Why the Company is making the Exchange Offer
Stock options are a critical component of the Company’s compensation philosophy, the focal point of which is to encourage the Company’s employees and consultants to build long-term stockholder value. The Board believes that stock options help the Company achieve this objective in several important ways, including the following: by aligning the Company’s employees’ and consultants’ interests with those of the Company’s stockholders; by motivating the Company’s employees and consultants to focus on the Company’s long-term success; and to promote retention by encouraging the Company’s employees and consultants who have received stock option awards that vest over time to continue their employment and service with the Company.
The Company completed its initial public offering (“IPO”) on June 1, 2021 to raise funds to support the development and commercialization of the Company’s G4 and PX sequencing platforms. To support these plans, the Company has significantly expanded its employee headcount. Since the Company completed its IPO and expansion of its headcount, the price of the Company’s common stock has significantly decreased. As of July 22, 2022, the closing price of the Company’s common stock on Nasdaq was $3.59 per share, resulting in all stock options granted to the Company’s employees and consultants prior to and following the Company’s IPO being “underwater,” meaning the exercise price of each of these options is greater than the Company’s current stock price. These stock options were primarily granted to the Company’s new hires and to other high-performing employees and consultants. Because of the higher exercise price, the Board is concerned that these underwater stock options may no longer be effective as incentives to motivate and retain the employees and consultants holding these stock options. The Board believes that it has a responsibility to address these issues and to properly incentivize the Company’s employees and consultants.
The Board determined that the Exchange Offer is in the best interests of the Company and its stockholders. It believes the New Options granted under the Exchange Offer will provide better incentives and motivation to the Company’s employees and consultants than the underwater options they currently hold and would exchange. Because many of the Company’s employees’ and consultants’ stock options are underwater, the Board determined that the Company has and may continue to face a considerable challenge in retaining these employees and consultants, and there is a possibility that the Company’s competitors may be able to offer equity incentives or other forms of compensation that are more attractive and that, in some cases, could make the terms offered by a competitor more attractive than what the Company offers to its existing employees and consultants.
The Board views it as critical for the Company to retain and motivate key employees and consultants, especially in light of the competitive marketplace in San Diego, California for employees and consultants with the skills required to develop and commercialize the Company’s products. The Exchange Offer is designed to address this concern as well as improve morale among the Company’s employees generally and reinvigorate a culture where equity compensation is a key component of the Company’s overall compensation package. Retaining employees and consultants can also reduce the costs and disruptions associated with employee and consultant resignations and better ensures the Company’s performance.
The Board also determined that the Exchange Offer, as an alternative to retaining employees through increased cash compensation, will allow the Company to devote more of its cash resources toward the development and commercialization of its products. The Board also considered granting additional equity awards to employees with underwater options. However, unlike granting additional equity awards, the Exchange Offer does not increase dilution. As such, the Board determined that the Exchange Offer is a more attractive alternative to granting additional equity awards to employees and consultants with underwater options.
The Board designed the Exchange Offer to restore equity value, increase retention and motivation in a competitive labor market, provide non-cash compensation incentives and better align the Company’s employee and stockholder interests for long-term growth. Through the Exchange Offer, the Board believes that the Company will be able to enhance long-term stockholder value by increasing its ability to retain experienced employees and consultants and by better aligning the interests of these individuals with the interests of its stockholders.
Notably, the Board limited the number of stock options included in the Exchange Offer. The Board determined not to include the stock options held by the Company’s Executive Officers and members of the Board in the Exchange Offer. In addition, the Board determined not to include the stock options awards issued after January 3, 2022 in the Exchange Offer. In March 2022, the Company issued annual incentive awards to its employees pursuant to its employee compensation program (the “2022 Annual Awards”). These options were granted at an
