been broadly interpreted to include anything of value such as gifts, discounts, rebates, waiver of payments or providing anything at less than its fair market value. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or the PPACA, amended the intent requirement of the Anti-Kickback Statute such that a person or entity can be found guilty of violating the statute without actual knowledge of the statute or specific intent to violate the statute. Further, the PPACA now provides that claims submitted in violation of the Anti-Kickback Statute constitute false or fraudulent claims for purposes of the federal False Claims Act, or FCA, including the failure to timely return an overpayment. Many states have adopted similar prohibitions against kickbacks and other practices that are intended to influence the purchase, lease or ordering of healthcare items and services reimbursed by a governmental health program or state Medicaid program. Some of these state prohibitions apply to remuneration for referrals of healthcare items or services reimbursed by any third-party payor, including commercial payors and self-pay patients.
Stark Law
Section 1877 of the Social Security Act, or the Stark Law, prohibits a physician from referring a patient to an entity for certain “designated health services” reimbursable by Medicare if the physician (or close family members) has a financial relationship with that entity, including an ownership or investment interest, a loan or debt relationship or a compensation relationship, unless an exception to the Stark Law is fully satisfied. The designated health services covered by the law include, among others, laboratory and imaging services. Some states have self-referral laws similar to the Stark Law for Medicaid claims and commercial claims.
Violation of the Stark Law may result in determining
the outcomeprohibition of payment for services rendered, a refund of any corporate transactionMedicare payments for services that resulted from an unlawful referral, $15,000 civil monetary penalties for specified infractions, criminal penalties, and potential exclusion from participation in government healthcare programs, and potential false claims liability. The repayment provisions in the Stark Law are not dependent on the parties having an improper intent; rather, the Stark Law is a strict liability statute and any violation is subject to repayment of all amounts arising out of tainted referrals. If physician self-referral laws are interpreted differently or if other legislative restrictions are issued, we could incur significant sanctions and loss of revenues, or we could have to change our arrangements and operations in a way that could have a material adverse effect on our business, prospects, damage to our reputation, results of operations and financial condition.
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False Claims Act
The FCA prohibits providers from, among other things, (1) knowingly presenting or causing to be presented, claims for payments from the Medicare, Medicaid or other matter submittedfederal healthcare programs that are false or fraudulent; (2) knowingly making, using or causing to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the federal government; or (3) knowingly making, using or causing to be made or used, a false record or statement to avoid, decrease or conceal an obligation to pay money to the stockholdersfederal government. The “qui tam” or “whistleblower” provisions of the FCA allow private individuals to bring actions under the FCA on behalf of the government. These private parties are entitled to share in any amounts recovered by the government, and, as a result, the number of “whistleblower” lawsuits that have been filed against providers has increased significantly in recent years. Defendants found to be liable under the FCA may be required to pay three times the actual damages sustained by the government, plus civil penalties ranging between $5,500 and $11,000 for approval,each separate false claim.
There are many potential bases for liability under the FCA. The government has used the FCA to prosecute Medicare and other government healthcare program fraud such as coding errors, billing for services not provided, and providing care that is not medically necessary or that is substandard in quality. The PPACA also provides that claims submitted in connection with patient referrals that result from violations of the Anti-Kickback Statute constitute false claims for the purpose of the FCA, and some courts have held that a violation of the Stark law can result in FCA liability, as well. In addition, a number of states have adopted their own false claims and whistleblower provisions whereby a private party may file a civil lawsuit in state court. We are required to provide information to our employees and certain contractors about state and federal false claims laws and whistleblower provisions and protections.
Civil Monetary Penalties Law
The Civil Monetary Penalties Law prohibits, among other things, the offering or giving of remuneration to a Medicare or Medicaid beneficiary that the person or entity knows or should know is likely to influence the beneficiary’s selection of a particular provider or supplier of items or services reimbursable by a federal or state healthcare program. This broad provision applies to many kinds of inducements or benefits provided to patients, including mergers, acquisitions, consolidationscomplimentary items, services or transportation that are of more than a nominal value. This law could affect how we have to structure our operations and activities.
Products and services offered RUO may be subject to regulatory scrutiny.
Certain of our products are currently labeled and sold for RUO and not for the diagnosis or treatment of disease. Because such products are not intended for diagnostic use, and the saleproducts do not include clinical or diagnostic claims or provide directions for use as diagnostic products, they are not subject to the same level of allregulation by the FDA as medical devices. In particular, while the FDA regulations require that RUO products be appropriately labeled, “For Research Use Only,” the regulations do not subject such products to the FDA’s pre- and post-market controls for medical devices. Pursuant to FDA guidance on RUO products, a company may not make clinical or substantiallydiagnostic claims about an RUO product or provide clinical directions or clinical support services to customers of RUO products. A product labeled RUO but deemed by the FDA to be intended for clinical diagnostic use may be viewed by the FDA as adulterated and misbranded under the FDCA and subject to FDA enforcement action. The FDA considers the totality of the circumstances surrounding distribution and use of a product labeled as RUO, including how the product is marketed and to whom, when determining its intended use. If the FDA were to disagree with our RUO classification or modify its approach to regulating products labeled for RUO, we could experience reduced revenue or increased compliance and other costs, which could adversely affect our business, prospects, results of operations and financial condition. In the event that the FDA requires marketing authorization of our RUO products in the future, the FDA may not ultimately grant any clearance, authorization or approval requested by us in a timely manner, or at all.
Intellectual Property Risks Related to Our Business
We cannot be certain that measures taken to protect our intellectual property will be effective.
We rely upon trade secrets, copyright and trademark laws, non-disclosure agreements and other contractual confidentiality provisions to protect our confidential and proprietary information that we are not seeking patent protection for various reasons. Such measures, however, may not provide adequate protection for our trade secrets or other proprietary information. If such measures do not protect our rights, third parties could use our technology and our ability to compete in the market would be reduced.
We depend on certain technologies that are licensed to us. We do not control these technologies and any loss of our rights to them could prevent us from selling some of our products.
We have entered into license agreements with third parties for certain licensed technologies that are, or may become, relevant to the products we market, or plan to market, including our license agreement with Dana-Farber pursuant to which we license our ICP technology. In addition, we may in the future elect to license third party intellectual property to further our business objectives and/or as needed for freedom to operate for our products. We do not and will not own the patents, patent applications or other intellectual property rights that are the subject of these licenses. Our rights to use these technologies and employ the inventions claimed in the licensed patents, patent applications and other intellectual property rights are or will be subject to the continuation of and compliance with the terms of those licenses.
We might not be able to obtain licenses to technology or other intellectual property rights that we require. Even if such licenses are obtainable, they may not be available at a reasonable cost or multiple licenses may be needed for the same product (e.g., stacked royalties). We could therefore incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our gross margins. Further, we could encounter delays in product introductions, or interruptions in product sales, as we develop alternative methods or products.
In some cases, we do not or may not control the prosecution, maintenance, or filing of the patents or patent applications to which we hold licenses, or the enforcement of these patents against third parties. As a result, we cannot be certain that drafting or prosecution of the licensed patents and patent applications by the licensors have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents and other intellectual property rights.
Third parties may assert ownership or commercial rights to inventions we develop.
Third parties may in the future make claims challenging the inventorship or ownership of our intellectual property. For example, third parties that have been introduced to or have benefited from our inventions may attempt to replicate or reverse engineer our products and circumvent ownership of our inventions. In addition, we may face claims that our agreements with employees, contractors, or consultants obligating them to assign intellectual property to us are ineffective, or in conflict with prior or competing contractual obligations of assignment, which could result in ownership disputes regarding intellectual property we have developed or will develop and interfere with our ability to capture the commercial value of such inventions. Litigation may be necessary to resolve an ownership dispute, and if we are not successful, we may be precluded from using certain intellectual property, or may lose our exclusive rights in that intellectual property. Either outcome could have an adverse impact on our business.
Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential information or misappropriated trade secrets.
Although we try to ensure that our employees and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third parties. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
The testing, manufacturing and marketing of medical diagnostic devices entails an inherent risk of product liability and personal injury claims.
To date, we have experienced no product liability or personal injury claims, but any such claims arising in the future could have a material adverse effect on our business, financial condition and results of operations. Potential product liability or personal injury claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of our policy or limited by other claims under our umbrella insurance policy. Additionally, our existing insurance may not be renewed by us at a cost and level of coverage comparable to that presently in effect, if at all. In the event that we are held liable for a claim against which we are not insured or for damages exceeding the limits of our insurance coverage, such claim could have a material adverse effect on our cash flow and thus potentially a materially adverse effect on our business, financial condition and results of operations.
All of our diagnostic technology development and our clinical services are performed at two laboratories, and in the event either or both of these facilities were to be affected by a termination of the lease or a man-made or natural disaster, our operations could be severely impaired.
We are performing all of our assets,diagnostic services in our CLIA laboratory located in New Haven, Connecticut and also the power to
preventour research and development operations are based in our facility in Omaha, Nebraska. Despite precautions taken by us, any future natural or man-made disaster at these laboratories, such as a fire, earthquake or terrorist activity, could cause substantial delays in our operations, damage or destroy our equipment and testing samples or cause a changeus to incur additional expenses.
In addition, we are leasing the facilities where our laboratories operate. We are currently in control. The interests of these stockholders may
differ fromcompliance with all and any lease obligations, but should the interestsleases terminate for any reason, or if at any time either of the other stockholders.
PROVISIONS IN OUR CHARTER MAY INHIBIT A TAKEOVER, WHICH COULD LIMIT THE PRICE
INVESTORS MIGHT BE WILLING TO PAY IN THE FUTURE FOR OUR COMMON STOCK.
Provisionslaboratories is moved due to conditions outside our control, it could cause substantial delay in our certificatediagnostics operations, damage or destroy our equipment and biological samples or cause us to incur additional expenses. In the event of incorporationan extended shutdown of either laboratory, we may be unable to perform our services in a timely manner or at all and bylawstherefore would be unable to operate in a commercially competitive manner. This could harm our operating results and financial condition.
Further, if we have to use a substitute laboratory while our facilities were shut down, we could only use another facility with established state licensure and accreditation under CLIA. We may havenot be able to find another CLIA-certified facility and comply with applicable procedures, or find any such laboratory that would be willing to perform the effecttests for us on commercially reasonable terms. Additionally, any new laboratory opened by us would be subject to certification under CLIA and licensure by various states, which would take a significant amount of delaying or preventing a changetime and result in control or changesdelays in our management that stockholders consider favorable or beneficial.ability to continue our operations.
An impairment in the carrying value of our intangible assets could negatively affect our results of operations.
A significant portion of our assets are intangible assets which are reviewed at least annually for impairment. If a changewe do not realize our business plan, our intangible assets may become impaired resulting in an impairment loss in our results of control or change in management is delayed or prevented, the marketoperations.
Risks Related to Our Common Stock
The price of our common stock may fluctuate significantly, which could decline.
13
OUR STOCK PRICE HAS BEEN VOLATILE AND YOUR INVESTMENT COULD SUFFER A DECLINE IN
VALUE, WHICH IN TURN COULD AFFECT OUR ABILITY TO RAISE ADDITIONAL CAPITAL TO
FUND THE COMMERCIALIZATION OF OUR PRODUCTS.negatively affect us and holders of our common stock.
There has been, and continues to be, a limited public market for our common stock, and an active trading market for our common stock has not and may never develop or, if developed, be sustained. The trading price of our common stock has beenmay be highly volatile and could be subject to largewide fluctuations in price in response to various factors, manysome of which will beare beyond our control. These factors include:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations by us or our competitors;
- new products or services introduced or announced by us or our competitors;
- changes in financial estimates by securities analysts;
- conditions or trends
| · | actual or anticipated fluctuations in our financial condition and operating results: |
| · | actual or anticipated changes in our growth rate relative to our competitors; |
| · | competition from existing products or new products that may emerge; |
| · | announcements by us, our academic institution partners, or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations, or capital commitments; |
| · | failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public and the revision of any financial estimates and projections that we provide to the public; |
| · | issuance of new or updated research or reports by securities analysts; |
| · | fluctuations in the valuation of companies perceived by investors to be comparable to us; |
| · | share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; |
| · | additions, transitions or departures of key management or scientific personnel; |
| · | disputes or other developments related to proprietary rights, including patents, litigation matters, and our ability to obtain patent protection for our technologies; |
| · | changes to reimbursement levels by commercial third-party payors and government payors, including Medicare, and any announcements relating to reimbursement levels; |
| · | Government shut-down or partial shut-downs impacting the financial markets, the United States Securities and Exchange Commission and other related agencies; |
| · | announcement or expectation of additional debt or equity financing efforts; |
| · | sales of our common stock by us, our insiders, or our other stockholders; and |
| · | general economic and market conditions |
These and other market and industry factors may cause the biotechnology, pharmaceutical and genomics
industries;
- announcements by us of significant acquisitions, strategic partnerships,
joint ventures or capital commitments; or
- additions or departures of key personnel.
The market price and demand for our common stock to fluctuate substantially, regardless of our commonactual operating performance, which may limit or prevent investors from readily selling their shares could also decline as a result of
sales of substantial amounts of our common stock inand may otherwise negatively affect the public market or the
perception that substantial sales could occur. These sales also might make it
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate. See "Shares Eligible for Future Sale."liquidity of our common stock. In addition, the stock market in general and the Nasdaq National Market and
the market for technology companies in particular, has recently experienced
extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of thosethese companies. Further, thereIn the past, when the market price of a stock has been particular volatilityvolatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management.
The price of our stock may be vulnerable to manipulation.
We believe our common stock has been the subject of significant short selling by certain market participants. Short sales are transactions in which a market participant sells a security that it does not own. To complete the transaction, the market participant must borrow the security to make delivery to the buyer. The market participant is then obligated to replace the security borrowed by purchasing the security at the market price at the time of required replacement. If the price at the time of replacement is lower than the price at which the security was originally sold by the market participant, then the market participant will realize a gain on the transaction. Thus, it is in the market pricesparticipant’s interest for the market price of the underlying security to decline as much as possible during the period prior to the time of replacement.
Because our unrestricted public float has been small relative to other issuers, previous short selling efforts have impacted, and may in the future continue to impact, the value of our stock in an extreme and volatile manner to our detriment and the detriment of our shareholders. Efforts by certain market participants to manipulate the price of our common stock for their personal financial gain may cause our stockholders to lose a portion of their investment, may make it more difficult for us to raise equity capital when needed without significantly diluting existing stockholders, and may reduce demand from new investors to purchase shares of our stock.
If we cannot continue to satisfy Nasdaq listing maintenance requirements and other rules, our securities may be delisted, which could negatively impact the price of biotechnologyour securities.
Although our common stock is listed on the NASDAQ Capital Market, we may be unable to continue to satisfy the listing maintenance requirements and life sciences companies.rules. If we are unable to satisfy The NASDAQ Stock Market, or NASDAQ, criteria for maintaining our listing, our securities could be subject to delisting.
On March 26, 2019, we were notified by the Listing Qualifications Staff of The Nasdaq Stock Market LLC that we did not meet the Bid Price Requirement and that the Staff had determined to delist our securities unless we timely request a hearing before the Nasdaq Listing Qualifications Panel. On April 25, 2019, prior to the hearing, we filed the Certificate of Amendment with the Secretary of State of Delaware, pursuant to which we effected a reverse stock split. The reverse stock split became effective as of 5:00 p.m. (Eastern Time) on April 26, 2019.The Common Stock began trading on a split-adjusted basis on the Nasdaq Capital Market at the market open on April 29, 2019. On May 2, 2019 the Company had a hearing with the Hearing Panel Nasdaq regarding the reverse stock split and the steps undertaken by the Company in order to regain compliance with the minimum bid price of $1.00.On May 15, 2019, we received a letter from the NASDAQ stating that because the Company’s common stock maintained a closing bid price at or above $1.00 per share for a minimum of ten (10) consecutive business days, the Company had regained compliance with the minimum bid price requirement for continued listing on the NASDAQ Capital Market, as set forth in NASDAQ Listing Rule 5550(a)(2), and that the matter is now closed.
Although we currently meet the Nasdaq requirements, there is risk that our stock price could decline below $1.00 again in the future, which may result in further delisting risk if we were to not be in compliance with the minimum bid price requirement.
If Nasdaq delists our securities, we could face significant consequences, including:
| · | a limited availability for market quotations for our securities; |
| · | reduced liquidity with respect to our securities; |
| · | a determination that our common stock is a “penny stock,” which will require brokers trading in our common stock to adhere to more stringent rules and possibly result in reduced trading; |
| · | activity in the secondary trading market for our common stock; |
| · | limited amount of news and analyst coverage; and |
| · | a decreased ability to issue additional securities or obtain additional financing in the future. |
In addition, we would no longer be subject to Nasdaq rules, including rules requiring us to have a certain number of independent directors and to meet other corporate governance standards.
Increased costs associated with corporate governance compliance may significantly impact our results of operations.
As a public company, we incur significant legal, accounting, and other expenses due to our compliance with regulations and disclosure obligations applicable to us, including compliance with the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules implemented by the SEC, and Nasdaq. The SEC and other regulators have continued to adopt new rules and regulations and make additional changes to existing regulations that require our compliance. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that have required the SEC to adopt additional rules and regulations in these areas. Stockholder activism, the current political environment, and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact, in ways we cannot currently anticipate, the manner in which we operate our business. Our management and other personnel devote a substantial amount of time to these compliance programs and monitoring of public company reporting obligations, and as a result of the new corporate governance and executive compensation related rules, regulations, and guidelines prompted by the Dodd-Frank Act, and further regulations and disclosure obligations expected in the future, we will likely need to devote additional time and costs to comply with such compliance programs and rules. These broadrules and regulations will cause us to incur significant legal and financial compliance costs and will make some activities more time-consuming and costly.
The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. Our current controls and any new controls that we develop may become inadequate, and weaknesses in our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting, which we may be required to include in our periodic reports that we file with the SEC under Section 404 of the Sarbanes-Oxley Act, and could harm our operating results, cause us to fail to meet our reporting obligations, or result in a restatement of our prior period financial statements. If we are not able to demonstrate compliance with the Sarbanes-Oxley Act, that our internal control over financial reporting is perceived as inadequate, or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results, and the price of our common stock could decline.
We are required to comply with certain of the SEC rules that implement Section 404 of the Sarbanes-Oxley Act, which requires management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. This assessment needs to include the disclosure of any material weaknesses in our internal control over financial reporting identified by our management or our independent registered public accounting firm. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting or if we are unable to complete our evaluation, testing, and any required remediation in a timely fashion, we will be unable to assert that our internal control over financial reporting is effective.
These developments could make it more difficult for us to retain qualified members of our Board of Directors, or qualified executive officers. We are presently evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude of additional costs we may incur as a result. To the extent these costs are significant, our general and administrative expenses are likely to increase.
We have not paid dividends on our common stock in the past and do not expect to pay dividends on our common stock for the foreseeable future. Any return on investment may be limited to the value of our common stock.
No cash dividends have been paid on our common stock. We expect that any income received from operations will be devoted to our future operations and growth. We do not expect to pay cash dividends on our common stock in the near future. Payment of dividends would depend upon our profitability at the time, cash available for those dividends, and other factors as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on an investor’s investment will only occur if our stock price appreciates. Investors in our common stock should not rely on an investment in our company if they require dividend income.
If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.
The trading market for our common stock relies in part on the research and industryreports that equity research analysts publish about us and our business. We do not control these analysts. The price of our common stock could decline if one or more equity research analysts downgrade our common stock or if they issue other unfavorable commentary or cease publishing reports about us or our business.
The sale or issuance of our common stock to Lincoln Park may cause significant dilution and the sale of the shares of common stock acquired by Lincoln Park, or the perception that such sales may occur, could cause the price of our common stock to fall.
On September 7, 2018, we entered into the LP Purchase Agreement pursuant to which Lincoln Park has agreed to purchase up to an aggregate of $10,000,000 of our common stock (subject to certain limitations) from time to time over the term of the LP Purchase Agreement.
On December 20, 2018 we obtained shareholder approval of the $10,000,000 Lincoln Park Purchase Agreement. Per the terms of the LP Purchase Agreement, we may direct Lincoln Park to purchase up to $10,000,000 worth of shares of our common stock under our agreement over a 24-month period
The extent we rely on Lincoln Park as a source of funding will depend on a number of factors including, the prevailing market price of our common stock and the extent to which we are able to secure working capital from other sources. The purchase price for the shares that we may seriously harmsell to Lincoln Park under the Purchase Agreement will fluctuate based on the market price of our common stock, regardlessstock. Depending on market liquidity at the time, sales of such shares may cause the trading price of our operating performance. Incommon stock to fall. We generally have the past, following periodsright to control the timing and amount of volatilityany future sales of our shares to Lincoln Park. Additional sales of our common stock, if any, to Lincoln Park will depend upon market conditions and other factors to be determined by us. We may ultimately decide to sell to Lincoln Park all, some or none of the additional shares of our common stock that may be available for us to sell pursuant to the Purchase Agreement. If and when we do sell shares to Lincoln Park, after Lincoln Park has acquired the shares, Lincoln Park may resell all, some or none of those shares at any time or from time to time in the
market price of a company's securities, securities class-action litigation has
often been instituted against that company. Such litigation, if instituted
againstits discretion. Therefore, sales to Lincoln Park by us could result in substantial costs and a diversiondilution to the interests of management's
attention and resources.
WE HAVE NEVER PAID DIVIDENDS ON OUR CAPITAL STOCK AND DO NOT INTEND TO DO SO FOR
THE FORSEEABLE FUTURE.
Unlike many public companies, we have never paid dividends on our capital
stock and do not intend to pay any dividends for the foreseeable future. We have
agreed not to pay dividends without the consentother holders of our lenders. Investors
seeking dividends or other current distributions should not invest in our common stock. See "Dividend Policy."
14
As of January 9, 2020, we have already received approximately $8.3 million from the sale of 3,226,667 shares of common stock to Lincoln Park.
The issuance of our common stock to creditors or litigants may cause significant dilution to our stockholders and cause the price of our common stock to fall.
We may seek to settle outstanding obligations to vendors, debtholders or litigants in any litigation through the issuance of our common stock or other security to such persons. Such issuances may cause significant dilution to our stockholders and cause the price of our common stock to fall.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made
This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements in this prospectus thatinclude, but are subjectnot limited to, risks and uncertainties. Many of these forward-looking statements refer to
our plans, objectives, expectations and intentions, as well as our future
financial results. Youabout:
| · | our use of the net proceeds from this offering; |
| · | the progress, timing and amount of expenses associated with our development and commercialization activities; |
| · | our plans and ability to develop and commercialize new products and services, and make improvements to our existing products and services; |
| · | our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; |
| · | our ability or the amount of time it will take to achieve successful reimbursement of our existing and future products and services from third-party payors, such as commercial insurance companies and health maintenance organizations, and government insurance programs, such as Medicare and Medicaid; |
| · | the accuracy of our estimates of the size and characteristics of the markets that may be addressed by our products; |
| · | the success of our study to demonstrate the impact of academic pathology expertise on diagnostic accuracy, and any other studies or trials we may conduct; |
| · | our intention to seek, and our ability to establish, strategic collaborations or partnerships for the development or sale of our products and the effectiveness of such collaborations or partnerships; |
| · | our expectations as to future financial performance, expense levels and liquidity sources; |
| · | our anticipated cash needs and our estimates regarding our capital requirements and our needs for additional financing, as well as our ability to obtain such additional financing on reasonable terms; |
| · | our ability to compete with other companies that are or may be developing or selling products that are competitive with our products; |
| · | our ability to build a sales force to market our products and services, and anticipated increases in our sales and marketing costs due to an expansion in our sales force and marketing activities; |
| · | federal and state regulatory requirements, including potential United States Food and Drug Administration regulation of our products or future products; |
| · | anticipated trends and challenges in our potential markets; |
| · | our ability to attract and retain key personnel; and |
| · | other factors discussed elsewhere in this prospectus. |
In some cases, you can identify these forward-looking statements by forward-looking wordsterminology such as "expects," "anticipates," "intends," "plans,"
"may," "will," "believes," "seeks," "estimates" and similar expressions. Because“may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and uncertainties, thereother factors, which are, important factorsin some cases, beyond our control and which could materially affect results. Factors that couldmay cause our actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and elsewhere in this prospectus. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.
The forward-looking statements includingin this prospectus represent our plans, objectives, expectationsviews as of the date of this prospectus. We anticipate that subsequent events and intentionsdevelopments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.
This prospectus relates to shares of our common stock that may be offered and sold from time to time by Lincoln Park. We will receive no proceeds from the sale of shares of common stock by Lincoln Park in this offering. We may receive up to $10,000,000 aggregate gross proceeds from any sales we make to Lincoln Park pursuant to the Purchase Agreement. We estimate that the net proceeds to us from the sale of our common stock to Lincoln Park pursuant to the Purchase Agreement will be up to approximately $9,808,000 over an approximately 24-month period, assuming that we sell the full amount of our common stock that we have the right, but not the obligation, to sell to Lincoln Park under that agreement and other factors discussed under
"Risk Factors"estimated fees and other factors identified by cautionary language used
elsewhereexpenses. See “Plan of Distribution” in this prospectus for more information. As of the date of this prospectus, we have $1,749,242 of aggregate proceeds remaining having already received approximately $8,250,758 from the sale 3,226,667 shares of common stock to Lincoln Park exclusive of the 920,654 shares of common stock registered hereunder.
We expect to use any proceeds that we receive under the Purchase Agreement for working capital and general corporate purposes.
This prospectus relates to the possible resale by the selling stockholder, Lincoln Park, of shares of common stock that have been or may be issued to Lincoln Park pursuant to the Purchase Agreement. We are filing the registration statement of which this prospectus forms a part pursuant to the provisions of the Registration Rights Agreement, which we entered into with Lincoln Park on September 7, 2018 concurrently with our execution of the Purchase Agreement, in which we agreed to provide certain registration rights with respect to sales by Lincoln Park of the shares of our common stock that have been or may be issued to Lincoln Park under the Purchase Agreement.
Lincoln Park, as the selling stockholder, may, from time to time, offer and sell pursuant to this prospectus any or all of the shares that we have issued or may sell to Lincoln Park under the Purchase Agreement. The selling stockholder may sell some, all or none of its shares. We do not know how long the selling stockholder will hold the shares before selling them, and we currently have no agreements, arrangements or understandings with the selling stockholder regarding the sale of any of the shares.
The following table presents information regarding the selling stockholder and the shares that it may offer and sell from time to time under this prospectus. BeforeThe table is prepared based on information supplied to us by the selling stockholder, and reflects its holdings as of January 9, 2020. Neither Lincoln Park nor any of its affiliates has held a position or office, or had any other material relationship, with us or any of our predecessors or affiliates. Beneficial ownership is determined in accordance with Section 13(d) of the Exchange Act and Rule 13d-3 thereunder.
| Selling Stockholder | Shares Beneficially Owned Before this Offering | Percentage of Outstanding | Shares to be Shares Under Purchase | Percentage of Beneficially Owned After this Offering | ||||||||||||
| Lincoln Park Capital Fund, LLC (1) | 68,412 | (2) | 0.85 | %(3) | 920,654 | (4) | 0.85 | % | ||||||||
| (1) | Josh Scheinfeld and Jonathan Cope, the Managing Members of Lincoln Park Capital, LLC, are deemed to be beneficial owners of all of the shares of common stock owned by Lincoln Park Capital Fund, LLC. Messrs. Cope and Scheinfeld have shared voting and investment power over the shares being offered under the prospectus filed with the SEC in connection with the transactions contemplated under the Purchase Agreement. Lincoln Park Capital, LLC is not a licensed broker dealer or an affiliate of a licensed broker dealer. |
| (2) | Represents an aggregate of 68,412 shares of our common stock issuable upon exercise of warrants to purchase our common stock, at certain fixed prices (that may be subject to adjustment as provided in such warrants), which warrants were acquired by Lincoln Park in connection with prior public offerings of securities. Lincoln Park may not convert these notes or exercise these warrants if such shares, when aggregated with all other shares of our common stock then beneficially owned by Lincoln Park and its affiliates, would result in Lincoln Park and its affiliates having beneficial ownership of more than 4.99% of the then total outstanding shares of our common stock, as calculated in accordance with the terms of such warrants. In accordance with rule 13d-3(d) under the Exchange Act, we have excluded from the number of shares beneficially owned prior to the offering all of the shares of common stock that Lincoln Park may be required to purchase pursuant to the Purchase Agreement because the issuance of such shares is solely at our discretion and is subject to certain conditions, the satisfaction of all of which are outside of Lincoln Park’s control, including the registration statement of which this prospectus is a part becoming and remaining effective. Furthermore, under the terms of the Purchase Agreement, issuances and sales of shares of our common stock to Lincoln Park are subject to certain limitations on the amounts we may sell to Lincoln Park at any time, including the Exchange Cap and the Beneficial Ownership Cap. See the description under the heading “The Lincoln Park Transaction” for more information about the Purchase Agreement. |
| (3) | Based on 8,018,117 outstanding shares of our common stock as of January 9, 2020. |
| (4) | Although the Purchase Agreement provides that we may sell up to $10,000,000 of our common stock to Lincoln Park, only 920,654 shares of our common stock are being offered under this prospectus, which may be sold by us to Lincoln Park at our discretion from time to time over a 24-month period commencing after the satisfaction of certain conditions set forth in the Purchase Agreement, including that the SEC has declared effective the registration statement that includes this prospectus. Depending on the price per share at which we sell our common stock to Lincoln Park pursuant to the Purchase Agreement, we may need to sell to Lincoln Park under the Purchase Agreement more shares of our common stock than are offered under this prospectus in order to receive aggregate gross proceeds equal to the $10,000,000 total commitment available to us under the Purchase Agreement. If we choose to do so, we must first register for resale under the Securities Act such additional shares. The number of shares ultimately offered for resale by Lincoln Park is dependent upon the number of shares we sell to Lincoln Park under the Purchase Agreement. As of the date of this prospectus, we have $1,749,242 of aggregate proceeds remaining having already received approximately $8,250,758from the sale of3,226,667shares of common stock to Lincoln Park pursuant to a registration statement on Form S-1A (File No.: 333-227364) filed on September 13, 2018, registration statement on Form S-1 (333-229478) filed on February 1, 2019 and registration statement on Form S-1 (333-233175) filed on August 9, 2019. |
On June 29, 2017, Precipio (then known as “Transgenomic, Inc.”, or “Transgenomic”), completed a reverse merger or, the Merger, with Precipio Diagnostics, LLC, a privately held Delaware limited liability company or, Precipio Diagnostics, in accordance with the terms of the Agreement and Plan of Merger, dated October 12, 2016, as amended on February 2, 2017 and June 29, 2017, by and among Transgenomic, Precipio Diagnostics and New Haven Labs Inc. a wholly-owned subsidiary of Transgenomic.
Since June 30, 2017, the trading date following the consummation of the Merger, our common stock has traded on the NASDAQ Capital Market under the symbol “PRPO.”
The following table sets forth, for the periods indicated, the closing prices of our common stock as reported on the market exchange noted above. The per share prices reflect a 1-for-15 reverse stock split effected on April 26, 2019:
| Fiscal Year 2020 | ||||||||
| High | Low | |||||||
| First Quarter (through January 9, 2020) | $ | 1.99 | $ | 1.90 | ||||
| Fiscal Year 2019 | ||||||||
| High | Low | |||||||
| First Quarter | $ | 3.90 | $ | 1.83 | ||||
| Second Quarter | $ | 9.15 | $ | 1.89 | ||||
| Third Quarter | $ | 4.08 | $ | 2.18 | ||||
| Fourth Quarter | $ | 2.60 | $ | 1.81 | ||||
| Fiscal Year 2018 | ||||||||
| High | Low | |||||||
| First Quarter | $ | 19.50 | $ | 7.15 | ||||
| Second Quarter | $ | 8.19 | $ | 5.43 | ||||
| Third Quarter | $ | 7.58 | $ | 4.92 | ||||
| Fourth Quarter | $ | 6.03 | $ | 2.25 | ||||
On January 9, 2020, the closing price of our common stock as reported on The NASDAQ Capital Market was $1.90 per share. As of January 9, 2020, there were approximately 58 holders of record and 8,018,117 shares of our common stock outstanding.
The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2019:
| · | on an actual basis |
| · | on a pro forma basis to give effect to: |
| · | the receipt of approximately $1,689,000 subsequent to September 30, 2019, as a result of the sale of 810,000 shares of common stock to Lincoln Park pursuant to a registration statement on Form S-1(333-233175)declared effective on August 21, 2019; |
| · | the issuance of 72,000 shares of our common stock, subsequent to September 30, 2019, as a result of the conversion of convertible promissory notes, totaling approximately $150,000. |
| · | on a pro forma as adjusted basis to give further effect to (i) our sale of 920,654 shares of common stock in this offering and our receipt of the net proceeds therefrom at an assumed public offering price of $1.90 per share, representing the closing price of our common stock on January 9, 2020, after deducting estimated offering expenses payable by us: |
The following information is illustrative only, and our cash and capitalization following the completion of the sale to Lincoln Park of the shares registered for resale pursuant to this prospectus will change based on the per share price of the common stock sold to Lincoln Park. You should read this table in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our condensed consolidated financial statements and related notes in our Quarterly Report on Form 10-Q for the third quarter ended September 30, 2019, filed with the SEC on November 13, 2019.
| As of September 30, 2019 | ||||||||||||
| Actual | Pro Forma | Pro Forma As Adjusted | ||||||||||
| (in thousands) | ||||||||||||
| Cash | $ | 1,683 | $ | 3,372 | $ | 5,096 | ||||||
| Current maturities of long-term debt | 454 | 454 | 454 | |||||||||
| Current maturities of convertible notes, less debt discounts and debt issuance costs | 34 | 28 | 28 | |||||||||
| Long-term debt | 207 | 207 | 207 | |||||||||
| Common stock warrant liability and derivative liability | 1.773 | 1,773 | 1,773 | |||||||||
| Finance leases and operating leases (current & long term) | 771 | 771 | 771 | |||||||||
| Stockholders' equity: | ||||||||||||
| Preferred stock, $0.01 par value per share; 15,000,000 shares authorized, actual, pro forma and pro forma as adjusted, 47 shares of Series B Preferred Stock issued and outstanding as of September 30, 2019, actual, pro forma and pro forma as adjusted | — | — | — | |||||||||
| Common stock, $0.001 par value per share; 150,000,000 shares authorized, actual, pro forma and pro forma as adjusted; 7,136,117 shares issued and outstanding at September 30, 2019, actual; 8,018,117 shares issued and outstanding, pro forma; 8,938,771 shares issued and outstanding, pro forma as adjusted; | 71 | 80 | 89 | |||||||||
| Additional paid-in capital | 72,381 | 74,068 | 75,783 | |||||||||
| Accumulated deficit | (57,158 | ) | (57,158 | ) | (57,158 | ) | ||||||
| Total stockholders' equity | 15,294 | 16,990 | 18,714 | |||||||||
| Total capitalization | $ | 12,055 | $ | 13,757 | $ | 15,481 | ||||||
The preceding data is based on 7,136,117 shares outstanding as of September 30, 2019. This number excludes the following, all of which, if issued by the Company, would be dilutive to our stockholders:
| · | 493,908 common shares issuable upon the exercise of stock options outstanding as of September 30, 2019, at a weighted average exercise price of $8.30 per share; |
| · | 909,189 shares of common stock issuable upon exercise of warrants that were outstanding as of September 30, 2019 at a weighted-average exercise price of $19.46 per share; |
| · | 25,293 shares of common stock reserved for future issuance under our 2017 Stock Option and Incentive Plan, as well as any automatic increases in the number of common shares reserved for issuance under the 2017 Stock Option and Incentive Plan after the date of this prospectus ; |
| · | 20,888 shares of our common stock issuable upon conversion of 47 shares of our Series B Preferred Stock; and |
| · | 301,734 shares of common stock issuable upon conversion of convertible promissory notes outstanding as of September 30, 2019, which amount may increase significantly if certain notes are not repaid or converted within 180 days of the issuance or if there is a decline in the Company’s stock price. |
Also, to the extent that we issue any common stock to vendors, lenders, litigants or potential litigants, the issuance of such securities could result in significant dilution to our stockholders.
If you invest in our common stock, you shouldyour interest will be aware thatdiluted to the occurrenceextent of the events described in these risk factors and
elsewhere in this prospectus could materially and adversely affect our business,
financial condition and results of operations.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Since July 17, 2000,difference between the date of our initial public offering price per share of our common stock hasand the pro forma as adjusted net tangible book value per share of our common stock after this offering. As of September 30, 2019, our historical net tangible book value was $(3.2) million, or $(0.45) per share of common stock, based on 7,136,117 shares of our common stock outstanding at September 30, 2019. Our historical net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities, divided by the total number of shares of our common stock outstanding as of September 30, 2019.
Our pro forma net tangible book value as of September 30, 2019 was $(1.5), million, or $(0.19), per share of common stock. Pro forma net tangible book value per share represents total tangible assets less total liabilities, divided by the number of shares of common stock outstanding, taking into accountthe receipt of approximately $1,689,000 subsequent to September 30, 2019, as a result of the sale of 810,000 shares of common stock to Lincoln Park and the issuance of 72,000 shares of our common stock subsequent to September 30, 2019 as a result of the conversion of convertible promissory notes, totaling approximately $150,000.After giving effect to the sale by us of 920,654shares of our common stock in this offering at the assumed public offering price of $1.90 per share, the closing price of our common stock on January 9, 2020, after deducting estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2019 would have been traded$0.2million, or $0.02per share. This represents an immediate increase in pro forma net tangible book value of $0.21per share to our existing stockholders and an immediate dilution of $1.88per share to our new investors purchasing shares of common stock in this offering. The following table illustrates this dilution on a per share basis:
| Assumed public offering price per share | $ | 1.90 | ||||||
| Historical net tangible book value per share as of September 30, 2019 | $ | (0.45 | ) | |||||
| Increase in net tangible book value per share attributable to the pro forma adjustments described above | $ | 0.26 | ||||||
| Pro forma net tangible book value per share as of September 30, 2019 | $ | (0.19 | ) | |||||
| Increase in pro forma net tangible book value per share attributable to this offering | $ | 0.21 | ||||||
| Pro forma as adjusted net tangible book value per share after this offering | 0.02 | |||||||
| Dilution per share to new investors in this offering | $ | 1.88 |
The preceding data is based on 7,136,117 shares outstanding as of September 30, 2019. This number excludes the Nasdaq National Marketfollowing, all of which, if issued by the Company, would be dilutive to our stockholders:
| · | 493,908common shares issuable upon the exercise of stock options outstanding as of September 30, 2019, at a weighted average exercise price of $8.30per share; |
| · | 909,189shares of common stock issuable upon exercise of warrants that were outstanding as of September 30, 2019 at a weighted-average exercise price of $19.46per share; |
| · | 25,293shares of common stock reserved for future issuance under our 2017 Stock Option and Incentive Plan, as well as any automatic increases in the number of common shares reserved for issuance under the 2017 Stock Option and Incentive Plan after the date of this prospectus; |
| · | 20,888shares of our common stock issuable upon conversion of 47 shares of our Series B Preferred Stock; and |
| · | 301,734shares of common stock issuable upon conversion of convertible promissory notes outstanding as of September 30, 2019, which amount may increase significantly if certain notes are not repaid or converted within 180 days of the issuance or if there is a decline in the Company’s stock price. |
To the extent that stock options are exercised or new stock options are issued under our equity incentive plans, there will be further dilution to investors purchasing common stock in this offering. In addition, we need to raise additional capital because of market conditions and strategic considerations. If we raise additional capital through the symbol TBIO. sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.
Also, to the extent that we issue any common stock to vendors, lenders, litigants or potential litigants, the issuance of such securities could result in significant dilution to our stockholders.
Summary Compensation Table
The following table sets forth compensation awarded to, paid to or earned by our “named executive officers” for services rendered during fiscal years 2019 and 2018.
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Option Awards ($)(1) | All Other Compensation ($)(2) | Total ($) | ||||||||||||||||||
| Ilan Danieli, (3) | 2019 | 250,000 | — | 34,000 | 13,556 | 297,556 | ||||||||||||||||||
| Chief Executive Officer | 2018 | 250,000 | — | 650,000 | 13,797 | 913,797 | ||||||||||||||||||
| Carl R. Iberger, (4) | 2019 | 200,000 | — | 34,000 | 10,671 | 244,671 | ||||||||||||||||||
| Chief Financial Officer | 2018 | 200,000 | — | 195,000 | 8,160 | 403,160 | ||||||||||||||||||
| Ahmed Zaki Sabet, (5) | 2019 | 150,000 | 10,000 | 34,000 | 13,758 | 207,758 | ||||||||||||||||||
| Chief Operations Officer | 2018 | 150,000 | — | 178,750 | 13,687 | 342,437 | ||||||||||||||||||
| Stephen Miller,(6) | 2019 | 200,000 | 36,891 | 47,600 | 15,323 | 299,814 | ||||||||||||||||||
| Chief Commercial Officer | 2018 | 200,000 | — | 97,500 | 13,797 | 311,297 | ||||||||||||||||||
(1)The amounts in this column reflect the highaggregate grant date fair value of the stock option awards granted during the respective fiscal year as computed in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, excluding the effect of estimated forfeitures. The amounts shown may not correspond to the actual value that may be recognized by the named executive officer. The fair value calculation of options granted during 2019 used the following assumptions: risk free interest rate of 2.47% based on the U.S. Treasury yield in effect at the time of grant; expected life of six years; and low sales pricesvolatility of 133% based on historical volatility of the Company’s common stock over a time that is consistent with the expected life of the option. For 2018 option grants, the assumptions we used to calculate fair value are included in Note 13 to our audited financial statements for fiscal 2018, included in our annual report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC on April 16, 2019. Our named executive officers will only realize compensation to the extent the trading price of our common stock foris greater than the third and fourth calendar quartersexercise price of 2000.such stock options on the date the options are exercised.
(2)Represents health insurance premiums paid by the Company.
(3)Mr. Danieli was appointed our Chief Executive Officer effective as of June 29, 2017. Prior to July 17, 2000,
therethat, Mr. Danieli was the Chief Executive Officer of Precipio Diagnostics, Inc. since November 2011. An employment agreement with Mr. Danieli was executed by the Company and Mr. Danieli on August 7, 2018.
(4)Mr. Iberger was appointed our Chief Financial Officer effective June 29, 2017. Prior to that, Mr. Iberger was the Chief Financial Officer of Precipio Diagnostics, Inc. since October 1, 2016. An employment agreement with Mr. Iberger was executed by the Company and Mr. Iberger on August 7, 2018.
(5)Mr. Sabet was appointed our Chief Operations Officer effective June 29, 2017. Prior to that, Mr. Sabet was the Chief Operations Officer of Precipio Diagnostics, Inc. since November 2011. An employment agreement with Mr. Sabet was executed by the Company and Mr. Sabet on August 7, 2018.
(6)An employment agreement with Mr. Miller was executed by the Company and Mr. Miller on August 7, 2018.
2019 Grants of Option Plan-Based Awards
The following table sets forth certain information with respect to grants of plan-based awards in fiscal year 2019 to our named executive officers and directors. The stock option awards granted in fiscal year 2019 were granted under the Company’s 2017 Stock Option and Incentive Plan, as amended (the “2017 Plan”). During the year ended December 31, 2019, no publicother equity awards were granted to our named executive officers and directors. See the notes below the table for details on option vesting schedules.
| Name | Grant Date | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise or Price of Option Awards ($/sh)(1) | Grant Date Fair Value of Option Awards ($)(2) | ||||||||||||
| Ilan Danieli | ||||||||||||||||
| Stock options(3) | 3/18/2019 | 16,667 | 2.25 | 34,000 | ||||||||||||
| Carl R. Iberger | ||||||||||||||||
| Stock options(3) | 3/18/2019 | 16,667 | 2.25 | 34,000 | ||||||||||||
| Ahmed Zaki Sabet | ||||||||||||||||
| Stock options(3) | 3/18/2019 | 16,667 | 2.25 | 34,000 | ||||||||||||
| Stephen Miller | ||||||||||||||||
| Stock options(4)(5) | 3/18/2019 | 23,334 | 2.25 | 47,600 | ||||||||||||
(1)The exercise price of the stock awards represent the fair market value of our common stock on the date of grant as defined in the 2017 Plan.
(2)The amount in this column reflects the aggregate grant date fair value of each stock award granted in accordance with ASC 718, excluding the effect of estimated forfeitures. The amounts shown may not correspond to the actual value that may be recognized. The fair value calculation of options granted during 2019 used the following assumptions: risk free interest rate of 2.47% based on the U.S. Treasury yield in effect at the time of grant; expected life of six years; and volatility of 133% based on historical volatility of the Company’s common stock over a time that is consistent with the expected life of the option. Our named executive officers will only realize compensation to the extent the trading price of our common stock is greater than the exercise price of such stock options on the date the options are exercised.
(3)The award vests over a four year period. Twenty-five percent (25%) of the options vest on the first anniversary of the grant and thereafter the reminder shall vest by 36 equal monthly installments and so long as the executive officer remains an employee of the Company or a Subsidiary on such dates.
(4)Includes 6,667 stock options which were performance based and have been forfeited or canceled as of December 31, 2019.
(5)Includes 16,667 stock options which vest over a four year period. Twenty-five percent (25%) of the options vest on the first anniversary of the grant and thereafter the reminder shall vest by 36 equal monthly installments and so long as the executive officer remains an employee of the Company or a Subsidiary on such dates.
Outstanding Equity Awards at Fiscal 2019 Year-End
The following table provides certain information concerning outstanding option awards held by our named executive officers as of December 31, 2019.
| Stock Option Awards(1) | ||||||||||||||||
| Name | Option Award Grant Date | Number of Securities Underlying Unexercised Options (#) (Exercisable) | Number of Securities Underlying Unexercised Options (#) (Unexercisable) | Options Exercise Price ($) | Option Expiration Date | |||||||||||
| Ilan Danieli | 9/26/2017 | 2,500 | 1,945 | 28.05 | 9/26/2027 | |||||||||||
| 2/16/2018 | 30,556 | 36,111 | 10.65 | 2/16/2028 | ||||||||||||
| 3/18/2019 | - | 16,667 | 2.25 | 3/18/2029 | ||||||||||||
| Carl Iberger | 9/26/2017 | 2,500 | 1,945 | 28.05 | 9/26/2027 | |||||||||||
| 2/16/2018 | 9,167 | 10,833 | 10.65 | 2/16/2028 | ||||||||||||
| 3/18/2019 | - | 16,667 | 2.25 | 3/18/2029 | ||||||||||||
| Ahmed Zaki Sabet | 2/16/2018 | 8,403 | 9,931 | 10.65 | 2/16/2028 | |||||||||||
| 3/18/2019 | - | 16,667 | 2.25 | 3/18/2029 | ||||||||||||
| Stephen Miller | 11/18/2013 | 138 | - | 2,700.00 | 11/18/2023 | |||||||||||
| 2/18/2014 | 11 | - | 2,490.00 | 2/18/2024 | ||||||||||||
| 4/1/2014 | 15 | - | 2,055.00 | 4/1/2024 | ||||||||||||
| 4/1/2015 | 133 | - | 645.00 | 4/1/2025 | ||||||||||||
| 9/26/2017 | 1,875 | 1,459 | 28.05 | 9/26/2027 | ||||||||||||
| 2/16/2018 | 4,583 | 5,417 | 10.65 | 2/16/2028 | ||||||||||||
| 3/18/2019 | - | 16,667 | 2.25 | 3/18/2029 | ||||||||||||
(1) The award vests over a four year period. Twenty-five percent (25%) of the options vest on the first anniversary of the grant and thereafter the reminder shall vest by 36 equal monthly installments and so long as the executive officer remains an employee of the Company or a Subsidiary on such dates.
Fiscal Year 2019 Option Exercises and Stock Vested
No stock options were exercised by any of our named executive officers during fiscal year 2019.
Agreements with Our Named Executive Officers
The Company has entered into employment agreements with each of Mr. Danieli, Mr. Iberger, Mr. Sabet and Mr. Miller.
Employment Agreement with Mr. Ilan Danieli
On August 7, 2018, the Company entered into a revised employment agreement with Ilan Danielli, effective as of that date (the “Danieli Employment Agreement”), in connection with his existing role as Chief Executive Officer of the Company. Pursuant to the Danieli Employment Agreement, Mr. Danieli will receive an annual salary in the amount of $250,000 per year and will be entitled to participate in the Company’s health plan and benefits on terms available to other Company employees.
Mr. Danieli is eligible to receive an annual bonus in accordance with the recommendations made by the Compensation Committee of the Board or a majority of the independent members of the Board. In addition, Mr. Danieli shall be eligible to receive stock options or other equity incentive awards in the Company subject to approval of the Compensation Committee of the Board.
In the event of termination without cause or for good reason (as such terms are defined in the Danieli Employment Agreement), Mr. Danieli shall be entitled to (i) a lump sum payment equal to 9 months of his base salary in effect at the date of termination, less applicable withholding (ii) COBRA benefits for a period of 9 months or such period as further described in the Danieli Employment Agreement and (iii) accelerated vesting of all unvested stock options or equity awards.
Upon death or termination of employment by virtue of disability, Mr. Danieli (or his estate or beneficiaries as applicable) shall have no right to receive any compensation or benefit pursuant to the terms of the agreement on and after the effective date of the termination of employment other than (i) annual salary earned and accrued under the agreement prior to the effective date of termination (ii) earned, accrued and vested benefits and paid time off under the agreement prior to the effective date of termination, subject to the terms of the plans applicable thereto (and any applicable laws and regulations); and (iii) reimbursement under the Agreement for expenses incurred prior to the effective date of termination, subject to the terms of the agreement and the policies applicable thereto.
If a sale event occurs (as defined in the Danieli Employment Agreement) and the Company, its subsidiaries or a successor entity, as the case may be, terminates the employment agreement and the employment of Mr. Danieli without cause or Mr. Danieli terminates the agreement and his employment for good reason, in either case within 12 months following such sale event, then Mr. Danieli shall be entitled to receive Change of Control Severance as set out in the terms of the agreement.
The description of the Danieli Employment Agreement set forth herein does not purport to be complete and is qualified in its entirety by reference to the full text thereof, which was attached as Exhibit 10.1(a) to the Current Report on Form 8-K filed by the Company on August 9, 2018.
Employment Agreement with Mr. Carl Iberger
On August 7, 2018, the Company entered into a revised employment agreement with Carl Iberger, effective as of that date (the “Iberger Employment Agreement”), in connection with his existing role as Chief Financial Officer of the Company. Pursuant to the Iberger Employment Agreement, Mr. Iberger will receive an annual salary in the amount of $200,000 per year and will be entitled to participate in the Company’s health plan and benefits on terms available to other Company employees.
Mr. Iberger is eligible to receive an annual bonus in accordance with the recommendations made by the Compensation Committee of the Board. In addition, Mr. Iberger shall be eligible to receive stock options or other equity incentive awards in the Company subject to approval of the Compensation Committee of the Board.
In the event of termination without cause or for good reason (as such terms are defined in the Iberger Employment Agreement), Mr. Iberger shall be entitled to (i) a lump sum payment equal to 9 months of his base salary in effect at the date of termination, less applicable withholding (ii) COBRA benefits for a period of 9 months or such period as further described in the Iberger Employment Agreement and (iii) accelerated vesting of all unvested stock options or equity awards.
Upon death or termination of employment by virtue of disability, Mr. Iberger (or his estate or beneficiaries as applicable) shall have no right to receive any compensation or benefit pursuant to the terms of the agreement on and after the effective date of the termination of employment other than (i) annual salary earned and accrued under the agreement prior to the effective date of termination (ii) earned, accrued and vested benefits and paid time off under the agreement prior to the effective date of termination, subject to the terms of the plans applicable thereto (and any applicable laws and regulations); and (iii) reimbursement under the Agreement for expenses incurred prior to the effective date of termination, subject to the terms of the agreement and the policies applicable thereto.
If a sale event occurs (as defined in the Iberger Employment Agreement) and the Company, its subsidiaries or a successor entity, as the case may be, terminates the employment agreement and the employment of Mr. Iberger without cause or Mr. Iberger terminates the agreement and his employment for good reason, in either case within 12 months following such sale event, then Mr. Iberger shall be entitled to receive Change of Control Severance as set out in the terms of the agreement.
The description of the Iberger Employment Agreement set forth herein does not purport to be complete and is qualified in its entirety by reference to the full text thereof, which is attached hereto as Exhibit 10.1(b) to the Current Report on Form 8-K filed by the Company on August 9, 2018.
Employment Agreement with Mr. Ahmed Zaki Sabet
On August 7, 2018, the Company entered into a revised employment agreement with Ahmed Zaki Sabet, effective as of that date (the “Sabet Employment Agreement”), in connection with his existing role as Chief Operations Officer of the Company. Pursuant to the Sabet Employment Agreement, Mr. Sabet will receive an annual salary in the amount of $150,000 per year and will be entitled to participate in the Company’s health plan and benefits on terms available to other Company employees.
Mr. Sabet is eligible to receive an annual bonus such amount as shall be determined in the sole discretion of the Chief Executive Officer of the Company based on recommendation of the Compensation Committee of the Board. In addition, Mr. Sabet shall be eligible to receive stock options or other equity incentive awards in the Company subject to approval of the Compensation Committee of the Board.
In the event of termination without cause or for good reason (as such terms are defined in the Sabet Employment Agreement), Mr. Sabet shall be entitled to (i) a lump sum payment equal to 9 months of his base salary in effect at the date of termination, less applicable withholding (ii) COBRA benefits for a period of 9 months or such period as further described in the Sabet Employment Agreement and (iii) accelerated vesting of all unvested stock options or equity awards.
Upon death or termination of employment by virtue of disability, Mr. Sabet (or his estate or beneficiaries as applicable) shall have no right to receive any compensation or benefit pursuant to the terms of the agreement on and after the effective date of the termination of employment other than (i) annual salary earned and accrued under the agreement prior to the effective date of termination (ii) earned, accrued and vested benefits and paid time off under the agreement prior to the effective date of termination, subject to the terms of the plans applicable thereto (and any applicable laws and regulations); and (iii) reimbursement under the Agreement for expenses incurred prior to the effective date of termination, subject to the terms of the agreement and the policies applicable thereto.
If a sale event occurs (as defined in the Sabet Employment Agreement) and the Company, its subsidiaries or a successor entity, as the case may be, terminates the employment agreement and the employment of Mr. Sabet without cause or Mr. Sabet terminates the agreement and his employment for good reason, in either case within 12 months following such sale event, then Mr. Sabet shall be entitled to receive Change of Control Severance as set out in the terms of the agreement.
The description of the Sabet Employment Agreement set forth herein does not purport to be complete and is qualified in its entirety by reference to the full text thereof, which is attached as Exhibit 10.1(c) to the Current Report on Form 8-K filed by the Company on August 9, 2018.
Employment Agreement with Mr. Stephen Miller
On August 7, 2018, the Company entered into a revised employment agreement with Stephen Miller, effective as of that date (the “Miller Employment Agreement”), in connection with his existing role as Chief Commercial Officer of the Company. Pursuant to the Miller Employment Agreement, Mr. Miller will receive an annual salary in the amount of $200,000 per year and will be entitled to participate in the Company’s health plan and benefits on terms available to other Company employees.
Mr. Miller is eligible to receive an annual bonus such amount as shall be determined in the sole discretion of the Chief Executive Officer of the Company based on recommendation of the Compensation Committee of the Board. In addition, Mr. Miller shall be eligible to receive stock options or other equity incentive awards in the Company subject to approval of the Compensation Committee of the Board.
In the event of termination without cause or for good reason (as such terms are defined in the Miller Employment Agreement), Mr. Miller shall be entitled to (i) a lump sum payment equal to 9 months of the greater of $258,500 or Mr. Miller’s base salary in effect at the date of termination, less applicable withholding (ii) COBRA benefits for a period of 9 months or such period as further described in the Miller Employment Agreement and (iii) accelerated vesting of all unvested stock options or equity awards.
Upon death or termination of employment by virtue of disability, Mr. Miller (or his estate or beneficiaries as applicable) shall have no right to receive any compensation or benefit pursuant to the terms of the agreement on and after the effective date of the termination of employment other than (i) annual salary earned and accrued under the agreement prior to the effective date of termination (ii) earned, accrued and vested benefits and paid time off under the agreement prior to the effective date of termination, subject to the terms of the plans applicable thereto (and any applicable laws and regulations); and (iii) reimbursement under the Agreement for expenses incurred prior to the effective date of termination, subject to the terms of the agreement and the policies applicable thereto.
If a sale event occurs (as defined in the Miller Employment Agreement) and the Company, its subsidiaries or a successor entity, as the case may be, terminates the employment agreement and the employment of Mr. Miller without cause or Mr. Miller terminates the agreement and his employment for good reason, in either case within 12 months following such sale event, then Mr. Miller shall be entitled to receive Change of Control Severance as set out in the terms of the agreement.
The description of the Miller Employment Agreement set forth herein does not purport to be complete and is qualified in its entirety by reference to the full text thereof, which is attached hereto as Exhibit 10.1(d) to the Current Report on Form 8-K filed by the Company on August 9, 2018.
Compensation Risk Analysis
We have reviewed our material compensation policies and practices for all employees and have concluded that these policies and practices are not reasonably likely to have a material adverse effect on us. While risk-taking is a necessary part of growing a business, our compensation philosophy is focused on aligning compensation with the long-term interests of our stockholders as opposed to rewarding short-term management decisions that could pose long-term risks.
31
DIRECTOR COMPENSATION
It is our Board’s general policy that compensation for independent directors should be a mix of cash and equity-based compensation. As part of a director’s total compensation, and to create a direct linkage between corporate performance and stockholder interests, our Board believes that a meaningful portion of a director’s compensation should be provided in, or otherwise based on, the value of appreciation in our common stock.
Our Board has the authority to approve all compensation payable to our directors, although our Compensation Committee is responsible for making recommendations to our Board regarding this compensation. Additionally, our Chief Executive Officer may also make recommendations or assist our Compensation Committee in making recommendations regarding director compensation. Our Board and Compensation Committee annually review our director compensation.
Cash Compensation
Directors who are also our employees are not separately compensated for serving on the Board other than reimbursement for out-of-pocket expenses related to attendance at Board and committee meetings. Independent directors are paid an annual retainer of $20,000 and receive reimbursement for out-of-pocket expenses related to attendance at Board and committee meetings. Independent directors serving on a committee of the Board are paid an additional annual retainer of $2,500 for the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee unless they are also a chairperson of a committee. The chairperson of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee receives an additional annual retainer of $8,000, $4,000 and $4,000, respectively.
In 2019, the directors were approximately 2,500 holdersgranted non-qualified options to purchase shares of our common stock.
Director Summary Compensation Table
The following table provides information regarding our compensation for non-employee directors during the year ended December 31, 2019. Directors who are our employees did not receive compensation for serving on the Board or its committees in fiscal year 2019.
| Name | Fees Earned | Option Awards ($)(1)(4) | All Other Compensation ($) | Total ($) | ||||||||||||
| Samuel Riccitelli(2) | 24,708 | 10,200 | — | 34,908 | ||||||||||||
| David Cohen | 21,458 | 10,200 | — | 31,658 | ||||||||||||
| Douglas Fisher | 26,500 | 10,200 | — | 36,700 | ||||||||||||
| Mark Rimer | 25,000 | 10,200 | — | 35,200 | ||||||||||||
| Jeffrey Cossman | 25,667 | 10,200 | — | 35,867 | ||||||||||||
| Kathleen LaPorte | 26,000 | 21,286 | — | 47,286 | ||||||||||||
| Richard Sandberg(3) | 1,667 | 14,480 | — | 16,147 | ||||||||||||
(1)The amount in this column reflects the aggregate grant date fair value of each stock award granted in accordance with ASC 718, excluding the effect of estimated forfeitures. The amounts shown may not correspond to the actual value that may be recognized. The fair value calculation of options granted during 2019 used the following assumptions: risk free interest rates of 1.60% to 2.47%, based on the U.S. Treasury yield in effect at the time of grant; expected life of six years; and volatility of 133% to 139% based on historical volatility of the Company’s common stock over a time that is consistent with the expected life of the option. Our directors will only realize compensation to the extent the trading price of our common stock is greater than the exercise price of such stock options on the date the options are exercised.
(2)Mr. Riccitelli resigned from the Board effective December 1, 2019. Any vested option awards as of Mr. Riccitelli’s resignation date may be exercised up until three months following his resignation date. Unvested option awards as of the resignation date were canceled or forfeited as of such date.
(3)Mr. Sandberg was elected a director of the Company on December 3, 2019.
(4)The aggregate outstanding options for each non-employee director as of December 31, 2019 are:
| Name | Aggregate Options Outstanding (#) | |||
| Samuel Riccitelli | 9,329 | |||
| David Cohen | 12,707 | |||
| Douglas Fisher | 12,707 | |||
| Mark Rimer | 12,707 | |||
| Jeffrey Cossman | 12,707 | |||
| Kathleen LaPorte | 12,240 | |||
| Richard Sandberg | 7,240 | |||
(5)Includes the following amounts for being a chairperson of a committee; Mr. Riccitelli $5,333; Mr. Fisher $4,000; Mr. Cossman $4,000; and Ms. LaPorte $2,667.
We have never declared or paid any cash dividends on our capital stock and
wecommon stock. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently expectintend to retain all available funds and any future earnings if any, for
investment into fund the development and growth of our business. In addition,Any future determination to declare dividends will be subject to the termsdiscretion of our current credit
facility prohibits us from paying cash dividends withoutboard of directors and will depend on various factors, including applicable laws, our lender's consent.
Dividends on our common stock will be paid only ifresults of operations, financial condition, future prospects and when declaredany other factors deemed relevant by our board of directors. The board's ability to declare a dividend is subject to
limits imposed by Delaware corporate law. In determining whether to declare
dividends,Investors should not purchase our common stock with the board may consider our financial condition, resultsexpectation of operations, workingreceiving cash dividends.
Our authorized capital requirements, future prospects and other relevant
factors.
15
SELECTED FINANCIAL DATA
The statementstock consists of operations data for the years ended December 31, 1997, 1998
and 1999 and the balance sheet data as of December 31, 1998 and 1999 are derived
from our historical consolidated financial statements and notes thereto included
elsewhere in this prospectus, which have been audited by Deloitte & Touche LLP,
independent auditors. The statement of operations data for the years ended
December 31, 1995 and 1996 and the balance sheet data as of December 31, 1995,
1996 and 1997 are derived from our audited historical consolidated financial
statements which are not included in this prospectus. The statement of
operations data for the nine months ended September 30, 1999 and 2000 and the
balance sheet data as of September 30, 2000 have been derived from our unaudited
consolidated financial statements included elsewhere in this prospectus. The
unaudited statements of operations data for the nine months ended September 30,
2000, may not be indicative of the results of operations for a full year. In the
opinion of our management, the unaudited consolidated financial statements
reflect all adjustments (consisting of only normal and recurring accruals)
necessary for a fair presentation of such information.
The following selected financial data should be read in conjunction with our
consolidated financial statements and the related notes thereto and the
information under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this prospectus.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1995(1) 1996(1) 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales.......................... $7,933 $12,535 $11,577 $18,935 $23,035 $16,903 $18,786
Cost of good sold.................. 3,516 6,760 6,336 9,590 12,090 9,040 9,402
------ ------- ------- ------- ------- ------- -------
Gross profit....................... 4,417 5,775 5,241 9,345 10,945 7,863 9,384
Selling, General and
Administrative................... 2,042 4,751 6,412 8,160 11,532 8,531 10,363
Research and Development........... 1,518 1,385 2,047 3,159 6,297 4,140 5,650
Stock Based Compensation Expense... -- -- -- -- -- -- 791
------ ------- ------- ------- ------- ------- -------
Operating expenses................. 3,560 6,136 8,459 11,319 17,829 12,671 16,804
Income (loss) before income
taxes............................ 728 (644) (3,646) (2,506) (8,082) (5,567) (8,289)
Net income (loss).................. $ 494 $ (415) $(2,410) $(1,576) $(9,827) $(7,428) $(8,289)
====== ======= ======= ======= ======= ======= =======
Basic and diluted net income (loss)
per share........................ $ 0.05 $ (0.04) $ (0.22) $ (0.13) $ (0.76) $ (0.57) $ (0.55)
====== ======= ======= ======= ======= ======= =======
Basic and diluted weighted average
shares outstanding............... 10,000 11,000 11,145 12,279 13,000 13,000 15,022
====== ======= ======= ======= ======= ======= =======
AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- --------------
1995(1) 1996(1) 1997 1998 1999 2000
-------- -------- -------- -------- -------- --------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total assets......................... $5,774 $9,527 $10,010 $14,736 $19,964 $83,461
Long-term debt, less current
portion............................ 626 1,597 1,128 695 12,538 --
Total stockholders' equity
(deficit).......................... 2,429 2,114 991 6,649 (2,099) 76,593
- ------------------------
(1) Financial information prior to July 1, 1997 is that of our predecessor
corporation, CETAC Holding Company, Inc. and its subsidiaries or
predecessors.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We provide innovative tools for DNA separation and analysis to researchers
seeking to discover and understand variations in the human genetic code and the
relationship of these variations to disease. Our
WAVE-Registered Trademark- System is a versatile system that can be used for
mutation detection, size-based double-strand DNA separation and analysis,
single-strand DNA separation and analysis and DNA purification. Our business
plan is to focus on the genomics segment of the life sciences industry and the
development, marketing and support of our proprietary technology for the
automated separation and analysis of DNA.
Revenues for our life sciences products are generated from the sale of our
principal product, the WAVE-Registered Trademark- System, and associated
consumable products and reagents. Through September 30, 2000, we have sold over
370 WAVE-Registered Trademark- Systems to major academic research centers and
commercial biopharmaceutical companies in 20 countries. Revenues from the sale
of consumable products in the first nine months of 2000 have represented
approximately 22% of our net sales derived from our life sciences business. We
expect that over the next five years, sales from consumable products will
increase as a percentage of our net sales.
Before July 1, 1997, we manufactured and sold instruments and other products
used in the non-life sciences instrumentation industry through our predecessor
company, CETAC Holding Company, Inc. and its subsidiaries. On July 1, 1997, we
merged these companies into Transgenomic, Inc., a new Delaware corporation, for
the purpose of developing, manufacturing and selling our new life sciences
product line in addition to continuing to manufacture and market our existing
non-life sciences products. In 1999, we decided to focus our resources on our
life sciences product line. Accordingly, during the second quarter of 2000 we
sold the assets related to our non-life sciences instrument products. These
assets consisted of inventory, property, plant and equipment, patents, other
intellectual property rights and a lease deposit, with an aggregate book value,
net of $125,000 of accrued liabilities, of approximately $4.7 million as of
April 1, 2000. Financial information for periods ending before the effective
date of the sale, April 1, 2000, includes the results of our non-life science
instrument product line. On July 21, 2000, we completed our initial public
offering, selling 5,152,000150,000,000 shares of common stock, at $15.00par value $0.01 per share, for net
proceedsand 15,000,000 shares of approximately $69.9 million.
Since our decision to focus on our life sciences products, we have incurred
significant losses, and aspreferred stock, par value $0.01 per share. As of September 30, 2000, we had an accumulated deficit
of $20.6 million. Our losses have resulted principally from costs incurred in
research and development and selling, general and administrative costs
associated with our operations. We expect to continue to incur substantial
research and development and selling, general and administrative costs as we
continue to expand our operations.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
NET SALES. Net sales increased 11%January9, 2020, from $16.9 million in 1999 to
$18.8 million in 2000. Salesthere were8,018,117shares of our life sciences products increased 68%, from
$9.9 million in 1999 to $16.6 million in 2000. Total revenues from salescommon stock outstanding and 47 shares of WAVE-Registered Trademark- Systems increased 67%, from $7.8 million in 1999 to
$13.0 million in 2000. Life sciences consumable sales increased 70%, from
$2.1 million in 1999 to $3.6 million in 2000. SalesSeries B preferred stock outstanding convertible into an aggregate of consumable products
increased as the installed base of WAVE-Registered Trademark- Systems has
increased and as researchers begin to use them more extensively in place of
other methods of DNA analysis. Sales of
17
our non-life science instrument products decreased 69%, from $7.0 million in
1999 to $2.2 in 2000 due to the fact that we sold this product line effective
April 1, 2000, therefore, no sales of these products were recorded after
March 31, 2000.
COST OF GOODS SOLD. Cost of goods sold increased 4% from $9.0 million in
1999 to $9.4 million in 2000, representing 54% of net sales in 1999 and 50% of
net sales in 2000. Cost of goods sold as a percent of sales has improved year
over year due to lower material costs for our life science instruments as
compared to the non-life science instruments. We anticipate that this percentage
will improve in the future as consumables become a greater percentage of our
revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 22%, from $8.5 million in 1999 to $10.4
million in 2000. This increase is the result of additional personnel and
personnel-related expenses and depreciation. Average selling, general and
administrative personnel counts increased 20% for the nine months from 83 in
1999 to 99 in 2000. Direct personnel expenses and increased travel and travel
related expenses associated with the activities of our expanded staff accounted
for approximately 75% of the total increase. Increased depreciation expense
associated with investments in offices and equipment supporting our expanded
staff accounted for approximately 10% of the total increase. We anticipate
selling, general and administrative expenses to increase over the next several
years to support our growing marketing, sales and business activities and costs
associated with operating a public company.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 37%, from $4.1 million in 1999 to $5.7 million in 2000. These expenses
represented 24% of net sales in 1999 versus 30% of net sales in 2000. The
increase in these expenses is attributable to increased personnel and personnel
related expenses, the costs associated with the expanded activities of the staff
and depreciation. Average research and development personnel count increased 16%
in the nine months from 49 in 1999 to 57 in 2000. Salaries, payroll taxes and
benefits accounted for approximately 60% of the total increase. The increase in
depreciation is the result of investments in equipment during the first nine
months of 2000. The increase in depreciation accounted for approximately 25% of
the total increase. We expect research and development spending to increase over
the next several years as we expand our development efforts.
STOCK BASED COMPENSATION. Stock based compensation expense was $791,000 in
2000. In connection with the sale of our non-life science instrument product
line, the Company accelerated the vesting of 71,700 options, which would have
otherwise been forfeited. Former employees who were associated with our non-life
science product line held these options. The acceleration resulted in the
recording of $574,000 of stock based compensation expense in the first quarter
of 2000. The remaining expense is due to amortization of deferred compensation
related to stock options issued.
OTHER EXPENSES. Other expenses, which consist mainly of net interest income
and expense, increased from $760,000 in 1999 to $870,000 in 2000. Interest
expense for the nine months was $1.8 million as compared to $885,000 in 1999.
The increase in interest expense was the result of interest expense on our
$12 million convertible notes that were issued in March 1999, additional
interest expense on our working capital lending facility and accelerated
interest charges on our convertible notes. On the effective date of our initial
public offering interest payable on the notes was accelerated through the
maturity date of the notes at an annual interest rate of 3.6%. As a result, the
Company recorded additional interest expense of approximately $795,000 in the
third quarter of 2000. Interest income for the nine months was $920,000 as
compared to $107,000 in 1999. The increase in interest income is a result of the
investment of the net proceeds from our initial public offering.
INCOME TAXES. The income tax expense in 1999 was $1.9 million while in 2000
no income tax benefit was provided. The expense recorded in 1999 relates to the
establishment of a valuation allowance against previously recorded deferred tax
assets. No further tax benefit is being recorded due
18
to our cumulative losses in recent years, expected losses in future years and
the uncertainty as to whether we will be able to utilize any additional losses
as carrybacks. We will continue to assess the recoverability of deferred tax
assets and the related valuation allowance. We expect to continue to incur
losses and expect to continue to provide valuation allowances against deferred
tax assets. To the extent we begin to generate income in future years and it is
determined that such valuation allowance is no longer required, the tax benefit
of the remaining deferred tax assets will be recognized.
YEARS ENDED DECEMBER 31, 1999 AND 1998
NET SALES. Net sales increased 22%, from $18.9 million for the year ended
1998 to $23.0 million for the year ended 1999. Sales from our life sciences
products increased 91%, from $7.4 million in 1998 to $14.2 in 1999. Total
revenues from sales of WAVE Systems increased 107%, from $5.4 million in 1998 to
$11.2 million in 1999. WAVE System unit sales increased 85% from 72 in 1998 to
133 in 1999. Life science consumables sales increased 50%, from $2.0 million in
1998 to $3.0 million in 1999. In 1999, we acquired another manufacturer of life
science consumables and began including sales of these products in our revenues.
These sales, along with an increase of $662,000 in sales of our WAVE Systems
consumables, account for the increase in total life science consumables sales.
Sales of our non-life sciences instruments decreased 24%, from $11.5 million in
1998 to $8.8 million in 1999. This decrease was a result of reduced demand for
these products related to an industry-wide consolidation among customers for
these products and the negative effect of a reorganization of our dealer and
distributor network.
COST OF GOODS SOLD. Cost of goods sold increased from $9.6 million in 1998
to $12.1 million in 1999 due to increased sales. Cost of goods sold as a
percentage of sales remained relatively constant from 1998 to 1999, increasing
from 51% in 1998 to 52% in 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 35%, from $2.8 million in 1998 to $3.8 million in 1999. This increase
is the result of increased wages and salaries, personnel-related expenses and
increased consulting fees. General and administrative personnel increased from
22 in 1998 to 30 in 1999, or 36%. Compensation, benefits, hiring expenses and
other direct personnel costs accounted for 28% of the total increase.
Additionally, we paid a one-time advisory services fee of $550,000, or 55% of
the total increase, in 1999 in connection with consulting and financial advisory
services associated with the development of our strategic business plan and
related intermediate and long-term financial strategies. We anticipate general
and administrative expenses to continue to increase over the next several years
to support our growing business activities and costs associated with operating a
public company.
MARKETING AND SALES EXPENSES. Marketing and sales expenses increased 45%,
from $5.4 million in 1998 to $7.8 million in 1999. This increase is the result
of continuing to build our direct sales and marketing staff in the United States
for our entry into the life sciences market. We also opened an office in Japan
and expanded our life sciences sales efforts in Europe. Sales and marketing
personnel increased 43%, from 47 in 1998 to 67 in 1999. Of this increase in
personnel, 8 were in the United States, 9 in Europe and 3 in Japan.
Compensation, benefits, hiring expenses and other direct personnel costs
accounted for 42% of the total increase. The remaining increase is attributable
to higher indirect personnel expenses associated with marketing and sales
activities. We expect these expenses to continue to increase over the next
several years as we expand our marketing and sales efforts.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 99%, from $3.2 million in 1998 to $6.3 million in 1999. These expenses
represented 17% of net sales in 1998, versus 27% of net sales in 1999. Research
and development expenses consist of salaries and related personnel costs of
researchers and software developers, material costs for prototypes and test
units, legal expenses relating to intellectual property, research activities,
testing and enhancement of our products, and amortization of intellectual
property. We expense our research and development costs in the year in which
they are incurred. The increase in these expenses was attributable to an 84%
increase
19
in research and development personnel, from 31 in 1998 to 57 in 1999.
Compensation, benefits, hiring expenses and other direct personnel costs
accounted for 62% of the total increase. The remaining increase is attributable
to the costs associated with the expanded activities of the research and
development staff. We expect research and development spending to increase
significantly over the next several years as we expand our research and product
development efforts.
OTHER EXPENSES. Other expenses, which consisted mainly of net interest
expense, increased 125%, from $532,000 in 1998 to $1.2 million in 1999. This
increase was related to interest expense on our placement of $12.0 million of
convertible notes in March 1999.
INCOME TAXES. The income tax benefit in 1998 was $930,000, while in 1999
income tax expense was $1.7 million. A valuation reserve of $4.5 million was
recorded in 1999 due to our cumulative losses in recent years, expected losses
in future years and an inability to utilize any additional losses as carrybacks.
We will continue to assess the recoverability of deferred tax assets and the
related valuation allowance. We expect to continue to incur losses and expect to
continue to provide a valuation reserve against deferred tax assets. To the
extent we begin to generate income in future years and determine that such
valuation allowance is no longer required, the tax benefit of the remaining
deferred tax assets will be recognized. As of December 31, 1999, we had federal
net operating loss carryforwards of approximately $11.6 million. We also had
federal research and development tax credit carryforwards of approximately
$131,000. The net operating loss and credit carryforwards will expire at various
dates from 2012 through 2019, if not utilized. We also had state income tax loss
carryforwards of $3.0 million. These carryforwards will also expire at various
dates if not utilized.
As of December 31, 1998 and 1999, we had net deferred tax assets of
approximately $2.0 million and $4.7 million, respectively. The net deferred tax
asset at December 31, 1999 has been offset by a valuation allowance of
$4.5 million due to our cumulative losses in recent years, expected losses in
future years and an inability to utilize any additional losses as carrybacks.
The net deferred tax assets were $2.0 million and $180,000 as of December 31,
1998 and 1999, respectively. Deferred tax assets relate primarily to net
operating loss carryforwards.
YEARS ENDED DECEMBER 31, 1998 AND 1997
NET SALES. Net sales increased 64%, from $11.6 million in 1997 to
$18.9 million in 1998. Of the $7.3 million increase, $5.1 million was due to
increased sales of our WAVE System and related consumable products. WAVE System
unit sales increased from five in 1997 to 72 in 1998. Sales of life sciences
consumable products were $1.9 million in 1997 and $2.0 million in 1998. Sales of
non-life sciences instrument products increased 22%, from $9.4 million in 1997
to $11.5 million in 1998. This increase was due to the release of an upgraded
laser-based solid sampling product in the first quarter of 1998.
COST OF GOODS SOLD. Cost of goods sold increased from $6.3 million in 1997
to $9.6 million in 1998, but decreased from 55% of net sales in 1997 to 51% of
net sales in 1998. This decrease was due to the fact that sales of WAVE Systems
accounted for a greater percentage of our total sales in 1998 than they did in
1997. The amount of in-house manufacturing costs incurred by us to produce WAVE
Systems is less than the in-house manufacturing costs we incur to produce our
non-life sciences instruments. The lower in-house manufacturing costs for the
WAVE System are partially offset by the higher material costs associated with
the WAVE System. The decrease was also due to the allocation of fixed
manufacturing costs over a larger revenue base.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 14%, from $2.4 million in 1997 to $2.8 million in 1998. This increase
is the result of increased bad debt expenses. In total, other general and
administrative expenses remained consistent with the prior year. The increase in
bad debt expenses was related to the write-off of one uncollectible account
receivable in Europe.
20
MARKETING AND SALES EXPENSES. Marketing and sales expenses increased 35%,
from $4.0 million in 1997 to $5.4 million in 1998. This increase is the result
of building a direct sales and marketing staff in the United States for our
entry into the life sciences market. Sales and marketing personnel increased 24%
from 38 in 1997 to 47 in 1998. Compensation, benefits, hiring expenses and other
direct personnel costs accounted for 54% of the total increase. The remaining
increase is attributable to higher indirect personnel expenses associated with
marketing and sales activities.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 54%, from $2.0 million in 1997 to $3.2 million in 1998. The increase
in these expenses was attributable to an increase in our research and
development staff and increased research and development activities.
Compensation, benefits, hiring expenses and other direct personnel costs
accounted for 50% of the total increase. The remaining increase is related to
the increased activities of both internal staff and out-sourced staff.
OTHER EXPENSES. Other expenses, which consisted mainly of net interest
expense, increased 24%, from $427,000 in 1997 to $532,000 in 1998. This increase
was due to the payment of interest on $1.5 million of mezzanine short-term
financing obtained at the end of 1997. This short-term financing was repaid in
1998.
INCOME TAXES. The income tax benefit for 1997 was $1.2 million, while the
benefit for 1998 was $930,000. The effective tax rate for 1997 was 34%, and the
effective tax rate for 1998 was 37%. As of December 31, 1998, we had federal net
operating loss carryforwards of approximately $3.9 million. We also had federal
research and development tax credit carryforwards of approximately $76,000. The
net operating loss and credit carryforwards will expire at various dates from
2012 through 2018, if not utilized. We also had state income tax loss
carryforwards of $1.4 million. These carryforwards will also expire at various
dates if not utilized. At December 31, 1998, the Company's management had
determined that it was more likely than not that the deferred tax asset of
$1.95 million would be realized through expected profits in future years.
LIQUIDITY AND CAPITAL RESOURCES
We have experienced net losses and negative cash flows from operations
during the past three years. As a result, we had an accumulated deficit of $20.6
million as of September 30, 2000. On July 21, 2000, we issued 5,152,000 20,888shares of common stock in our initial public offering at $15.00 per share. After
payment of the underwriters' discounts and commissions and other expenses, we
received net proceeds of approximately $69.9 million from this offering.stock. In addition, the holderas of a warrantJanuary 9, 2020options to purchase 300,000 501,148shares of our common stock exercised the warrantwere outstanding at the timea weighted average exercise price of $8.21per share,18,053shares of our initial public offering thus providing
us with an additional $1.5 million in cash. Ascommon stock were reserved for future grants under our stock option plans and warrants to purchase909,189shares of December 31, 1999our common stock were outstanding at a weighted average exercise price of $19.46per share.
The following description of our capital stock and September 30, 2000, we had approximately $153,000provisions of our amended and $60.4 million,
respectively, in cashrestated certificate of incorporation, amended and cash equivalents.
On May 19, 2000 we sold the assets relatedrestated by-laws and certificate of designation are summaries of material terms and provisions and are qualified by reference to our non-life sciences
instrument product line to a company controlled by Stephen F. Dwyer, a directoramended and a principal stockholderrestated certificate of ours, for a total adjusted purchase priceincorporation, amended and restated by-laws and certificates of $5.65 million plus reimbursement by the buyerdesignation, copies of approximately $400,000 of
expenses paid by us since March 31, 2000 in connection with this product line.
Approximately $3.65 million was paid in cash at the closing of the sale and
$2.0 million was paid with an interest-bearing promissory note due on
December 30, 2000.
The purchaser financed the cash portion of the purchase price for these
assets plus initial working capital needs with borrowings of approximately
$4.6 million obtained from a bank. We acquired the notes evidencing these loans
from the bank upon closing of our initial public offering by paying to the bank
an amount equal to the entire principal balance of the notes plus accrued and
unpaid interest. These acquired notes were consolidatedwhich have been previously filed with the original
$2.0 million note. All of the principal of and accrued interest on this
consolidated note was repaid prior to maturity. On December 29, 2000, we
repurchased 261,904SEC.
Common Stock
We may issue shares of our common stock from Mr. Dwyer for $10.50 per
share, which was the
21
closing price for our common stock on that day, for an aggregate purchase price
of $2,749,992. Mr. Dwyer used the proceeds from this sale to partially prepay
the principal of and interest on the consolidated note.
The Company's $12 million convertible notes, due 2002, contained features
that were impacted by our initial public offering. On the effective date of our
initial public offering interest payable on the notes was accelerated through
the maturity date of the notes at an annual interest rate of 3.6%. As a result,
the Company recorded additional interest expense of approximately $795,000.
These notes contained a conversion feature that would allow the Company, upon
satisfaction of certain conditions, to cause conversion of the principal plus
accrued interest into common stock of the Company at a conversion price of
$5.00 per share. On August 14, 2000, the Company's Board of Directors authorized
the Company to convert the notes into common stock upon meeting the required
conditions. On August 15, 2000, such conditions were met and the notes were
converted into 2,750,906 shares of common stock. All principal and accrued
interest at the conversion date of approximately $13.9 million was recorded to
stockholders equity.
Our operating activities resulted in net outflows of $7.0 million in the
first nine months of 1999 as compared to $3.7 million in 2000. The operating
cash outflows for this period resulted from significant investments in research
and development, and sales and marketing, which resulted in operating losses.
The operating cash outflows for the nine months are significantly lower than
those in the prior year. This improvement in operating cash flows was attained
in part through increased accounts receivable collection.
Net cash used in investing activities was $2.8 million for the nine months
ended September 30, 1999, compared to $3.5 million in 2000. The change in
investing cash flow in 2000 is the result of our acquisition of the notes
evidencing loans previously obtained by the purchaser of our non-life sciences
product line and investments in property and equipment.
Net cash provided by financing activities was $11.9 million for the nine
months ended September 30, 1999, compared to $67.3 million in 2000. The
financing cash inflows in 2000 are the result of our initial public offering
offset by the repayment of bank debt. The funds used for the repayment came from
the proceeds of the sale of our non-life science instrument product line and our
initial public offering. The financing cash inflows in 1999 were due to the
issuance of convertible notes that provided net proceeds of $11.4 million in
March 1999, and net other borrowings.
Our capital expenditures budget for 2000 and 2001 is approximately
$5.0 million. Capital expenditures for the current year are expected to relate
to facility and equipment improvements related to our life sciences business.
Research and development expenses are budgeted at approximately $7.2 million and
$8.5 million, respectively for 2000 and 2001. We expect to devote substantial
capital resources to continue our research and development efforts, to expand
our marketing and sales and customer support activities, and for other general
corporate activities. Our capital requirements depend on a number of factors,
including the level of our research and development activities, market
acceptance of our products, the resources we devote to developing and supporting
our products, and other factors.
We believe that our current cash balances will be sufficient to fund
operations through at least fiscal year 2003. During or after this period, if
cash generated by operations is insufficient to satisfy our liquidity
requirement, we may need to sell additional equity or debt securities, or obtain
additional credit arrangements.
IMPACT OF INFLATION
We do not believe that price inflation had a material adverse effect on our
financial condition or results of operations during the periods presented.
22
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "ACCOUNTING FOR DERIVATIVE FINANCIAL
INSTRUMENTS AND FOR HEDGING ACTIVITIES" (SFAS No. 133). This statement, which is
effective for the Company beginning on January 1, 2001, requires the recognition
of all derivative financial instruments as either assets or liabilities in the
statement of financial position and measurement of those instruments at fair
value. Management does not believe the adoption of SFAS No. 133 will have a
material effect on our financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we invest in
may have market risk. This means that a change in prevailing interest rates may
cause the market value of the investment to fluctuate. For example, if we hold a
security that was issued with a fixed interest rate at the then-prevailing rate
and the prevailing interest rate later rises, the market value of our investment
will probably decline. To minimize this risk in the future, we intend to
maintain our portfolio of cash equivalents and short-term investments in a
variety of securities, including commercial paper, money market funds,
government and non-government debt securities. The average duration of all of
our investments in 2000 was less than one year. Due to the short term nature of
these investments, we believe we have no material exposure to interest rate risk
arising from our investments. Therefore, no quantitative tabular disclosure is
presented.
FOREIGN CURRENCY RATE FLUCTUATIONS
Approximately 50% of our net sales have been to customers in the United
States. While we do sell products in many foreign countries, most of these sales
are completed by our wholly-owned subsidiary, Transgenomic, LTD., and are made
in its operating currency British pounds sterling, or the Euro. Results of
operations for the Company's foreign subsidiary are translated using the average
exchange rate during the period. Assets and liabilities are translated at the
exchange rate in effect on the balance sheet dates. As a result the Company is
subject to exchange rate risk, however, at this time management feels we do not
have a material exposure to foreign currency rate fluctuations.
23
BUSINESS
OVERVIEW
We provide innovative tools for DNA separation and analysis to researchers
seeking to discover and understand variations in the human genetic code and the
relationship of these variations to disease. Prior to the formation of
Transgenomic, Inc., we conducted our business operations through an Iowa
corporation known as CETAC Holding Company, Inc. and its various subsidiaries.
CETAC Holding Company, Inc. designed, manufactured and sold several different
types of non-life sciences instruments that prepare samples of material so that
they may be more easily analyzed by, and efficiently introduced into testing
apparatus. We also manufactured and sold chromatography products that are used
in a variety of testing applications, such as food analysis and environmental
testing. On July 1, 1997, we consolidated these companies into a new Delaware
corporation known as Transgenomic, Inc., that was formed to develop, manufacture
and market our new DNA separation and analysis products in addition to
continuing the non-life sciences business of CETAC Holding Company, Inc. and its
subsidiaries. In 1999, we acquired, through our subsidiary in the United
Kingdom, substantially all of the assets of Kramel Biotech International,
Limited, a manufacturer of laboratory consumables used in the field of molecular
biology.
Our business plan is to focus on the genomics segment of the life sciences
industry and the development, marketing and support of our proprietary
technology for the automated separation and analysis of DNA. Therefore, we sold
the assets associated with our non-life sciences instrument product line in May
2000.
INDUSTRY BACKGROUND
DNA AND GENOMICS-BASED RESEARCH
The human body is composed of billions of cells each containing
deoxyribonucleic acid, or DNA, which encodes the basic instructions for cellular
function. The complete set of DNA is called the genome, or genetic code. The
human genome is composed of 23 pairs of chromosomes which are further divided
into over 100,000 smaller regions called genes. Genes are used in the cell as
the template for the production of proteins, and it is these proteins that
direct cell function that are ultimately reflected in the individual traits of
the person. Each gene is made up of four different chemicals known as nucleotide
bases which are commonly designated by the first letter of their chemical names,
or G, C, A and T. The entire human genome contains approximately 3 billion of
these nucleotides arranged in order along the two complimentary strands of the
DNA molecule. The order of the nucleotides along these strands is known as the
DNA sequence, and it is this sequence that determines the function of the genes.
Therefore, any variation in the DNA sequence of a particular gene may result in
a change in the cell function controlled by that gene. These changes, known as
genetic mutations or polymorphisms, therefore, are often the cause of disease or
make an individual more susceptible to disease.
Genomics is the systematic and comprehensive analysis of the sequence,
structure and function of the genes which comprise the genome with the objective
of identifying and understanding the role of genes in human physiology and
disease. During the last ten years, an intense effort has been underway to
determine the sequence of genes in the entire human genome and this basic
research is expected to be completed in the next few years. Both the
U.S.-government sponsored Human Genome Project and private researchers have been
involved in this effort which has provided an immense amount of sequencing
information for human DNA. While these efforts will provide a basic blueprint of
the human genome, they have necessarily been centered on determining the DNA
sequence of a limited number of individuals. Therefore, this fundamental
sequencing data will not, by itself, provide much information about the function
of genes and their relationship to disease. This information will only be
developed through the intense study of genetic variation. Accordingly, genomics
researchers are now attempting to understand variations in this DNA sequence
information and how it correlates to disease in order to develop new drugs,
treatments and diagnostic methods.
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IMPORTANCE OF THE DISCOVERY OF GENETIC VARIATION
There are a variety of mutations known to occur in DNA sequences. The most
common form of genetic mutation involves a change in a single nucleotide and is
called a single nucleotide polymorphism, or SNP. Other types of genetic mutation
include the insertion or deletion of several nucleotides and translocation or
repetition of nucleotides. The identification and understanding of these
mutations, including SNPs, are important because they may indicate
predisposition to a variety of diseases. Since even a single mutation of a
nucleotide can have a major role in human disease, efforts to understand and
analyze genetic mutations have recently intensified.
After SNPs or other mutations are discovered, their potential relevance to
disease must be validated by determining the frequency of mutation in different
segments of the population. Some diseases, such as muscular dystrophy, are
caused by DNA mutations in a single gene. Many common diseases, such as
diabetes, cancer and obesity, are caused by mutations in more than one gene.
Since a single mutation or multiple mutations may be required for a particular
disease or trait to manifest itself, it is necessary to measure a sizable
population of these mutations in order to be able to predict with confidence the
association of a mutation with a particular disease or trait.
Therefore, the need to discover new genetic variations will be ongoing as
the variety of human diseases are studied and their correlation with different
populations or groups of individuals is analyzed. In order to do this on the
scale that likely will be required, researchers will need technologies that
provide faster sample analysis, greater accuracy and reliability and lower costs
than technologies that they have historically used. It will be especially
important that the technology used by these researchers be able to detect all
types of mutations, including SNPs, insertions and deletions, translocations and
repetitions, whether the existence of the mutation is known or unknown. It is
this need that we believe creates a market opportunity for our WAVE System and
its ability to detect genetic mutations quickly, accurately and inexpensively.
CURRENT TECHNOLOGIES FOR MUTATION ANALYSIS
Current widely-used DNA mutation analysis technologies were originally
developed primarily for collecting DNA sequence information and not for the
discovery of mutation and other genetic variations. As these methods have been
modified for use in SNP and other mutation analysis, several limitations have
become clear. Current technologies for DNA analysis include the following:
- GEL ELECTROPHORESIS. Gel electrophoresis is primarily a manual
separation technique for DNA which uses an electrical current to cause
DNA fragments to migrate over a gel. Because different lengths of DNA
will migrate at different speeds, they will be separated by this
process. The gel is transferred to a fluorescence-imaging camera and
photographed or scanned into a computer so that the DNA can be
visualized. If a particular fragment of DNA is required, then it must
be cut from the gel with a scalpel, the section can be melted to a
liquid or the DNA can be drawn out of the gel and into the surrounding
electrolyte with a further application of an electric field. Gel
electrophoresis provides good separation resolution and the cost of
associated equipment is relatively inexpensive.
- CAPILLARY ELECTROPHORESIS. Capillary electrophoresis may be in the form
of long thin capillaries or embodied in a chip. This technology
separates DNA by passing an electric current through a capillary tube
filled with a linear polymer and an electrolyte. DNA is introduced into
the top of the capillary and the current is applied. This method is
generally faster than conventional gel electrophoresis and allows for
simultaneous detection of results.
- CHIP ARRAY. Chip Array technology uses short fragments of single-strand
DNA that are attached to small squares on the surface of a "chip" so
that strands within a square have the same DNA sequence, but this
sequence is different in each separate square. The sample strand of DNA
is introduced to this chip and binds, or hybridizes, specifically only
where it matches the sequence attached to one of the squares. In this
way a match can be found, if
25
it exists, from a very large array of candidate DNA sequences. The chip
primarily identifies sequences which are known prior to analysis.
- MASS SPECTROMETRY. Mass spectrometry is a technique that applies a
charge to the sample and introduces the ionized sample into a chamber
that measures the mass per charge of each type of molecule. The mass of
the sample and various fragments produced indicates the identity of the
molecule that was introduced into the instrument. Although the sequence
of the DNA is not measured when using mass spectrometry, the
nucleotides making up the molecule bases can be measured.
LIMITATIONS OF CURRENT TECHNOLOGIES
Although these technologies are well accepted and established, none is
ideally suited to the analysis of sequence mutations. The limitations of current
methods include the following:
- GEL ELECTROPHORESIS. Gel electrophoresis is a time-consuming, labor
intensive process. Sample introduction, pouring of gels, separation,
identification of bands, and recovery of DNA must all be done manually.
As a result, the analysis of a single sample can often take many hours.
In addition, there is no real-time monitoring of the process and this
can cause problems. For example, if an insufficient sample were used
for the analysis, a researcher would only become aware after several
wasted hours of experimentation.
- CAPILLARY ELECTROPHORESIS. Capillary electrophoresis can automate the
gel electrophoresis process. However, it is difficult to control the
conditions needed to determine genetic variation. Capillary
electrophoresis also requires the attachment of detection-enhancing
fluorescent molecules to the DNA. Fluorescent reagents are relatively
expensive and their use requires further manipulation of the DNA
molecules prior to analysis, thereby increasing the amount of time per
sample spent by a researcher. In addition, the small quantities of DNA
separated by capillary electrophoresis are usually not sufficient for
sequencing of the DNA or cloning applications.
- MASS SPECTROMETRY. Mass spectrometry is only a detection method. It
does not incorporate any separation capability, which is essential for
analysis of multiple DNA molecules needed for mutation detection, as
well as for purification. In addition, this method cannot directly
analyze large DNA fragments or double-stranded DNA due to its
inflexibility and fundamental limitations.
- CHIP ARRAY. Because this technology relies on sample DNA binding to a
DNA strand with a known sequence attached to the chip, it is capable of
detecting only known mutations matching the sequence on the chip. In
addition, the binding process is unreliable when many mutations are to
be detected in the sample.
These disadvantages limit the usefulness of these other techniques for the
efficient discovery of unknown genetic variation. While some types of gel
electrophoresis and capillary electrophoresis can be used to determine the
sequence of nucleotides on a gene fragment and thereby detect unknown mutations,
they are expensive and labor-intensive because the researcher must identify and
compare the sequence of the large number of nucleotides making up both the
sample gene and the standard gene without knowing if a mutation exists or where
the mutation may be. Insertions, deletions, translocations and repetitions are
very difficult to detect using any of these technologies.
THE TRANSGENOMIC SOLUTION
We believe our WAVE System, which incorporates our proprietary DNASep
technology and associated software, chemical reagents and other consumable
products, will become a leading tool to analyze genetic variation. The WAVE
System allows researchers to analyze both known and unknown genetic mutations
faster, with more accuracy and at a lower cost than other commercially available
techniques. The WAVE System enables a researcher to detect the presence of a
mutation without the need to determine the DNA sequence of the gene being
studied, allowing the screening of a large number of samples to identify
mutations without the need to indiscriminately sequence all of the
26
samples. Only those samples which are determined to contain a mutation require
further sequencing work in order to determine the precise change in the DNA
sequence. Therefore, the use of the WAVE System can result in a significant
savings of time and cost. We believe key benefits of the WAVE System include the
following:
- HIGH SPEED. DNA separation and analysis using our WAVE System can be
performed faster than current methods, depending on the type of
research being conducted. Separation times using our DNASep columns
average approximately 5-7 minutes per sample and can be as short as 3
minutes, depending on the application. After the separation, results
are immediately available for quantification, analysis, reporting and
archiving.
- IMPROVED DATA ACCURACY. Our WAVE System produces more accurate and
consistent data than other existing techniques for mutation analysis.
Based on published reports, accuracy in discovery of known and unknown
mutations is greater than 95% with the WAVE System. The higher level of
data quality achievable with the WAVE System is extremely valuable to
the life sciences researcher.
- REDUCED COST. Because our WAVE System is completely automated, the
amount of time per sample spent by a researcher is greatly reduced. The
WAVE System analyzes very small DNA samples and does not require
additional sample purification. This allows samples to be analyzed with
a smaller volume of chemical reagents than other methods. In addition,
the WAVE System can detect DNA mutations directly without the use of
expensive fluorescent tags or markers required by other techniques.
Savings in labor, reagents and tags significantly reduce the costs per
analysis over current methods.
- AUTOMATION AND EASE OF USE. The WAVE System is fully automated and easy
to operate. A multiple number of amplified DNA samples can be loaded
into the WAVE System's autosampler. Once loaded, the appropriate
application is chosen by the researcher and the WAVE System can
automatically introduce the sample, conduct the DNA separation and
analyze the results. Unlike other techniques, no purification or other
additional preparation of the DNA sample is necessary. With the
addition of a fragment collector, the WAVE System will automatically
collect DNA material for further analysis. The entire process is
controlled by our proprietary WAVEMaker software. This aspect of the
WAVE System can significantly enhance the productivity of a genomics
researcher.
- DISCOVER NEW MUTATIONS. WAVE System technology can efficiently discover
new mutations in a sample without prior knowledge of the mutation or
its location. The WAVE System is uniquely well-suited to the discovery
of insertions and deletions because it does not depend on knowing the
DNA sequence in order to detect the mutation. Other than sequencing,
most genotyping methods require prior knowledge of the location of the
mutation. Compared to sequencing, which requires the researcher to
determine and compare the sequence of a large number of nucleotides
making up both the sample gene and the standard gene to detect unknown
mutations, the WAVE System displays mutations, whether previously known
or unknown, as a vertical spike, or peak, on a simple graph. The
ability to accurately detect the presence of mutations allows for the
screening of large fragments of DNA without time-consuming and
cumbersome sequencing of the entire fragment.
- SCALABILITY. Our bench top WAVE System is scalable depending on the
research problem to be solved. The DNASep separation columns are
available in different sizes depending on the application required.
27
STRATEGY
We intend to be the leading provider of technology platforms which enable
life science researchers to discover and understand variations in the human
genetic code, or genome, in order to accelerate and improve drug development and
diagnostics. Key elements of our strategy are as follows:
- FOCUS ON THE GENETIC VARIATION DISCOVERY MARKET. Our current focus is
to promote the use of our WAVE System by researchers involved in the
discovery and analysis of genetic variation. The investment in genomics
research is large and growing, and the corresponding need to analyze
genetic variations has led to increased demand for new technologies
such as the WAVE System. We believe the WAVE System significantly
increases research productivity and may accelerate drug development and
diagnostics.
- ESTABLISH THE WAVE SYSTEM AS THE INDUSTRY STANDARD. We are focusing our
initial marketing efforts on large well-known academic and commercial
research institutions to establish the WAVE System as the industry
standard for mutation analysis. We believe we are the first to bring
high performance DNASep micro-bead technology to the market and have
sold instruments to key genomics researchers to gain validation of our
technology, which has resulted in the publication of over 60 articles
in numerous scientific journals discussing the WAVE System. A key
component of our strategy is to maintain a worldwide sales organization
that provides technical support on a local level. We plan to increase
the number of our sales teams composed of sales personnel, application
scientists and technical support persons. In addition, because we
believe that a major factor in ensuring the success of our products is
to provide qualified technical support on a local level, we expect to
increase the number of technical support representatives and
application scientists.
- INCREASE CONSUMABLE SALES. We expect that our expanding base of
installed WAVE Systems will result in recurring sales of our associated
consumable products which include our proprietary columns and reagents.
Sales of our consumable products over the next five years should
increase as a proportion of our net sales. In order to support the
expected increase in consumable sales, we have dedicated manufacturing
facilities in California, Nebraska and the U.K.
- PENETRATE NEW MARKETS. Our WAVE System may be used for purposes other
than genetic mutation discovery research. These other potential uses
represent additional market opportunities that we intend to pursue. For
example, a number of companies produce short single-strand DNA
fragments, known as oligonucleotides, with a known sequence and sell
them to genetic researchers who use them in research and other
applications. When synthesizing oligonucleotides, it is important that
the single-stranded DNA fragments do not contain fragments with
unwanted DNA sequences. The WAVE System's ability to separate and
purify DNA fragments could be used by the synthesizers of
oligonucleotides to produce a more consistently pure product. We
believe that this will become an important new market for the WAVE
System. Another potential new market for the WAVE System will be the
genetic screening market. This market consists primarily of hospitals
and other medical facilities that could use the WAVE System to screen
tissue or blood samples for mutations known to be related to genetic
disease. We believe that the ability of the WAVE System to screen
genetic mutations quickly, accurately and economically can make it a
useful tool for this market. It will allow researchers to use the
validated technology used for the original mutation discovery work to
screen for mutations in a larger population. We are in the process of
designing specific software and hardware improvements to adapt the WAVE
System specifically for these new market opportunities. We expect these
improvements to be available within the next 24 months.
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- BUILD A SUBSTANTIAL INTELLECTUAL PROPERTY ESTATE. We pursue an
intellectual property strategy of licensing patents and pursuing patent
protection for our inventions. We currently hold 22 U.S. patents and
18 foreign patents and one non-exclusive license for a U.S. patent. We
also have pending applications for 28 U.S. patents and 54 foreign
patents. These issued and pending patents are directed at our DNA and
related research technologies, and cover separation chemistry,
molecular biology, algorithms, instruments and software. We believe
that our strong intellectual property estate will continue to be an
important competitive advantage.
OUR TECHNOLOGY AND PRODUCTS
Our WAVE System is a versatile system that can be used for mutation
detection, size-based double-strand DNA separation and analysis, single-strand
DNA separation and analysis and DNA purification. Because of this versatility,
the WAVE System can essentially replace the use of traditional gel
electrophoresis in the molecular biology laboratory. Our patented technology
uses a process known as high performance liquid chromatography to separate DNA
material so that genetic variation may be identified and analyzed. In this
process, DNA is injected into a special tube or column containing microscopic
polymer beads. These micro-beads have special surface chemistries that cause the
DNA molecules to attach to the surface of the beads. A chemical reagent is then
pumped through the column under carefully controlled pressure and temperature
conditions causing the DNA molecules to be selectively released from the beads
so that they can be separated and measured. Our proprietary software controls
the entire process by computer and produces the results of the operation in an
easy-to-read chart format. Once the DNA sample is loaded into the instrument and
necessary data is entered into the software, the process requires virtually no
additional input from the researcher. By using our patented DNASep columns and
specifically-formulated reagents that we have developed for various research
applications, the researcher is able to achieve a consistent high-quality
result. Our WAVE System includes the following components:
- an autosampler (automatically introduces the DNA sample into our WAVE
instrument)
- a pump (pumps sample and reagents through the DNASep column and
instrument)
- a DNASep column (separates DNA fragments)
- a column oven (controls the temperature of the DNASep column)
- a detector (detects and measures DNA coming off the column)
- a fragment collector (collects high purity DNA fragments of interest)
- a personal computer and WAVEMaker Software (used for instrument control,
experiment design, data collection, data analysis, and reporting)
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[DIAGRAM OF COMPONENTS OF WAVE SYSTEM]
The basic operation of the WAVE System is described below:
DNA SAMPLE PREPARATION. A sample of the DNA fragment of interest is first
extracted from a biological sample such as tissue or blood. Extraneous proteins
are removed from the DNA sample and the sample is placed into a multi-well plate
along with chemicals or reagents. A targeted DNA sequence is then copied by
repeated cycles of heating and cooling in order to produce enough of the
targeted sequence so that it can be detected. This replication process is known
as polymerase chain reaction, or PCR, amplification.
After the sample has been amplified, the sample DNA fragment may be mixed
with "normal" DNA fragments that have a known sequence of nucleotides. The
sample is then heated to cause the two strands of the DNA molecules in both the
sample DNA and the normal DNA to separate from each other. The mixture is then
cooled so that the strands reattach to each other. Because they are mixed
together, the single-strand DNA from the sample DNA and the normal DNA will, in
some cases, recombine with each other. If the sample DNA has a sequence of
nucleotides that differs from the normal DNA, some of the recombined strands
will not completely match and, therefore, will not bind completely. As a result,
both the mismatched, or heteroduplex, DNA fragments and the correctly matched,
or homoduplex, DNA fragments will be present. On the other hand, if the sample
DNA has the same sequence of nucleotides as the normal DNA, all of the
recombined strands will match and bind completely and only homoduplex DNA
fragments will be present.
WAVE SYSTEM SAMPLE INTRODUCTION AND SEPARATION PROCESS. A sample plate
containing DNA is inserted directly into the WAVE System's autosampler. The
autosampler takes a small volume of the sample and injects it into the DNASep
column containing the micro-beads. Due to the chemical affinity of the DNA to
the surface chemistry on the micro-beads in the column, the DNA attaches itself
to the micro-beads. After the sample is injected into the instrument, a mixture
of reagent fluids is pumped into the column at specified reagent concentrations
and temperature conditions.
As the reagents are pumped through the column, DNA fragments are released
and separated from each other. The DNA fragments flow from the DNASep column and
through an ultraviolet or a fluorescence detector, which then measures and
reports the passage of the DNA fragments of interest. Depending on the mode of
operation, DNA fragments can be identified and measured to determine whether
they are mutant or normal, or a specific DNA size or type. The separation and
detection process continues until the entire DNA sample mixture is separated
into individual fragments. Any fragment of interest can be collected for further
study.
30
MODES OF OPERATION. DNA can be separated using three different modes by
controlling the oven temperature. These modes include the following:
- NON-DENATURING MODE. This mode uses relatively low temperature so that no
melting, or denaturing, of the double-strand DNA occurs. This allows
double-stranded DNA fragments to be separated by the number of nucleotides
making up the fragment, with the shorter DNA fragments being first
released from the column and increasingly longer fragments of DNA being
released in ascending size order until the entire sample is separated. The
high-resolution separation and purification of fragments can be used for
high-purity cloning, sequencing or PCR amplification. Tests that are based
on fragment length also use this mode.
- PARTIAL-DENATURING MODE. The partial-denaturing mode is used for detecting
genetic variation. In this mode, the WAVE System uses temperatures ranging
from 50 DEG.C to 65 DEG.C to partially melt, or denature, the
double-strand DNA. Because mismatched, or heteroduplex, DNA fragments will
melt at a slightly lower temperature than homoduplex DNA fragments, they
will be released first from the DNASep column, followed by the release of
the homoduplex DNA fragments. If there was no sequence mutation in the
sample DNA, only homoduplex fragments will be present, all of which will
be released from the DNASep column at the same time. As the release of the
DNA fragments is detected, it will be depicted by the WAVEMaker software
as a single peak on a graph. However, if there was a sequence mutation in
the sample DNA, both homoduplex and heteroduplex DNA fragments will be
present. Because homoduplex and heteroduplex DNA fragments will release
from the DNASep column at different times, these distinct release times
will result in a second peak on the graph.
- FULL-DENATURING MODE. The full-denaturing mode is used for the analysis of
single-strand DNA and RNA (special molecules that transmit genetic
information inside of a cell) where it is necessary to reduce the
interaction of the two complementary strands of DNA with each other. In
this mode, temperatures in excess of 70 DEG.C are used to separate
single-strand DNA or RNA molecules according to sequence and size.
DETECTION. The standard WAVE System uses ultraviolet, or UV, detection. UV
detection is highly sensitive and can be used for all applications with standard
PCR amplification. By adding fluorescence detection to our system, we can
further decrease the amount of DNA needed for analysis. In this process, special
fluorescent molecules, or tags, are attached to specific points in the DNA being
analyzed. This makes it possible to detect fluorescently labeled DNA fragments
from extremely low sample concentrations or from samples with low PCR
amplification.
FRAGMENT COLLECTION. Purified DNA fragments can be collected for PCR
amplification, sequencing or for cloning. Cloning is a process where bacteria is
used to grow a large amount of specified DNA fragments. It is important that the
DNA material used for cloning is very pure so that only the specified DNA
material is found in the bacteria colonies. Amplification and sequencing also
benefit from highly purified DNA fragments.
WAVEMAKER SOFTWARE. Our WAVEMaker Software integrates the instrumentation
control and data acquisition functions of the WAVE System. The software performs
several functions including the formatting and presentation of data. Our
WAVEMaker Software provides logical input and output of instrument data that is
easily understood by researchers familiar with conventional gel-based
technology. We are working to further refine the software component of the WAVE
System to make it easier to operate for a broader market of end users.
WAVEMaker Software enables the user to choose a specific application. The
clear display allows the user to set up the procedure in a matter of minutes.
Customized protocols can easily be created and saved to facilitate future
analyses. Point mutation detection can be performed by importing the sequence or
size of the DNA fragment of interest into WAVEMaker Software.
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The following diagram presents a sample screen taken from our WAVEMaker
Software.
[PICTURE OF COMPUTER SCREEN SHOWING WAVEMAKER SOFTWARE]
PRICING. This integrated WAVE System is priced from $60,000 to $100,000
depending on features and accessories. The price is dependent upon user selected
options, which include fragment collection, various detector configurations and
software versions.
WAVE OPTIMIZED MOLECULAR BIOLOGY CONSUMABLES
The WAVE System requires the use of various consumable products which we
manufacture and sell separately. As more WAVE Systems are sold, we expect that
these consumable products will become an increasingly significant source of
revenue for us.
The principal consumable products used with the WAVE System are the DNASep
columns and the chemical reagents that are used to carry the DNA samples though
the WAVE System. Other consumables include filters and other replacement parts
of the WAVE System.
The DNASep columns are essentially small metal tubes which are packed with
microscopic polymer beads, each of which is approximately two microns in
diameter. A micron is one millionth of a meter. The surface of these micro-beads
has a special chemical makeup that causes DNA molecules to adhere to them. The
columns come in two sizes which are used depending on the amount of DNA being
analyzed or purified. The smaller standard column sells for approximately $1,200
and the larger column sells for approximately $2,400. The WAVE System comes with
one standard DNASep column which has a recommended warranted life of
approximately 4,000 test cycles. Our experience to date indicates that the
average customer uses between two and six columns per instrument per year.
We also sell the chemical reagents used with the WAVE System. In general,
these reagents are special fluids that are pumped through the columns in order
to cause DNA molecules to release their
32
chemical bonds to the micro-beads under the correct conditions. Although most of
these reagents are similar to those that can be obtained from various suppliers,
we have developed formulas for these reagents that have been specially developed
to be used in the WAVE System. By using these WAVE Optimized reagents, we
believe that researchers are more likely to achieve consistent high quality
results with their WAVE Systems.
Some consumables are contained and packaged in convenient kits to increase
ease of use and minimize possibility of user error. These kits may be used in
sample preparation or automated instrument operations for particular
applications. By adding different application kits, the WAVE System can perform
various applications.
RESEARCH AND DEVELOPMENT
We continue to maintain an active program of research and development and
expect to spend approximately $8.5 million on these efforts in 2001. Our
research and development activities include the improvement of the DNA
separation media used in our columns and the refinement of the hardware and
software components of the WAVE System. In addition, we are working to
understand different aspects of the chemistry of molecular biology testing and
to use this knowledge to develop new molecular biology tests.
Our research and development work is focused on developing additional
functionality in the WAVE System that will allow us to sell into market segments
other than the genetic mutation discovery market. For example, we are working on
software and hardware advances that will tailor the WAVE System specifically for
the analysis and purification of single-strand DNA. Short single-strand DNA,
known as oligonucleotides, are used to target a known sequence of DNA in a gene.
A number of companies produce oligonucleotides with a known sequence and sell
them to genetic researchers who use them for PCR amplification, sequencing or
other research applications and to medical facilities for diagnostic testing.
When synthesizing oligonucleotides on a commercial scale, it is important to
exclude fragments with unwanted DNA sequences. Our research efforts are focused
on determining the quality of single-strand DNA needed for each application and
on developing the appropriate instrumentation modifications, software and
separation protocols for each. We expect to have WAVE Systems available for this
market within 18 months.
We are also developing improved methods and procedures to enable hospitals
and other medical facilities to use the WAVE System to screen tissue or blood
samples for mutations known to be related to genetic disease. We believe the
WAVE System will be an attractive tool for this group of users because it will
allow them to use the same validated methodology used to discover a mutation and
its link to disease to screen for that mutation in a large population. We are
working to make the screening process faster and more automated through the
development of new software and improved separation media and instrumentation.
We also expect to have these improvements available in the next 18 months.
SALES AND MARKETING
We currently sell our WAVE Systems and related consumables in major
geographical markets. We target the U.S., the U.K. and most countries in Western
Europe with a direct sales staff of 18 persons. For the rest of the world, we
also sell our products to dealers and distributors located in local markets. We
also maintain regionally-based technical support staffs and applications
scientists to support our sales and marketing activities throughout the U.S.,
Europe and Japan. See Note O, "Sales and Product Information," to our
consolidated financial statements for a summary of our net sales by geographic
area and product group.
Our marketing efforts utilize a variety of promotional channels including
print advertisements, scientific conferences, trade shows, and Internet browser
ads. The primary targets of our marketing efforts are life sciences researchers
and medical geneticists in academic and commercial research institutions.
33
CUSTOMERS
We had sold WAVE Systems to customers in 20 countries. Customers that have
purchased at least one WAVE System include numerous core laboratory facilities
and a number of other leading academic and medical institutions in the U.S. and
abroad, including Harvard University, Stanford University, Baylor College of
Medicine, University of Chicago, Fred Hutchison Cancer Research Facility, Mayo
Clinic, National Cancer Institute, National Institutes of Health, Institut
Curie, University of Cambridge, Welcome Trust-Oxford University and Institut
Gustave Roussy. Customers also include a number of large, established U.S. and
foreign pharmaceutical and biotech companies including SmithKline Beecham,
Bristol-Meyers Squibb, Millennium Pharmaceuticals, Merck & Company, Novartis and
Eli Lilly and Company. No single customer accounted for more than 3% of our
sales in 1999.
MANUFACTURING
We manufacture all of our consumable products including our proprietary
DNASep separation columns and liquid reagents. We also incorporate our own
modifications into the basic liquid chromatography instrument that we use in our
WAVE System. Our manufacturing facilities are located in San Jose, California,
Omaha, Nebraska, and Crewe, England.
We obtain the basic liquid chromatography instrument for our WAVE System
from Hitachi Instruments, Inc. This relationship allows us to use Hitachi's
significant manufacturing capability to meet potential future increases in
demand for the WAVE System without investing in expanding our own manufacturing
capacity.
Although our relationship with Hitachi has existed since 1997, we have
recently entered into a new supply agreement with Hitachi under which they will
cooperate with us in the co-development of a modified instrument for use in our
WAVE System. Under the agreement, we have the exclusive right to market any
co-developed products for DNA analysis and purification using our DNASep
technologies. In addition, the agreement will provide for fixed pricing of the
liquid chromatography instruments for our WAVE System. Our agreement with
Hitachi has no fixed term and we have retained the right to work with other
vendors for liquid chromatography instruments. Under the agreement, there will
be no transfer of intellectual property rights without a specific agreement to
do so.
LEGAL PROCEEDINGS
We are not a party, nor are any of our assets or properties subject, to any
material legal proceedings.
INTELLECTUAL PROPERTY
To establish and protect our proprietary technologies and products, we rely
on a combination of patent, copyright, trademark and trade-secret laws, as well
as confidentiality provisions in our contracts.
We have implemented an aggressive patent strategy designed to provide us
with freedom to operate and facilitate commercialization of our current and
future products. We currently own 22 issued patents in the United States and
have 28 pending applications, of which we have received notices of allowances
for four. We also own 18 foreign issued patents and have 54 foreign patent
applications pending. We hold an exclusive license for components of the DNA
separation technology used in our WAVE System under an agreement with the
inventors. This license terminates in 2013. We have also entered into a
non-exclusive license agreement with a U.S. university relating to DNA detection
technology.
The DNASep column and the systems with which it is combined are DNA
compatible. The micro-beads used within the DNASep column are covered by
U.S. Patent No. 5,585,236 and corresponding European patents. DNA compatible
systems are free from materials which would bind with DNA and
34
interfere with the separations. Separating DNA with DNA compatible systems and
related processes are covered by U.S. Patents 5,772,889, 5,997,742, 5,972,222,
6,017,457, 6,024,878 and 6,056,877, along with a corresponding foreign patent
application pending. Additional patent applications for the DNA compatible
column and system are pending in the U.S., Europe and Japan. Future products
including disposable nucleic acid separation systems are covered by U.S. Patent
5,986,085 and pending U.S. and foreign patent applications.
Generally, U.S. patents have a term of 17 years from the date of issue for
patents issued from applications filed with the U.S. Patent Office prior to
June 8, 1995, and 20 years from the application filing date or earlier claimed
priority date in the case of patents issued from applications filed on or after
June 8, 1995. Patents in most other countries have a term of 20 years from the
date of filing the patent application. Our issued United States patents will
expire between 2009 and 2017. Our success depends to a significant degree upon
our ability to develop proprietary products and technologies. We intend to
continue to file patent applications as we develop new products and
technologies.
Patents provide some degree of protection for our intellectual property.
However, the assertion of patent protection involves complex legal and factual
determinations and is therefore uncertain. The scope of any of our issued
patents may not be sufficiently broad to offer meaningful protection. In
addition, our issued patents or patents licensed to us may be successfully
challenged, invalidated, circumvented or unenforceable so that our patent rights
would not create an effective competitive barrier. Moreover, the laws of some
foreign countries may not protect our proprietary rights to the same extent as
do the laws of the United States and Canada. In addition, the laws governing
patentability and the scope of patent coverage continue to evolve, particularly
in areas of interest to us. As a result, there can be no assurance that patents
will issue from any of our patent applications or from applications licensed to
us. In view of these factors, our intellectual property positions bear some
degree of uncertainty.
We also rely in part on trade-secret protection of our intellectual
property. We attempt to protect our trade secrets by entering into
confidentiality agreements with third parties, employees and consultants. Our
employees and consultants also sign agreements requiring that they assign to us
their interests in patents and copyrights arising from their work for us. All
employees sign an agreement not to compete unfairly with us during their
employment and after termination of their employment, through the misuse of
confidential information, soliciting employees, soliciting customers and the
like. However, it is possible that these agreements may be breached or
invalidated and if so, there may not be an adequate corrective remedy available.
Despite the measures we have taken to protect our intellectual property, we
cannot assure you that third parties will not independently discover or invent
competing technologies, or reverse engineer our trade secrets or other
technologies. Therefore, the measures we are taking to protect our proprietary
rights may not be adequate.
We do not believe that our products infringe on the intellectual property
rights of any third party. However, third parties may file claims asserting that
our technologies or products infringe on their intellectual property. We cannot
predict whether third parties will assert claims against us or against the
licensors of technology licensed to us, or whether those claims will be found to
have merit. If we are forced to defend against such claims, whether they are
with or without any merit, whether they are resolved in favor of or against us
or our licensors, we may face costly litigation and diversion of management's
attention and resources. As a result of such disputes, we may have to develop
costly non-infringing technology or enter into licensing agreements. These
agreements, if necessary, may be unavailable on terms acceptable to us, or at
all, which could seriously harm our business or financial condition.
COMPETITION
The market for our products is highly competitive. Our principal competitors
include those entities that provide alternative technologies and products for
the separation and analysis of DNA in the areas
35
of sample amplification, analysis process, sample separation and mutation
detection and correlation. They include Affymetrix, Inc., Agilent Technologies,
Amersham Pharmacia Biotech AB, Bio-Rad Laboratories, Inc., BioWhittaker
Molecular Applications, Caliper Technologies Corp., GeneTrace Systems, Inc.,
Invitrogen Corporation, PE Corporation, Sequenom, Inc. and Varian
Associates Inc. Moreover, competitors have greater name recognition than we do
and provide more conventional technologies and products with which some of our
customers and potential customers may have more familiarity or experience. In
many cases, in order to compete against existing and alternative technologies,
we will need to demonstrate the superior performance, speed and capabilities of
our WAVE System, including our proprietary DNASep column and micro-bead
technology. We cannot assure you that we will be able to make the necessary
enhancements to our technology or products to compete successfully with newly
emerging technologies.
EMPLOYEES
As of December 31, 2000, we had 189 full-time employees. The following sets
forth the number of persons employed in the principal areas of our operation:
Manufacturing............................................... 32
Sales and Marketing......................................... 68
Research and Development.................................... 59
Administration.............................................. 30
Our future success depends on our continuing ability to attract, train and
retain highly qualified technical, sales and managerial personnel. Competition
for these personnel is intense. Due to the limited number of people available
with the necessary technical skills, we can give no assurance that we can retain
or attract key personnel in the future. None of our employees is represented by
a labor union. We have not experienced any work stoppages and consider our
relations with our employees to be good.
PROPERTIES
We do not own any real property. We currently lease office and manufacturing
space in the following locations:
LOCATION SQUARE FOOTAGE ANNUAL RENT LEASE TERM EXPIRES
- -------- -------------- ----------------- ------------------
Omaha, Nebraska................................... 16,734 $172,000 2007
San Jose, California.............................. 27,860 $468,000 2005
Crewe, England.................................... 10,250 L97,500 2006
Cramlington, England.............................. 8,200 L26,000 2001
Tokyo, Japan...................................... 1,000 Y7,293,000 2001
Cambridge, Massachusetts.......................... 2,500 $54,000 2002
Gaithersburg, Maryland............................ 2,294 $35,000 2004
Houston, Texas.................................... 2,760 $24,000 2003
San Diego, California............................. 4,995 $135,000 2003
36
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our executive officers and directors, positions held by them and their ages,
are as follows:
NAME AGE POSITION
- ---- -------- --------
Collin J. D'Silva......................... 43 Chairman of the Board, Chief Executive
Officer and Director
William P. Rasmussen...................... 48 Chief Financial Officer
Douglas T. Gjerde, Ph.D................... 47 Chief Scientific Officer and Director
John E. Doyle............................. 57 Executive Vice President of Operations
William Walker............................ 65 Vice President of Intellectual Property
Mitchell L. Murphy........................ 44 Vice President, Secretary and Treasurer
Stephen F. Dwyer.......................... 58 Director
Jeffrey Sklar, M.D., Ph.D................. 53 Director
Parag Saxena.............................. 45 Director
Gregory J. Duman.......................... 45 Director
Roland J. Santoni......................... 59 Director
COLLIN J. D'SILVA. Mr. D'Silva has served as our Chairman of the Board and
Chief Executive Officer since 1997 and is also a Director. Mr. D'Silva, a
co-founder of Transgenomic, has worked for Transgenomic and its predecessors
since 1988. Prior to that time, Mr. D'Silva was employed by AT&T from 1980. At
AT&T, he held various positions in engineering, materials management, sales
support and business development. His last position at AT&T was Business Unit
Manager and Engineering Manager for a network distribution products division.
Mr. D'Silva holds a B.S. degree and a M.Eng. degree in industrial engineering
from Iowa State University and an M.B.A. from Creighton University.
WILLIAM P. RASMUSSEN. Mr. Rasmussen joined us on October 1, 1998 and
currently serves as our Chief Financial Officer. Prior to joining us,
Mr. Rasmussen was Chief Financial Officer at I-Mark Systems from 1996 until it
was purchased in 1997. I-Mark Systems designed integrated computer voting
solutions and was a successor corporation of ADD Consulting Inc., which provided
computer staffing professionals to numerous industries. Mr. Rasmussen served as
Chief Financial Officer of ADD Consulting Inc. from 1994 until joining I-Mark
Systems in 1996. Mr. Rasmussen owned a travel management company from 1986 until
1998, and he provided consulting services to numerous software and
telecommunication companies from 1984 through 1994. Mr. Rasmussen's previous
experience also includes serving as Controller and Principle Accounting Officer
for Applied Communications, Inc. from 1979 until 1984. Applied
Communications, Inc., now known as Transaction Systems Architects, Inc., is a
software provider for transaction processing systems.
DOUGLAS T. GJERDE, PH.D. Dr. Gjerde joined us in 1996 as Chief Scientific
Officer. Dr. Gjerde has held positions as senior scientist for Exxon Research
and Engineering, Director of Research for Wescan Instruments, and President and
Director of Research & Development for Sarasep, Inc. Sarasep, which Dr. Gjerde
co-founded, was acquired by us in 1996. Dr. Gjerde has authored 12 patents and
has more than 40 journal publications, primarily focused on separation
technology. Dr. Gjerde received his B.S. in chemistry in 1976 from Minnesota
State University, Mankato, Minnesota, and his Ph.D. in analytical chemistry in
1980 from Iowa State University, Ames, Iowa.
JOHN E. DOYLE. Mr. Doyle has been with our company since September 1997,
initially focusing on operations and process improvement. In 1999, Mr. Doyle
assumed responsibility for sales, again focusing on process as well as
improvements in staffing. Prior to joining Transgenomic, he was with
Supelco Inc. for 20 years, serving as Chief Executive Officer when it was a
Sigma-Aldrich company; Business Unit Vice President when it was a subsidiary of
Rohm and Haas Corporation; and
37
International Vice President when it was privately held. Mr. Doyle received his
engineering degree from Pennsylvania State University.
WILLIAM WALKER. Mr. Walker joined us in 1998 as Vice President of
Intellectual Property. Mr. Walker is a corporate attorney with an emphasis in
intellectual property law. Mr. Walker served as Director of Patents and
Licensing for Syntex Corporation (1970-1981) and subsequently provided
intellectual property counseling to new and emerging companies. Mr. Walker has a
law degree from Georgetown University Law Center, a B.S. degree in chemical
engineering from the University of Tennessee and a MFCC degree in psychology
from Santa Clara University. He is a member of the California Bar and is active
in numerous professional organizations.
MITCHELL L. MURPHY. Mr. Murphy joined us in 1992. His current duties
include the overall corporate administration and shareholder relations. Prior to
joining Transgenomic, he held accounting and financial management positions for
companies involved in manufacturing, steel distribution and rebar fabrication
for 15 years. He spent over two years as an auditor for the Omaha, Nebraska
office of Deloitte, Haskins & Sells (now Deloitte & Touche LLP) working in a
broad range of industries. Mr. Murphy graduated with honors from Creighton
University in 1978 with a B.S. degree in business administration with an
accounting major.
STEPHEN F. DWYER. Mr. Dwyer is the Chief Executive Officer of SD
Acquisition Inc., a company that acquired the assets associated with our
non-life sciences instrument product line during the second quarter of 2000.
Mr. Dwyer is a director and was a co-founder of Transgenomic. From 1996 until
March 2000, Mr. Dwyer was employed by Transgenomic and its predecessor company,
most recently as Vice Chairman. In 1966, Mr. Dwyer started Sasco Inc., which
produced laboratory animals used in disease research. In 1986, Mr. Dwyer sold
Sasco to Charles River Labs. He continued to run Sasco as a Charles River Labs
subsidiary for the next eight years.
JEFFREY SKLAR, M.D., PH.D. Dr. Sklar is professor of Pathology at Harvard
Medical School, where he has been on the faculty for more than five years. He
also serves as Director of the Divisions of Diagnostic Molecular Biology and
Molecular Oncology, department of Pathology Brigham and Women's Hospital.
Dr. Sklar serves on the Editorial Boards of Numerous Journals in the area of
Pathlogy and Cancer and on Scientific Advisory Committees to the Dana-Farber
Cancer Center, Boston, MA; the Fred Hutchinson Cancer Center, Seattle,
Washington; the New England Regional Primate Center; Harvard University; and the
National Institutes of Health. He is a director of Dianon Systems, Inc., and has
served on the scientific advisory boards of numerous companies in the
biotechnology field. Dr. Sklar holds an M.D. and Ph.D. from Yale University and
an M.A. (honorary) from Harvard University.
PARAG SAXENA. Mr. Saxena is the Chief Executive Officer of INVESCO Private
Capital, Inc. ("IPC") and has held that position for more than five years. As a
founding member of IPC, Mr. Saxena has been involved in numerous private capital
transactions and has served as a director on a number of venture-backed
healthcare and telecommunications companies. Mr. Saxena began his career in 1978
as a product engineer at Becton Dickinson Corporation. He later joined Booz,
Allen and Hamilton in the Technology Management Services Group where his
responsibilities included market analysis, technology strategy, acquisition
evaluation and business strategy formulation for several Fortune 100
corporations in the healthcare field. Mr. Saxena joined Citicorp Investment
Management, Inc. in 1983 as a founding member of the private capital group's
predecessor and was responsible for healthcare private investments and small cap
public stocks. Mr. Saxena received a B. Tech in 1977 from the Indian Institute
of Technology and an M.S. in 1978 in Chemical Engineering from West Virginia
College of Graduate Studies. He earned an M.B.A. in 1982 from the Wharton School
of the University of Pennsylvania.
GREGORY J. DUMAN. Mr. Duman has been a director since March 2000.
Mr. Duman is the Chief Financial Officer of Artios, Inc. (formerly ECOM
Worldwide, Inc.), a transaction processing services company, which he joined in
2000. Prior to that, he was Executive Vice President of Transaction
38
Systems Architects, Inc. ("TSA"). He joined TSA in 1983 as Director of
Administration. He became Controller in 1985 and Vice President and Chief
Financial Officer in 1991, serving until February 2000. From 1979 to 1983, he
worked for Arthur Andersen & Co. as a certified public accountant. Mr. Duman is
a director of TSA and Digital Courier Technologies, Inc.
ROLAND J. SANTONI. Mr. Santoni has been a director since March 2000. He has
been Professor of Law at Creighton University School of Law, Omaha, Nebraska
since 1977. He also has been Of Counsel with Erickson & Sederstrom, P.C. since
1978. Mr. Santoni received a B.S. in Economics from The Wharton School,
University of Pennsylvania, in 1963 and a J.D., CUM LAUDE, from the University
of Pennsylvania School of Law in 1966.
SCIENTIFIC ADVISORS
We consult with several leading scientists from around the world, as part of
our ongoing research and development efforts. These advisors assist us in
formulating our research, development, and commercialization strategies. Some of
these advisors include:
- Dennis R. Burton, Ph.D., Professor of Immunology, The Scripps Research
Institute, La Jolla, California.
- R. Alan North, Ph.D., Professor and Director of the Institute of
Molecular Physiology, the University of Sheffield, Sheffield, U.K.
- Eric Hoffman, Ph.D., Director, Research Center for Genetic Medicine,
The Children's National Medical Center, Washington, D.C.
- Leon Yengoyan, Ph.D., Professor of Chemistry, San Jose State
University, San Jose, California.
We do not pay cash remuneration to our scientific advisors, but may
reimburse them for reasonable expenses they incur on our behalf. We may also
award stock options to them under our stock option plan. See "Stock Option and
Other Compensation Plans" below.
BOARD OF DIRECTORS
Our Board of Directors is comprised of seven directors and is divided into
three classes. Directors of each class are elected for terms of three years.
Class I directors are Parag Saxena and Collin J. D'Silva. Class II directors are
Stephen F. Dwyer and Jeffrey Sklar. Class III directors are Douglas T. Gjerde,
Gregory Duman and Roland J. Santoni. The current terms of the Class I, Class II
and Class III directors will end at our annual stockholders meetings held in
2001, 2002 and 2003, respectively.
BOARD COMMITTEES
The audit committee consists of Messrs. Duman, Sklar and Saxena, each of
whom is an independent director. The audit committee reviews the services
provided by our independent auditors, consults with the auditors on audits and
proposed audits, and reviews and evaluates our control functions.
The compensation committee consists of Messrs. Sklar, Dwyer and Saxena. The
compensation committee reviews the compensation arrangements for our executive
officers, makes recommendations to the Board of Directors regarding compensation
matters and administers our employee stock option plan. See "Stock Option and
Other Compensation Plans" below.
DIRECTOR COMPENSATION
Directors who are also our officers are not separately compensated for
serving on the Board of Directors other than reimbursement for out-of-pocket
expenses related to attendance at board and committee meetings. Non-employee
directors are paid an annual retainer of $12,000. In addition, they receive a
fee of $1,200 for attending meetings in person, or $600 for participating in a
meeting by teleconference, as well as reimbursement for out-of-pocket expenses
related to attendance at board and committee meetings.
39
Our non-employee directors are issued options to purchase 15,000 shares of
common stock under our 1997 Stock Option Plan upon initial appointment to the
board. These options vest at the rate of 20% per year of service on the board.
Additional grants will be made from time to time so that each non-employee
director holds 15,000 unvested options at any time. All options granted to
non-employee directors have exercise prices that represented the fair market
value of our stock on the grant date. Exercise prices on outstanding options
granted to our non-employee directors range from $5.00 to $13.00 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of our compensation committee serves as a member of the board of
directors or compensation committee of any other company that has one or more
executive officers serving as a member of our board of directors or compensation
committee.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation we paid during the
year ended December 31, 1999 to our Chief Executive Officer and our next four
most highly compensated executive officers whose salary and bonus for 1999
exceeded $100,000. Also included is the compensation of an executive officer who
resigned prior to the end of the year. These executive officers are referred to
as the named executive officers elsewhere in the prospectus.
SUMMARY COMPENSATION TABLE(1)
ANNUAL COMPENSATION
----------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION(2)
- --------------------------- -------- -------- ------------ ---------------
Collin J. D'Silva.................................. $132,440 $ 0 $6,129 $21,587
Chief Executive Officer
William Walker..................................... 201,466 0 1,889 5,631
Vice President of
Intellectual Property
John E. Doyle...................................... 150,645 4,000 3,615 17,893
Executive Vice President
of Operations
Andrew T. Zander, Ph.D............................. 117,378 0 2,101 4,695
Vice President of Research and Development(3)
Douglas T. Gjerde, Ph.D............................ 101,216 0 3,074 19,394
Chief Scientific Officer
P. Thomas Pogge.................................... 162,871 0 4,643 8,256
General Counsel(4)
- ------------------------
(1) No long term compensation was awarded or paid to any named executive
officer during 1999.
(2) Consists of accrued vacation to be taken in the future or paid in cash upon
termination of employment.
(3) Dr. Zander resigned as an executive officer on March 24, 2000.
(4) Mr. Pogge resigned as an executive officer prior to the end of 1999.
All executive officers are eligible to participate in our stock option plan
(described under "Stock Option and Other Compensation Plans") and may
participate in other employee benefit plans and programs, such as health
insurance plans, that we offer to our other employees.
40
OPTION GRANTS IN LAST FISCAL YEAR
None of the named executive officers were awarded any stock options during
1999.
AGGREGATED OPTION EXERCISE IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
None of the named executive officers exercised any stock options during
1999.
STOCK OPTION AND OTHER COMPENSATION PLANS
STOCK OPTION PLAN. Our stock option plan allows us to grant options to our
employees, directors and advisors which give them the right to buy our common
stock at a fixed price, even if the market value of our stock goes up. Our stock
option plan is administered by the compensation committee of our Board of
Directors and it has the sole authority to set the number, exercise price, term
and vesting provisions of the options granted under the plan. Under the terms of
the plan, the exercise price of an incentive stock option, as defined under the
Internal Revenue Code of 1986, as amended, cannot be less than the fair market
value of our common stock on the date the option is granted. In general, options
will expire if not exercised within ten years from the date they are granted.
The committee may also require that an option holder remain employed by us for a
specified period of time before an option may be exercised. These "vesting"
provisions are established on an individual basis by the committee. The
committee will also decide whether options will be nonqualified options or
structured to be qualified options for U.S. income tax purposes. Either
incentive or nonqualified stock options may be granted to employees, but only
nonqualified stock options may be granted to our non-employee directors and
advisors. Options for a maximum of 6,000,000 shares may be granted under the
plan. As of the date of this prospectus, we have outstanding options for
4,034,881 shares of our common stock. These options have exercise prices ranging
from $5.00 to $13.00 per share.
Under the terms of our stock option plan, if the option holder dies, becomes
permanently disabled or retires any options not vested at such time will become
immediately vested. If an option holder voluntarily resigns, any options not
vested as of the date of resignation will terminate and all rights will cease,
unless the compensation committee determines otherwise. In the event an option
holder's employment, board membership or status as an advisor is terminated for
cause, the option holder's right to exercise an option, whether or not vested,
will immediately terminate and all rights will cease, unless the compensation
committee determines otherwise.
EMPLOYEE SAVINGS PLAN. We have also established an employee savings plan
that is intended to qualify as a tax-qualified plan under Section 401(k) of the
Internal Revenue Code. This plan allows for voluntary contributions up to
statutory maximums by eligible employees. We match a specific proportion of
these contributions, subject to limitations imposed by law. We may make
additional contributions to the savings plan on behalf of our employees if our
Board of Directors decides to do so. During the years ended December 31, 1997,
1998 and 1999, we contributed $92,733, $117,923 and $174,973 to the savings plan
on behalf of our employees.
LIMITATION OF DIRECTORS AND OFFICERS LIABILITY
Our certificate of incorporation provides that no director will be liable
for monetary damages for breach of the director's fiduciary duty to the company
or its stockholders, except for liability arising from:
- breach of the director's duty of loyalty to the company or its
stockholders;
- acts or omissions not in good faith or involving intentional misconduct or
knowing violations of law;
- improper distributions to stockholders and improper redemptions of stock;
and
- transactions from which the director derived an improper personal benefit.
41
This provision of our certificate of incorporation does not eliminate the
directors' fiduciary duties, and in appropriate circumstances, equitable
remedies including an injunction or other forms of non-monetary relief would
remain available under Delaware law. This provision also does not affect a
director's responsibilities under any other laws including federal securities
laws or state or federal environmental laws.
In addition, our bylaws provide that we will indemnify our directors and
officers to the fullest extent permitted by Delaware law. We are also empowered
under our bylaws to enter into indemnification contracts with our directors and
officers and to purchase insurance on behalf of any person we are required or
permitted to indemnify. We have obtained directors and officers liability
insurance coverage which covers, among other things, liabilities arising under
the Securities Act.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with our Chief Executive Officer,
Collin J. D'Silva, our Chief Financial Officer, William P. Rasmussen, our Chief
Scientific Officer, Douglas T. Gjerde Ph.D. and our Vice-President of
Intellectual Property, William R. Walker. The employment agreements require our
executives to devote their full time to our business activities, provided that
they may serve as directors of or consultants to other companies that do not
compete with us and for nonprofit corporations, civic organizations,
professional groups and similar entities. Our executives are not allowed to
compete with us during the term of their employment and for a year after they
are no longer our employee. Each agreement contains provisions under which our
executive officers have agreed to maintain the confidentiality of information
concerning us and which prohibits them from disclosing confidential information
about our business to people outside of the company except for proper business
purposes.
Each of the employment agreements with Mr. D'Silva and Dr. Gjerde has an
initial term of four years and may be extended unless we or Mr. D'Silva or
Dr. Gjerde, as the case may be, give notice of an intention not to renew. The
employment agreement with Mr. Walker has an initial term of two years and will
automatically renew for an additional two-year period unless Mr. Walker or we
give notice of an intention not to renew. The employment agreement with
Mr. Rasmussen has an initial term of one year. If one of our officers is
terminated for reasons other than an act of serious misconduct, the officer will
be entitled to severance pay in an amount equal to his then current base salary
for an amount equal to twelve months' salary, except for Mr. Walker who will be
entitled to severance pay in an amount equal to his then current base salary
plus the amount of the previous year's bonus, provided that such severance
payment does not exceed 299% of his current salary. In addition, if Mr. Walker
dies or becomes permanently disabled, he will receive an amount equal to six
months of salary.
42
PRINCIPAL STOCKHOLDERS
The following table provides information as of December 31, 2000, concerning
beneficial ownership of our common stock by:
- each of our named executive officers;
- each of our directors;
- all of our directors and executive officers as a group; and
- each stockholder that we know owns more than 5% of our outstanding common
stock.
Based on information furnished by such owners, we believe that the beneficial
owners listed below have sole voting and investment power with respect to such
shares.
NUMBER OF SHARES PERCENT
NAME BENEFICIALLY OWNED BENEFICIALLY OWNED
- ---- ------------------ ------------------
EXECUTIVE OFFICERS AND DIRECTORS
Collin J. D'Silva(1)................................. 4,906,154 23.1%
William P. Rasmussen(2).............................. 85,000 *
Douglas T. Gjerde, Ph.D.(3).......................... 2,500,000 11.0
John E. Doyle(4)..................................... 45,000 *
William Walker(5).................................... 50,000 *
Mitchell L. Murphy(6)................................ 24,000 *
Stephen F. Dwyer(7).................................. 2,724,096 12.8
Jeffrey Sklar, M.D., Ph.D.(8)........................ 9,000 *
Gregory Duman(9)..................................... 25,400 *
Roland J. Santoni(10)................................ 4,300 *
Parag Saxena......................................... -- *
All executive officers and directors as a group
(11 persons)....................................... 10,372,950 45.3
OTHER STOCKHOLDERS
Arthur P. D'Silva(11)................................ 1,093,846 5.2
INVESCO Private Capital, Inc.(12).................... 2,292,426 10.8
- ------------------------
* Less than 1%.
(1) Includes 1,400,000 shares owned by the Arthur P. D'Silva Trust, of which
Collin J. D'Silva is the sole trustee and 484,616 shares owned by D'Silva,
LLC of which Mr. D'Silva is the managing member.
(2) Includes vested options to purchase 40,000 shares at $5.00 per share and
25,000 shares at $13.00 per share. Mr. Rasmussen holds unvested options to
purchase an additional 10,000 shares at $5.00 per share and 25,000 shares at
$13.00 per share.
(3) Includes an option to purchase 1,500,000 shares at $5.00 per share.
(4) Consists of vested options to acquire 45,000 shares at $5.00 per share.
Mr. Doyle holds unvested options to purchase an additional 30,000 shares at
$5.00 per share.
(5) Consists of vested options to purchase 50,000 shares at $5.00 per share.
Mr. Walker holds unvested options to purchase an additional 50,000 shares
at $5.00 per share.
(6) Consists of 4,000 shares owned by Mr. Murphy and vested options to purchase
20,000 shares at $5.00 per share. Mr. Murphy holds unvested options to
purchase an additional 30,000 shares at $5.00 per share and 10,000 at $11.94
per share.
43
(7) Includes 500,000 shares owned by Nancy A. Dwyer, Mr. Dwyer's wife.
(8) Consists of vested options to acquire 9,000 shares of common stock at $5.00
per share. Dr. Sklar also holds unvested options to purchase 6,000 shares
at $5.00 per share and 9,000 shares at $13.00 per share.
(9) Consists of 25,400 shares owned by Mr. Duman. Mr. Duman holds unvested
options to purchase an additional 15,000 shares at $10.00 per share.
(10) Consists of 1,800 shares owned by Mr. Santoni and vested options to
purchase 2,500 shares of common stock at $10.00 per share. Mr. Santoni
holds unvested options to purchase 15,000 shares at $10.00 per share.
(11) Includes 783,000 shares owned by the Cecilia F. D'Silva Residuary Trust, of
which Arthur P. D'Silva is co-trustee. Mr. D'Silva is the father of Collin
J. D'Silva. Mr. D'Silva's address is Transgenomic, Inc., 12325 Emmet, Omaha,
Nebraska 68164.
(12) These shares are held by entities affiliated with INVESCO Private Capital,
Inc. which disclaims beneficial ownership of such shares. The address of
INVESCO Private Capital, Inc. is 1166 Avenue of the Americas, New York, New
York 10036. These affiliated entities are each selling stockholders that may
sell shares of our common stock under this prospectus.
44
SELLING STOCKHOLDERS
The following table shows the number of shares beneficially owned by each of
the selling stockholders which includes shares which may be issued upon the
exercise of warrants. This prospectus also relates to any additional shares of
common stock which may become issuable to the selling stockholders by reason of
any stock dividend, stock split, recapitalization or other similar transaction
effected without the receipt of consideration which results in an increase in
the number of our outstanding shares of common stock. The shares offered by this
prospectus may be offered from time to time by the selling stockholders.
No selling stockholder holds any position or office with Transgenomic or has
any other material relationship with us. Mr. G. S. Beckwith Gilbert was a
director of Transgenomic from December 1997 to November 1998.
Percentage ownership is based on the 21,205,566 shares of our common stock
outstanding as of the date of this prospectus. For purposes of computing the
percentage of outstanding shares held by each person or group of persons named
below, any security which such person or group of persons has the right to
acquire within 60 days is deemed to be outstanding for the purpose of computing
the percentage ownership for such person or persons, but is not deemed to be
outstanding for the purpose of computing the percentage ownership of any other
person. Any estimate that we give regarding the number of shares that will be
held by the selling stockholders after completion of this offering may prove to
be inaccurate because the selling stockholders may offer all or some of their
shares and because there currently are no agreements, arrangements or
understandings with respect to the sale of any of the shares.
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
THE OFFERING THE OFFERING
------------------------- SHARES TO BE ----------------------
NAME NUMBER PERCENTAGE SOLD NUMBER PERCENTAGE
- ---- ------------ ---------- ------------ --------- ----------
American Frontier Financial
Corporation.................. 10,671 * 10,671 0 *
Millennium Financial Group..... 500 * 500 0 *
Consolidated Investment
Corp......................... 33,613 * 33,613 0 *
Max H. Callen.................. 5,891 * 891 5,000 *
Eames Irvin.................... 5,071 * 471 4,600 *
Allen J. Moore................. 3,417 * 3,417 0 *
George W. Peterson............. 8,601 * 8,601 0 *
William B. Shreve.............. 3,946 * 2,946 1,000 *
Thomas C. Smith................ 63,420 * 47,420 16,000 *
A. John Walters................ 9,691 * 5,891 3,800 *
John P. Kanouff................ 16,850 * 16,850 0 *
Robert H. Taggart.............. 3,370 * 3,370 0 *
James M. McCrory............... 500 * 500 0 *
Leroy J. Schroeder............. 2,500 * 2,500 0 *
Namaste, Ltd................... 2,225 * 2,225 0 *
Deltron, Ltd................... 2,225 * 2,225 0 *
Michael G. Fugler.............. 800 * 800 0 *
Shelley K. Gluck............... 250 * 250 0 *
David M. Dobson................ 500 * 500 0 *
Frank T. Marino................ 500 * 500 0 *
G.S. Beckwith Gilbert.......... 300,000 1.4% 300,000 0 *
Chancellor Private Capital
Partners III, L.P............ 260,649 1.2% 260,649 0 *
45
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
THE OFFERING THE OFFERING
------------------------- SHARES TO BE ----------------------
NAME NUMBER PERCENTAGE SOLD NUMBER PERCENTAGE
- ---- ------------ ---------- ------------ --------- ----------
Citiventure 96 Partnership
L.P.......................... 1,118,934 5.2% 1,118,934 0 *
Chancellor Private Capital
Offshore Partners II, L.P.... 429,142 2.0% 429,142 0 *
Chancellor Private Capital
Offshore Partners I, C.V..... 40,117 * 40,117 0 *
Drake & Co. for the account of
Citiventure III.............. 443,584 2.1% 443,584 0 *
Berkely Investments Limited.... 126,083 * 126,083 0 *
Daystar Realty Limited......... 57,310 * 57,310 0 *
Hambrecht & Quist California... 27,509 * 27,509 0 *
Hambrecht & Quist Employee
Venture Fund, L.P. II........ 27,509 * 27,509 0 *
CLSP, L.P...................... 135,253 * 135,253 0 *
CLSP/SBS I, L.P................ 50,433 * 50,433 0 *
CLSP/SBS II, L.P............... 20,631 * 20,631 0 *
Steve Elms..................... 2,292 * 2,292 0 *
John Rumsey.................... 2,292 * 2,292 0 *
Rob Olan....................... 2,292 * 2,292 0 *
Vivek Jain..................... 2,292 * 2,292 0 *
Dennis Purcell................. 2,292 * 2,292 0 *
George Montgomery.............. 2,292 * 2,292 0 *
- ------------------------
* less than 1%
46
RELATED PARTY TRANSACTIONS
On May 19, 2000, we sold the assets related to our non-life sciences
instrument product line to SD Acquisition Inc., a company controlled by
Stephen F. Dwyer, a director and a principal stockholder of ours. These assets
consisted of inventory, property, plant and equipment, patents, other
intellectual property rights and a lease deposit, with an aggregate book value,
net of $125,000 of accrued liabilities, of approximately $4.7 million as of
March 31, 2000. These assets were sold for a total adjusted purchase price of
$5.65 million plus reimbursement by the buyer of approximately $400,000 of
expenses paid by us since March 31, 2000 in connection with this product line.
Approximately $3,650,000 was paid in cash at the closing and $2,000,000 was paid
with an interest-bearing promissory note due on December 30, 2000.
The purchaser financed the cash portion of the purchase price for these
assets plus initial working capital needs with borrowings of approximately
$4.6 million obtained from a bank. We acquired the notes evidencing these loans
from the bank upon closing of our initial public offering by paying it an amount
equal to the entire principal balance of the loans plus accrued and unpaid
interest. These acquired notes were consolidated with the original $2.0 million
note. All of the principal of and accrued interest on this consolidated note was
repaid prior to maturity. On December 29, 2000, we repurchased 261,904 shares of
our common stock from Mr. Dwyer for $10.50 per share, which was the closing
price for our common stock on that day, for an aggregate purchase price of
$2,749,992. Mr. Dwyer used the proceeds from this sale to partially prepay the
principal of and interest on the consolidated note.
Since early 1999, we have had discussions with potential purchasers of the
assets relating to our non-life sciences product line, each of which was
unaffiliated with us. In some cases, our management approached companies that we
identified as potential purchasers of these assets based on the nature of their
existing businesses. In other cases, these discussions were unsolicited. Based
on our knowledge of the industry, our management believes that we contacted the
most likely buyers of these assets. As a result, we did not engage any business
brokers or finders, nor did we use any advertising to locate a buyer for these
assets.
These discussions resulted in a single offer, other than Mr. Dwyer's. This
offer specified a total purchase price of $4,000,000 and would have required us
to assume employee severance and other windup costs. Since this was an
arm's-length offer, we believe that it represented a fair market valuation of
these assets. In addition, we considered the book value of these assets to be a
reasonable approximation of their fair market value. Therefore, we did not
obtain an independent appraisal of these assets. The purchase price and other
terms of the transaction were determined through negotiation between us and
Mr. Dwyer and was approved by our disinterested directors.
We expect to acquire peripheral components of our WAVE System, such as the
autosampler, from SD Acquisition Inc., although we have no agreement to do so.
All components will be acquired at market prices. We may purchase any or all of
these components from other suppliers. Mr. Dwyer will act as a consultant to us
until June 2001. We will pay Mr. Dwyer a retainer of $70,000 for serving in this
capacity.
On February 10, 2000, we borrowed $204,190 from Stephen F. Dwyer. We
delivered an unsecured promissory note for this loan which bears interest at a
rate of 9.75% per annum and was repaid on August 10, 2000.
Collin J. D'Silva, Stephen F. Dwyer and Douglas T. Gjerde were partners of
CT Partners, an Iowa general partnership, along with various other individuals,
some of whom are relatives of Mr. D'Silva and Mr. Dwyer. Mr. D'Silva, Mr. Dwyer
and Dr. Gjerde held partnership interests of 28.6%, 23.8% and 4.8%,
respectively, in CT Partners. In 1997, our predecessor company agreed to provide
CT Partners with research and development services to assist CT Partners in the
development of miniature solid-state optical spectrometry technology to which it
held the rights. Our predecessor company was
47
entitled to a fee for these services and for reimbursement of its expenses. In
addition, our predecessor company entered into a royalty agreement with CT
Partners under which it received an exclusive license to manufacture and market
this technology and agreed to pay CT Partners a royalty of up to $6,500,000
based on the sales of products employing this technology. On June 3, 1999, we
acquired the rights to this technology from CT Partners for a purchase price of
$2,000,000. The purchase price was offset by the cancellation of principal and
interest due on promissory notes given to us by CT Partners in payment of the
fees and expense reimbursements owed to us by it. Principal and interest on
these notes plus additional accrued expenses equaled $1,085,931. The sale price
was based on the present value of anticipated future net income from the sale of
products associated with the technology. While we believe the terms of this
transaction represent the fair value of the acquired technology, neither we nor
CT Partners obtained an independent valuation of the technology or took any
other steps to determine what an unaffiliated party would have paid for this
technology. The royalty agreement was cancelled as a result of the sale of the
technology rights by CT Partners to us. We will sell the rights to this
technology in connection with the sale of assets related to the non-life
sciences instrument product line described above.
DESCRIPTION OF CAPITAL STOCK
GENERAL
We can issue up to 60,000,000 shares of our common stock and
15,000,000 shares of our preferred stock. There are currently 21,205,566 shares
of our common stock outstanding. We have not issued any shares of preferred
stock. You should read the following summary description of our capital stock in
conjunction with our certificate of incorporation and our bylaws, each of which
is available upon request.
COMMON STOCK
The holdersHolders of our common stock are entitled to - one vote per share on all matters submitted to a votebe voted upon by the stockholders. Holders of our stockholders;
- the payment of any dividends declared by the Board of Directors out of
legally available funds, after the superior rights of any preferred stock
holders have been satisfied; and
- share ratably in company assets available for distribution to them in the
event of the liquidation, dissolution, distribution of assets or winding
up of the company.
The holders of common stock do not have cumulative voting rights. As a
result,rights in the election of directors. Subject to the preferences that may be applicable to any then outstanding preferred stock, holders of a majority of the outstanding common stock can elect allare entitled to receive ratably such dividends, if any, as may be declared by our Board of Directors out of funds legally available therefor. Upon the directorsliquidation, dissolution, or winding up of the company. The remainingour company, holders of common stock holders will not be
ableare entitled to electshare ratably in all of our assets which are legally available for distribution after payment of all debts and other liabilities and liquidation preference of any directors. The holdersoutstanding preferred stock. There are no sinking fund provisions applicable to our common stock. Holders of common stock have no preemptive, or
other subscription, rights, and there are no conversion, redemption or sinking
fund provisions with respect to the common stock. All outstanding sharesconversion rights. The rights, preferences and privileges of holders of common stock are subject to, and allmay be adversely affected by, the rights of the holders of shares of commonany series of preferred stock that we have designated and issued and may designate and issue in the future.
Preferred Stock
We may issue shares of our preferred stock from time to be outstanding upon
completion of this offering will be, fully paid and non-assessable.time, in one or more series. The common
stock has a par value of $0.01 per share.
PREFERRED STOCK
The Board of Directors is authorized to issue up to 15,000,000 shares of preferred stock in one or more series andauthorized are undesignated as to fix the rights, powers,
preferences, qualifications, limitationsprivileges and restrictions, granted to or imposed
on the preferred stock. The authority of theother than as set forth herein. Our Board of Directors includeswill determine the right to fixrights, preferences and privileges of the shares of each wholly unissued series, and any qualifications, limitations or restrictions thereon, including dividend rights, conversion rights, terms of redemption or repurchase, liquidation preference,preferences, sinking fund terms and the number of shares constituting any series or the designation of a series, without any further vote or action byseries.
The General Corporation Law of the stockholders. TheState of Delaware, the state of our incorporation, provides that the holders of preferred stock will have the right to vote separately as a class (or, in some cases, as a series) on an amendment to our amended and restated certificate of incorporation if the amendment would change the par value, the number of authorized shares of the class or the powers, preferences or special rights of the class or series so as to adversely affect the class or series, as the case may be. This right is in addition to any voting rights that may be issued with a preference overprovided for in the common stock as to the paymentapplicable certificate of dividends. Thedesignation.
Our Board of Directors without
stockholder approval, can issue
48
andor conversion rights that could adversely affect the voting power or other rights of the holders of our common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions, financings and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in our control of Transgenomic. For the foregoing reasons, any preferred stock we issue couldand may adversely affect yourthe market price of our common stock and the voting and other rights as a holderof the holders of our common stock. We do not have any
present plans
Series B Preferred Stock
On August 25, 2017, we filed a Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (the “Series B Certificate of Designation”) with the State of Delaware, which designates 6,900 shares of our preferred stock as Series B Senior Convertible Preferred Stock (the “Series B Preferred Stock”). The Series B Preferred Stock has a stated value of $1,000 per share and a par value of $0.01 per share.
If, prior to issue preferred stock.
WARRANTS
Asthe second anniversary of the original issue date of this prospectus,the Series B Preferred Stock, we have 106,754 outstanding warrantssell or grant any option to purchase or sell or grant any right to reprice, or otherwise dispose of or issue, any of our common stock at an exercise price equal to $5.00 per share. These
warrants will expire in 2003. All of the warrants contain provisionsor securities convertible into or exercisable for the
adjustment of the exercise price and the aggregate number of shares that may be
issued upon the exercise of the warrant if a stock dividend, stock split,
reorganization, reclassification or consolidation occurs.
OPTIONS
As of the date of this prospectus, we have outstanding options to purchase
4,034,881 shares of our common stock at an effective price per share that is lower than the then effective conversion price, then the conversion price will be reduced to equal the higher of (A) such lower price or (B) $0.75, subject to an exception for the following types of issuances (i) issuances to our employees, officers or directors pursuant to any stock or option plan adopted by a majority of the non-employee members of our Board of Directors or committee thereof, (ii) issuances upon the exercise prices ranging from $5.00 to
$13.00 per share. Additional options to acquire 1,774,150or exchange of any securities issued in connection with the August 2017 Offering or convertible into shares of common stock issued and outstanding on the date of the underwriting agreement entered into in connection with the August 2017 Offering, provided that such securities have not been amended since the date of the underwriting agreement to increase the number of securities or decrease the exercise, exchange or conversion price, or (iii) issuances pursuant to acquisitions or strategic transactions approved by a majority of the disinterested members of our Board of Directors, provided that such securities are “restricted securities” under Rule 144 and carry no registration rights that require or permit the filing of any registration statement in connection therewith during the 90-day period following the original issuance date of the Series B Preferred Stock, and provided that any such issuance is to a person or its equity holders that is an operating company or an owner of an asset in a business synergistic with the business of our company and will provide our company with additional benefits in addition to the investment of funds, but will not include a transaction in which we issue securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities (the issuances referred to in (i) through (iii) above, the “Exempt Issuances”).
In the event of a liquidation, the holders of Series B Preferred Shares are entitled to an amount equal to the par value of the Series B Preferred Stock and thereafter to participate on an as-converted-to-common stock basis with holders of the common stock in any distribution of our assets to the holders of the common stock. The Series B Certificate of Designation provides, among other things, that we will not pay any dividends on shares of common stock (other than dividends in the form of common stock) unless and until such time as we pay dividends on each Series B Preferred Share on an as-converted basis. Other than as set forth in the previous sentence, the Series B Certificate of Designation provides that no other dividends will be paid on Series B Preferred Shares and that we will pay no dividends (other than dividends in the form of common stock) on shares of common stock unless we simultaneously comply with the previous sentence. The Series B Certificate of Designation does not provide for any restriction on the repurchase of Series B Preferred Shares by us while there is any arrearage in the payment of dividends on the Series B Preferred Shares. There are no sinking fund provisions applicable to the Series B Preferred Shares.
In addition, in the event we consummate a merger or consolidation with or into another person or other reorganization event in which our shares of common stock are converted or exchanged for securities, cash or other property, or we sell, lease, license, assign, transfer, convey or otherwise dispose of all or substantially all of our assets or we or another person acquire 50% or more of our outstanding shares of common stock, then following such event, the holders of the Series B Preferred Shares will be entitled to receive upon conversion of the Series B Preferred Shares the same kind and amount of securities, cash or property which the holders would have received had they converted the Series B Preferred Shares immediately prior to such fundamental transaction. Any successor to us or surviving entity is required to assume the obligations under the Series B Preferred Shares.
Notwithstanding the foregoing, in the event we are not the surviving entity of a fundamental transaction or in the event of a reverse merger or similar transaction where we are the surviving entity, then, automatically and contemporaneous with the consummation of such transaction, the surviving entity (or our company in the event of a reverse merger or similar transaction) will purchase the then outstanding shares of Series B Preferred Stock by paying and issuing, in the event that such consideration given to the holders of our common stock is non-cash consideration, as the case may be, issuedto each holder an amount equal to the cash consideration plus the non-cash consideration in the future underform issuable to the holders of our common stock (in the case of a reverse merger or similar transaction, shares of common stock issuable to the holders of the acquired company) per share of our common stock in the fundamental transaction multiplied by the number of shares of common stock underlying the shares of Series B Preferred Stock Option Plan.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND CHARTER PROVISIONS
DELAWARE LAW.held by the holder on the date immediately prior to the consummation of the fundamental transaction. Such amount will be paid in the same form and mix (whether securities, cash or property, or any combination of the foregoing) as the consideration received by holders of our common stock in the fundamental transaction.
With certain exceptions, as described in the Series B Certificate of Designation, shares of Series B Preferred Stock, or Series B Preferred Shares, have no voting rights. However, as long as any shares of Series B Preferred Shares remain outstanding, the Series B Certificate of Designation provides that we may not, without the affirmative vote of holders of a majority of the then-outstanding Series B Preferred Shares, (a) alter or change adversely the powers, preferences or rights given to the Series B Preferred Shares or alter or amend the Series B Certificate of Designation, (b) increase the number of authorized shares of Series B Preferred Shares or (c) amend our Certificate of Incorporation or other charter documents in any manner that adversely affects any rights of holders of Series B Preferred Shares.
Each Series B Preferred Share is convertible at any time at the holder’s option into a number of shares of common stock equal to $1,000 divided by the Series B Conversion Price. The “Series B Conversion Price” was initially $37.50 and is subject to adjustment for stock splits, stock dividends, distributions, subdivisions and combinations and, as discussed above, certain dilutive issuances of our common stock or securities convertible into or exercisable for shares of our common stock. In general,November 2017, at the time of our issuance of our Series C Preferred Stock, the conversion price of the Series B Preferred Stock was reduced from $37.50 per share to $21.00 per share. In February 2018, we entered into an equity purchase agreement and, as a result, the conversion price of the Series B Convertible Preferred Stock was automatically adjusted from the reduced $21.00 per share price to $15.60 per share. On March 21, 2018, the Series B Conversion Price was reduced from $15.60 to $11.25 as a result of our letter agreement with certain holders of shares of our Series B Preferred Stock and Series C Preferred Stock (the “Letter Agreement”). In April 2018, as a result of a securities purchase agreement pursuant to which we agreed to issue up to approximately $3,296,703 in Senior Secured Convertible Promissory Notes, the conversion price of the Series B Convertible Preferred Stock was automatically adjusted from $11.25 per share to $4.50 per share On November 29, 2018, as a result of the Amendment Agreement, the conversion price of our Series B Convertible Preferred Stock was automatically adjusted from $4.50 per share to $2.25 per share and is subject to further adjustment as set forth in the Series B Certificate of Designation. Notwithstanding the foregoing, the Series B Certificate of Designation further provides that we may not effect any conversion of Series B Preferred Shares, with certain exceptions, to the extent that, after giving effect to an attempted conversion, the holder of Series B Preferred Shares (together with such holder’s affiliates, and any persons acting as a group together with such holder or any of such holder’s affiliates) would beneficially own a number of shares of our common stock in excess of 4.99% (or, at the election of the holder, 9.99%) of the shares of our common stock then outstanding after giving effect to such exercise (the “Preferred Stock Beneficial Ownership Limitation”); provided, however, that upon notice to us, the holder may increase or decrease the Preferred Stock Beneficial Ownership Limitation, provided that in no event may the Preferred Stock Beneficial Ownership Limitation exceed 9.99% and any increase in the Preferred Stock Beneficial Ownership Limitation will not be effective until 61 days following notice of such increase from the holder to us.
As of January9, 2020, 47 shares of Series B Preferred Stock are outstanding.
35
Antitakeover Effects of Delaware Law and Provisions of our Amended and Restated Certificate of Incorporation and Amended and Restated By-laws
Certain provisions of the Delaware General Corporation Law and of our amended and restated certificate of incorporation and amended and restated by-laws could have the effect of delaying, deferring or discouraging another party from acquiring control of us. These provisions, which are summarized below, are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and, as a consequence, they might also inhibit temporary fluctuations in the market price of our common stock that often result from actual or rumored hostile takeover attempts. These provisions are also designed in part to encourage anyone seeking to acquire control of us to first negotiate with our board of directors. These provisions might also have the effect of preventing changes in our management. It is possible that these provisions could make it more difficult to accomplish transactions that stockholders might otherwise deem to be in their best interests. However, we believe that the advantages gained by protecting our ability to negotiate with any unsolicited and potentially unfriendly acquirer outweigh the disadvantages of discouraging such proposals, including those priced above the then-current market value of our common stock, because, among other reasons, the negotiation of such proposals could improve their terms.
Delaware Takeover Statute
We are subject to the provisions of Section 203 of the Delaware General Corporation LawLaw. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in any business combinationa “business combination” with any interested stockholderan “interested stockholder” for a three-year period of three years following the datetime that thethis stockholder becamebecomes an interested stockholder, unless:
- prior to that date, the Board of Directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder's
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 those shares owned by persons who are
directors and also officers, and employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held under the plan will be tendered in a tender or exchange offer;
or
- on or subsequent to that date,unless the business combination is approved by the
Board of Directorsin a prescribed manner. Under Section 203, a business combination between a corporation and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirdsinterested stockholder is prohibited unless it satisfies one of the outstanding voting stock that is not owned by the
interested stockholder.
following conditions:
| · | before the stockholder became interested, our board of directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; |
| · | upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding, shares owned by persons who are directors and also officers, and employee stock plans, in some instances, but not the outstanding voting stock owned by the interested stockholder; or |
| · | at or after the time the stockholder became interested, the business combination was approved by our board of directors and authorized at an annual or special meeting of the stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder. |
Section 203 defines "business combination"a business combination to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
- in general, any transaction that results in the issuance or transfer by
the corporation of any stock of the corporation to 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.
49
| · | any merger or consolidation involving the corporation and the interested stockholder; |
| · | any sale, transfer, lease, pledge or other disposition involving the interested stockholder of 10% or more of the assets of the corporation; |
| · | subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; |
| · | subject to 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. |
In general, Section 203 defines an interested stockholder as any 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 the entity or person.
CHARTER PROVISIONS.
Our Second
36
Provisions of our Amended and Restated Certificate of Incorporation and BylawsAmended and Restated By-laws
Our amended and restated certificate of incorporation and amended and restated by-laws include a number of provisions that may have the effect of deterring hostile
takeoversdelaying, deferring or delayingdiscouraging another party from acquiring control of us and encouraging persons considering unsolicited tender offers or preventing changesother unilateral takeover proposals to negotiate with our board of directors rather than pursue non-negotiated takeover attempts. These provisions include the items described below.
Board composition and filling vacancies. In accordance with our amended and restated certificate of incorporation, our board is divided into three classes serving staggered three-year terms, with one class being elected each year. Our amended and restated certificate of incorporation also provides that directors may be removed only for cause and then only by the affirmative vote of the holders the majority of the shares then entitled to vote at an election of directors. Furthermore, any vacancy on our board of directors, however occurring, including a vacancy resulting from an increase in control or managementthe size of Transgenomic. First, our board, may only be filled by the affirmative vote of a majority of our directors then in office even if less than a quorum.
No written consent of stockholders. Our amended and restated certificate of incorporation provides that all stockholder actions mustare required to be effectedtaken by a vote of the stockholders at an annual or special meeting, and that stockholders may not take any action by written consent in lieu of a duly calledmeeting. This limit may lengthen the amount of time required to take stockholder actions and would prevent the amendment of our by-laws or removal of directors by our stockholder without holding a meeting of holdersstockholders.
Meetings of stockholders. Our amended and not
by a consent in writing. Second, our bylawsrestated by-laws provide that special meetings of the
holders may be called only by the chairman of the Board of Directors, the Chief
Executive Officer or our Board of Directors pursuant to a resolution adopted by a majority of the total numbermembers of authorized directors. Third, our certificateboard of incorporation provides that our Boarddirectors then in office may call special meetings of Directors can issue up to 15,000,000
shares of preferred stock, as described under "Preferred Stock" above. Fourth,
our certificate of incorporationstockholders and only those matters set forth in the Bylaws provide for a classified Board
of Directors in which approximately one-thirdnotice of the directors wouldspecial meeting may be elected
each year. Consequently, any potential acquirer would needconsidered or acted upon at a special meeting of stockholders. Our amended and restated by-laws limit the business that may be conducted at an annual meeting of stockholders to successfully
complete two proxy contests in order to take control ofthose matters properly brought before the Board of Directors.
As a result of the provisions of the certificate of incorporationmeeting.
Advance notice requirements. Our amended and Delaware
law, stockholders will not be able to cumulate votes for directors. Fifth, our
certificate of incorporation prohibits a business combination with an interested
stockholder without the approval of the holders of 75% of all voting shares and
the vote of a majority of the voting shares held by disinterested stockholders,
unless it has been approved by a majority of the disinterested directors.
Finally, our bylawsrestated by-laws establish procedures, including advance notice procedures with regard to stockholder proposals relating to the nomination of candidates for election as directors or new business to be brought before meetings of our stockholders. These procedures provide that notice of stockholder proposals must be timely given in writing to our corporate secretary prior to the meeting at which the action is to be taken. Generally, to be timely, notice must be received at our principal executive offices not less than 90 days or more than 120 days prior to the first anniversary date of the annual meeting for the preceding year. The notice must contain certain information specified in our amended and restated by-laws.
Amendment to certificate of incorporation and by-laws. As required by the Delaware General Corporation Law, any amendment of our amended and restated certificate of incorporation must first be approved by a majority of our board of directors, and if required by law or our amended and restated certificate of incorporation, must thereafter be approved by a majority of the outstanding shares entitled to vote on the amendment, and a majority of the outstanding shares of each class entitled to vote thereon as a class, Our amended and restated by-laws may be amended by the affirmative vote of a majority vote of the directors then in office, subject to any limitations set forth in the amended and restated by-laws; and may also be amended by the affirmative vote of at least a majority of the outstanding shares entitled to vote on the amendment, or, if the board of directors recommends that the stockholders approve the amendment, by the affirmative vote of the majority of the outstanding shares entitled to vote on the amendment, in each case voting together as a single class.
Undesignated preferred stock. Our amended and restated certificate of incorporation provides for authorized shares of preferred stock. The existence of authorized but unissued shares of preferred stock may enable our board of directors to render more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise. For example, if in the due exercise of its fiduciary obligations, our board of directors were to determine that a takeover proposal is not in the best interests of us or our stockholders, our board of directors could cause shares of preferred stock to be issued without stockholder proposals. These provisionsapproval in one or more private offerings or other transactions that might dilute the voting or other rights of the proposed acquirer or insurgent stockholder or stockholder group. In this regard, our amended and restated certificate of incorporation grants our board of director’s broad power to establish the rights and preferences of authorized and unissued shares of preferred stock. The issuance of shares of preferred stock could decrease the amount of earnings and assets available for distribution to holders of shares of common stock. The issuance may also adversely affect the rights and powers, including voting rights, of these holders and may have the effect of delaying, deterring or preventing a change in control of us.
37
Choice of forum. Our amended and restated by-laws provide that the Court of Chancery of the State of Delaware is the sole and exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our by-laws, or any action asserting a claim against us that is governed by the internal affairs doctrine. Although our amended and bylawsrestated by-laws contain the choice of forum provision described above, it is possible that a court could discourage potential acquisition proposalsrule that such a provision is inapplicable for a particular claim or action or that such provision is unenforceable.
Transfer Agent and could delay or
prevent a change in control or management of our company.
TRANSFER AGENT AND REGISTRAR
Wells Fargo Bank Minnesota, N.A. has been appointed as theRegistrar
The transfer agent and registrar for our common stock.
NATIONAL MARKET LISTING
stock is EQ Shareowner Services.
Listing
Our common stock is listed on the Nasdaq Stock Market's NationalThe NASDAQ Capital Market under the symbol TBIO.
50
SHARES ELIGIBLE FOR FUTURE SALE
Sales“PRPO.”
THE LINCOLN PARK TRANSACTION
General
On September 7, 2018, we entered into the Purchase Agreement and the Registration Rights Agreement with Lincoln Park. Pursuant to the terms of substantial amountsthe Purchase Agreement, Lincoln Park has agreed to purchase from us up to $10,000,000 of our common stock (subject to certain limitations) from time to time during the term of the Purchase Agreement. Pursuant to the terms of the Registration Rights Agreement, we are required to file with the SEC a registration statement that includes a prospectus to register for resale under the Securities Act the shares that have been or may be issued to Lincoln Park under the Purchase Agreement.
Pursuant to the terms of the Purchase Agreement, at the time we executed the Purchase Agreement and the Registration Rights Agreement, we issued 40,000 Commitment Shares to Lincoln Park as consideration for its commitment to purchase shares of our common stock under the Purchase Agreement.
We do not have the right to commence any sales to Lincoln Park under the Purchase Agreement until certain conditions set forth in the Purchase Agreement, all of which are outside of Lincoln Park’s control, have been satisfied, including the registration statement registering the shares being issued and sold to Lincoln Park being declared effective by the SEC. Thereafter, we may, from time to time and at our sole discretion, on any single business day on which the closing price of our common stock is not less than $1.50 per share (subject to adjustment for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction as provided in the Purchase Agreement), direct Lincoln Park to purchase shares of our common stock in the public market could
adversely affectregular purchases in amounts up to 30,000 shares which amounts may be increased to up to 36,666 shares depending on the market price of our common stock at the time of sale and subject to a maximum commitment by Lincoln Park of $1,000,000 per singular regular purchase. The purchase price per share sold in a regular purchase will be based on the market price of our abilitycommon stock immediately preceding the time of sale as computed under the Purchase Agreement. Lincoln Park may not assign or transfer its rights and obligations under the Purchase Agreement.
As of the date of this prospectus, we have already received approximately $8.3million from the sale of3,226,667shares of common stock to raise
equity capital inLincoln Park which were sold to Lincoln Park pursuant to the futureregistration statement on terms favorableForm S-1A (File No.: 333-227364) filed on September 13, 2018, registration statement on Form S-1 (333-229478) filed on February 1, 2019 and registration statement on Form S-1 (333-233175) filed on August 9, 2019.
The Purchase Agreement also prohibits us from directing Lincoln Park to us.
A totalpurchase any shares of 21,205,566common stock if those shares, when aggregated with all other shares of our common stock are outstanding. The
5,152,000 shares soldthen beneficially owned by Lincoln Park and its affiliates, would result in Lincoln Park exceeding the Beneficial Ownership Cap.
Purchase of Shares Under the Purchase Agreement
Under the Purchase Agreement, on any business day selected by us inon which the closing price of our initial public offering, shares issued under
our stock option plan and 3,200,547 shares that we have registered for certain
shareholders (including the 3,195,047 covered by this prospectus) are freely
tradable without restriction or further registration under the Securities Act,
unless these shares are purchased by "affiliates" as that term is defined in
Rule 144 under the Securities Act. A total of 12,763,096 shares of common stock are "restricted securities"is not less than $1.50 per share (subject to adjustment for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction as that term is defined in Rule 144 under the
Securities Act. Restricted securities may be soldprovided in the public market only if
registered or if they qualify for an exemption from registration under
Rules 144 under the Securities Act which is summarized below.
RULE 144
In general, under Rule 144 as currently in effect a person who has
beneficially ownedPurchase Agreement), we may direct Lincoln Park to purchase up to 30,000 shares of our common stock in a regular purchase on such business day, provided, however, that (i) the Regular Purchase may be increased to up to 33,333 shares, provided that the closing sale price of our common stock is not below $7.50 on the purchase date (subject to adjustment for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction as provided in the Purchase Agreement) and (ii) the Regular Purchase may be increased to up to 36,666 shares, provided that the closing sale price of our common stock is not below $11.25 on the purchase date(subject to adjustment for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction as provided in the Purchase Agreement) (such share amount limitation, the “Regular Purchase Share Limit”). In each case, Lincoln Park’s maximum commitment in any single Regular Purchase may not exceed $1,000,000. The Regular Purchase Share Limit is subject to proportionate adjustment in the event of a reorganization, recapitalization, non-cash dividend, stock split or other similar transaction; provided, that if after giving effect to such full proportionate adjustment, the adjusted Regular Purchase Share Limit would preclude us from requiring Lincoln Park to purchase common stock at least one year, includingan aggregate purchase price equal to or greater than $100,000 in any affiliate of ours, is entitledsingle Regular Purchase, then the Regular Purchase Share Limit will not be fully adjusted, but rather the Regular Purchase Share Limit for such Regular Purchase shall be adjusted as specified in the Purchase Agreement, such that, after giving effect to sell, withinsuch adjustment, the Regular Purchase Share Limit will be equal to (or as close as can be derived from such adjustment without exceeding) $100,000.
The purchase price per share for each such Regular Purchase will be equal to the lower of:
| · | the lowest sale price for our common stock on the purchase date of such shares; or |
| · | the arithmetic average of the three lowest closing sale prices for our common stock during the 10 consecutive business days ending on the business day immediately preceding the purchase date of such shares. |
In addition to Regular Purchases described above, we may also direct Lincoln Park, on any three-month period,business day on which we have properly submitted a Regular Purchase notice directing Lincoln Park to purchase the maximum number of shares that is not more than the greater of:
- 1% of the number of shares of common stock then outstanding, which
currently equals approximately 212,000 shares; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks before a notice of the sale
on Form 144 is filed.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days before a sale, and who has
beneficially owned the restricted shares for at least two years, including the
holding period of any prior owner other than an affiliate, is entitled to sell
the shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
51
PLAN OF DISTRIBUTION
The selling stockholders may sell their shares of our common stock that we are then permitted to include in a single Regular Purchase notice and the closing sale price of our common stock on such business day is not below $3.75 per share (subject to adjustment for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction as provided in the Purchase Agreement), to purchase an additional amount of our common stock, which we refer to as an Accelerated Purchase, not to exceed the lesser of:
| · | 25% of the aggregate shares of our common stock traded during all or, if certain trading volume or market price thresholds specified in the Purchase Agreement are crossed on the applicable Accelerated Purchase date, which is defined as the next business day following the purchase date for the corresponding Regular Purchase, the portion of the normal trading hours on the applicable Accelerated Purchase date prior to such time that any one of such thresholds is crossed, which period of time on the applicable Accelerated Purchase date we refer to as the Accelerated Purchase Measurement Period; and |
| · | 3 times the number of purchase shares purchased pursuant to the corresponding Regular Purchase. |
The purchase price per share for each such Accelerated Purchase will be equal to the lower of:
| · | 96% of the volume weighted average price of our common stock during the applicable Accelerated Purchase Measurement Period on the applicable Accelerated Purchase date; and |
| · | the closing sale price of our common stock on the applicable Accelerated Purchase date. |
We may also direct Lincoln Park, not later than 1:00 p.m., Eastern time, on a business day on which an Accelerated Purchase has been completed and all of the shares to be purchased thereunder (and under the corresponding Regular Purchase) have been properly delivered to Lincoln Park in accordance with the Purchase Agreement prior to such time on such business day, and provided that the closing price of our common stock on the business day immediately preceding such business day is not less than $3.75 per share (subject to adjustment for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction as provided in the Purchase Agreement), to purchase an additional amount of our common stock, which we refer to as an Additional Accelerated Purchase, of up to the lesser of:
| · | 25% of the aggregate shares of our common stock traded during a certain portion of the normal trading hours on such Accelerated Purchase date as determined in accordance with the Purchase Agreement, which period of time we refer to as the Additional Accelerated Purchase Measurement Period; and |
| · | 3 times the number of purchase shares purchased pursuant to the Regular Purchase corresponding to the Accelerated Purchase that was completed on such Accelerated Purchase date on which an additional accelerated Purchase notice was properly received. |
We may, in our sole discretion, submit multiple Additional Accelerated Purchase notices to Lincoln Park prior to 1:00 p.m., Eastern time, on a single Accelerated Purchase date, provided that all prior Accelerated Purchases and Additional Accelerated Purchases (including those that have occurred earlier on the same day) have been completed and all of the shares to be purchased thereunder (and under the corresponding Regular Purchase) have been properly delivered to Lincoln Park in accordance with the Purchase Agreement.
The purchase price per share for each such Additional Accelerated Purchase will be equal to the lower of:
| · | 96% of the volume weighted average price of our common stock during the applicable Additional Accelerated Purchase Measurement Period on the applicable Additional Accelerated Purchase date; and |
| · | the closing sale price of our common stock on the applicable Additional Accelerated Purchase date. |
In the case of the Regular Purchases, Accelerated Purchases and Additional Accelerated Purchases, the purchase price per share will be equitably adjusted for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction occurring during the business days used to compute the purchase price.
Other than as described above, there are no trading volume requirements or restrictions under the Purchase Agreement, and we will control the timing and amount of any sales of our common stock to Lincoln Park.
Events of Default
Events of default under the Purchase Agreement include the following:
| · | the effectiveness of the registration statement of which this prospectus forms a part lapses for any reason (including, without limitation, the issuance of a stop order), or any required prospectus supplement and accompanying prospectus are unavailable for the resale by Lincoln Park of our common stock offered hereby, and such lapse or unavailability continues for a period of 10 consecutive business days or for more than an aggregate of 30 business days in any 365-day period; |
| · | suspension by our principal market of our common stock from trading for a period of one business day; |
| · | the de-listing of our common stock from The NASDAQ Capital Market, our principal market, provided our common stock is not immediately thereafter trading on the New York Stock Exchange, the NASDAQ Global Market, the NASDAQ Global Select Market, the NYSE Market, the OTC Bulletin Board or OTC Markets (or nationally recognized successor thereto); |
| · | the failure of our transfer agent to issue to Lincoln Park shares of our common stock within two business days after the applicable date on which Lincoln Park is entitled to receive such shares; |
| · | any breach of the representations or warranties or covenants contained in the Purchase Agreement or Registration Rights Agreement that has or could have a material adverse effect on us and, in the case of a breach of a covenant that is reasonably curable, that is not cured within five business days; |
| · | if at any time the Exchange Cap is reached, to the extent applicable; |
| · | any voluntary or involuntary participation or threatened participation in insolvency or bankruptcy proceedings by or against us; or |
| · | if at any time we are not eligible to transfer our common stock electronically. |
Lincoln Park does not have the right to terminate the Purchase Agreement upon any of the events of default set forth above. During an event of default, all of which are outside of Lincoln Park’s control, we may not direct Lincoln Park to purchase any shares of our common stock under the Purchase Agreement.
Our Termination Rights
We have the unconditional right, at any time, for any reason and without any payment or liability to us, to give notice to Lincoln Park to terminate the Purchase Agreement. In the event of bankruptcy proceedings by or against us, the Purchase Agreement will automatically terminate without action of any party.
No Short-Selling or Hedging by Lincoln Park
Lincoln Park has agreed that neither it nor any of its affiliates shall engage in any direct or indirect short-selling or hedging of our common stock during any time prior to the termination of the Purchase Agreement.
Prohibitions on Variable Rate Transactions
There are no restrictions on future financings, rights of first refusal, participation rights, penalties or liquidated damages in the Purchase Agreement or Registration Rights Agreement other than a prohibition on entering into a “Variable Rate Transaction,” as defined in the Purchase Agreement.
Effect of Performance of the Purchase Agreement on Our Stockholders
All920,654shares registered in this offering which have been or may be issued or sold by us to Lincoln Park under the Purchase Agreement are expected to be freely tradable. It is anticipated that shares registered in this offering will be sold over a period of up to 24-months commencing on the date that the registration statement including this prospectus becomes effective. The sale by Lincoln Park of a significant amount of shares registered in this offering at any given time could cause the market price of our common stock to decline and to be highly volatile. Sales of our common stock to Lincoln Park, if any, will depend upon market conditions and other factors to be determined by us. We may ultimately decide to sell to Lincoln Park all, some or none of the additional shares of our common stock that may be available for us to sell pursuant to the Purchase Agreement. If and when we do sell shares to Lincoln Park, after Lincoln Park has acquired the shares, Lincoln Park may resell all, some or none of those shares at any time or from time to time. The selling stockholderstime in its discretion. Therefore, sales to Lincoln Park by us under the Purchase Agreement may result in substantial dilution to the interests of other holders of our common stock. In addition, if we sell a substantial number of shares to Lincoln Park under the Purchase Agreement, or if investors expect that we will act independentlydo so, the actual sales of shares or the mere existence of our arrangement with Lincoln Park may make it more difficult for us to sell equity or equity-related securities in making
decisions regardingthe future at a time and at a price that we might otherwise wish to effect such sales. However, we have the right to control the timing manner and sizeamount of each sale. Theany additional sales of our shares to Lincoln Park and the Purchase Agreement may be madeterminated by us at any time at our discretion without any cost to us.
Pursuant to the terms of the Purchase Agreement, we have the right, but not the obligation, to direct Lincoln Park to purchase up to $10,000,000 of our common stock. Depending on the Nasdaq National Marketprice per share at which we sell our common stock to Lincoln Park pursuant to the Purchase Agreement, we may need to sell to Lincoln Park under the Purchase Agreement more shares of our common stock than are offered under this prospectus in order to receive aggregate gross proceeds equal to the $10,000,000 total commitment available to us under the Purchase Agreement. If we choose to do so, we must first register for resale under the Securities Act such additional shares of our common stock, which could cause additional substantial dilution to our stockholders. The number of shares ultimately offered for resale by Lincoln Park under this prospectus is dependent upon the number of shares we direct Lincoln Park to purchase under the Purchase Agreement.
The Purchase Agreement prohibits us from issuing or selling to Lincoln Park under the Purchase Agreement (i) shares of our common stock in excess of the Exchange Cap, unless we obtain stockholder approval to issue shares in excess of the Exchange Cap, such consent was obtained on December 20, 2018, or if the average price of all applicable sales of our common stock to Lincoln Park under the Purchase Agreement equal or exceed $7.09, such that the transactions contemplated by the Purchase Agreement are exempt from the Exchange Cap limitation under applicable NASDAQ rules, and (ii) any shares of our common stock if those shares, when aggregated with all other shares of our common stock then beneficially owned by Lincoln Park and its affiliates, would exceed the Beneficial Ownership Cap.
The following table sets forth the amount of gross proceeds we would receive from our sale of shares being registered in this prospectus, to Lincoln Park under the Purchase Agreement at varying purchase prices:
| Assumed Average Purchase Price Per Share | Number of Registered Shares to be Issued if Full Purchase (1) | Percentage of Outstanding Shares After Giving Effect to the Issuance to Lincoln Park (2) | Proceeds from the Sale of Shares to Lincoln Park Under the $10M Purchase Agreement | |||||||||||
| $ | 1.50 | 920,654 | 10.3 | % | $ | 1,380,981 | ||||||||
| $ | 1.90 | (3) | 920,654 | 10.3 | % | $ | 1,749,242 | |||||||
| $ | 4.00 | 437,310 | 5.2 | % | $ | 1,749,240 | ||||||||
| $ | 6.00 | 291,540 | 3.5 | % | $ | 1,749,240 | ||||||||
| $ | 8.00 | 218,655 | 2.7 | % | $ | 1,749,240 | ||||||||
| (1) | Although the Purchase Agreement provides that we may sell up to $10,000,000 of our common stock to Lincoln Park, we are only registering at this time under the registration statement that includes this prospectus a total of920,654shares of our common stock that may be sold to Lincoln Park as purchase shares under the Purchase Agreement, which may or may not cover all the shares we ultimately sell to Lincoln Park under the Purchase Agreement, depending on the purchase price per share. As a result, we have included in this column only those shares that we are registering in this offering. As of the date of this prospectus, we have already received approximately $8.3from the sale of3,226,667shares of common stock to Lincoln Park which were sold to Lincoln Park pursuant to a registration statement on Form S-1A (File No.: 333-227364) filed on September 13, 2018, registration statement on Form S-1 (333-229478) filed on February 1, 2019 and registration statement on Form S-1 (333-233175) filed on August 9, 2019. |
| (2) | The denominator is based on8,018,117shares of our common stock outstanding as of January9, 2020, adjusted to include the number of shares set forth in the adjacent column which we would have sold to Lincoln Park, assuming the purchase price in the adjacent column. The numerator is based on the number of shares issuable under the Purchase Agreement at the corresponding assumed purchase price set forth in the adjacent column. |
| (3) | The closing sale price of our shares on January9, 2020. |
The common stock offered by this prospectus is being offered by the selling stockholder, Lincoln Park. The common stock may be sold or distributed from time to time by the selling stockholder directly to one or more purchasers or through brokers, dealers, or underwriters who may act solely as agents at market prices prevailing at the time of sale, at prices related to the prevailing market prices, at negotiated prices, or at fixed prices, which may be changed. The sale of the common stock offered by this prospectus could be effected in one or more of the following methods:
| · | ordinary brokers’ transactions; |
| · | transactions involving cross or block trades; |
| · | through brokers, dealers, or underwriters who may act solely as agents |
| · | “at the market” into an existing market for the common stock; |
| · | in other ways not involving market makers or established business markets, including direct sales to purchasers or sales effected through agents; |
| · | in privately negotiated transactions; or |
| · | any combination of the foregoing. |
In order to comply with the securities laws of certain states, if applicable, the shares may be sold only through registered or licensed brokers or dealers. In addition, in certain states, the shares may not be sold unless they have been registered or qualified for sale in the over-the-counter marketstate or otherwise,an exemption from the state’s registration or qualification requirement is available and complied with.
Lincoln Park is an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act.
Lincoln Park has informed us that it intends to use an unaffiliated broker-dealer to effectuate all sales, if any, of the common stock that it may purchase from us pursuant to the Purchase Agreement. Such sales will be made at prices and at terms then prevailing or at prices related to the then current market price, or in negotiated transactions. The selling
stockholders may effectprice. Each such transactions by sellingunaffiliated broker-dealer will be an underwriter within the shares to or through
broker-dealers. The shares may be sold by one or moremeaning of or a combinationSection 2(a)(11) of the following:
- a block trade in which theSecurities Act. Lincoln Park has informed us that each such broker-dealer will attempt to sell the shares
as agent but may position and resell a portion of the block as principal
to facilitate the transaction,
- purchases by a broker-dealer as principal and resale by such broker-dealer
for its account under this prospectus,
- an exchange distribution in accordance with the rules of such exchange,
- ordinaryreceive commissions from Lincoln Park that will not exceed customary brokerage transactions and transactions in which the broker
solicits purchasers, and
- in privately negotiated transactions.
To the extent required, this prospectus may be amendedcommissions.
Brokers, dealers, underwriters or supplemented from
time to time to describe a specific plan of distribution. In effecting sales,
broker-dealers engaged by the selling stockholders may arrange for other
broker-dealers to participateagents participating in the resales. The selling stockholders may enter
into hedging transactions with broker-dealers in connection with distributionsdistribution of the shares or otherwise. In these transactions, broker-dealers may engage in
short sales of the shares in the course of hedging the positions they assume
with selling stockholders. The selling stockholders also may sell shares short
and redeliver the shares to close out such short positions. The selling
stockholders may enter into option or other transactions with broker-dealers
which require the delivery to the broker-dealer of the shares. The broker-dealer
may then resell or otherwise transfer such shares under this prospectus. The
selling stockholders also may lend or pledge their shares to a broker-dealer.
The broker-dealer may sell the shares so lent, or upon a default the
broker-dealer may sell the pledged shares under this prospectus.
Broker-dealers oras agents may receive compensation in the form of commissions, discounts, or concessions from the selling stockholders. Broker-dealers
stockholder and/or agents may also receive compensation from the purchasers of the sharescommon stock for whom theythe broker-dealers may act as agents or to whom they sell as principals, or both.
Compensation asagent. The compensation paid to a particular broker-dealer mightmay be less than or in excess of customary commissions andcommissions. Neither we nor Lincoln Park can presently estimate the amount of compensation that any agent will receive.
We know of no existing arrangements between Lincoln Park or any other stockholder, broker, dealer, underwriter or agent relating to the sale or distribution of the shares offered by this prospectus. At the time a particular offer of shares is made, a prospectus supplement, if required, will be in amountsdistributed that will set forth the names of any agents, underwriters or dealers and any compensation from the selling stockholder, and any other required information.
We will pay the expenses incident to be negotiatedthe registration, offering, and sale of the shares to Lincoln Park. We have agreed to indemnify Lincoln Park and certain other persons against certain liabilities in connection with the sale.
Broker-dealers or agents and any other participating broker-dealers or the
selling stockholders may be deemed to be "underwriters" within the meaningoffering of Section 2(11)shares of common stock offered hereby, including liabilities arising under the Securities Act or, if such indemnity is unavailable, to contribute amounts required to be paid in respect of 1933 (the "Securities Act")such liabilities. Lincoln Park has agreed to indemnify us against liabilities under the Securities Act that may arise from certain written information furnished to us by Lincoln Park specifically for use in this prospectus or, if such indemnity is unavailable, to contribute amounts required to be paid in respect of such liabilities.
Lincoln Park has represented to us that at no time prior to the Purchase Agreement has Lincoln Park or its agents, representatives or affiliates engaged in or effected, in any manner whatsoever, directly or indirectly, any short sale (as such term is defined in Rule 200 of Regulation SHO of the Exchange Act) of our common stock or any hedging transaction, which establishes a net short position with respect to our common stock. Lincoln Park agreed that during the term of the Purchase Agreement, it, its agents, representatives or affiliates will not enter into or effect, directly or indirectly, any of the foregoing transactions.
We have advised Lincoln Park that it is required to comply with Regulation M promulgated under the Exchange Act. With certain exceptions, Regulation M precludes the selling stockholder, any affiliated purchasers, and any broker-dealer or other person who participates in the distribution from bidding for or purchasing, or attempting to induce any person to bid for or purchase any security which is the subject of the distribution until the entire distribution is complete. Regulation M also prohibits any bids or purchases made in order to stabilize the price of a security in connection with salesthe distribution of that security. All of the shares. Accordingly, any such commission, discount or
concession receivedforegoing may affect the marketability of the securities offered by them and any profitthis prospectus.
This offering will terminate on the resaleearlier of (i) termination of the Purchase Agreement or (ii) the date that all shares purchased
by them may be deemed to be underwriting discounts or commissions under the
Securities Act. Because selling stockholders may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, the selling
stockholders will be subject to the prospectus delivery requirements of the
Securities Act. In addition, any securities coveredoffered by this prospectus which
qualifyhave been sold by Lincoln Park.
Our common stock is quoted on The NASDAQ Capital Market under the symbol “PRPO”.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses including attorneys' fees, judgments, fines and amounts paid in settlement in connection with various actions, suits or proceedings, whether civil, criminal, administrative or investigative other than an action by or in the right of the corporation, a derivative action, if they acted in good faith and 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, if they had no reasonable cause to believe their conduct was unlawful. A similar standard is applicable in the case of derivative actions, except that indemnification only extends to expenses including attorneys' fees incurred in connection with the defense or settlement of such actions, and the statute requires court approval before there can be any indemnification where the person seeking indemnification has been found liable to the corporation. The statute provides that it is not exclusive of other indemnification that may be granted by a corporation's certificate of incorporation, bylaws, agreement, and a vote of stockholders or disinterested directors or otherwise.
Our Amended and Restated Certificate of Incorporation and By-Laws provide that we will indemnify and hold harmless, to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, as amended from time to time, each person that such section grants us the power to indemnify.
The Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for sale under Rule 144 promulgatedmonetary damages for breach of fiduciary duty as a director, except for liability for:
| · | any breach of the director's duty of loyalty to the corporation or its stockholders; |
| · | acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; |
| · | payments of unlawful dividends or unlawful stock repurchases or redemptions; or |
| · | any transaction from which the director derived an improper personal benefit. |
Insofar as indemnification for liabilities arising under the Securities Act may be sold
under Rule 144 ratherpermitted to directors, offices or controlling persons of ours, pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than under this prospectus. The selling stockholders have
advisedthe payment by us that they have not entered intoof expenses incurred or paid by a director, officer or controlling person of ours in the successful defense of any agreements, understandingsaction, suit or arrangements with any underwritersproceeding) is asserted by such director, officer or broker-dealers regarding the sale of their
securities. There is no underwriter or coordinating broker actingcontrolling person in connection with the proposed sale of shares by the selling stockholders.
The sharessecurities being registered hereunder, we will, be sold only through registered or licensed brokers or
dealers if required under applicable state securities laws. In addition, in
certain states the shares may not be sold unless they
52
have been registered or qualified for sale in the applicable state or an
exemption from the registration or qualification requirement is available and is
complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the shares may not simultaneously engage in
market making activities with respect to our common stock for a period of two
business days prior to the commencement of such distribution. In addition, each
selling stockholder will be subject to applicable provisions of the Exchange Act
and the associated rules and regulations under the Exchange Act, including
Regulation M, which provisions may limit the timing of purchases and sales of
sharesopinion of our common stockcounsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the selling stockholders. We will make copies of
this prospectus available to the selling stockholders and have informed them of
the need to deliver copies of this prospectus to purchasers at or prior to the
time of any sale of the shares.
We will file a supplement to this prospectus, if required, to comply with
Rule 424(b) underquestion whether such indemnification by us is against public policy as expressed in the Securities Act upon being notifiedand will be governed by a selling
stockholder that any material arrangements have been entered into with a
broker-dealer for the salefinal adjudication of shares through a block trade, special offering,
exchange distribution or secondary distribution or a purchase by a broker or
dealer. Such supplement will disclose:
- the name of each such selling stockholder and of the participating
broker-dealer(s),
- the number of shares involved,
- the price at which such shares were sold,
- the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable,
- that such broker-dealer(s) did not conduct any investigation to verify the
information set out or incorporated by reference in this prospectus, and
- other facts material to the transaction.
In addition, upon being notified by a selling stockholder that a donee or
pledgee intends to sell more than 500 shares, we will file a supplement to this
prospectus.
We will bear all costs, expenses and fees in connection with the
registration of the shares. The selling stockholders will bear all commissions
and discounts, if any, attributable to the sales of the shares. The selling
stockholders may agree to indemnify any broker-dealer or agent that participates
in transactions involving sales of the shares against certain liabilities,
including liabilities arising under the Securities Act.
issue.
The validity of the common stock offered by this prospectushereby will be passed upon for us by Kutak RockSichenzia Ross Ference LLP, Omaha, Nebraska.
New York, New York.
The consolidated financial statements of Precipio, Inc. as of December 31, 1998 and 1999 and for each of
the three years in the period ended December 31, 1999 included2018 and 2017 appearing in this
prospectusour Annual Report on Form 10-K filed for the year ended December 31, 2018, have been audited by Deloitte & ToucheMarcum LLP, an independent auditors,registered public accounting firm, to the extent and for the periods as statedset forth in their report appearingthereon, and incorporated herein and are includedby reference in reliance upon such report given on the reportauthority of such firm given upon their authority as experts in accounting and auditing.
53
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange CommissionSEC a registration statement on Form S-1 under the Securities Act with respect tothat registers the shares of our common stock offered hereby.to be sold in this offering. This prospectus is only a part of the registration
statement and does not contain all of the information included in the
registration statement. Further information with respect to Transgenomic, Inc.
and the common stock offered hereby can be foundset forth in the registration statement and the exhibits and schedules thereto. The exhibits tofiled as part of the registration statement includestatement. For further information with respect to us and our common stock, we refer you to the full text of contracts, agreements and other documents
described in this prospectus. You should refer to these exhibits when reading
the descriptions of these documents contained in this prospectus. The registration statement and the exhibits and schedules thereto mayfiled as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract or any other document, are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, we refer you to the copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit. The reports and other information we file with the SEC can be inspected
without chargeread and copied at the public reference facilities maintained by the Commission
inSEC’s Public Reference Room 1024, 450 Fifthat 100 F Street, N.W.,NE, Washington D.C. 20549, and at the
following regional offices of the Commission: Seven World Trade Center, Room
1400, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661.20549. Copies of suchthese materials can be obtained at prescribed rates from the Public Reference Section of the CommissionSEC at 450 Fifththe principal offices of the SEC, 100 F Street, N.W.,NE, Washington D.C. 20549, Room 1024, at prescribed rates. The public20549. You may obtain information onregarding the operation of the Public Reference Roompublic reference room by calling the1(800) SEC-0330. The SEC at
1-800-SEC-0330. In addition, we are required to file electronic versions of
these documents with the Commission through the Commission's Electronic Data
Gathering, Analysis, and Retrieval (EDGAR) system. The Commissionalso maintains an
interneta web site at http:(http://www.sec.govwww.sec.gov) that contains reports, proxy and information statements and other information regarding registrantsissuers like us that file electronically with the Commission.
SEC.
We are subjectrequired to file annual, quarterly and current reports and other information with the information reporting requirements ofSEC under the Securities Exchange Act of 1934, as amended, and fileamended. These periodic reports, proxy statements and other information will be available for inspection and copying at the SEC’s public reference room and the web site of the SEC referred to above.
MARKET AND INDUSTRY DATA AND FORECASTS
Market data and certain industry data and forecasts included in this prospectus were obtained from internal company surveys, market research, publicly available information, reports of governmental agencies and industry publications and surveys. We have relied upon industry publications as our primary sources for third-party industry data and forecasts. Industry surveys, publications and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. We have not independently verified any of the data from third-party sources, nor have we ascertained the underlying economic assumptions relied upon therein. Similarly, internal surveys, industry forecasts and market research, which we believe to be reliable based upon our management’s knowledge of the industry, have not been independently verified. Forecasts are particularly likely to be inaccurate, especially over long periods of time. In addition, we do not know what assumptions regarding general economic growth were used in preparing the forecasts we cite. Statements as to our market position are based on recently available data. While we are not aware of any misstatements regarding our industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under “Risk Factors” in this prospectus. While we believe our internal business research is reliable and market definitions are appropriate, neither such research nor definitions have been verified by any independent source. This prospectus may only be used for the purpose for which it has been published.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This prospectus omits some information contained in the registration statement in accordance with SEC rules and regulations. You should review the information and exhibits included in the registration statement of which this prospectus is a part for further information about us and the securities we are offering. Statements in this prospectus concerning any document we filed as an exhibit to the registration statement or that we otherwise filed with the Commission.
54
TRANSGENOMIC, INC.
INDEX TO FINANCIAL STATEMENTS
SEC are not intended to be comprehensive and are qualified by reference to these filings. You should review the complete document to evaluate these statements.
The SEC allows us to “incorporate by reference” information we file with it, which means that we can disclose important information to you by referring you to other documents. The information incorporated by reference is considered to be a part of this prospectus. Information contained in this prospectus supersedes information incorporated by reference that we have filed with the SEC prior to the date of this prospectus.
We incorporate by reference the following documents listed below (excluding any document or portion thereof to the extent such disclosure is furnished and not filed):
| · | Our Annual Report on Form 10-K for the |
| · | Our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, filed with the SEC onMay 16, 2019 and our Quarterly Report on Form 10-Q for the quarter ended June 30 2019, filed with the SEC onAugust 9, 2019;our Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, filed with the SEC onNovember 13, 2019; |
| · | Our Current Reports on Form 8-K filed with the SECJanuary 7, 2019,January 22, 2019,January 30, 2019, February 14, 2019,March 11, 2019,March 27, 2019,April 26, 2019,May 15, 2019,May 23, 2019,June 10, 2019,June 19, 2019,June 20, 2019,August 14, 2019,September 26, 2019,October 3, 2019,November 5, 2019, November 26, 2019,December 4, 2019 andJanuary 14, 2020 |
| · | The portions of our definitive proxy statement on Schedule 14A relating to |
In addition, we hereby incorporate by reference into this prospectus all documents that we file with the Company pursuant to the rules and regulationsSEC under Sections 13(a), 13(c), 14, or 15(d) of the Securities and Exchange Commission. Certain information and disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations. In the
opinion of management of the Company, all adjustments (consisting of only normal
and recurring accruals) have been made to present fairly the financial
positions, the results of operations and cash flows for the periods presented.
Although the Company believes that the disclosures are adequate to make the
information presented not misleading, these financial statements should be read
in conjunction with the consolidated financial statements for the year ended
December 31, 1999 that are included elsewhere in this Registration Statement.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "ACCOUNTING FOR DERIVATIVE FINANCIAL
INSTRUMENTS AND FOR HEDGING ACTIVITIES" (SFAS No. 133). This statement, which is
effective for the Company beginning on January 1, 2001, requires the recognition
of all derivative financial instruments as either assets or liabilities in the
statement of financial position and measurement of those instruments at fair
value. Management does not believe the adoption of SFAS No. 133 will have a
material effect on our financial statements.
B. INVENTORIES
At December 31, 1999 and September 30, 2000 inventories consist of the
following:
We will provide without charge to each person, including any beneficial owner, to whom a copy of this prospectus is delivered, upon written or oral request, a copy of any or all of the notes at an
annual interest rateforegoing documents which we incorporate by reference in this prospectus (not including exhibits to such documents unless such exhibits are specifically incorporated by reference to such documents). Requests should be directed to:
Precipio, Inc.
4 Science Park
New Haven, CT 06511
(203) 787-7888
A copy of 3.6%. As a result, the Company recorded additional
interest expense of approximately $795,000.
- The Company was provided a conversion feature that would allow the
Company, upon the satisfaction of certain conditions, to cause a
conversionany or all of the principal plus accrued interest into common stock offoregoing documents which we incorporate by reference in this prospectus may be accessed on our corporate web site at http://www.precipiodx.com (Click the Company at a conversion price of $5.00 per share. “Investors” link and then the “SEC Filings” link).
47
Shares
Common Stock
PROSPECTUS
, 2020
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
| Item 13. | Other Expenses of Issuance and Distribution |
The conversion feature
was formula drivenfollowing table sets forth all expenses, other than the underwriting discounts and based partially uponcommissions, payable by the average trading price of
the Company stock over 20 consecutive trading days.
On August 14, 2000, the Company's Board of Directors authorized the Company
to convert the notes into common stock upon meeting the required conditions. On
August 15, 2000, such conditions were met, and the notes were converted into
2,750,906 shares of common stock. All principal and accrued interest at the
conversion date of approximately $13.9 million was recorded to stockholders
equity.
OTHER COMPREHENSIVE INCOME. Results of operations for the Company's foreign
subsidiary are translated using the average exchange rates during the period.
Assets and liabilities are translated at the exchange rateregistrant in effect on the
balance sheet dates. These translation adjustments are the Company's only
component of other comprehensive income.
| Total | ||||
| SEC registration fee | $ | 227 | ||
| Printing and engraving expenses | 1,000 | |||
| Legal fees and expenses | 5,000 | |||
| Accounting fees and expenses | 17,000 | |||
| Transfer agent and registrar fees | 1,000 | |||
| Miscellaneous | 1,000 | |||
| Total | $ | 25,227 | ||
| Item 14. | Indemnification of Directors and Officers |
Section 145(a) of the options andDelaware General Corporation Law (the “DGCL”) provides, in general, that a corporation shall have the deemed fair
valuepower to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the common stockcorporation), by reason of the fact he or she is or was a director, officer, employee or agent of the corporation, or is or was serving at the daterequest of the vesting was accelerated. In addition,
218,700 options were forfeitedcorporation as a resultdirector, officer, employee or agent of the sale.
Includedanother corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in the 364,000 options granted in the first quarter were 128,000
options granted to non-employees under consultingsettlement actually and other service agreements.
The Company recorded approximately $100,000 of compensation expense and $271,000
of deferred compensation associated with these grants, which is being amortized
over the respective service periods using the graded vesting method, which is an
accelerated method of amortization. These expense amounts were calculated using
the Black-Scholes option pricing model with the following assumptions: no common
stock dividends, risk-free interest rates of 6.30% to 6.57%, volatility of 35%,
and an expected option life of 1 to 5 years. Such amortization expense amounted
to approximately $60,000 for the nine months ended September 30, 2000.
The following table summarizes activity under the 1997 Stock Option Plan
during the nine months ended September 30, 2000.
Section 145(b) of the purchase priceDGCL provides, in general, that a corporation shall have the power to indemnify any person who was paidor is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in cash and
$2.0 million was paid with an interest-bearing promissory note due on
December 30, 2000. The note bears interest at 8.75%. The purchaser financed the cash portionright of the purchase price for these assets plus initial working capital
needs with borrowings of approximately $4.6 million obtained fromcorporation to procure a bank. The
Company acquiredjudgment in its favor because the notes evidencing these loans from the bank upon closing of
its initial public offering on July 21, 2000 by paying to the bank an
F-8
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 (CONTINUED)
(UNAUDITED)
F. SALE OF PRODUCT LINE (CONTINUED)
amount equal to the entire principal balanceperson is or was a director, officer, employee or agent of the notes plus accrued and
unpaid interest. The acquired notes mature on December 30, 2000, and bear
interestcorporation, or is or was serving at a rate of 8.75% per annum. A total of 1,200,000 sharesthe request of the Company's common stock ownedcorporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees) actually and reasonably incurred by Mr. Dwyer is pledged as security for the notes
and is held in an escrow account. The Company anticipates that it will exercise
its right to cause these shares to be sold in order to pay principal and
interest on the notes when due, subject to Mr. Dwyer's lock-up agreement signedperson in connection with the Company's initial public offering.defense or settlement of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made with respect to any claim, issue or matter as to which he or she shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or other adjudicating court determines that, despite the adjudication of liability but in view of all of the circumstances of the case, he or she is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or other adjudicating court shall deem proper.
Section 145(g) of the DGCL provides, in general, that a corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify the person against such liability under Section 145 of the DGCL.
Section 9.1 of Article IX of the Registrant’s Third Amended and Restated Certificate of Incorporation, as amended to date (the “Certificate of Incorporation”), and Section 1 of Article V of the Registrant’s Amended and Restated Bylaws, as amended to date (the “Bylaws”) provide that each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he or she is or was a director or officer of the Registrant or is or was serving at the request of the Registrant as a director or officer of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans (hereinafter an “indemnitee”), whether the basis of such proceeding is alleged action in an official capacity as a director or officer or in any other capacity while serving as a director or officer, shall be indemnified and held harmless by the Registrant to the fullest extent authorized by the General Corporation Law of the State of Delaware, as the same exists or may thereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Registrant to provide broader indemnification rights than such law permitted the Registrant to provide prior to such amendment), against all expense, liability and loss (including attorneys’ fees, judgments, fines, excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith and that such indemnification shall continue as to an indemnitee who has ceased to be a director or officer and shall inure to the benefit of the indemnitee’s heirs, executors and administrators; provided, however, that, except as otherwise provided in the Certificate of Incorporate or Bylaws, as applicable, the Registrant will indemnify any such indemnitee in connection with a proceeding initiated by such indemnitee only if such proceeding was authorized by the Board of Directors of the Registrant. The net assetsright to indemnification conferred by the Certificate of Incorporation and Bylaws is a contract right and includes the right to be paid by the Registrant the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an “advancement of expenses”); and provided, further, that, if the General Corporation Law of the State of Delaware requires it, an advancement of expenses incurred by an indemnitee shall be made only upon delivery to the Registrant of an undertaking, by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such indemnitee is not entitled to be indemnified for such expenses under the Certificate of Incorporation or Bylaws, as applicable, or otherwise (hereinafter an “undertaking”).
II-1
Section 9.2 of Article IX of the Certificate of Incorporation and Section 2 of Article V of the Bylaws provide that if a claim under Section 9.1 of Article IX of the Certificate of Incorporation or under Section 1 of Article V of the Bylaws, as applicable, is not paid in full by the Registrant within sixty (60) days after a written claim has been received by the Registrant, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty (20) days, the indemnitee may at any time thereafter bring suit against the Registrant to recover the unpaid amount of the claim. If successful in whole or part in any such suit, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses), it shall be a defense that the indemnitee has not met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware. Likewise, in any suit by the Registrant to recover an advancement of expenses pursuant to the terms of an undertaking, the Registrant shall be entitled to recover such expenses upon a final adjudication that the indemnitee has not met such standards. Neither the failure of the Registrant (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the Registrant (including its Board of Directors, independent legal counsel or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right under such indemnification provisions of the Certificate of Incorporation or Bylaws, as applicable, or by the Registrant to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified or to such advancement of expenses shall be on the Registrant.
The Registrant has entered into indemnification agreements with each of its directors and executive officers, in addition to the indemnification provisions provided for in its charter documents, and the Registrant intends to enter into indemnification agreements with any new directors and executive officers in the future.
The Registrant also maintains a directors’ and officers’ liability insurance policy that insures the Registrant’s directors and officers against such liabilities as are customarily covered by such policies.
| Item 15. | Recent Sales of Unregistered Securities |
During the past three years, we have sold and their book valuesissued the following unregistered securities.
II-2
We issued unregistered securities in connection with the Merger as previously disclosed and included in our 10-Q filed on August 22, 2017, November 20, 2017, and 8-Ks filed on February 2, 2017 and June 30, 2017.
On January 20, 2015, the Company entered into a series of April 1, 2000 are as
follows:
On April 13, 2017, Transgenomic completed the sale of the non-life sciences
instrument product line occurred aspromissory notes in the amount of the beginning of the periods presented
are as follows:
On October 31, 2017, the Company completesentered into a Debt Settlement Agreement with certain of its accounts payable creditors and in connection with the settlement, the Company agreed to issue to certain of the creditors, namely Paul Hasting LLP, Mount Sinai, Montefiore Medical Center and Allergan Sales LLC, warrants to purchase approximately 7,207 shares of the Company’s common stock at an Offering priorexercise price of $112.50 per share. The warrants are exercisable on the date of issuance and will expire five years from the date of issuance.
On April 20, 2018, the Company entered into a securities purchase agreement (the “Debt Financing Agreement“) with Osher Capital Partners LLC, M2B Funding Corp and Alpha Capital Anstalt pursuant to September 25, 2000,which the Company issued up to approximately $3,296,703 in 8% Senior Secured Convertible Promissory Notes with 100% common stock warrant coverage. The transaction consists of unregistered 8% Senior Secured Convertible Notes bearing interest at a rate of 8.00% annually and an original issue discount of 9%. The initial notes were convertible at a price of $7.50 per share, provided that if the note is not repaid within 180 days, the conversion price shall be either the lesser of $5.00 per share or 50%adjusted to 80% of the lowest volume weighted average price during the prior 10 days, subject to a minimum conversion price of $4.50 per shareshare. The transaction consisted of multiple drawdowns between April 20, 2018 and September 20, 2018. In aggregate, the closings provided the Company with $3,000,000 of gross proceeds for the issuance of notes with an aggregate principal of $3,296,703. The notes are payable by the Company on the earlier of (i) the one year anniversary of each note’s closing date or (ii) upon the closing of a qualified offering, price. Ifnamely the Offering is completed betweenCompany raising gross proceeds of at least $7,000,000.
On September 25, 20007, 2018, we issued the 40,000 Commitment Shares to Lincoln Park, as further discussed herein. The Commitment Shares were issued to Lincoln Park in accordance with the terms of the Purchase Agreement.
On November 29, 2018, we entered into an amendment and restatement agreement (the “Amendment Agreement”) amending and restating the terms of the Debt Financing Agreement. The Amendment Agreement provided for the issuance of up to $1,318,681 of additional notes together with applicable warrants, in one or more tranches, on substantially the same terms and conditions as the notes and warrants granted in connection with the Debt Financing Agreement, subject to certain adjustments to their terms. For the notes issued under the Debt Financing Agreement as well as the notes issued pursuant to the Amendment Agreement, the conversion price in effect on any conversion date has been amended so that it shall be equal to the greater of $3.75 or $0.75 above the closing bid price of our common stock on the date prior to the original issue date. In the event the notes are not paid in full prior to 180 days after the original issue date, the conversion price shall be equal to 80% of the lowest VWAP in the 10 trading days prior to the date of the notice of conversion, but in no event below the floor price of $2.25. In aggregate, the notes issued under the Amendment Agreement provided the Company with $1,100,000 of gross proceeds for the issuance of Notes with an aggregate principal of $1,208,791 and the maturity
date,Company issued to the investors 300,115 warrants to purchase shares of common stock of the Company with an exercise price of $5.40 and a five-year term.
II-3
On September 17, 2018, October 23, 2018 and November 7, 2018 we entered into an Exchange Agreements (the “Exchange Agreements”) with three institutional investors pursuant to which we agreed to issue promissory notes, due January 1, 2021 in exchange for amounts owed to certain vendors pursuant to certain debt settlement agreements, dated October 31, 2017. The Exchange was being made in reliance upon the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended. Under the Exchange Agreements, we exchanged up to an aggregate principal amount of $3,165,903 due under the debt settlement agreements for convertible notes totaling $2,765,568. Pursuant to the terms of the notes, we shall pay to the noteholders the aggregate principal amount of the notes in eighteen (18) equal installments beginning on August 1, 2019 and ending on January 1, 2021. In accordance with the terms of the notes, the noteholders shall have the right, to convert at the then applicable conversion price any amount of the notes up to $300,000 on any given trading day, with a maximum conversion amount up to $500,000 during a period of five (5) trading days. The conversion price shall be the lesser of $5.00 per share, or between
35%(i) the average volume average weighted price for the five trading days prior to the date of conversion multiplied by 1.65 and 50%(ii) $15.00.
On March 12, 2018, we entered into a settlement agreement (the “Crede Agreement”) with Crede Capital Group LLC (“Crede”) pursuant to which we agreed to pay to Crede a total sum of $1.925 million (the “Settlement Amount”) over a period of 16 months payable in a combination of cash and stock in accordance with terms contained in the Crede Agreement. On January 15, 2019, we entered into an amendment and restatement agreement with Crede (the “Crede Amendment”), in order to enable us to provide Crede with an alternative means of payment of the per share offering price to the public, calculated on a
declining straight-line basis, through the day on which an offering is
completed. If an Offering is not completed before the maturity date, the holder
may elect to convert at $5.00 per share but the price will be adjusted to 35% of
the Offering price if less than $5.00 per share, and additional shares, if any,
will be issued to reduce the conversion price to such lesser amount.
If prior to consummation of an Offering, the Company enters into a merger,
consolidation, the sale of substantially all of its assets, change of control,
or the dissolution of the Company or other event causing final liquidation, the
holders of the notes shall have the right to elect to either receive payment in
full of all principal of the notes and accrued interest earned through date of
payment, or convert all outstanding principal and unpaid interest on the notes
into common stock. The holders will be entitled to receive the greater of the
number of shares derived by dividing the balance due by $5.00 per share, or the
number of shares having an aggregate value equal to 200% of the outstanding
unpaid principal, plus all accrued interest.
If the note holders elect not to convert the notes to stock at maturity, the
Company will be required to repay all principal amounts, all accrued and unpaid
interest, if any, and a redemption premium equal to 10% of the face value of the
notes, which is being recognized ratably over the life of the notes. The
effective interest rate, including the redemption premium, was 9.3% at
December 31, 1999. The Company can require conversion after an Offering provided
specific closing prices are achieved for twenty consecutive trading days.
The notes contain numerous covenants with which the Company is in
compliance.
At December 1999, the convertible notes payable balance is comprised of the
following:
On January 29, 2019, we entered into a settlement agreement with Leviston (the “Leviston Agreement”), at which time we issued to Leviston a convertible note in the rightamount of $700,000 (the “Leviston Note”). The Leviston Note is payable by the Company (i) in fourteen equal monthly installments commencing on the earlier to terminateoccur of (x) the last day of the month upon which a registration statement to be filed by the Company covering the resale of the shares of common stock underlying the Note is declared effective by the Securities and Exchange Commission and (y) the six month anniversary of the date of issuance, (ii) upon the closing of a qualified offering, namely the Company raising gross proceeds of at least $4,000,000 or (iii) such earlier date as the Leviston Note is required or permitted to be repaid as provided by the terms of the Leviston Note. The Company, at its option, may redeem some or all of the then outstanding principal amount of the Leviston Note for cash. The conversion price of the Leviston Note in effect on any outstanding but unexercised options. In March 2000,Conversion Date shall equal the Company's
BoardVWAP of Directors approvedthe Common Stock on the date of Conversion Date.
On April 16, 2019, the Company entered into an amendment and restatement agreement (“Amendment No.2 Agreement”) amending and restating the terms of the Securities Purchase Agreement dated April 20, 2018 (as first amended pursuant to the Stock Option Plan to increaseAmendment Agreement dated November 29, 2018). The Amendment No. 2 Agreement provided the numberCompany with approximately $900,000 of sharesgross proceeds for which options can be granted to 6,000,000, subjectthe issuance of notes with an aggregate principal of approximately $989,011 (the “April 2019 Bridge Notes”) together with applicable warrants, with substantially the same terms and conditions as the previously issued bridge notes and related warrants. In connection with the April 2019 Bridge Note issuances, the Company issued to the approval of the Company's stockholders.
F-25
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
L. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes activity under the Stock Option Plan during
the three years ended December 31, 1999:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- --------
Balance at Inception (June 1997):........................ -- $ --
Granted................................................ 1,515,000 5.00
Exercised.............................................. -- --
Canceled............................................... -- --
---------
Balance at December 31, 1997:............................ 1,515,000 5.00
Granted................................................ 1,690,250 5.00
Exercised.............................................. -- --
Canceled............................................... -- --
---------
Balance at December 31, 1998:............................ 3,205,250 5.00
Granted................................................ 590,250 5.00
Exercised.............................................. -- --
Canceled............................................... (257,750) 5.00
---------
Balance at December 31, 1999............................. 3,537,750
=========
Exercisable at December 31, 1999......................... 2,028,650
=========
The weighted average fair value of options granted in 1997, 1998 and 1999
was $1.34, $1.02 and $1.00, respectively. At December 31, 1999, the weighted
average remaining contractual life of options outstanding was 8.4 years.
In 1997, the Company granted options to purchase 1.5 million shares at $5.00
per share to an officer of the Company which are fully vested and exercisable at
December 31, 1997 and expire in 2007. The Company has also granted optionsinvestors 147,472 warrants to purchase shares of common stock with an aggregate fixed cost of $75,000 to a
member of the Company's Board of Directors at anCompany with a five year term and exercise price which isof $5.40. The April 2019 Bridge Notes were issued to investors that previously participated in the lower of (a) $5.00 per share for 15,000 shares or (b) 50% ofApril 20, 2018 Securities Purchase Agreement. Pursuant to the price per share
at whichAmendment No.2 Agreement, the Company offers common stock in an initial public offering, of which
66.67% ofwarrants issued pursuant to the shares are vested and exercisable at December 31, 1999. The
remaining options issued in 1997 vest over two years and expire in 2002.
The Company has electedSecurities Purchase Agreement dated April 20, 2018 (as amended from time to follow the measurement provisions of Accounting
Principles Board Opinion No. 25, under which no recognition of expense is
required in accounting for stock options granted to employees for whichtime) were amended such that the exercise price equals or exceeds the deemed fair market value of the stock at
the grant date. In those cases where options have been granted with an exercise
price below the deemed fair market value, the Company recognizes compensation
expense using the straight-line method over the vesting periods of the
individual stock options. During December 1999, the Company recorded unearned
compensation of $112,500 for options granted with exercise prices less than the
deemed fair market value at the date of grant.
Pro forma information regarding net income and income per share is required
by Statement of Financial Accounting Standard No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, (SFAS No. 123)
F-26
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
L. STOCK OPTIONS AND WARRANTS (CONTINUED)
assuming the Company accounted for its employee stock options using the fair
value method. The fair value of each stock option granted is estimated at the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions for options granted in 1997, 1998 and 1999,
respectively: no common stock dividends, risk-free interest rates ranging from
5.44% and 5.74% to 6.33% and 5.51% to 6.13%; no volatility (prior to becoming a
public company); and an expected option life of five years. Pro forma net income
and income per share assuming compensation expense for the Stock Option Plan had
been determined under SFAS No. 123, are as follows:
1997 1998 1999
----------- ----------- -----------
Net Loss:
As reported.......................... $(2,409,539) $(1,576,393) $(9,826,886)
Pro forma............................ (4,421,148) (1,662,641) (9,974,172)
Basic and diluted loss per share:
As reported.......................... (0.22) (0.13) (0.76)
Pro forma............................ (0.40) (0.14) (0.77)
In the first quarter of fiscal 2000, the Company granted 212,500 options,
including 72,000 options with exercise prices at $5.00 per share and will record
unearned compensation in connection with these grants.
During 1998, the Company issuedsuch warrants to purchase 152,450 shares of
common stock pursuant to placement agent agreements (see Note K). On December
16, 1997, the Company issued a warrant to purchase 300,000 shares of common
stock pursuant to a Securities Purchase Agreement (see Note M).
M. RELATED PARTY TRANSACTIONS
CT PARTNERS.
The Company and CT Partners were related parties through common ownership.
The Company provided research and development services for CT Partners at cost.
The cost of these services amounted to $650,782 and $318,800 for the years ended
December 31, 1996 and 1997, respectively. There were no research and development
services provided subsequent to 1997 as the technology involved was fully
developed. These amounts are included in note receivable-related party, along
with accrued interest and administration fees of $116,349 at December 31, 1998.
The Company also performs contract research and development services for
unaffiliated entities.
On June 27, 1997 the Company entered into a royalty agreement with CT
Partners in which the Company received an exclusive license to manufacture and
market a miniature solid-state optical spectrometer developed by CT Partners.
This agreement was amended on December 1, 1997. Under the terms of thefrom $7.50 to $5.40 and any warrant that had a one-year term was amended royalty agreement, the Company would payto have a royalty to CT Partners equal to a
maximum of $6.5 million. The first $1.5 million would be paid upon achieving $3
million in sales of products employing the licensed technology or from a sale of
the technology. Subsequent royalty payments would equal 10% of gross revenues
received by the Company from the licensed technology, payable quarterly. At
December 31, 1998, CT Partners owed the Company $1,085,931 for contract research
and development expenses incurred in connection with this agreement.
F-27
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
M. RELATED PARTY TRANSACTIONS (CONTINUED)
In June 1999, the Company and CT Partners entered into an Asset Purchase
Agreement whereby the parties terminated the royalty agreement and the Company
purchased all intellectual property previously developed for CT Partners for $2
million in cash, less the outstanding note receivable of $1,085,931 and certain
related expenses. The Company is amortizing the intellectual property over 5
years.
SECURITIES PURCHASE AGREEMENT.
five-year term.
On December 16, 1997,May 14, 2019, the Company entered into a Securities Purchase Agreement with a private investor who subsequently was elected as a director of
the Company, pursuant to which the private investor purchasedCompany was provided with approximately $1,000,000 of gross proceeds for the issuance of notes with an aggregate principal of approximately $1,098,901 (the “May 2019 Bridge Notes”) together with applicable warrants, with substantially the same terms and conditions as the previously issued bridge notes and related warrants that were issued in connection with the Securities Purchase Agreement dated April 20, 2018 (as amended from time to time). In connection with the May 2019 Bridge Note issuances, the Company a
secured promissory note inissued to the principal amount of $1,500,000 (the "$1,500,000
Note") and a warrantinvestors 154,343 warrants to purchase 300,000 shares of common stock (the "300,000
Share Warrant"), subjectof the Company with a five year term and exercise price of $9.56. The May 2019 Bridge Notes were issued to adjustment. The agreement allowedinvestors that previously participated in the purchaseSecurities Purchase Agreement dated April 20, 2018.
Unless otherwise stated above, the issuance of additional debtthe above securities was deemed to be exempt from the Company. In February 1998,registration requirements of the CompanySecurities Act by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.
| Item 16. | Exhibits and Financial Statement Schedules |
(a) Exhibits.
The exhibits to the registration statement are listed in the Exhibit Index to this registration statement and are incorporated herein by reference.
(b) Financial Statement Schedule.
None.
II-4
| Item 17. | Undertakings |
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;
(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 informed, as allowed byregistered) and any deviation from the agreement, that no additional debt securities wouldlow or high end of the estimated maximum offering range may be purchased. Therefore,reflected in accordancethe form of prospectus filed with the termsSEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the agreement, in 1998
the Company paid the $1,500,000 Note plus interest and other agreed-to expenses.
The private investor is no longer a director of the Company.
The 300,000 Share Warrant entitles the holder to acquire 300,000 shares of
common stock at the lower of (a) $5.00 per share or (b) 50% of the price per
share at which the Company offers common stock in an initial public offering.
The 300,000 Share Warrant will expire if it has not been exercised on or before
the Company's initial public offering. The warrants were valued at $82,117 at
December 31, 1997 using the Black-Scholes pricing model with the following
assumptions: no common stock dividends, risk free interest rate of 5.71%;
expected life of 12 months; and no volatility. These warrants were completely
amortized as of December 31, 1998.
N. COMMITMENTS AND CONTINGENCIES
The Company is not a party toeffective registration statement;
(iii) To include any material legal proceedings.
In May 1998, the Company electedinformation with respect to self-insure the majority of its
employees' health care coverage with lifetime coverage up to $2,000,000 and
$5,000,000 per person at December 31, 1998 and 1999, respectively. In place are
reinsurance policies limiting losses for any individual within the plan of $10,000 per year,distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
Provided, however, that paragraphs (a)(1)(i), (a)(1)(ii) and (a)(1)(iii) do not apply if the information required to be included in a total company aggregate stop-loss limit at December 31,
1999post-effective amendment by those paragraphs is contained in reports filed with or furnished to the SEC by the registrant pursuant to Section 13 or 15(d) of approximately $282,000, with coverage upthe Exchange Act that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to $2,282,000 of aggregated
total claims. Based on estimated claimsbe a new registration statement relating to the securities offered therein, and the reinsurance in place, management
believesoffering of such securities at that time shall be deemed to be the costs are reasonably estimatedinitialbona 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.
The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the registrant’s annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the financial statements.
O. SALES AND PRODUCT INFORMATION
The Company believes it is advantageousregistration statement shall be deemed to operate onbe a fully integrated
basis in one operating segment. Accordingly, managementnew registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initialbona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company evaluates
performance and determines the allocation of resources on an entity-wide basis.
There are no material long-lived assets held outside the
F-28
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
O. SALES AND PRODUCT INFORMATION (CONTINUED)
United States. The following is supplemental information for net sales by
geographic area and product group:
1997 1998 1999
----------- ----------- -----------
Sales by Geographic Area:
United States....................... $ 6,435,359 $10,214,962 $10,001,539
Europe.............................. 3,009,936 6,248,695 9,286,394
Pacific Rim......................... 1,620,735 1,704,190 2,992,099
Other............................... 510,647 767,593 754,922
----------- ----------- -----------
Total................................. $11,576,677 $18,935,440 $23,034,954
=========== =========== ===========
Sales by Product Group:
Bio-Systems......................... $ 295,000 $ 5,460,684 $11,218,887
Bio-Consumables..................... 2,275 209,814 1,435,702
Scientific Instruments.............. 9,410,072 11,496,105 8,794,165
Other Consumables................... 1,869,330 1,768,837 1,586,200
----------- ----------- -----------
Total................................. $11,576,677 $18,935,440 $23,034,954
=========== =========== ===========
P. SUPPLEMENTAL CASH FLOW INFORMATION
1997 1998 1999
-------- -------- ----------
Noncash investing and financing activities:
Exchange of note receivable for intellectual
property..................................... $ -- $ -- $1,085,931
Liabilities assumed in connection with business
acquisitions................................. $ -- $ -- $ 135,333
Reduction of equity and increase in other
accrued expenses for redemption of preferred
stock and preferred stock dividends.......... $52,161 -- --
Q. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following is a summary of activity for the allowance for doubtful
acounts during each of the three years ended December 31, 1999:
ADDITIONAL
BEGINNING CHARGES DEDUCTIONS ENDING
BALANCE TO INCOME FROM RESERVE BALANCE
--------- ---------- ------------ --------
Year Ended December 31, 1997....................... $ -- $102,495 $ (2,495) $100,000
Year Ended December 31, 1998....................... 100,000 462,698 (1,053) 561,645
Year Ended December 31, 1999....................... 561,645 121,609 (522,661) 160,593
R. SUBSEQUENT EVENTS
On March 7, 2000, the Company signed a letter of intent for the sale of the
assets of its non-life sciences instrument product line to a director of the
Company for $6,000,000, of which $5,000,000 will be paid in cash and $1,000,000
will be paid with an interest-bearing promissory note due on March 31, 2001. The
non-life science instrument product line contributed revenues of $8,794,165 in
1999. The Company expects this transaction to close on March 31, 2000, subjectregistrant pursuant to the approval offoregoing provisions, or otherwise, the Company's stockholders.
F-29
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma statement of operations for the nine
months ended September 30, 2000 and the year ended December 31, 1999 reflects
the sale of assets related to our non-life sciences instrument product line on
May 19, 2000 as if the sale had occurred on January 1, 1999.
The unaudited pro forma statements of operations reflects all adjustments
necessaryregistrant has been advised that in the opinion of the Company's management (consisting onlySEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of normal
recurring adjustments) for a fair presentation of such data.
The unaudited financial data are intended for informational purposes only
and are not intended to be indicative of our results of operations had this
transaction occurred on the dates specified, nor is it indicative of our future
results of operations.
The unaudited pro forma financial data, including notes thereto, should be
read in conjunction with our historical consolidated financial statements,
including notes thereto, appearing elsewhere in this Prospectus.
F-30
TRANSGENOMIC, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
ADJUSTMENTS
FOR SALE OF
NON-LIFE
SCIENCES
THE INSTRUMENT THE
COMPANY PRODUCT COMPANY
(1) LINE PRO FORMA
----------- ----------- -----------
NET SALES................................................. $18,785,721 $2,170,674 (2a) $16,615,047
COST OF GOODS SOLD........................................ 9,401,352 1,432,955 (2a,b) 7,968,397
----------- ---------- -----------
Gross profit.......................................... 9,384,369 737,719 8,646,650
OPERATING EXPENSES
Selling, general and administrative..................... 10,362,474 415,323 (2b,c) 9,947,151
Research and development................................ 5,650,088 419,222 (2b) 5,230,866
Stock based compensation expense........................ 791,327 573,600 (2c) 217,727
----------- ---------- -----------
16,803,889 1,408,145 15,395,744
----------- ---------- -----------
LOSS FROM OPERATIONS...................................... (7,419,520) (670,426) (6,749,094)
OTHER INCOME (EXPENSE).................................... (869,293) -- (869,293)
----------- ---------- -----------
LOSS BEFORE INCOME TAXES.................................. (8,288,813) (670,426) (7,618,387)
INCOME TAX EXPENSE........................................ -- -- --
----------- ---------- -----------
NET LOSS.................................................. $(8,288,813) $ (670,426) $(7,618,387)
=========== ========== ===========
BASIC AND DILUTED LOSS PER SHARE.......................... $ (0.55) $ (0.51)
=========== ===========
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING..... 15,021,504 15,021,504
=========== ===========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION.
F-31
TRANSGENOMIC, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
ADJUSTMENTS
FOR SALE OF
NON-LIFE
SCIENCES
THE INSTRUMENT THE
COMPANY PRODUCT COMPANY
(1) LINE PRO FORMA
----------- ----------- ------------
NET SALES................................................ $23,034,954 $8,794,165 (2a) $ 14,240,789
COST OF GOODS SOLD....................................... 12,090,036 4,924,757 (2a,b) 7,165,279
----------- ---------- ------------
Gross profit......................................... 10,944,918 3,869,408 7,075,510
OPERATING EXPENSES
General and administrative............................. 3,771,663 236,808 (2b,c) 3,534,855
Marketing and sales.................................... 7,759,997 1,610,369 (2b) 6,149,628
Research and development............................... 6,296,859 1,728,827 (2b) 4,568,032
----------- ---------- ------------
17,828,519 3,576,004 14,252,515
----------- ---------- ------------
LOSS FROM OPERATIONS..................................... (6,883,601) 293,404 (7,177,005)
OTHER INCOME (EXPENSE)
Interest expense, net.................................. (1,198,378) -- (1,198,378)
Other, net............................................. 366 -- 366
----------- ---------- ------------
(1,198,012) -- (1,198,012)
----------- ---------- ------------
LOSS BEFORE INCOME TAXES................................. (8,081,613) 293,404 (8,375,017)
INCOME TAX EXPENSE....................................... 1,745,273 -- 1,745,273
----------- ---------- ------------
NET LOSS................................................. $(9,826,886) $ 293,404 $(10,120,290)
=========== ========== ============
BASIC AND DILUTED LOSS PER SHARE......................... $ (0.76) $ (0.78)
=========== ============
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING.... 13,000,000 13,000,000
=========== ============
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION.
F-32
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
On May 19, 2000, we sold the assets related to our non-life sciences
instrument product line to a company controlledexpenses incurred or paid by Stephen F. Dwyer, a director, and a principal stockholder of ours, for a total adjusted purchase price of
$5.65 million plus reimbursement by the buyer of expenses paid by us since
March 31, 2000 in connection with this product line. Approximately $3,650,000
was paid in cash at the closing and $2,000,000 was paid with an interest-bearing
promissory note due on December 30, 2000. The note bears interest at 8.75% per
annum. The purchaser financed the cash portionofficer or controlling person of the purchase price plus
initial working capital needs with borrowingsregistrant in the successful defense of approximately $4.6 million
obtained from a bank. We acquired the notes evidencing these loans from the bank
upon closing of our initial public offeringany action, suit or proceeding) is asserted by paying to the bank an amount
equal to the entire principal balance of the notes plus accrued and unpaid
interest. Mr. Dwyer has pledged 1,200,000 shares of our common stock owned by
him as security for the acquired notes. All of these shares are in an escrow
account as security for the notes. We anticipate that we will exercise our right
to cause the shares to be sold in order to pay principal and interest on the
acquired notes when due, subject to a 180-day lock-up agreement. The acquired
notes mature on December 30, 2000 and bear interest at a rate of 8.75% per
annum. The unaudited pro forma statement of operations for the year ended
December 31, 1999 and the nine months ended September 30, 2000 reflects this
sale, as if it had occurred on January 1, 1999. The unaudited pro forma
financial data are based on the following:
1. Our historical consolidated financial statements.
2. The pro forma statement of operations adjustments for the sale of the assets
relating to our non-life sciences instrument product line are as follows:
a. Elimination of the actual historical revenues and direct cost of goods
sold.
b. Elimination of indirect manufacturing and operating expenses. The
elimination of these expenses for the year ended December 31, 1999 is
based on an allocation of each department's expenses based on the ratio
of actual life-sciences and non-life sciences individual employees' wages
for each department in proportion to such department's total wages. Our
management believes such method is reasonable. The elimination for the
nine months ended September 30, 2000 is based on actual department
expenses.
c. An increase in general and administrative expenses to reflect $200,000
and $50,000 of anticipated increased rental costs for the year ended
December 31, 1999 and the nine months ended September 30, 2000,
respectively, which will be incurred by us as a result of the sale of the
assets relating to our non-life sciences instrument product line. We will
be required to relocate to a separate facility subsequent to the sale. A
decrease in general and administrative costs to eliminate $573,600 of
non-recurring compensation costs incurreddirector, officer or controlling person in connection with the accelerationsecurities being registered, the registrant will, unless in the opinion of vestingits counsel the matter has been settled by controlling precedent, submit to a court of employee optionsappropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in connection with the saleSecurities Act and will be governed by the final adjudication of such issue.
The Registrant hereby undertakes that:
(a) The Registrant will provide to the underwriter at the closing as specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.
(b) For purposes of determining any liability under the Securities Act, 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 assetstime it was declared effective.
II-5
(c) For the purpose of determining any liability under the Securities Act each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to our non-life sciences instruments product line.
d. No tax adjustment has been made duethe securities offered therein, and the offering of such securities at that time shall be deemed to our current net operating loss
position.
F-33
- --------------------------------------------------------------------------------
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3,195,047 SHARES
[LOGO]
COMMON STOCK
---------------
PROSPECTUS
------------------
--------------------
JANUARY 15, 2001
--------------------
YOU SHOULD RELY ONLY ON INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. SELLING STOCKHOLDERS ARE OFFERING TO SELL, AND
SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS
AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF
DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO
PERMIT A PUBLIC OFFERING OF THE COMMON SHARES OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN THAT JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS
PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO INFORM
THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND THE
DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.
- --------------------------------------------------------------------------------
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 16: EXHIBITS AND FINANCIAL STATEMENTS; SCHEDULES
(a) Exhibits.
2 Asset Purchase Agreement, dated May 16, 2000 between the
Registrant and SD Acquisition Inc.(2)
3.1 Second Amended and Restated Certificate of Incorporation of
the Registrant (2)
3.2 Bylaws of the Registrant (1)
4.1 Form of Certificate of the Registrant's Common Stock (1)
4.2 Form of Warrant for Purchase of Common Stock between the
Registrant and various Placement Agents (1)
5 Opinion of Kutak Rock LLP (3)
10.1 Amended and Restated 1997 Stock Option Plan of the
Registrant (1)
10.2 1999 UK Approved Stock Option Sub Plan of the Registrant (1)
10.3 Employment Agreement, dated April 1, 2000, between the
Registrant and Colin J. D'Silva (1)
10.4 Employment Agreement, dated April 1, 2000, between the
Registrant and William P. Rasmussen (2)
10.5 Employment Agreement, dated March 4, 2000, between the
Registrant and Douglas T. Gjerde (1)
10.6 Employment Agreement, dated November 16, 1998, between the
Registrant and William B. Walker (1)
10.7 Letter Agreement, dated February 18, 2000, between the
Registrant and Gregory J. Duman (1)
10.8 License Agreement, dated September 1, 1994, between
Registrant and Professor Dr. Gunther Bonn, et. al. and
Amendment thereto, dated March 14, 1997+ (1)
10.9 License Agreement, dated August 20, 1997, between the
Registrant and Leland Stanford Junior University+ (1)
10.10 Supply Agreement, dated January 1, 2000, between the
Registrant and Hitachi Instruments+ (1)
10.11 Lease Agreement, dated November 2, 1998, between the
Registrant and Westlake Development Company, Inc. (1)
10.12 Lease Agreement, dated May 15, 1996, between Interaction
Chromatography Inc. and Westlake Development Co., Inc. (1)
10.13 Business Property Lease, dated April 20, 2000, between the
Registrant and Todd Smith (2)
10.14 $6,693,772 Promissory Note, dated July 21, 2000, from SD
Acquisition, Inc. to the Registrant (incorporated by
reference to Exhibit 10.1 to Form 10-Q of the Registrant for
the quarter ended September 30, 2000 (file no. 000-30975)).
21 Subsidiaries of the Registrant (3)
23.1 Consent of Deloitte & Touche LLP (3)
23.2 Consent of Kutak Rock LLP (included in Exhibit 5)
24 Powers of Attorney (3)
27 Financial Data Schedule (3)
- ------------------------
(1) This Exhibit is incorporated by reference tobe the Registration Statement of
the Registrant (Registration No. 333-32174), which was filed on March 10,
2000.
(2) This Exhibit is incorporated by reference to the Registration Statement of
the Registrant (Registration No. 333-32174), as amended by Amendment 1,
which amendment was filed on May 17, 2000.
II-1
(3) This Exhibit is incorporated by reference to the Registration Statement of
the Registrant (Registration No. 333-51960), which was filed on
December 15, 2000.
+ Certain confidential portions of this Exhibit were omitted by means of
redacting a portion of the text (the "Mark"). This Exhibit has been filed
separately with the Secretary of the Commission without the Mark pursuant to
the Registrant's Application Requesting Confidential Treatment under
Rule 406 of the Securities Act.
(b) Financial Statement Schedules:
All financial statement schedules have been omitted because the required
information is included in the consolidated financial statements of the
Registrant or related notes thereto.
II-2
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Amendment No. 1 to this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Omaha
and State of Nebraska, on the 10th27th day of January, 2001.
2020.
| PRECIPIO, INC. | ||
| By: | /s/ Ilan Danieli | |
| Ilan Danieli | ||
| Chief Executive Officer | ||
Each person whose individual signature appears below hereby authorizes and appoints Ilan Danieli and Carl Iberger, and each of them, with full power of substitution and re-substitution and full power to act without the other, as his or her true and lawful attorney in fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this Registration Statement, including any and all post effective amendments and amendments thereto, and any registration statement relating to the same offering as this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys in fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys in fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 1
toas amended, this Registration Statement has been signed by the following persons in the capacities indicated as ofbelow on the 10th27th day of January, 2001.
2020.
| Signature | Title | Date | ||
| /s/ Ilan Danieli | Chief | January 27, 2020 | ||
| Ilan Danieli | Executive | |||
| /s/ Carl Iberger | Chief Financial Officer (Principal Financial | January 27, 2020 | ||
| Carl Iberger | Officer and Principal Accounting Officer) | |||
| /s/ Douglas Fisher, M.D. | Chairman of the Board of Directors | January 27, 2020 | ||
| Douglas Fisher, M.D. | ||||
| /s/ Kathleen LaPorte | Director | January 27, 2020 | ||
| Kathleen LaPorte | ||||
| /s/ Mark Rimer | Director | January 27, 2020 | ||
| Mark Rimer | ||||
| /s/ Richard Sandberg | Director | January 27, 2020 | ||
| Richard Sandberg | ||||
| /s/ Jeffrey Cossman, M.D. | Director | January 27, 2020 | ||
| Jeffrey Cossman, M.D. | ||||
| /s/ David Cohen | Director | January 27, 2020 | ||
| David Cohen |
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EXHIBIT INDEX
| * | This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Registrant specifically incorporates it by reference | |
| # | Confidential treatment has been requested or granted for certain information contained in this exhibit. Such information has been omitted and filed separately with the Securities and Exchange Commission. | |
| † | Indicates a management contract or any compensatory plan, contract or arrangement |