As filed with the Securities and Exchange Commission on July 7, 2020
Registration No. 333-239506
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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PRE-EFFECTIVE AMENDMENT NO. 1
2
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. / /
¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
If delivery¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the prospectus is expectedExchange Act.
| Large Accelerated Filer | ¨ | Accelerated Filer | ¨ | |||
| Non-Accelerated Filer | x | Smaller Reporting Company | x | |||
| Emerging Growth Company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to be madeuse 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 | $ | 5,085,000 | $ | 660.03(3) | ||||
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 434,
check457(o) under the following box. / /
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THE INFORMATION IN THIS 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
The holdersSecurities Act of 3,195,047 shares of our common stock may sell some or all of
these shares under this prospectus. These stockholders may sell shares at the
then prevailing market price for our common stock at the time1933, as amended.
(2) Calculated pursuant to Rule 457(o) based on an estimate of the sale, or at
other prices. We will not receive anyproposed maximum aggregate offering price.
(3) The Registrant previously paid $660.03 of the proceeds fromtotal registration fee in connection with the salefiling of these
shares by these stockholders.
In July 2000, we sold 5,152,000 shares of our common stockRegistration Statement on Form S-1 filed on June 26, 2020.
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 our initial
public offering. The underwriters of our initial public offering are not
underwriting anyaccordance with Section 8(a) of the sharesSecurities 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.
EXPLANATORY NOTE
This Pre-Effective Amendment No.2 (“Amendment No.2”) to the Registration Statement on Form S-1 (File No. 333-239506) (the “Registration Statement”) of Precipio, Inc. (the “Company”) is being sold byfiled solely to disclose the selling stockholders. Priorpurpose of the Company’s Pre-Effective Amendment No.1 (“Amendment No.1”) to the Registration Statement filed on July 6, 2020. Amendment No.1 was filed solely to amend the Exhibit Index to the Registration Statement, whereby the asterisk next to our initial public offering, therelegal counsel’s opinion was no public market for our common stock.
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Our common stock is listed onremoved. The meaning of the Nasdaq National Market underasterisk can be found in 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
PAGE
--------
Prospectus Summary.......................................... 1
Risk Factors................................................ 7
Forward-Looking Statements.................................. 15
Price Range of Common Stock and Dividend Policy............. 15
Selected Financial Data..................................... 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Business.................................................... 24
Management.................................................. 37
Principal Stockholders...................................... 43
Related Party Transactions.................................. 47
Description of Capital Stock................................ 48
Shares Eligible for Future Sale............................. 51
Plan of Distribution........................................ 52
Legal Matters............................................... 53
Experts..................................................... 53
Where You Can Find More Information......................... 54
Index to Financial Statements............................... F-1
THIS PROSPECTUS CONTAINS REFERENCES TO OUR REGISTERED TRADEMARKS
WAVE-REGISTERED TRADEMARK- AND DNASEP-REGISTERED TRADEMARK-. WAVEMAKER-TM-, WAVE
OPTIMIZED-TM- AND THE TRANSGENOMIC NAME AND THE TRANSGENOMIC LOGO ARE OUR
TRADEMARKS FOR WHICH REGISTRATION APPLICATIONS HAVE BEEN FILED WITH THE UNITED
STATES PATENT AND TRADEMARK OFFICE. ALL OTHER TRADEMARKS OR TRADE NAMES REFERRED
TO IN THIS PROSPECTUS ARE THE PROPERTY OF THEIR RESPECTIVE OWNERS.
PROSPECTUS SUMMARY
THE SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL THE INFORMATION YOU SHOULD
CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND OUR CONSOLIDATED HISTORICAL
AND PRO FORMA FINANCIAL STATEMENTS AND THE NOTES TO THOSE FINANCIAL STATEMENTS
BEGINNING ON PAGE F-1, BEFORE MAKING AN INVESTMENT DECISION.
TRANSGENOMIC
OUR BUSINESS
We provide innovative research toolsfootnotes to the genomics segmentExhibit Index of this Amendment No.2.
This Amendment No. 2 does not modify any provision of the life
sciences industry. These tools enable researchers to discover and understand
variations in the human genetic code, or genome. Understanding the role of
variations in the human genetic code may lead to the development of new drugs
and diagnostic techniques. We believe our WAVE System, which incorporates our
proprietary DNASep separation column and associated software, chemical reagents
and other consumable items, will become a leading tool to analyze genetic
mutations. 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.
As efforts to sequence the human genome near completion, understanding
variations in the genetic sequence, or mutation analysis, is becoming the vital
link to the development of new drug products and diagnostics. By comparing
genetic mutations in the genome to the occurrence of diseases or particular
traits, correlations can be made between genes and specific diseases or traits.
Our WAVE System, unlike tools employing more conventional technologies, can
detect these genetic mutations without previous knowledge of their existence or
position. As a result, the WAVE System provides researchers a more accurate and
efficient means of performing the experiments necessary to identify mutations
and to correlate the relationships between mutations and diseases.
OUR TECHNOLOGY AND PRODUCTS
Our WAVE System is designed to perform high-speed, automated analyses of DNA
molecules to identify the type, location and frequency of DNA mutations, with a
high degree of accuracy and consistency. The WAVE System is based on our
proprietary micro-bead technology. Our patented micro-beads are packed into our
proprietary DNASep separation column, which is the key component of our WAVE
System. Each micro-bead has specific surface chemistry that interacts with DNA
molecules. The DNA molecules are then selectively separated from the micro-beads
with a mixture of our liquid reagents. This process is automated by our
proprietary WAVEMaker Software for analysis and interpretation.
RESEARCH AND DEVELOPMENT
We maintain an active research and development program. Our research and
development work is focused on making improvements to the WAVE System that are
needed to adapt it to commercial applications such as diagnostics research and
drug development.
CUSTOMERS
Since the product launch in August 1997, we have sold over 450 WAVE Systems
in 20 countries to core laboratory facilities, academic research centers,
medical institutions and biopharmaceutical companies. Customers that have
purchased at least one WAVE System include 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,
1
University of Cambridge, Wellcome Trust-Oxford University, Institut Gustave
Roussy, SmithKline Beecham, Bristol-Meyers Squibb, Millennium Pharmaceuticals,
Merck & Company, Novartis and Eli Lilly and Company.
OUR STRATEGY
We intend to be the leading provider of technology platforms which enable
life sciences researchers to discover and understand variations in the human
genome, in order to accelerate and improve drug development and diagnostics. Key
elements of this strategy include:
- FOCUS ON THE GENETIC VARIATION DISCOVERY MARKET;
- ESTABLISH THE WAVE SYSTEM AS THE INDUSTRY STANDARD;
- INCREASE CONSUMABLE SALES;
- PENETRATE NEW MARKETS; AND
- BUILD A SUBSTANTIAL INTELLECTUAL PROPERTY ESTATE.
RECENT DEVELOPMENTS
We were incorporated in Delaware on March 6, 1997 to develop, manufacture
and market our DNA separation and analysis products in addition to continuing to
manufacture and sell the non-life sciences instrumentation products that were
being manufactured and sold by our predecessor company, CETAC Holding Company,
Inc. and its subsidiaries, CETAC Technologies, Inc., Sarasep, Inc. and
Interaction Chromatography, Inc. On July 1, 1997, we merged CETAC Holding
Company, Inc. and its subsidiaries into Transgenomic.
We have since decided to focus our resources on our life sciences products
and recently sold the assets related to our non-life sciences instrument product
line. See "Related Party Transactions."
On July 21, 2000, we completed the initial public offering of our common
stock. We sold 5,152,000 shares at a price of $15.00 per share in our initial
public offering. In addition, we issued 300,000 shares of our common stock at
$5.00 per share to the holder of a warrant on the same date. On August 15, 2000,
we converted $12 million of our convertible notes, plus accrued interest, into
2,750,906 shares of our common stock.
Our principal office is located at 12325 Emmet Street, Omaha, Nebraska 68164
(telephone: 402-452-5400). We maintain manufacturing facilities and our
principal research and development office in San Jose, California (telephone:
408-432-3230). Our website is located at http://www.transgenomic.com. The
informationpreliminary prospectus contained in our website is not partPart I or Items 13, 14, 15 or 17 of Part II of the Registration Statement. Accordingly, this prospectus, and you
should rely only on the information contained in this prospectus in deciding
whether to invest in our common stock.Amendment No. 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 number of shares outstanding does not include (i) 106,754 shares that will
be issued upon the exercise of outstanding warrants, (ii) 261,904 shares of
stock held in treasury and (iii) shares that we could issue under our employee
stock option plan. Asa copy of the datepreliminary prospectus.
Shares
Common Stock
PROSPECTUS
, 2020
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of this prospectus, we have outstanding
options to purchase 4,034,881 shares of common stock at exercise prices ranging
from $5.00 to $13.00 per share. We may issue options to acquire up to
1,774,150 additional shares of our common stock under this plan.
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3
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
The summary consolidated historical financial data for our 1997, 1998Issuance and 1999 fiscal years and for the nine months ended September 30, 1999 and 2000 is
derived from our consolidated financial statements 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.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
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1997 1998 1999 1999 2000
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Net sales.................................... $11,577 $18,935 $23,035 $16,903 $18,786
Gross profit................................. 5,241 9,345 10,945 7,863 9,384
Operating expenses........................... 8,459 11,320 17,829 12,671 16,804
Loss from operations......................... (3,218) (1,975) (6,884) (4,808) (7,420)
Net loss..................................... $(2,410) $(1,576) $(9,827) $(7,428) $(8,289)
======= ======= ======= ======= =======
Basic and diluted loss per share............. $ (0.22) $ (0.13) $ (0.76) $ (0.57) $ (0.55)
======= ======= ======= ======= =======
Basic and diluted weighted average shares
outstanding................................ 11,145 12,279 13,000 13,000 15,022
======= ======= ======= ======= =======
AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
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1998 1999 2000
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(IN THOUSANDS)
BALANCE SHEET DATA:
Total assets.............................................. $14,736 $19,964 $83,461
Long-term debt, less current portion...................... 695 12,538 --
Stockholders' equity (deficit)............................ 6,649 (2,099) 76,593
4
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The following summary unaudited pro forma statements of operations data 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 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 date specified, nor are they indicative of
our future results of operations. You should read this summary along with 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 elsewhere in this
prospectus.
NINE MONTHS ENDED SEPTEMBER 30, 2000
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ADJUSTMENTS FOR
SALE OF
NON-LIFE
SCIENCES
TRANSGENOMIC INSTRUMENT TRANSGENOMIC
(HISTORICAL) PRODUCT LINE PRO FORMA
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales......................................... $18,786 $2,171 $16,615
Gross profit...................................... 9,384 738 8,646
Operating expenses................................ 16,804 1,408 15,396
Loss from operations.............................. (7,420) (670) (6,750)
Other expense..................................... (869) -- (869)
Loss before income taxes.......................... (8,289) (670) (7,619)
Net loss.......................................... $(8,289) $ (670) $(7,619)
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Basic and diluted loss per
share........................................... $ (0.55) $ (0.51)
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Basic and diluted weighted average shares
outstanding..................................... 15,022 15,022
======= =======
5
YEAR ENDED DECEMBER 31, 1999
---------------------------------------------
ADJUSTMENTS FOR
SALE OF
NON-LIFE
SCIENCES
TRANSGENOMIC INSTRUMENT TRANSGENOMIC
(HISTORICAL) PRODUCT LINE PRO FORMA
------------ --------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales......................................... $23,035 $8,794 $ 14,241
Gross profit...................................... 10,945 3,869 7,076
Operating expenses................................ 17,829 3,576 14,253
(Loss) income from operations..................... (6,884) 293 (7,177)
Other expense..................................... (1,198) -- (1,198)
(Loss) income before income taxes................. (8,082) 293 (8,375)
Net (loss) income................................. $(9,827) $ 293 $(10,120)
======= ====== ========
Basic and diluted loss per
share........................................... $ (0.76) $ (0.78)
======= ========
Basic and diluted weighted average shares
outstanding..................................... 13,000 13,000
======= ========
6
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR COMMON STOCK.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. ANY OF THE
FOLLOWING RISKS COULD HARM OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AND COULD RESULT IN A COMPLETE LOSS OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY AS A COMPANY FOCUSED ON LIFE SCIENCES TECHNOLOGIES
AND APPLICATIONS SUBJECTS US TO RISKS INHERENT IN THE DEVELOPMENT OF A NEW
BUSINESS ENTERPRISE AND TO THE RISK THAT WE MAY NOT ACHIEVE PROFITABILITY.
We have a limited operating history as a company focused on life sciences
technologies and applications and are at a relatively early stage 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 results will
depend on a number of factors, including the market acceptance of our products,
the introduction of new products by our competitors, our ability to adapt our
technology to the commercial needs of our customers and to developments in the
genomics industry, and the timing and extent of our research and development
efforts. Our limited operating history in the life sciences industry makes
accurate prediction 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 during the nine months
ended September 30, 2000, $6.9 million in fiscal 1999, $2.0 million in fiscal
1998 and $3.2 million in fiscal 1997. These losses were mostly due to research
and development expenses and sales and marketing expenses related to the
development 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 losses 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 growth in the
genomics industry, the availability and price of competing
7
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, 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. If we are
unable to complete the further development of the WAVE System 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 that have no known cure. Any of these scenarios could reduce the potential
markets for our products, which could limit 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 direct sales force may not be sufficiently large or knowledgeable to
successfully penetrate the market. 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 applications 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.
9
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
10
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, or if we
are able to do so, patents may not provide us with substantial protection or be
commercially beneficial. Our patent applications may not protect our products
because of the following reasons:
- we cannot be certain that any 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 issued or licensed to us will
provide 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 an
adverse effect on our ability to do business.
Patent law relating to the scope of claims in the technology fields in which
we operate is still evolving. The degree of future protection for our
proprietary rights is uncertain. Furthermore, we cannot be certain 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 and our
ability to compete 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, any of the following could
still occur:
- proprietary information could be disclosed or others may gain access to
such information;
- others may independently develop substantially equivalent proprietary
information and techniques;
11
- we may not have adequate remedies 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 technologies in the
future in order to keep our products competitive. If we fail to license or
otherwise acquire 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% of 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 of 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 prohibited from selling our products before we obtain a
license, which, if available at all, may require us to pay substantial
royalties. Even if a claim is without merit, defending a lawsuit takes
significant time, may be expensive and may divert management attention from
other business concerns. Any public announcements related to litigation 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 members 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 assurance 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 growth 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 could 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.
Our research and development and manufacturing activities involve the
controlled use of hazardous materials and chemicals, including acetonitrile. We
are subject to federal, state and local 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 you 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 and principal stockholders and their
affiliates beneficially own approximately 50% of our outstanding common stock.
Accordingly, they collectively will have a significant influence in determining
the outcome of any corporate transaction or other matter submitted to the
stockholders for approval, including mergers, acquisitions, consolidations and
the sale of all or substantially all of our assets, and also the power to
prevent or cause a change in control. The interests of these stockholders may
differ from the interests 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.
Provisions in our certificate of incorporation and bylaws may have the
effect of delaying or preventing a change in control or changes in our
management that stockholders consider favorable or beneficial. If a change of
control or change in management is delayed or prevented, the market price of our
common stock 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.
The trading price of our common stock has been volatile and subject to large
fluctuations in price in response to various factors, many of which will be
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 in 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 of our common shares could also decline as a result of
sales of substantial amounts of our common stock in 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."
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 those companies. Further, there
has been particular volatility in the market prices of securities of
biotechnology and life sciences companies. These broad market and industry
factors may seriously harm the market price of our common stock, regardless of
our operating performance. In the past, following periods of volatility in the
market price of a company's securities, securities class-action litigation has
often been instituted against that company. Such litigation, if instituted
against us, could result in substantial costs and a diversion of management's
attention and resources.
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 consent of our lenders. Investors
seeking dividends or other current distributions should not invest in our common
stock. See "Dividend Policy."
14
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus that are subject
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. You can identify these forward-looking statements by
forward-looking words such as "expects," "anticipates," "intends," "plans,"
"may," "will," "believes," "seeks," "estimates" and similar expressions. Because
these forward-looking statements involve risks and uncertainties, there are
important factors that could cause our actual results to differ materially from
those expressed or implied by these forward-looking statements, including our
plans, objectives, expectations and intentions and other factors discussed under
"Risk Factors" and other factors identified by cautionary language used
elsewhere in this prospectus. Before you invest in our common stock, you should
be aware that the occurrence 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, the date of our initial public offering, our common
stock has been traded on the Nasdaq National Market under the symbol TBIO. Distribution
The following table sets forth all expenses, other than the highunderwriting discounts and low sales prices for our common stock
forcommissions, payable by the third and fourth calendar quarters of 2000. Prior to July 17, 2000,
there was no public market for our common stock.
| Total | ||||
| SEC registration fee | $ | 660 | ||
| 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 | $ | 25,660 | ||
Item 14. Indemnification of Directors and Officers
Section 145(a) of the Delaware General Corporation Law (the “DGCL”) provides, in general, that a corporation shall have the power 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 corporation), 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 request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding, 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 and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful.
Section 145(b) of the DGCL provides, in general, that a corporation shall have the power 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 or suit by or in the right of the corporation to procure a judgment in its favor because the person 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 expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with the 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.
| II-1 |
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 right 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”).
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 issued the following unregistered securities.
| II-2 |
We issued unregistered securities in connection with the Merger as previously disclosed and included in our non-life science instrument product
line,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 accelerated the vestingentered into a series of 71,700 options, which would have
otherwise been forfeited. Former employees who were associatedUnsecured Convertible Promissory Notes with our non-life
science product line held these options. The acceleration resultedseven accredited investors in the recordingprincipal amount of $574,000 of stock based compensation expense in the first quarter
of 2000.$925,000. The remaining expense is dueCompany also issued, 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
expenseits placement agent for the nine months was $1.8 millionnotes, a convertible promissory note, upon the same terms and conditions 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 throughin an aggregate principal amount equal to 5% of the proceeds received by the Company, or $46,250. The notes are convertible into shares of the Company’s common stock. On January 13, 2017, all but one investor exercised their conversion rights relating to their respective notes, including the agent’s note, and agreed to convert an aggregate amount of $499,359 of principal and interest due under the notes and agent’s note into 925 shares of the Company’s common stock. On January 17, 2017, the non-converting investor agreed to extend the maturity date of its note pursuant to an amendment that provides for two-thirds of the outstanding principal amount of the note must be paid upon the earlier to occur of the close of the Merger with Precipio Diagnostics, LLC or June 16, 2017 (such applicable date, the “Deferred Maturity Date”). On June 21 2017, the non-converting investor agreed to further extend the Deferred Maturity Date of the note until the earlier to occur of (1) the closing of a public offering by the Company of either common stock, convertible preferred stock or convertible preferred notes or (2) August 16, 2017. On August 31, 2017, the Company made payment of two-thirds of the then outstanding principal amount, which was more than 10 days after the Deferred Maturity Date and constituted an event of default under the terms of the Note. The non-converting investor agreed to waive the event of default under the Note and in consideration of this waiver, the Company issued the non-converting investor warrant to purchase 666 shares of the Company’s common stock, par value $0.01 per share. The balance was satisfied by the issuance to the non-converting investor of registered common shares on February 12, 2018.
On April 13, 2017, Transgenomic completed the sale of the promissory notes in the amount of $1.2 million and the issuance of warrants to acquire 2,667 shares of the Company's common stock at an annual interest rateexercise price of 3.6%. As a result,$225 per share, subject to anti-dilution protection. Aegis capital Corp. acted as placement agent for the bridge financing and received warrants to acquire 373 shares of Transgenomic common stock at an exercise price of $225.00 per share.
On October 31, 2017, the Company recorded additional interest expenseentered into a Debt Settlement Agreement with certain 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 yearsits accounts payable creditors 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 expensessettlement, the Company agreed to continueissue 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%certain of the total increase. The remaining increase is attributablecreditors, namely Paul Hasting LLP, Mount Sinai, Montefiore Medical Center and Allergan Sales LLC, warrants 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%purchase approximately 7,207 shares of the total increase.Company’s common stock at an exercise price of $112.50 per share. The remaining increase is attributable
towarrants are exercisable on the costs associated with the expanded activitiesdate of the researchissuance 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 shares
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. In
addition, the holder of a warrant to purchase 300,000 shares of common stock
exercised the warrant at the time of our initial public offering thus providing
us with an additional $1.5 million in cash. As of December 31, 1999 and
September 30, 2000, we had approximately $153,000 and $60.4 million,
respectively, in cash and cash equivalents.
On May 19, 2000 we sold the assets related to our non-life sciences
instrument product line to a company controlled 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 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 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
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.
24
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.
28
- 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)
29
[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 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 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 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 share. 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 patents issued from applications filedthe issuance of notes with an aggregate principal of $3,296,703. The notes are payable by the U.S. Patent Office prior to
June 8, 1995, and 20 years fromCompany on the application filingearlier of (i) the one year anniversary of each note’s closing date or earlier claimed
priority date(ii) upon the closing of a qualified offering, namely the Company raising gross proceeds of at least $7,000,000.
On September 7, 2018, we issued the 40,000 Commitment Shares to Lincoln Park, as further discussed herein. The Commitment Shares were issued to Lincoln Park 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 agreementsaccordance 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,Purchase Agreement.
On November 29, 2018, we entered into an amendment and restatement agreement (the “Amendment Agreement”) amending and restating the exercise priceterms of an incentive stock option,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 definedthe notes and warrants granted in connection with the Debt Financing Agreement, subject to certain adjustments to their terms. For the notes issued under the Internal Revenue CodeDebt 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 1986, as amended, cannot be less than$3.75 or $0.75 above the fair market
valueclosing bid price of our common stock on the date prior to the option is granted.original issue date. In general, options
will expire ifthe event the notes are not exercised within ten years frompaid in full prior to 180 days after the original issue date, they are granted.
The committee may also require that an option holder remain employed by us for a
specified periodthe conversion price shall be equal to 80% 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
structuredlowest VWAP in the 10 trading days prior 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 optionsthe 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 4,034,881 sharesthe issuance of our common stock. These options have exercise prices ranging
from $5.00 to $13.00 per share.
UnderNotes with an aggregate principal of $1,208,791 and 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 contributionsCompany issued to the savings plan on behalf of our employees if our
Board of Directors decidesinvestors 300,115 warrants 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 officeCompany 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 holders of our common stock are entitled to
- one vote per share on all matters submitted to a vote 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, the holders of a majority of the outstanding common stock can elect all
the directors of the company. The remaining common stock holders will not be
able to elect any directors. The 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 shares of
common stock are, and all shares of common stock to be outstanding upon
completion of this offering will be, fully paid and non-assessable. 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 and to fix the rights, powers,
preferences, qualifications, limitations and restrictions granted to or imposed
on the preferred stock. The authority of the Board of Directors includes the
right to fix dividend rights, conversion rights, terms of redemption,
liquidation preference, sinking fund terms and the number of shares constituting
any series or the designation of a series, without any further vote or action by
the stockholders. The preferred stock may be issued with a preference over the
common stock as to the payment of dividends. The Board of Directors, without
stockholder approval, can issue
48
preferred stock with voting and conversion rights that could adversely affect
the voting power of the holders of common stock. The issuance of preferred stock
could have the effect of delaying, deferring or preventing a change in control
of Transgenomic. For the foregoing reasons, any preferred stock we issue could
adversely affect your rights as a holder of our common stock. We do not have any
present plans to issue preferred stock.
WARRANTS
As of the date of this prospectus, we have 106,754 outstanding warrants to
purchase common stock at an exercise price equal to $5.00 per share. These
warrants will expire in 2003. All of the warrants contain provisions for the
adjustment of the exercise price$5.40 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,five-year term.
| II-3 |
On September 17, 2018, October 23, 2018 and November 7, 2018 we have outstanding options to purchase
4,034,881 shares of our common stock at exercise prices ranging from $5.00 to
$13.00 per share. Additional options to acquire 1,774,150 shares of common stock
may be issued in the future under our Stock Option Plan.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND CHARTER PROVISIONS
DELAWARE LAW.
In general, Section 203 of the Delaware General Corporation Law prohibits a
publicly held Delaware corporation from engaging in any business combinationentered into an Exchange Agreements (the “Exchange Agreements”) with any interested stockholder for a period of three years following the date
that the stockholder became 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, the business combination is approved by the
Board of Directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines "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
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 Amended and Restated Certificate of Incorporation and Bylaws
include a number of provisions that may have the effect of deterring hostile
takeovers or delaying or preventing changes in control or management of
Transgenomic. First, our certificate of incorporation provides that all
stockholder actions must be effected at a duly called meeting of holders and not
by a consent in writing. Second, our bylaws 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 Directorsinstitutional investors pursuant to a resolution adopted by
a majority ofwhich 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 total number of authorized directors. Third, our certificate
of incorporation provides that our Board of Directors can issue up to 15,000,000
shares of preferred stock, as described under "Preferred Stock" above. Fourth,
our certificate of incorporation and the Bylaws provide for a classified Board
of Directors in which approximately one-third of the directors would be elected
each year. Consequently, any potential acquirer would need to successfully
complete two proxy contests in order to take control of the Board of Directors.
As a result of the provisions of the certificate of incorporation 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 bylaws establish procedures, including advance notice procedures,
with regard to the nomination of candidates for election as directors and
stockholder proposals. These provisions of our certificate of incorporation and
bylaws could discourage potential acquisition proposals 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 the transfer agent
and registrar for our common stock.
NATIONAL MARKET LISTING
Our common stock is listed on the Nasdaq Stock Market's National Market
under the symbol TBIO.
50
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market could
adversely affect the market price of our common stock and our ability to raise
equity capital in the future on terms favorable to us.
A total of 21,205,566 shares of our common stock are outstanding. The
5,152,000 shares sold by us in 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" as that term is defined in Rule 144 under the
Securities Act. Restricted securities may be sold 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 owned shares of our common stock for at least one year, including
any affiliate of ours, is entitled to sell, within any three-month period, a
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 from time
to time. The selling stockholders will act independently of us in making
decisions regarding the timing, manner and size of each sale. The sales may be
made on the Nasdaq National Market or in the over-the-counter market or
otherwise, 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 effect such transactionsprovided by selling the shares to or through
broker-dealers. The shares may be sold by one or more of, or a combination of,
the following:
- a block trade in which the 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,
- ordinary brokerage transactions and transactions in which the broker
solicits purchasers, and
- in privately negotiated transactions.
To the extent required, this prospectus may be amended 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 participate in the resales. The selling stockholders may enter
into hedging transactions with broker-dealers in connection with distributions
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 or agents may receive compensation in the form of
commissions, discounts or concessions from selling stockholders. Broker-dealers
or agents may also receive compensation from the purchasers of the shares for
whom they act as agents or to whom they sell as principals, or both.
Compensation as to a particular broker-dealer might be in excess of customary
commissions and will be in amounts to be negotiated 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 meaning of
Section 2(11)3(a)(9) of the Securities Act of 1933, (the "Securities Act") in connection
with salesas amended. Under the Exchange Agreements, we exchanged up to an aggregate principal amount of the shares. Accordingly, any such commission, discount or
concession received by them and any profit on the resale of the shares purchased
by them may be deemed to be underwriting discounts or commissions$3,165,903 due 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 subjectdebt settlement agreements for convertible notes totaling $2,765,568. Pursuant to the prospectus delivery requirements of the
Securities Act. In addition, any securities covered by this prospectus which
qualify for sale under Rule 144 promulgated under the Securities Act may be sold
under Rule 144 rather than under this prospectus. The selling stockholders have
advised us that they have not entered into any agreements, understandings or
arrangements with any underwriters or broker-dealers regarding the sale of their
securities. There is no underwriter or coordinating broker acting in connection
with the proposed sale of shares by the selling stockholders.
The shares 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
shares of our common stock by 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) under the Securities Act upon being notified by a selling
stockholder that any material arrangements have been entered into with a
broker-dealer for the sale 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.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Kutak Rock LLP, Omaha, Nebraska.
EXPERTS
The financial statements as of December 31, 1998 and 1999 and for each of
the three years in the period ended December 31, 1999 included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and are included in reliance upon the
report 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 Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered hereby. 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 found in the registration statement
and the exhibits and schedules thereto. The exhibits to the registration
statement include 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 may be inspected
without charge at the public reference facilities maintained by the Commission
in Room 1024, 450 Fifth Street, N.W., 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. Copies of such materials can be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, Room 1024, at prescribed rates. The public may obtain
information on the operation of the Public Reference Room by calling 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 Commission maintains an
internet site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
We are subject to the information reporting requirements of the Securities
Exchange Act of 1934, as amended, and file reports, proxy statements and other
information with the Commission.
54
TRANSGENOMIC, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
Unaudited Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of December 31,
1999 and September 30, 2000............................. F-2
Condensed Consolidated Statements of Operations for the
nine months ended
September 30, 1999 and 2000............................. F-3
Condensed Consolidated Statements of Cash Flows for the
nine months ended
September 30, 1999 and 2000............................. F-4
Notes to Condensed Consolidated Financial Statements for
the nine months ended September 30, 1999 and 2000....... F-5
Audited Consolidated Financial Statements:
Independent Auditors' Report.............................. F-10
Consolidated Balance Sheets as of December 31, 1998 and
1999.................................................... F-11
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999........................ F-12
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1997, 1998 and 1999.... F-13
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999........................ F-14
Notes to Consolidated Financial Statements for the years
ended December 31, 1997, 1998 and 1999.................. F-15
Unaudited Pro Forma Financial Information:
Unaudited Pro Forma Statement of Operations for the nine
months ended September 30, 2000......................... F-31
Unaudited Pro Forma Statement of Operations for the year
ended December 31, 1999................................. F-32
Notes to Unaudited Pro Forma Financial Information........ F-33
F-1
TRANSGENOMIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND SEPTEMBER 30, 2000
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------- --------------
ASSETS
CURRENT ASSETS
Cash & Cash Equivalents................................... $ 153,336 $ 60,431,360
Accounts Receivable--Net.................................. 6,199,059 5,466,184
Inventories............................................... 3,918,866 2,729,610
Prepaid Expenses and Other Current Assets................. 623,461 1,348,421
Notes Receivable from Related Party....................... -- 6,807,072
------------ ------------
Total Current Assets.................................... 10,894,722 76,782,647
PROPERTY & EQUIPMENT
Equipment................................................. 4,695,785 4,698,411
Furniture & Fixtures...................................... 1,567,370 1,175,586
------------ ------------
Total Property & Equipment.............................. 6,263,155 5,873,997
Less: Accumulated Depreciation............................ 3,682,016 2,276,388
------------ ------------
Net Property & Equipment................................ 2,581,139 3,597,609
------------ ------------
Intangible Assets........................................... 2,690,608 819,914
Demonstration Inventory..................................... 2,124,159 163,032
Other Assets................................................ 1,672,882 2,097,325
------------ ------------
Total Assets................................................ $ 19,963,510 $ 83,460,527
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes Payable--Bank....................................... $ 4,340,000 $ --
Current Portion of Notes Payable--Other................... 579,724 --
Accounts Payable.......................................... 2,827,186 3,660,900
Accrued Expenses.......................................... 1,778,090 2,301,398
Deferred Gain on Sale of Assets........................... -- 904,830
------------ ------------
Total Current Liabilities............................... 9,525,000 6,867,128
LONG-TERM LIABILITIES
Notes Payable--Other, Less Current Maturies............... 116,958 --
Convertible Notes Payable................................. 12,421,010 --
Commitments and Contingencies
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock $.01 Par Value, 15,000,000 Shares
Authorized, None Outstanding............................ -- --
Common Stock $.01 Par Value, 60,000,000 Shares Authorized,
13,000,000 and 21,407,637 issued and outstanding in 1999
and 2000................................................ 130,000 214,029
Additional Paid-in Capital................................ 10,231,595 97,692,116
Deferred Stock Based Compensation......................... (112,500) (563,406)
Accumulated Other Comprehensive Income (Loss)............. (4,478) (116,452)
Accumulated Deficit....................................... (12,344,075) (20,632,888)
------------ ------------
Total Stockholders' Equity (Deficit).................... (2,099,458) 76,593,399
------------ ------------
Total Liabilities and Stockholders' Equity
(Deficit)............................................ $ 19,963,510 $ 83,460,527
============ ============
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
F-2
TRANSGENOMIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(UNAUDITED)
1999 2000
----------- -----------
Net Sales................................................... $16,903,128 $18,785,721
Cost of Goods sold.......................................... 9,039,855 9,401,352
----------- -----------
Gross Profit.............................................. 7,863,273 9,384,369
Operating Expenses:
Selling, General and Administrative....................... 8,531,069 10,362,474
Research and Development.................................. 4,139,911 5,650,088
Stock Based Compensation Expense.......................... -- 791,327
----------- -----------
12,670,980 16,803,889
Loss From Operations........................................ (4,807,707) (7,419,520)
Interest Expense............................................ (885,072) (1,776,110)
Interest Income............................................. 107,281 919,977
Other Income (Expense), Net................................. 18,256 (13,160)
----------- -----------
Loss Before Income Taxes.................................... (5,567,242) (8,288,813)
Income Tax Expense.......................................... 1,860,639 --
----------- -----------
Net Loss.................................................. $(7,427,881) $(8,288,813)
=========== ===========
Shares Used in Net Loss Per Common Share Calculations--Basic
and Diluted............................................... 13,000,000 15,021,504
Net Loss Per Common Share--Basic and Diluted................ $ (0.57) $ (0.55)
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
F-3
TRANSGENOMIC INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(UNAUDITED)
1999 2000
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss.................................................. $(7,427,881) $ (8,288,813)
Adjustments to Reconcile Net Loss to Net Cash Flows from
Operating Activities:
Depreciation & Amortization............................. 762,396 1,289,302
(Gain) Loss on Sale of Assets........................... (18,240) 4,200
Accrued Interest on Convertible Notes................... 578,666 1,415,258
Non Cash Compensation Expense........................... -- 791,327
Amortization of Deferred Financing Costs................ 94,722 100,539
Deferred Tax Assets..................................... 1,834,390 --
Changes in Operating Assets and Liabilities Net of
Acquisitions and Dispositions:
Accounts Receivable..................................... (1,456,019) 448,837
Inventories............................................. (1,303,149) (279,540)
Prepaid Expenses........................................ (89,592) (346,204)
Other Assets and Liabilities............................ 9,310 34,332
Accounts Payable........................................ (334,809) 599,766
Accrued Expenses........................................ 397,983 536,569
----------- ------------
Net Cash Flows from Operating Activities.................. (6,952,223) (3,694,427)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property & Equipment.......................... (1,221,269) (1,629,734)
Increase in Notes Receivable.............................. -- (4,807,072)
Proceeds from Asset Sales................................. 19,500 3,620,570
Increase in Other Long-Term Assets........................ (1,584,480) (669,855)
----------- ------------
Net Cash Flows from Investing Activities.................. (2,786,249) (3,486,091)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Change in Note Payable--Bank.......................... 830,000 (4,340,000)
Proceeds from Notes Payable--Other........................ 12,000,000 204,000
Deferred Financing Costs.................................. (587,612) --
Payments on Notes Payable--Other.......................... (319,125) (900,682)
Net Proceeds from Stock Issuance.......................... -- 72,365,247
----------- ------------
Net Cash Flows from Financing Activities.................. 11,923,263 67,328,565
Effect of Foreign Currency Exchange Rates on Cash........... (29,561) 129,977
----------- ------------
Net Change in Cash and Cash Equivalents..................... 2,155,230 60,278,024
Cash and Cash Equivalents at Beginning of Period............ 187,455 153,336
----------- ------------
Cash and Cash Equivalents at End of Period.................. $ 2,342,685 $ 60,431,360
=========== ============
Non-Cash Financing Activity:
Exchange of Note Receivable for Intellectual Property..... $ 1,085,931 --
Conversion of Notes Payable into Common Stock............. -- $ 13,909,299
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
F-4
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(UNAUDITED)
A. CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of
Transgenomic, Inc. and Subsidiaries (the "Company") have been prepared by the
Company pursuant to the rules and regulations 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:
1999 2000
---------- -----------
Finished goods...................................... $ 157,216 $ 1,190,626
Raw materials and work in progress.................. 2,786,958 1,021,023
Demonstration inventory............................. 3,098,851 680,993
---------- -----------
6,043,025 2,892,642
Less: Long-term demonstration inventory............. (2,124,159) (163,032)
---------- -----------
$3,918,866 $ 2,729,610
========== ===========
During the nine months ended September 30, 2000, the Company reclassified
demonstration inventory of approximately $1.0 million to property and equipment.
C. NOTES PAYABLE
At December 31, 1999, Notes Payable consisted of borrowings against a
revolving line of credit and other installment notes. On July 21, 2000, the
Company paid in full the outstanding balances plus accrued interest for these
notes with the proceeds received from its initial public offering.
On February 10, 2000, the Company borrowed approximately $204,000 from a
director and principal stockholder. The promissory note had an interest rate of
9.75% per annum and was repaid on August 10, 2000.
F-5
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 (CONTINUED)
(UNAUDITED)
D. STOCKHOLDERS' EQUITY AND STOCK OPTIONS
STOCKHOLDERS' EQUITY. On March 30, 2000, the Company's stockholders
approved an increase in the number of authorized common shares to 60,000,000.
In March 2000, the Company issued 25,000 common shares at $10.00 per share
to an individual who was subsequently elected to the Company's Board of
Directors.
On July 21, 2000, the Company issued 5,152,000 shares of common stock in its
initial public offering at $15.00 per share. After payment of the underwriters'
discounts and commissions and other expenses, the Company received net proceeds
of approximately $69.9 million from this offering. In addition, the holder of a
warrant to purchase 300,000 shares of common stock at $5.00 per share exercised
the warrant at the time of our initial public offering.
The Company's $12 million convertible notes, due 2002, contained features
which were impacted by our initial public offering as follows:
- On the effective date of our initial public offering interest payable on
the notes was accelerated through the maturity dateterms of the notes, at an
annual interest rate 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
conversion of the principal plus accrued interest into common stock of the
Company at a conversion price of $5.00 per share. The conversion feature
was formula driven and based partially upon 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 rate in effect on the
balance sheet dates. These translation adjustments are the Company's only
component of other comprehensive income.
NINE MONTHS ENDED
-------------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 2000
-------------------- --------------------
Net Loss.................................................... $(7,427,881) $(8,288,813)
Currency translation adjustments............................ (27,106) (111,974)
----------- -----------
Total Comprehensive Loss.................................... $(7,454,987) $(8,400,787)
=========== ===========
STOCK OPTIONS. On March 30, 2000, the Company's stockholders approved an
amendmentwe shall pay to the 1997 Stock Option Plan to increasenoteholders the number of shares for
which common stock options can be granted to 6,000,000. During the third quarter
of fiscal 2000, the Company granted 297,000 options
F-6
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 (CONTINUED)
(UNAUDITED)
D. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
with exercise prices of $13.00 per share. During the second quarter of fiscal
2000, the Company granted 97,500 options with exercise prices of $13.00 per
share. During the first quarter of fiscal 2000, the Company granted 364,000
options, including 59,500 options with exercise prices at $5.00 per share and
recorded $297,500 in deferred compensation in connection with these grants
representing the difference between the exercise price of the options granted
and the deemed fair value of the common stock at the date of grant. These
amounts, along with $112,500 of deferred compensation recorded at December 31,
1999, are being amortized by charges to operations over the vesting periods of
the individual stock options using the straight-line method. Such amortization
expense amounted to approximately $60,000 for the nine months ended
September 30, 2000.
In connection with the sale of the Company's non-life science instrument
product line, the Company accelerated the vesting of 71,700 options, which would
have otherwise been forfeited. Compensation expense of approximately $574,000
was recorded for these options during the first quarter of 2000, representing
the difference between the exercise price of the options and the deemed fair
value of the common stock at the date the vesting was accelerated. In addition,
218,700 options were forfeited as a result of the sale.
Included in the 364,000 options granted in the first quarter were 128,000
options granted to non-employees under consulting 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.
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
Balance at December 31, 1999....................... 3,537,750 $ 5.00
Granted........................................ 758,500 11.82
Exercised...................................... (153,769) 5.04
Canceled....................................... (358,300) 5.80
--------- ------
Balance at September 30, 2000...................... 3,784,181 $ 5.75
========= ======
Exercisable at September 30, 2000.................. 2,075,541 $ 5.33
--------- ------
The weighted average fair value of options granted was $6.23 for the first
nine months of fiscal 2000. At September 30, 2000, the weighted average
remaining contractual life of options outstanding was 7.7 years. 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 the first nine months of fiscal 2000: no
common stock dividends; risk-free interest rates
F-7
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 (CONTINUED)
(UNAUDITED)
D. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
ranging from 6.44% to 6.53%, 35% volatility; and an expected option life ranging
from 1 to 6.9 years. Pro forma net income and income per share for the nine
months ended September 30, 2000, assuming compensation expense for the Stock
Option Plan had been determined under SFAS 123, is as follows:
NINE MONTHS
ENDED
SEPTEMBER 30, 2000
-------------------
Net Loss:
As reported............................................. $(8,288,813)
Pro forma............................................... $(9,185,528)
Basic and diluted loss per share:
As reported............................................. $ (0.55)
Pro forma............................................... $ (0.61)
E. INCOME TAXES
Due to the Company's cumulative losses in recent years, expected losses in
future years and inability to utilize any additional losses as carrybacks, the
Company has not provided for an income tax benefit during the nine months ended
September 30, 2000 based on management's determination that it was more likely
than not that such benefits would not be realized. The Company will continue to
assess the recoverability of deferred tax assets and the related valuation
allowance. To the extent the Company begins to generate income in future periods
and it determines that such valuation allowance is no longer required, the tax
benefit of the remaining deferred tax assets will be recognized at such time.
During the nine months ended September 30, 1999, the Company established a
valuation allowance offsetting previously recorded deferred tax assets.
Management determined that, due to cumulative losses in recent years, expected
losses in future years and inability to utilize any additional losses as
carrybacks, it was more likely than not that such benefits would not be
realized.
As of December 31, 1999 and September 30, 2000, the Company had net deferred
tax assets of approximately $180,000. The net deferred tax asset at
September 30, 2000 has been offset by a valuation allowance of approximately
$7.8 million due to the Companys cumulative losses in recent years, expected
losses in future years and inability to utilize any additional losses as
carrybacks.
F. SALE OF PRODUCT LINE
On May 19, 2000, the Company sold the assets related to its non-life
sciences instrument product line to a company controlled by Stephen F. Dwyer, a
director andaggregate principal stockholder of the Company, for a total adjusted purchase
price of $5.65 million plus reimbursement by the purchaser of approximately
$400,000 of expenses paid by the Company in connection with this product line
since March 31, 2000. The effective date of the transaction was April 1, 2000.
Approximately $3.65 million of the purchase price was paid 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 portion of the purchase price for these assets plus initial working capital
needs with borrowings of approximately $4.6 million obtained from a bank. The
Company acquired 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 balance of the notes plus accrued and
unpaid interest. The acquired notes mature on December 30, 2000, and bear
interest at a rate of 8.75% per annum. A total of 1,200,000 shares of the
Company's common stock owned 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 signed
in connection with the Company's initial public offering.
The net assets sold and their book values as of April 1, 2000 are as
follows:
Inventories................................................. $2,485,722
Property, net............................................... 510,410
Other assets................................................ 1,839,611
Accrued liabilities......................................... (124,203)
----------
Net assets sold............................................. $4,711,540
==========
The Company expects to realize an after-tax gain on the sale of these assets
of approximately $710,000. The Company has deferred recognition of the gain on
the sale until the earlier of (i) the repayment of the notes in full or
(ii)eighteen (18) equal installments beginning on August 1, 2019 and ending on January 1, 2021. In accordance with the releaseterms of the 1,200,000 shares fromnotes, the lock-up agreement.
G. PRO FORMA RESULTS OF OPERATIONS
The Company's unaudited pro forma results of operations for the nine months
ended September 30, 1999 and 2000, assuming the sale of the non-life sciences
instrument product line occurred as of the beginning of the periods presented
are as follows:
NINE MONTHS ENDED
-----------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 2000
------------------- -------------------
Net Sales................................................... $ 9,896,261 $16,615,047
Net Loss.................................................... $(7,887,930) $(7,618,387)
Basic and diluted loss per share............................ $ (0.61) $ (0.51)
F-9
INDEPENDENT AUDITORS' REPORT
Board of Directors
Transgenomic, Inc.
Omaha, Nebraska
We have audited the accompanying consolidated balance sheets of
Transgenomic, Inc. and subsidiaries (the Company) as of December 31, 1998 and
1999 and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Transgenomic, Inc. and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States of America.
/s/ DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 7, 2000
F-10
TRANSGENOMIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1999
1998 1999
----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 187,455 $ 153,336
Accounts receivable, net.................................. 4,425,419 6,199,059
Inventories............................................... 3,363,971 3,918,866
Prepaid expenses and other current assets................. 292,926 527,461
Deferred income taxes..................................... 114,000 --
Refundable income taxes................................... 34,000 96,000
----------- ------------
Total current assets.................................... 8,417,771 10,894,722
PROPERTY AND EQUIPMENT:
Equipment................................................. 3,272,132 4,695,785
Furniture and fixtures.................................... 1,070,569 1,567,370
----------- ------------
4,342,701 6,263,155
Less-accumulated depreciation............................. 2,931,886 3,682,016
----------- ------------
1,410,815 2,581,139
DEMONSTRATION INVENTORY..................................... 819,538 2,124,159
OTHER ASSETS................................................ 4,087,940 4,363,490
----------- ------------
$14,736,064 $ 19,963,510
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Note payable-bank......................................... $ 3,150,000 $ 4,340,000
Current portion of notes payable-other.................... 432,338 579,724
Accounts payable.......................................... 2,287,451 2,827,186
Accrued compensation...................................... 533,680 666,219
Other accrued expenses.................................... 988,950 1,111,871
----------- ------------
Total current liabilities............................... 7,392,419 9,525,000
NOTES PAYABLE-OTHER, LESS CURRENT MATURITIES................ 694,536 116,958
CONVERTIBLE NOTES PAYABLE................................... -- 12,421,010
COMMITMENTS AND CONTINGENCIES (NOTES H, J, L, M AND N)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value, 15,000,000 shares
authorized, none outstanding............................ -- --
Common stock, $.01 par value, 30,000,000 shares
authorized, 13,000,000 shares issued and outstanding in
1998 and 1999........................................... 130,000 130,000
Additional paid-in capital................................ 10,119,095 10,231,595
Note receivable related party............................. (1,085,931) --
Unearned compensation..................................... -- (112,500)
Accumulated deficit....................................... (2,517,189) (12,344,075)
Accumulated other comprehensive income (loss)............. 3,134 (4,478)
----------- ------------
Total stockholders' equity (deficit).................... 6,649,109 (2,099,458)
----------- ------------
$14,736,064 $ 19,963,510
=========== ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-11
TRANSGENOMIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1997 1998 1999
----------- ----------- -----------
NET SALES................................................... $11,576,677 $18,935,440 $23,034,954
COST OF GOODS SOLD.......................................... 6,335,986 9,590,663 12,090,036
----------- ----------- -----------
Gross profit............................................ 5,240,691 9,344,777 10,944,918
OPERATING EXPENSES:
General and administrative................................ 2,444,398 2,795,199 3,771,663
Marketing and sales....................................... 3,967,574 5,364,953 7,759,997
Research and development.................................. 2,047,057 3,159,377 6,296,859
----------- ----------- -----------
8,459,029 11,319,529 17,828,519
----------- ----------- -----------
LOSS FROM OPERATIONS........................................ (3,218,338) (1,974,752) (6,883,601)
OTHER INCOME (EXPENSE):
Interest expense, net of interest income of $53,527,
$59,147 and $126,215 in 1997, 1998 and 1999,
respectively............................................ (412,755) (516,366) (1,198,378)
Other-net................................................. (14,634) (15,282) 366
----------- ----------- -----------
(427,389) (531,648) (1,198,012)
----------- ----------- -----------
LOSS BEFORE INCOME TAXES.................................... (3,645,727) (2,506,400) (8,081,613)
INCOME TAX EXPENSE (BENEFIT):
Current................................................... (348,702) 19,993 (27,727)
Deferred.................................................. (887,486) (950,000) 1,773,000
----------- ----------- -----------
(1,236,188) (930,007) 1,745,273
----------- ----------- -----------
NET LOSS.................................................... $(2,409,539) $(1,576,393) $(9,826,886)
=========== =========== ===========
BASIC AND DILUTED LOSS PER SHARE............................ $ (0.22) $ (0.13) $ (0.76)
=========== =========== ===========
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING....... 11,144,583 12,279,042 13,000,000
=========== =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-12
TRANSGENOMIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
RETAINED
ADDITIONAL EARNINGS
COMMON PREFERRED PAID-IN NOTE UNEARNED (ACCUMULATED
STOCK STOCK CAPITAL RECEIVABLE COMPENSATION DEFICIT)
-------- --------- -------------- ----------- ------------ ------------
BALANCE, JANUARY 1, 1997........... $ 110 $ 41,000 $ 1,242,940 $ (650,782) $ -- $ 1,479,904
Net loss......................... -- -- -- -- -- (2,409,539)
Other comprehensive income
(loss):
Foreign currency translation
adjustment................... -- -- -- -- -- --
Comprehensive income
(loss)..................... -- -- -- -- -- --
Note receivable from related
party.......................... -- -- -- (369,062) -- --
Preferred stock dividends........ -- -- -- -- -- (11,161)
Redeem 410 shares of preferred
stock.......................... -- (41,000) -- -- -- --
1,000 to 1 stock exchange........ 109,890 -- (109,890) -- -- --
Sale of 351,500 common shares.... 3,515 -- 1,620,354 -- -- --
Issuance of warrants to purchase
300,000 common shares.......... -- -- 82,117 -- -- --
-------- -------- -------------- ----------- --------- ------------
BALANCE, DECEMBER 31, 1997......... 113,515 -- 2,835,521 (1,019,844) -- (940,796)
Net loss......................... -- -- -- -- -- (1,576,393)
Other comprehensive income
(loss):
Foreign currency translation
adjustment................... -- -- -- -- -- --
Comprehensive income
(loss)..................... -- -- -- -- -- --
Note receivable from related
party.......................... -- -- -- (66,087) -- --
Sale of 1,648,500 common
shares......................... 16,485 -- 7,283,574 -- -- --
-------- -------- -------------- ----------- --------- ------------
BALANCE, DECEMBER 31, 1998......... 130,000 -- 10,119,095 (1,085,931) -- (2,517,189)
Net loss......................... -- -- -- -- -- (9,826,886)
Other comprehensive income
(loss):
Foreign currency translation
adjustment................... -- -- -- -- -- --
Comprehensive income
(loss)..................... -- -- -- -- -- --
Issuance of 22,500 stock
options........................ -- -- 112,500 -- (112,500) --
Note receivable from related
party.......................... -- -- -- 1,085,931 -- --
-------- -------- -------------- ----------- --------- ------------
BALANCE, DECEMBER 31, 1999......... $130,000 $ -- $ 10,231,595 $ -- $(112,500) $(12,344,075)
======== ======== ============== =========== ========= ============
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME
(LOSS) TOTAL
------------- -----------
BALANCE, JANUARY 1, 1997........... $ 768 $ 2,113,940
Net loss......................... (2,409,539) (2,409,539)
Other comprehensive income
(loss):
Foreign currency translation
adjustment................... 1,348 1,348
-----------
Comprehensive income
(loss)..................... (2,408,191)
-----------
Note receivable from related
party.......................... -- (369,062)
Preferred stock dividends........ -- (11,161)
Redeem 410 shares of preferred
stock.......................... -- (41,000)
1,000 to 1 stock exchange........ -- --
Sale of 351,500 common shares.... -- 1,623,869
Issuance of warrants to purchase
300,000 common shares.......... -- 82,117
----------- -----------
BALANCE, DECEMBER 31, 1997......... 2,116 990,512
Net loss......................... (1,576,393) (1,576,393)
Other comprehensive income
(loss):
Foreign currency translation
adjustment................... 1,018 1,018
-----------
Comprehensive income
(loss)..................... (1,575,375) --
-----------
Note receivable from related
party.......................... -- (66,087)
Sale of 1,648,500 common
shares......................... -- 7,300,059
----------- -----------
BALANCE, DECEMBER 31, 1998......... 3,134 6,649,109
Net loss......................... (9,826,886) (9,826,886)
Other comprehensive income
(loss):
Foreign currency translation
adjustment................... (7,612) (7,612)
-----------
Comprehensive income
(loss)..................... (9,834,498) --
-----------
Issuance of 22,500 stock
options........................ -- --
Note receivable from related
party.......................... -- 1,085,931
----------- -----------
BALANCE, DECEMBER 31, 1999......... $ (4,478) $(2,099,458)
=========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-13
TRANSGENOMIC INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1997 1998 1999
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(2,409,539) $(1,576,393) $(9,826,886)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization........................... 918,214 798,708 1,364,246
Deferred income taxes................................... (887,486) (950,000) 1,773,000
Gain on sale of assets.................................. (72,250) (8,411) (16,105)
Accrued interest and redemption premium................. -- -- 858,665
Amortization of deferred financing costs................ -- -- 149,960
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable................................... 318,646 (2,029,247) (1,635,316)
Inventories........................................... (174,192) (1,717,595) (1,775,273)
Prepaid expenses and other current assets............. 52,704 (81,250) (233,686)
Refundable income taxes............................... (54,000) 388,000 (62,000)
Accounts payable...................................... (342,096) 1,392,087 481,068
Accrued expenses...................................... 39,600 340,178 178,793
----------- ----------- -----------
Net cash flows from operating activities............ (2,610,399) (3,443,923) (8,743,534)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (486,190) (682,674) (1,828,047)
Proceeds from asset sales................................. 153,305 10,000 21,425
Increase in other assets.................................. (152,373) (813,405) (1,461,250)
Purchase of business, net of cash acquired................ -- -- (187,294)
Note receivable........................................... 15,560 22,946 --
----------- ----------- -----------
Net cash flows from investing activities............ (469,698) (1,463,133) (3,455,166)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock and common stock warrants........ 1,705,986 7,300,059 --
Net change in note payable-bank........................... 750,000 (800,000) 1,190,000
Proceeds from notes payable-other......................... 1,467,918 100,000 --
Payments on notes payable-other........................... (361,343) (1,964,555) (430,192)
Proceeds from convertible notes payable................... -- -- 12,000,000
Deferred financing costs.................................. -- -- (587,615)
Increase in related party receivables..................... (369,062) (66,087) --
----------- ----------- -----------
Net cash flows from financing activities............ 3,193,499 4,569,417 12,172,193
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH.... 1,348 1,018 (7,612)
----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 114,750 (336,621) (34,119)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 409,326 524,076 187,455
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 524,076 $ 187,455 $ 153,336
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 424,501 $ 472,579 $ 318,856
=========== =========== ===========
Cash paid for taxes....................................... $ 17,026 $ 30,120 $ 37,630
=========== =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-14
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION.
Transgenomic, Inc., a Delaware corporation, and its subsidiaries (the
"Company") provide innovative research tools to the life sciences industry.
These tools enable researchers to discover and understand variation in the human
genetic code, or genome, in order to accelerate and improve drug development and
diagnostics. The Company also manufactures and designs sample preparation and
monitoring instruments, which are primarily used with various types of optical
and mass spectrometers to analyze the chemical makeup of samples. The Company
markets and sells these platforms primarily throughout North America, Europe and
the Pacific Rim.
PRINCIPLES OF CONSOLIDATION.
The consolidated financial statements include the accounts of Transgenomic,
Inc. and its wholly-owned subsidiaries Transgenomic, Ltd. (fka CETAC
Technologies, Ltd.), which provides sales and customer support outside the
United States and Transgenomic St. Thomas, Inc., which is organized as a foreign
sales corporation. All material intercompany balances and transactions have been
eliminated. On July 1, 1997 the Company merged with CETAC Holding Company, Inc.
in a 1000 to 1 stock exchange. Before and after the merger, the companies had
identical ownership structures. Accordingly, this transaction was between
companies under common control and was accounted for similar to a pooling of
interests. The Company had no assets, liabilities or operations prior to its
merger with CETAC Holding Company, Inc.
SALES AND DISTRIBUTION STRATEGY.
The Company sells its products in three major ways:
1) DIRECT-The Company serves the United States market through direct sales
efforts from the Company headquarters in Omaha. The Company has direct
salespeople strategically located to cover all sections of the United
States and Europe.
2) DISTRIBUTORS-The Company also sells its products to distributors in its
major European and Pacific Rim markets.
3) ORIGINAL EQUIPMENT MANUFACTURERS (OEM)-The Company sells its sample
preparation and monitoring instruments to major ICP (intra-coupled
plasma) spectrometer manufacturers and their authorized representatives.
The Company has sales offices in the United States, United Kingdom and
Japan. These offices function mainly as service and support centers and also as
sales resources for OEM and distributor customers in Europe.
CASH AND CASH EQUIVALENTS.
For purposes of reporting cash flows, cash and cash equivalents include cash
and temporary investments with maturities at acquisition of three months or
less.
F-15
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE.
Accounts receivable are shown net of allowance for doubtful accounts of
$561,645 and $160,593 in 1998 and 1999, respectively. Payment terms generally
are 30 or 60 days. The Company has also provided extended payment terms to some
of its customers. Accounts receivable balances subject to extended terms were
approximately $59,000 as of December 31, 1998 and $216,000 as of December 31,
1999. Balances due more than one year from the balance sheet date were
approximately $0 and $77,000, respectively.
INVENTORIES.
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The Company has certain finished goods inventory it provides as
demonstration units to potential customers for evaluation, as well as to certain
universities and original equipment manufacturers for testing and demonstration.
All demonstration units are held for resale and included in inventory at the
lower of cost or market. Demonstration inventory that is greater than one year
old and remains held for resale is reclassified from current assets to long-term
assets and carried at the lower of cost or market. If the instrument is not
purchased by the customer or institution, it is retrieved, and, if necessary,
reconditioned for sale. Demonstration inventory is evaluated for impairment
based on its physical condition and technological status. No impairment loss has
been recognized to date. At the time these instruments no longer are held for
resale and will be used for in-house testing and analysis, they are transferred
from inventory to property at the lower of cost or market and depreciated.
Demonstration equipment included in property and equipment is used for research
and development and training.
PROPERTY AND EQUIPMENT.
Property and equipment are carried at cost. Depreciation and amortization
are computed by the straight-line and accelerated methods over the estimated
useful lives of the related assets as follows:
Furniture and fixtures...................................... 5 to 7 years
Production equipment........................................ 5 to 7 years
Computer equipment.......................................... 5 years
Research and development equipment.......................... 3 to 5 years
Demonstration equipment..................................... 3 to 5 years
GOODWILL.
Goodwill arising from the excess of cost over the fair value of net assets
at dates of acquisition is being amortized using the straight-line method over
15 years.
IMPAIRMENT OF LONG-LIVED ASSETS.
The Company assesses the recoverability of long-lived assets held for use,
including certain intangible assets and goodwill, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In such cases, if the sum of the expected cash flows (undiscounted
and without interest) resulting from the use of the asset are less than the
carrying
F-16
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amount, an impairment loss is recognized based on the difference between the
carrying amount and the fair value of the assets. No impairment loss has been
recognized to date.
OTHER ASSETS.
Other assets include patents, capitalized software and intellectual
property. The Company capitalizes the external and in-house legal costs and
filing fees associated with obtaining patents on its new discoveries and
amortizes these costs using the straight-line method over the shorter of the
legal life of the patent or its economic life, generally 17 years, beginning on
the date the patent is issued.
The Company develops software as an integral component of its instruments.
The Company capitalizes software development costs, which include purchased
software and direct labor, after technological feasibility for the software has
been established. After the software is ready for general release, the Company
ceases capitalization of software development costs. The software is amortized
over the estimated life of the product, generally three years. Intellectual
property, which is purchased technology, is recorded at cost and is amortized
over its estimated useful life of between 5 and 10 years.
DEFERRED FINANCING COSTS.
Deferred financing costs are amortized over the term of the related
financing using the effective interest method.
STOCK BASED COMPENSATION.
The Company accounts for its employee stock option grants under the
provisions of Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, which utilizes the intrinsic value method. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
deemed fair market value of the Company's common stock at the date of grant over
the stock option exercise price. Stock option grants to nonemployees are
accounted for using the fair value method of accounting in accordance with
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION using the Black-Scholes model and volatility factors for comparable
public companies.
UNEARNED COMPENSATION.
Unearned compensation represents the unamortized difference between the
option exercise price and the deemed fair market value of the Company's common
stock at the option grant date, for options issued under the Company's Stock
Option Plan (Note L). The unearned compensation is charged to operations over
the vesting period of the respective options.
INCOME TAXES.
Deferred tax assets and liabilities are determined based on the differences
between the financial reporting and tax bases of assets and liabilities at each
balance sheet date using enacted tax rates expected to be in effect in the year
the differences are expected to reverse.
F-17
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION.
Sales of products are recorded based on receipt of an unconditional customer
order and shipment of product. The Company's sales terms do not provide for the
right of return unless the product is damaged or defective. Installation and
training revenues are deferred and recognized when earned.
RESEARCH AND DEVELOPMENT.
Research and development costs are charged to expense when incurred.
TRANSLATION OF FOREIGN CURRENCY.
Financial statements of subsidiaries outside the U.S. are measured using the
local currency as the functional currency. The adjustments to translate those
amounts into U.S. dollars are accumulated in a separate account in stockholders'
equity and are included in other comprehensive income. Foreign currency
transaction gains or losses resulting from changes in currency exchange rates
are included in the determination of net income. For the periods presented,
foreign currency transaction adjustments were not significant.
COMPREHENSIVE INCOME.
Comprehensive income for all periods presented consists of net income and
foreign currency translation adjustments. The Company deems its foreign
investments to be permanent in nature and does not provide for taxes on currency
translation adjustments arising from converting its investments in a foreign
currency to U.S. dollars. There were no reclassification adjustments to be
reported in the periods presented.
FAIR VALUE OF FINANCIAL INSTRUMENTS.
The estimated fair value of receivables, accounts payable, and short-term
and long-term notes payable approximate the carrying values. The carrying value
of receivables and accounts payable approximate fair value based on their
short-term nature. The estimated fair value amounts for short-term and long-term
debt were determined using rates that are currently available for issuances of
debt with similar terms and maturities.
EARNINGS PER SHARE.
Basic earnings per share are calculated based on the weighted-average number
of common shares outstanding during each period. Diluted earnings per share
include shares issuable upon exercise of outstanding stock options and warrants
or conversion of convertible notes, where dilutive. Potentially dilutive
securities have been excluded from the computation of diluted earnings per share
as they have an antidilutive effect due to the Company's net loss.
Weighted-average shares outstanding reflects the 1,000 to 1 stock exchange which
occurred on July 1, 1997, in connection with the merger of Transgenomic, Inc.
and CETAC Holding Company, as if such exchange occurred at the beginning of the
earliest period presented.
F-18
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING PRONOUNCEMENTS.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES, (SFAS No. 133). This statement, which is effective for
fiscal years beginning after June 15, 2000, 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 is in the process of determining the effect, if any, SFAS No.
133 will have on the Company's financial statements.
In 1999, the Company adopted Statement of Position 98-1, ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE, (SOP 98-1)
which, on a prospective basis, revised the accounting for software development
costs. SOP 98-1 requires the capitalization of certain costs related to internal
use software once certain criteria have been met. The adoption of this statement
did not have a material impact on the Company's financial statements.
USE OF ESTIMATES.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS.
Certain reclassifications have been made to the 1997 and 1998 financial
statements to conform with the 1999 presentation.
B. ACQUISITION
On January 26, 1999, the Company, through its UK subsidiary, acquired
substantially all of the assets of Kramel Biotech International, Limited
(Kramel) for approximately $187,000 in cash and the assumption of approximately
$135,000 in liabilities of Kramel, and entered into employment agreements with
the two principals. Kramel manufactures laboratory consumables used in the field
of molecular biology. The acquisition was accounted for as a purchase and
resulted in goodwill of approximately $66,000. All identifiable assets acquired
and liabilities assumed were allocated a portion of the cost, equal to their
fair values. Kramel's results of operations have been included in the
accompanying statements of operations subsequent to the date of acquisition.
F-19
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
C. INVENTORIES
At December 31, 1998 and 1999 inventories consist of the following:
1998 1999
---------- ----------
Finished goods....................................... $ 257,173 $ 157,216
Raw materials and work in process.................... 2,295,336 2,786,958
Demonstration inventory.............................. 1,631,000 3,098,851
---------- ----------
4,183,509 6,043,025
Less long-term demonstration inventory............... (819,538) (2,124,159)
---------- ----------
$3,363,971 $3,918,866
========== ==========
During 1997, 1998 and 1999, the Company reclassified demonstration inventory
of $22,914, $9,096 and $41,090, respectively, to property and equipment.
D. OTHER ASSETS
At December 31, 1998 and 1999, other assets consist of the following:
1998 1999
------------------------------------- -------------------------------------
ACCUMULATED NET BOOK ACCUMULATED NET BOOK
COST RESERVE VALUE COST RESERVE VALUE
---------- ----------- ---------- ---------- ----------- ----------
Deferred income taxes.......... $1,839,000 $ -- $1,839,000 $ 180,000 $ -- $ 180,000
Goodwill....................... 843,446 235,435 608,011 909,492 306,463 603,029
Intellectual property.......... 534,852 160,455 374,397 2,534,852 447,273 2,087,579
Patents........................ 815,934 8,010 807,924 1,076,384 21,107 1,055,277
Software....................... 369,678 118,558 251,120 503,730 227,079 276,651
Other.......................... 309,103 101,615 207,488 160,954 -- 160,954
---------- -------- ---------- ---------- ---------- ----------
Total...................... $4,712,013 $624,073 $4,087,940 $5,365,412 $1,001,922 $4,363,490
========== ======== ========== ========== ========== ==========
E. NOTE PAYABLE-BANK
At December 31, 1998 and 1999, note payable-bank consisted of borrowings in
the amounts of $3,150,000 and $4,340,000, respectively, against a revolving line
of credit of $5,000,000. The note carries an interest rate equal to the national
prime. The interest is payable monthly. The interest rate at December 31, 1998
and 1999 was 7.75% and 8.50%, respectively. The line matures July 31, 2000.
Substantially all of the Company's assets and certain life insurance policies
are pledged as collateral on this note payable. The loan contains certain
restrictive covenants that the Company must comply with on a quarterly basis.
Such covenants include a prohibition on the payment of dividends, the purchase
of its stock, and the redemption of stock options and warrants, among other
things, without the written agreement of the lender. As of December 31, 1999,
the Company was not in compliance with these covenants. However, a waiver was
obtained from the bank for the covenant violations as of December 31, 1999,
which is effective until March 31, 2000. The financial covenants for which the
Company was not in compliance were as follows: to maintain no less than
$8.25 million of tangible net worth; to maintain a maximum debt to tangible net
worth ratio of not more than 1.2 to 1; to maintain a
F-20
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
E. NOTE PAYABLE-BANK (CONTINUED)
minimum working capital of $4.25 million; and to restrict the purchase or lease
of fixed assets to an amount that does not exceed the depreciation taken in the
Company's fiscal year.
F. NOTES PAYABLE-OTHER
Notes payable-other at December 31, 1998 and 1999 consists of the following:
1998 1999
---------- --------
Installment note payable to a bank maturing on
December 1, 2000; payable in monthly installments of
$15,618, which includes interest of 9.0%;
collateralized by all equipment and furnishings..... $ 342,194 $179,711
Installment note payable to a bank maturing on August
13, 2001; payable in monthly installments of $15,123
which includes interest of 9.0%; collateralized by
all equipment and furnishings....................... 429,516 280,436
Note payable to a living trust, payable in monthly
installments of $11,000 including interest at 5.33%
per year, due March 1, 2000 secured by certain
assets of the Company's California division......... 355,164 236,535
---------- --------
Total notes payable-other............................. 1,126,874 696,682
Less current portion.................................. 432,338 579,724
---------- --------
Notes payable-other excluding current portion......... $ 694,536 $116,958
========== ========
Aggregate maturities of notes payable-other at December 31, 1999 consist of
the following:
YEAR ENDING DECEMBER 31,
2000........................................................ $579,724
2001........................................................ 116,958
--------
$696,682
========
In connection with certain installment notes payable to a bank, the Company
must comply with certain restrictive covenants on an annual basis. As of
December 31, 1999, the Company was not in compliance with these covenants.
However, a waiver was obtained from the bank for the covenant violations as of
December 31, 1999, which is effective until December 31, 2000. The financial
covenants for which the Company was not in compliance were as follows: to make
no payments to subsidiaries; to maintain debt service coverage, defined as net
profit plus depreciation, of at least $470,000; and to not incur an operating
loss.
G. CONVERTIBLE NOTES PAYABLE
On March 23, 1999, the Company received approximately $11.4 million of net
proceeds from the placement of $12 million aggregate principal amount 6%
convertible notes due March 25, 2002. Interest on the notes compounds at 6% per
annum until maturity or a Designated Offering (as
F-21
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
G. CONVERTIBLE NOTES PAYABLE (CONTINUED)
defined) ("Offering") and either will be payable in cash upon repayment of the
note at or after the maturity date, or if elected upon the completion of an
Offering all accrued and unpaid interest shall be converted into shares of
common stock. The interest after an Offering shall be reduced to 3.6%, and shall
become due for the remainder of the term through the maturity date at the time
of an Offering.
The holdernoteholders shall have the right, to convert at the principal amounts due under
these notes into sharesthen applicable conversion price any amount of the Company's common stock atnotes up to $300,000 on any time. If the
Company completes an Offering priorgiven trading day, with a maximum conversion amount up to September 25, 2000, the conversion price
shall be either the lesser$500,000 during a period of $5.00 per share or 50% of the per share offering
price. If the Offering is completed between September 25, 2000 and the maturity
date, thefive (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 Securities Act by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.
On March 26, 2020, the Company was
informed, as allowed by theentered into an amendment agreement that no additional debt securities would
be purchased. Therefore, in accordance with(the “March 2020 Amendment”) amending the terms of that certain Amendment No. 2 Agreement dated April 16, 2019 and the securities purchase agreement in 1998
the Company paid the $1,500,000 Note plus interest and other agreed-to expenses.
The private investor is no longerdated May 14, 2019. As a directorresult of the Company.
The 300,000 Share Warrant entitlesMarch 2020 amendment, (i) the holder to acquire 300,000 shares of
common stock at the lower of (a) $5.00 per share or (b) 50%maturity date of the April 2019 Bridge Notes and the May 2019 Bridge Notes was extended three months from April 16, 2020 to July 16, 2020, (ii) the floor price per
share at which conversions may occur under the CompanyApril 2019 Bridge Notes and the May 2019 Bridge Notes was amended from $2.25 to $0.40, and (iii) guaranteed interest on the April 2019 Bridge Notes and the May 2019 Bridge Notes was amended from twelve months to eighteen months.
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 common stockor 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 an initial public offering.
The 300,000 Share Warrant will expire if it hasthe 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 been exercised onexceed that which was registered) and any deviation from the low or beforehigh end of the Company's initial public offering. The warrants were valued at $82,117 at
December 31, 1997 usingestimated maximum offering range may be reflected in the Black-Scholes pricing modelform of prospectus filed with the following
assumptions:SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no common stock dividends, risk free interest ratemore than 20 percent change in the maximum aggregate offering price set forth in the “Calculation 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 toRegistration Fee” table in the effective 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 estimatedinitial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
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 initial bona 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.
(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-5 |
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused Amendment No. 1 to this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, on the 7th day of July, 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 resubstitution 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 Cityname and on behalf of Omahaeach person, individually and Statein 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 Nebraska, on1933, as amended, and to file the 10th daysame, 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 January, 2001.
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 10th 7th day of January, 2001.
July, 2020.
| Signature | Title | Date | ||
| /s/ Ilan Danieli | Chief | July 7, 2020 | ||
| Ilan Danieli | Executive | |||
| /s/ Carl Iberger | Chief Financial Officer (Principal Financial | July 7, 2020 | ||
| Carl Iberger | Officer and Principal Accounting Officer) | |||
| /s/ Douglas Fisher, M.D. | Chairman of the Board of Directors | July 7, 2020 | ||
| Douglas Fisher, M.D. | ||||
| /s/ Kathleen LaPorte | Director | July 7, 2020 | ||
| Kathleen LaPorte | ||||
| /s/ Mark Rimer | Director | July 7, 2020 | ||
| Mark Rimer | ||||
| /s/ Richard Sandberg | Director | July 7, 2020 | ||
| Richard Sandberg | ||||
| /s/ Jeffrey Cossman, M.D. | Director | July 7, 2020 | ||
| Jeffrey Cossman, M.D. | ||||
| /s/ David Cohen | Director | July 7, 2020 | ||
| David Cohen |
| II-6 |
EXHIBIT INDEX