As filed
with the Securities and Exchange Commission on April 27,
2010
Registration
No. 333-163997
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 4 to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
RULES-BASED MEDICINE,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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8071
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22-3860791
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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3300 Duval Road
Austin, Texas 78759
(512) 835-8026
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
T. Craig Benson
President and Chief Executive Officer
Rules-Based Medicine, Inc.
3300 Duval Road
Austin, Texas 78759
(512) 835-8026
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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Robert L. Kimball
Christopher G. Schmitt
Vinson & Elkins L.L.P.
2001 Ross Avenue, Suite 3700
Dallas, Texas 75201
(214) 220-7700
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Donald J. Murray, Esq.
Dewey & LeBoeuf LLP
1301 Avenue of the Americas
New York, New York 10019
(212) 259-8000
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this Registration Statement.
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: o
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. o
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. o
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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
The registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date
until the registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and
may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell these securities and is not soliciting an offer to
buy these securities in any state where the offer or sale is not
permitted.
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SUBJECT TO COMPLETION, DATED APRIL 27, 2010
Preliminary
Prospectus
Shares
Rules-Based
Medicine, Inc.
Common
Stock
We are
offering shares
of our common stock. This is our initial public offering, and no
public market currently exists for our common stock. We expect
the initial public offering price to be between
$ and
$ per common share. We have
applied to list our common stock on the Nasdaq Global Market
under the symbol RULE.
Investing in our common stock involves a high degree of risk.
Please read Risk Factors beginning on
page 9.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
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PER SHARE
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TOTAL
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Public Offering Price
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$
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$
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Underwriting Discounts and Commissions
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$
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$
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Proceeds to Rules-Based Medicine, Inc. (Before Expenses)
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$
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$
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Delivery of the shares of common stock is expected to be made on
or
about ,
2010. We have granted the underwriters an option for a period of
30 days to purchase, on the same terms and conditions set
forth above, up to an
additional shares
of our common stock to cover over-allotments. If the
underwriters exercise the option in full, the total underwriting
discounts and commissions payable by us will be
$ , and the total proceeds to us,
before expenses, will be $ .
Sole Book-Running
Manager
Jefferies &
Company
Co-Managers
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Stephens
Inc. |
Baird |
William Blair & Company |
Prospectus
dated ,
2010
Table of
Contents
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139
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F-1
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EX-23.1 |
You should rely only on the information contained in this
prospectus and any free writing prospectus made available by us.
We have not, and the underwriters have not, authorized anyone to
provide you with different information. If anyone provides you
with different or inconsistent information, you should not rely
on it. We are not, and the underwriters are not, making an offer
to sell these securities in any jurisdiction where an offer or
sale is not permitted. You should assume that the information
appearing in this prospectus is accurate as of the date on the
front cover of this prospectus. Our business, financial
condition, results of operations, and prospects may have changed
since that date.
Through and
including ,
2010 (the
25th
day after the date of this prospectus), all dealers that
effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
i
(THIS
PAGE INTENTIONALLY LEFT BLANK)
ii
Prospectus
Summary
This summary highlights information contained elsewhere in
this prospectus. Because this section is only a summary, it does
not contain all of the information that may be important to you
or that you should consider before making an investment
decision. You should read the entire prospectus carefully,
including the historical and pro forma financial statements and
the notes to those financial statements. You should read
Risk Factors beginning on page 9 for more
information about important risks that you should consider
before investing in our common stock. In this prospectus, unless
the context otherwise requires, the terms we,
us, our and RBM refer to
Rules-Based Medicine, Inc. and its subsidiaries.
Our
Business
We are a life sciences company focused on the development and
commercialization of molecular diagnostic tests based on novel
biomarker patterns, initially for the psychiatric market. We
believe these patterns can provide quantitative, objective
information to aid in the diagnosis and treatment of diseases or
disorders where current objective tests either do not exist or
are not sufficiently accurate. We develop molecular diagnostic
tests using our proprietary multi-analyte profiling, or MAP,
technology that quantifies biomarkers, such as proteins and
hormones in biological fluids. Our technology enables us to
efficiently screen large sets of well-characterized clinical
samples from both diseased and non-diseased populations against
our extensive menu of biomarker tests. Analyzing the data
generated from these tests, we attempt to discover biomarker
patterns that indicate a particular disease or disorder with a
high degree of accuracy. We then create and validate diagnostic
test panels that allow us to analyze a patient sample and
deliver a result that can aid the physician in making diagnostic
and treatment decisions. We are commercializing our initial
molecular diagnostic test panels as Laboratory Developed Tests,
or LDTs, using our high-complexity laboratory located in Austin,
Texas, which is certified under the Clinical Laboratory
Improvement Amendments of 1988, or CLIA.
Our initial molecular diagnostic test panel, our
VeriPsychtm
test, is a blood-based test that evaluates a proprietary set of
51-biomarker
tests. These biomarkers are associated with various biochemical
pathways, including inflammation, metabolism and cell-to-cell
signaling. Many of these pathways, as well as most of the
individual biomarkers that our panel measures, have been
associated with mental illness in hundreds of peer-reviewed
publications. Based on our clinical studies, we believe our
VeriPsych test will aid psychiatrists in the diagnosis of
recent-onset schizophrenia, bipolar disorder and major
depressive disorder. According to the National Institute of
Mental Health, approximately 22.9 million patients in the
United States exhibit symptoms consistent with these disorders.
These disorders are often chronic and progressive, and are
expensive to the healthcare system and society in general.
Diagnosis is currently based on the patients self-reported
experiences and observed behavior. The clinical similarity in
experiences and behaviors among these patients creates a
formidable diagnostic challenge that frequently leads to
misdiagnosis and potentially years of inappropriate and
ineffective treatment. Our studies suggest that these disorders
have distinct biochemical patterns that can be objectively
measured by blood-based diagnostic tests.
We conducted a three-site clinical validation study with over
1,200 well-characterized samples from patients with various
mental illnesses, including 593 samples from confirmed
schizophrenics and 245 samples from normal controls. Our
VeriPsych test differentiated patients with recent-onset
schizophrenia from normal controls with a sensitivity of 84%,
specificity of 85% and an Area Under the Receiver Operator
Curve, or AUROC, of 0.89. Sensitivity is the likelihood that a
person who is schizophrenic will be identified by our VeriPsych
test as schizophrenic. Specificity is the likelihood that a
person who is not schizophrenic will be identified by our
VeriPsych test as not schizophrenic. AUROC is a measure of total
diagnostic accuracy on a scale of 0.0 to 1.0, with 1.0 being the
most accurate. Based on these results we believe our VeriPsych
test can be a valuable tool for psychiatrists seeking an
objective test to aid in the initial diagnosis of recent-onset
schizophrenia.
In March 2010, we began making our VeriPsych test as an aid in
the diagnosis of recent-onset schizophrenia available for order.
We focused our initial marketing efforts on several leading
academic psychiatry centers including the Laureate Psychiatric
Clinic and Hospital in Tulsa, Oklahoma, the Department of
Psychiatry at the University of Minnesota in Minneapolis,
Minnesota, and at the Department of Psychiatry and Behavioral
Science
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at the KU School of Medicine-Witchita in Witchita, Kansas. We
have also begun marketing our VeriPsych test to selected
psychiatric group practices including the Austin
Neuropsychiatric Clinic, Carolina Partners in Mental Health and
the Johns Hopkins Mood Disorders Center. We plan a broader
launch of our VeriPsych test for this use in the second half of
2010.
Clinical laboratory services have historically not been subject
to Food and Drug Administration, or FDA, regulation. LDTs are
clinical laboratory tests that are developed and validated by a
laboratory for use in examinations the laboratory performs
itself. Most LDTs currently are not subject to premarket review
by the FDA. We believe that our VeriPsych test is a type of LDT
for which premarket review by the FDA is not currently required.
The FDA is in the process of reassessing the regulatory status
of LDTs generally, especially ones using multiple markers to
calculate single scores, and is considering regulating such
tests as medical devices, including requiring premarket review.
The FDA may also seek to actively regulate a test offered by a
laboratory and require premarket review and clearance or
approval if the FDA concludes that the test was not developed by
that laboratory. For more information about potential FDA
regulation of LDTs, see Risk Factors Risks
Related to Regulatory Matters Finalization of the
FDA draft guidance concerning IVDMIAs or the determination that
our VeriPsych test is not a laboratory-developed test could lead
to increase costs and delays in introducing our molecular
diagnostic tests and Business Regulatory
Compliance.
During development and validation of our initial schizophrenia
indication, our VeriPsych test also differentiated between
patients with schizophrenia, patients with bipolar disorder and
patients with major depressive disorder, based on a limited
number of samples. We are currently conducting clinical studies
on the expanded populations of bipolar disorder and major
depressive disorder patients that we expect will be sufficient
to validate a differential diagnosis indication for our
VeriPsych test. Because of the challenge in diagnosing patients
with these three conditions, this test may significantly
increase our VeriPsych tests utility for a broader group
of patients. We expect results to be available for bipolar
disorder and major depressive disorder in the second half of
2010 and, if the results are compelling, we intend to begin
marketing our test for the differential diagnosis indication in
early 2011. As we continue to collect additional patient
samples, we intend to further validate and commercialize our
VeriPsych test for additional indications that will expand the
utility and market for our test.
We also have several development-stage programs that, if
successful, could have significant commercial potential
targeting diseases and disorders where there are limited
diagnostic testing options currently available. We are
developing two tests using a subset of the biomarkers in our
VeriPsych test that, based on two clinical studies, we believe
may be useful to primary care physicians, military healthcare
professionals and other non-psychiatrists as a first-line tool
for the early identification of patients in need of psychiatric
care. In addition, we, through Psynova Neurotech Ltd., or
Psynova, our majority-owned subsidiary are collaborating with F.
Hoffman-La Roche Ltd., or Roche, to develop a companion
diagnostic test to be used in tandem with a Roche drug, which is
in clinical development. Finally, we are also collaborating to
develop diagnostic tests in several other areas including
cancer, infectious disease, kidney disease and neurodegenerative
disease.
In addition to developing molecular diagnostic tests, we provide
testing products and services to the pharmaceutical,
biotechnology and medical research industries based on our menu
of validated biomarker immunoassays. An immunoassay is a
biochemical test that measures the concentration of a substance
in a biological liquid using the reaction of an antibody or
antibodies to its antigen, or a molecule that binds to its
antibody. We believe that we are the largest biomarker testing
laboratory specializing in delivering quantitative data from
multiplexed immunoassays on humans and rodents. A multiplex
immunoassay, or multiplexing, is a type of laboratory procedure
that simultaneously measures multiple biomarkers in a single
immunoassay. We believe our proprietary MAP technology makes the
drug discovery and development process more efficient by
providing researchers with more information on the effect of a
particular drug on specific biomarkers. Our molecular diagnostic
tests leverage the logistical infrastructure and technology used
for the last eight years in our pharmaceutical testing products
and services.
Our
Solution
We have developed over 400 distinct immunoassays that we
configure into panels for use in diagnostic and research
applications. Using a microsphere, or bead, -based multiplexing
technology combined with laboratory
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robotics, we are able to rapidly conduct simultaneous
quantitative analysis of a large number of biomarkers from a
small sample of serum, plasma or other bodily fluids.
Statistical analysis identifies the most relevant biomarkers in
clinical samples from patients known to have a given disease or
disorder. For our pharmaceutical testing products and services
customers, these panels provide a comprehensive and
cost-effective evaluation of the biomarker patterns critical to
applications such as drug safety and efficacy, disease
diagnosis, disease modeling and patient stratification as well
as personal health assessments. Where we believe there may be
attractive clinical applications, we then create and validate
diagnostic immunoassay panels based on these biomarker patterns
that allow us to analyze a patient sample and deliver a result
that can aid the physician in making diagnostic and treatment
decisions.
We have applied our proprietary MAP technology to discover
unique biomarker patterns characteristic of several diseases and
disorders, initially for the psychiatric market, for which
blood-based diagnostic tests are currently unavailable or
inadequate. We believe these patterns provide clinically
relevant information for the diagnosis of these diseases and
disorders. Our VeriPsych test represents our first commercial
diagnostic test panel resulting from this approach with an
initial indication for recent-onset schizophrenia.
We believe the ability to identify and accurately measure, in an
efficient, cost-effective way, the concentrations of specific
biomarkers and, more importantly, biomarker patterns that
correlate to diseases or medical conditions, will become
increasingly important in both medicine and pharmaceutical
research and development. According to published reports, the
global molecular diagnostics market will be $3.7 billion in
2010 and will grow to $6.4 billion by 2015.
Advantages of Our
Solution
We believe our proprietary MAP technology offers several
important advantages over existing biomarker discovery and
diagnostic methods for complex, multi-factorial diseases,
including:
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An extensive menu of immunoassays. We believe we have the
most extensive menu of validated multiplexed biomarker
immunoassays in the industry, enabling us to cast a wide net in
the search for clinically relevant biomarker patterns.
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Greater diagnostic accuracy. We believe we can measure
more biomarkers than any other immunoassay platform using a
comparable sample volume, resulting in molecular diagnostic
tests with high sensitivity and specificity.
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Precise, reproducible data. Our solution is highly
standardized, combining the precision of Luminex technology and
liquid handling robots. This technology was developed by Luminex
Corporation, or Luminex, a developer, manufacturer and marketer
of innovative biological testing technologies to clinical
researchers. Together with other proprietary immunoassay
processes, we are able to deliver data with a high degree of
precision and reproducibility.
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Cost-effective results. By rapidly analyzing a large
number of biomarkers in a small sample volume, we are able to
efficiently and cost-effectively deliver results that would
otherwise require a large sample volume, multiple test and
ultimately higher costs and greater complexity using less
sensitive or less precise techniques.
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Our
Strategy
Our strategy is to become a leader in the development and
commercialization of molecular diagnostic tests based on novel
biomarker patterns discovered using our proprietary MAP
technology. To achieve this strategy, we plan to:
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successfully commercialize our VeriPsych test as an aid in the
diagnosis of recent-onset schizophrenia;
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validate and commercialize additional indications for our
VeriPsych test;
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continue to expand our molecular diagnostic offerings in the
psychiatric market;
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advance and expand our pipeline of molecular diagnostic tests
across multiple attractive indications by leveraging our
pharmaceutical testing products and services; and
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expand our existing pharmaceutical testing products and services.
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3
Risk
Factors
Our business and our ability to execute our business strategy
are subject to numerous risks that could have a material adverse
effect on our business, financial condition and results of
operations. You should carefully consider the following risk
factors, as well as the other information in this prospectus,
before deciding whether to invest in shares of our common stock.
In particular, you should consider the following risks, which
are discussed more fully in Risk Factors beginning
on page 9.
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Our VeriPsych test is the first blood-based test to aid in the
diagnosis of mental illness, including schizophrenia, and may
not achieve any market acceptance by the psychiatric community,
patients or payors.
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The successful launch of our VeriPsych test depends on our
ability to leverage the credibility of well-respected
psychiatric centers and thought-leaders in the psychiatric
community to promote adoption and expanded use of our VeriPsych
test as an aid in the diagnosis and treatment of mental illness.
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We have limited experience in marketing, selling and providing
customer support for our VeriPsych test and may be unable to
successfully market, sell or support it.
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If payors do not reimburse us or our customers for the use of
our VeriPsych test or other molecular diagnostic tests that may
be developed in the future, our financial condition and results
of operations will be materially adversely affected.
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The loss of the licenses granted under a framework agreement
between Psynova, our 77.6%-owned subsidiary, and Cambridge with
respect to two patent applications directed to the biomarker
panel being commercialized in our VeriPsych test could
materially adversely affect our ability to commercialize our
VeriPsych test. Additionally, any failure of Psynova to exercise
its rights under the framework agreement could result in our
being unable to use future Cambridge intellectual property.
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We sublicense the intellectual property related to our VeriPsych
test from Psynova. Any disruption in our rights to such
intellectual property could materially adversely affect our
ability to commercialize our VeriPsych test for schizophrenia
and to develop and validate our VeriPsych test for additional
indications.
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We rely on third-party license agreements for patents or
applications and additional technology related to our products
and services, and the termination of these agreements could
delay or prevent us from being able to commercialize our
products and services.
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Our VeriPsych test is not protected by any issued patents.
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If we are unable to obtain, maintain and enforce intellectual
property protection covering our products, others may be able to
make, use or sell our products, which could have a material
adverse effect on our business.
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Substantially all of our pharmaceutical testing services are
performed, and all of our molecular diagnostic tests will be
performed, at a single laboratory, and if this facility is
affected by man-made or natural disasters, our business could be
materially adversely affected.
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The loss or suspension of a license, especially our CLIA
license, or the imposition of a fine or penalties under, or
future changes in, federal or state laws and regulations could
have a material adverse effect on our business.
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Finalization of the FDA draft guidance concerning
in vitro diagnostic multivariate index assays, or
IVDMIA, or the determination that our VeriPsych test is not a
laboratory-developed test could lead to increased costs and
delays in introducing our molecular diagnostic tests.
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We are highly dependent on Luminex for our multiplexed testing
services platform, and the loss of access to such technology
could materially adversely affect our revenues and results of
operations.
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As we commercialize our VeriPsych test, we expect that we will
incur operating losses.
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We may require additional funding, and our future access to
capital is uncertain. Insufficient funds may limit our ability
to develop and commercialize new products, services and
technologies.
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4
Corporate
Information
We were incorporated in Delaware in August 2002. Our principal
executive offices are located at 3300 Duval Road, Austin,
Texas 78759, and our telephone number is
(512) 835-8026.
Our website address is
http://www.rulesbasedmedicine.com.
The information in, or accessible through, our website is not
part of this prospectus.
Trademarks and
Trade Names
We own or have rights to use certain trademarks or trade names
in conjunction with the operation of our business, including
DiscoveryMAPtm,
HumanMAP®,
RodentMAP®,
TruCulturetm,
MetabolicMAPtm,
KidneyMAPtm,
InflammationMAPtm,
NeuroMAPtm,
Rules-Based
Medicine®,
CardiovascularMAPtm,
CytokineMAPtm
and
VeriPsychtm.
5
The
Offering
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Common stock offered by us |
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shares
(or shares,
if the underwriters exercise their option to purchase additional
shares in full). |
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Common stock to be outstanding after this offering |
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shares
(or shares,
if the underwriters exercise their option to purchase additional
shares in full). |
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Use of proceeds |
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We intend to use the net proceeds of approximately
$ million from this offering,
based on an assumed initial offering price of
$ per
share, which is the midpoint of the price range set forth on the
cover of this prospectus, and after deducting estimated
underwriting discounts and commissions and estimated offering
expenses payable by us, to pay accrued dividends of
approximately $ million
relating to our outstanding
Series A-1
preferred stock, to repay all amounts outstanding under our
revolving line of credit and our subordinated debt, and for
working capital and other general corporate purposes. See
Use of Proceeds. |
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Risk factors |
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Investing in our common stock involves a high degree of risk.
You should carefully read and consider the information set forth
under the heading Risk Factors and all other
information set forth in this prospectus before deciding to
invest in our common stock. |
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Nasdaq Global Market listing |
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We have applied to list our common stock on the Nasdaq Global
Market under the symbol RULE. |
The number of shares of common stock shown to be outstanding
after this offering is based on the number of shares of common
stock outstanding as of March 31, 2010. This number does
not include:
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200,000 shares of common stock issuable upon the exercise
of outstanding warrants at an exercise price of $9.00 per share;
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796,950 shares of common stock issuable upon the exercise
of outstanding options at a weighted average exercise price of
$4.17 per share;
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23,799 shares of common stock reserved for future issuance
under our 2007 Long Term Incentive Plan;
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2,200,000 shares reserved for issuance under our 2010 Long
Term Incentive Plan; and
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any shares of common stock issued in connection with our
acquisition of the remaining 22.4% interest in Psynova. See
Certain Relationships and Related Party
TransactionsAcquisition of Shares of Psynova Neurotech
Ltd.
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Except as otherwise indicated, all information in this
prospectus assumes:
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that our shares of common stock will be sold at
$ per
share, which is the midpoint of the price range set forth on the
cover of this prospectus;
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no exercise by the underwriters of their option to purchase up
to additional
shares from us;
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the filing of our amended and restated certificate of
incorporation and adoption of our amended and restated bylaws
upon completion of this offering;
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the conversion of all outstanding shares of our
Series A-1
preferred stock
into shares
of common stock upon the completion of this offering; and
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no outstanding options or warrants having been exercised since
March 31, 2010.
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6
Summary
Consolidated Historical Financial Data and
Pro Forma Financial Data
The following summary historical financial data should be read
in conjunction with, and is qualified by reference to, the
section entitled Managements Discussion and Analysis
of Financial Condition and Results of Operations and the
consolidated financial statements and the related notes included
elsewhere in this prospectus. The following summary unaudited
pro forma financial data should be read in conjunction with, and
is qualified by reference to, the section entitled
Unaudited Pro Forma Financial Data included
elsewhere in this prospectus. We prepared the unaudited
consolidated financial statements on a basis consistent with
that used in preparing our audited consolidated financial
statements, and they include all adjustments consisting of
normal and recurring items that, in the opinion of management,
are necessary for a fair presentation of the financial position
and results of operations for the unaudited periods.
In September 2009, we acquired a controlling interest in Psynova
for $5.5 million in cash. Our pro forma consolidated
statement of operations for the year ended December 31,
2009 include the results of operations of Psynova after giving
effect to certain purchase accounting adjustments. The summary
unaudited pro forma financial data has been presented to give
effect to the acquisition of Psynova as if it had been completed
on January 1, 2009. The pro forma year ended
December 31, 2009 is not necessarily indicative of
operating results which would have been achieved had the
acquisition of Psynova been completed on January 1, 2009
and should not be construed as representative of future
operating results. Our pro forma consolidated statement of
operations for the three months ended March 31, 2010 give
effect to the pending transaction to purchase the remaining
interest in Psynova as described in Certain Relationships
and Related Party
Transactions Acquisition of Shares of
Psynova Neurotech Ltd. as if it had occurred on
January 1, 2010. The pro forma three months ended
March 31, 2010 is not necessarily indicative of the pending
transaction had it happened on January 1, 2010 and is
subject to adjustment upon completion of the transaction.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009(1)
|
|
|
2009
|
|
|
2010
|
|
|
2010(2)
|
|
|
|
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pharmaceutical testing products and services revenues
|
|
$
|
13,037
|
|
|
$
|
21,669
|
|
|
$
|
24,641
|
|
|
$
|
23,473
|
|
|
$
|
5,830
|
|
|
$
|
5,616
|
|
|
$
|
5,616
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
4,868
|
|
|
|
8,590
|
|
|
|
9,985
|
|
|
|
9,985
|
|
|
|
2,457
|
|
|
|
2,383
|
|
|
|
2,383
|
|
Research and development
|
|
|
1,544
|
|
|
|
3,235
|
|
|
|
4,803
|
|
|
|
5,494
|
|
|
|
896
|
|
|
|
1,372
|
|
|
|
1,372
|
|
Sales and marketing
|
|
|
2,575
|
|
|
|
4,368
|
|
|
|
5,252
|
|
|
|
5,252
|
|
|
|
1,228
|
|
|
|
1,727
|
|
|
|
1,727
|
|
General and administrative
|
|
|
1,676
|
|
|
|
2,520
|
|
|
|
2,867
|
|
|
|
3,033
|
|
|
|
770
|
|
|
|
1,212
|
|
|
|
1,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
10,663
|
|
|
|
18,713
|
|
|
|
22,907
|
|
|
|
23,764
|
|
|
|
5,351
|
|
|
|
6,694
|
|
|
|
6,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
2,374
|
|
|
|
2,956
|
|
|
|
1,734
|
|
|
|
(291
|
)
|
|
|
479
|
|
|
|
(1,078
|
)
|
|
|
(1,078
|
)
|
Gain on re-measurement of Psynova
|
|
|
|
|
|
|
|
|
|
|
1,947
|
|
|
|
950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in loss of Psynova
|
|
|
|
|
|
|
|
|
|
|
(997
|
)
|
|
|
|
|
|
|
(263
|
)
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
|
51
|
|
|
|
138
|
|
|
|
(296
|
)
|
|
|
(754
|
)
|
|
|
(51
|
)
|
|
|
(354
|
)
|
|
|
(410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
2,425
|
|
|
|
3,094
|
|
|
|
2,388
|
|
|
|
(95
|
)
|
|
|
165
|
|
|
|
(1,432
|
)
|
|
|
(1,488
|
)
|
Provision (benefit) for income taxes
|
|
|
433
|
|
|
|
1,218
|
|
|
|
708
|
|
|
|
23
|
|
|
|
45
|
|
|
|
(357
|
)
|
|
|
(376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,992
|
|
|
$
|
1,876
|
|
|
$
|
1,680
|
|
|
$
|
(118
|
)
|
|
$
|
120
|
|
|
$
|
(1,075
|
)
|
|
|
(1,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less net loss attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
(488
|
)
|
|
|
|
|
|
|
(168
|
)
|
|
|
|
|
Net income (loss) attributable to RBM
|
|
$
|
1,992
|
|
|
$
|
1,876
|
|
|
$
|
1,701
|
|
|
$
|
370
|
|
|
$
|
120
|
|
|
$
|
(907
|
)
|
|
$
|
(1,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to preferred stockholders
|
|
|
598
|
|
|
|
1,441
|
|
|
|
1,528
|
|
|
|
1,528
|
|
|
|
376
|
|
|
|
399
|
|
|
|
399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to RBM common stockholders
|
|
$
|
1,394
|
|
|
$
|
435
|
|
|
$
|
173
|
|
|
$
|
(1,158
|
)
|
|
$
|
(256
|
)
|
|
$
|
(1,306
|
)
|
|
$
|
(1,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.16
|
|
|
$
|
0.05
|
|
|
$
|
0.02
|
|
|
$
|
(0.14
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
8,814,989
|
|
|
|
8,326,512
|
|
|
|
8,446,838
|
|
|
|
8,446,838
|
|
|
|
8,446,838
|
|
|
|
8,446,838
|
|
|
|
8,757,920
|
|
|
7
|
|
|
(1)
|
|
On a pro forma basis to give effect
to the acquisition of Psynova as if it had been completed on
January 1, 2009, as more fully described in Unaudited
Pro Forma Financial Data.
|
|
|
|
(2)
|
|
On a pro forma basis to give effect
to the pending transaction to purchase the remaining interest in
Psynova as if it had been completed on January 1, 2010, as
more fully described in Unaudited Pro Forma Financial
Data.
|
The following table presents a summary of our balance sheet as
of March 31, 2010 on (i) an actual basis; (ii) a
pro forma basis to give effect to the automatic conversion of
all of the outstanding shares of our Series A-1 preferred
stock into an aggregate
of shares
of our common stock immediately prior to the closing of this
offering; and (iii) a pro forma as adjusted basis to give
further effect to the sale
of shares
of common stock at an assumed initial public offering price of
$
per share, which is the midpoint of the price range listed on
the cover of this prospectus, after deducting the estimated
underwriting discounts and commissions and estimated offering
expenses payable by us.
The pro forma and pro forma as adjusted information below, which
also gives effect to the filing of our amended and restated
articles of incorporation, is illustrative only, and our
capitalization following the completion of this offering will be
adjusted based on the actual initial public offering price and
other terms of this offering determined at pricing. You should
read this table together with the sections entitled
Capitalization, Unaudited Pro Forma Financial
Data, Selected Consolidated Historical Financial
Data, Managements Discussion and Analysis of
Financial Condition and Results of Operations and our
consolidated financial statements and the related notes included
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
as Adjusted
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
5,045
|
|
|
|
5,045
|
|
|
|
|
|
Working capital
|
|
|
10,533
|
|
|
|
10,533
|
|
|
|
|
|
Total assets
|
|
|
51,345
|
|
|
|
51,345
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
13,642
|
|
|
|
13,642
|
|
|
|
|
|
Total liabilities
|
|
|
27,682
|
|
|
|
27,682
|
|
|
|
|
|
Series A-1
preferred stock
|
|
|
26,167
|
|
|
|
|
|
|
|
|
|
Total RBM stockholders equity (deficit)
|
|
|
(4,629
|
)
|
|
|
21,538
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Each $1.00 increase or decrease in
the assumed public offering price of
$ per
share, which is the midpoint of the price range listed on the
cover of this prospectus, would increase or decrease the net
proceeds to us from this offering by approximately
$ million, or approximately
$ million if the underwriters
exercise their option to purchase additional shares of our
common stock, in each case assuming the number of shares of our
common stock offered by us, as set forth on the cover of this
prospectus, remains the same and after deducting the estimated
underwriting discounts and commissions and estimated offering
expenses payable by us.
|
The table above does not include as of March 31, 2010:
|
|
|
|
|
200,000 shares of common stock issuable upon the exercise
of outstanding warrants at an exercise price of $9.00 per share;
|
|
|
|
796,950 shares of common stock issuable upon the exercise
of outstanding options at a weighted average exercise price of
$4.17 per share;
|
|
|
|
23,799 shares of common stock reserved for future issuance
under our 2007 Long Term Incentive Plan;
|
|
|
|
2,200,000 shares of common stock reserved for future
issuance under our 2010 Long Term Incentive Plan; and
|
|
|
|
any shares of common stock issued in connection with our
acquisition of the remaining 22.4% interest in Psynova. See
Certain Relationships and Related Party
TransactionsAcquisition of Shares of Psynova Neurotech
Ltd.
|
8
Risk
Factors
Investing in our common stock involves a high degree of risk.
You should carefully consider the following risk factors, as
well as the other information in this prospectus, before
deciding whether to invest in shares of our common stock. The
occurrence of any of the following risks could harm our
business, financial condition, results of operations or growth
prospects. In that case, the trading price of our common stock
could decline and you may lose all or part of your
investment.
Risks Related to
Our Business
Our
VeriPsych test is the first blood-based test to aid in the
diagnosis of mental illness, including schizophrenia, and we
cannot assure you that the product will achieve any market
acceptance by the psychiatric community, patients or
payors.
There is currently no established market for blood-based
psychiatric diagnostic testing products and services.
Psychiatric protocols, including those in the Diagnostic and
Statistical Manual of Mental Disorders,
4th
Edition, a guide to psychiatric diagnosis published by the
American Psychiatric Association, or DSM IV, have not
contemplated the use of blood-based testing to aid in the
diagnosis of psychiatric disorders. Psychiatrists may be
hesitant to accept that the diagnosis of mental illness can be
aided by a blood-based test. Further, many psychiatrists may be
hesitant to employ blood-based tests in their practice to assist
in the positive diagnosis of mental illness. We will need to
make significant investments to educate the psychiatric
community not only about the benefits of our VeriPsych test, but
also about how to properly use the test, interpret its results
and incorporate the results into the diagnosis of mental
illness. Given that our VeriPsych test represents a potentially
significant shift in the diagnosis of mental illness, the
circulation of any negative reports or dissatisfaction regarding
the test in the medical community could have a material adverse
effect on psychiatrist and patient acceptance of our VeriPsych
test as well as of our future molecular diagnostic tests.
Psychiatrists, patients and payors also may be highly sensitive
to reimbursement rates for our VeriPsych test as well as related
billing and collection matters. Potential patients may not have
health insurance or may not have health insurance with benefits
sufficient to pay for our VeriPsych test.
We have developed our VeriPsych test as an LDT, for which FDA
approval is not currently required if conducted in our
CLIA-certified laboratory. Despite the fact that FDA approval is
not currently required, physicians may view the lack of FDA
approval as a negative factor in deciding whether to use this
test.
The
successful launch of our VeriPsych test depends on our ability
to leverage the credibility of major psychiatric centers and
thought-leaders in the psychiatric community to promote adoption
and expanded use of our VeriPsych test as an aid in the
diagnosis and treatment of mental illness.
Because our VeriPsych test is a novel diagnostic tool, our sales
and marketing plan for the product may not be successful. In
March 2010, we began making our VeriPsych test as an aid in
the diagnosis of recent-onset schizophrenia available for order.
We focused our initial marketing efforts on several leading
academic psychiatric centers and have subsequently begun
marketing our VeriPsych test to selected psychiatric group
practices. We intend to use our early experience with these
psychiatric centers and group practices to refine the process by
which psychiatrists order and use the results of our VeriPsych
test, and the manner in which the results of the tests are
reported. We expect that this limited initial launch will assist
in the broader launch of our VeriPsych test in the second half
of 2010. We cannot assure you that psychiatrists at these
centers and group practices will use and interpret our VeriPsych
test correctly or be satisfied with the results that our
VeriPsych test provides to aid in the diagnosis of recent-onset
schizophrenia. If these psychiatrists are not satisfied with our
VeriPsych test, we may not be able to successfully launch the
product to the broader psychiatric community, which could
materially adversely affect our business, financial condition
and results of operations.
The successful launch of our VeriPsych test will also depend on
our ability to convince mental health advocacy groups as well as
thought-leaders in the psychiatric community of the benefits and
uses of our VeriPsych test. We cannot assure you that we will
effectively convince these advocacy groups and thought-leaders
of such benefits and uses or that we will obtain their support.
Further, we will not be able to control the message that these
mental health advocacy groups and thought-leaders communicate
about our VeriPsych test. Any dissatisfaction, or failure
9
to effectively communicate satisfaction, with our VeriPsych test
by such advocacy groups and thought-leaders could materially
adversely affect the broader launch of the product and could
materially adversely affect our business, financial condition
and results of operations.
We intend to obtain public validation of our VeriPsych test
through articles in peer-reviewed journals. We cannot assure you
that data about our VeriPsych test will ever be published, will
be favorable, or that such peer-reviewed journal publications
will be convincing to psychiatrists. Some psychiatrists may
require the validation of our VeriPsych test in one or more
peer-reviewed journal publications before ordering the test. If
we fail to obtain such peer-reviewed journal publications, our
VeriPsych test might not be broadly adopted.
Moreover, the American Medical Association, or AMA, generally
requires several validating peer-reviewed articles before
considering a new Current Procedural Terminology, or CPT, code
for a new laboratory test. If we seek a CPT code for our test
but fail to obtain one because of the lack of peer-reviewed
articles, reimbursement for the test would be more difficult.
We have
limited experience in marketing, selling and providing customer
support for, our VeriPsych test and may be unable to
successfully market, sell or support it.
We have limited marketing, sales and customer support experience
with respect to our molecular diagnostic tests and services. As
of April 19, 2010, our molecular diagnostic sales and
marketing team consisted of three employees. We expect to grow
this sales and marketing force to 10 employees by the
second half of 2010 in connection with the broader commercial
launch of our VeriPsych test. Our ability to achieve
profitability from our molecular diagnostic tests depends on
attracting customers and educating them about the benefits of
our tests. To successfully perform sales, marketing and customer
support functions, we must:
|
|
|
|
|
attract and retain the skilled sales force, marketing staff and
support team necessary to commercialize and gain market
acceptance;
|
|
|
|
identify and penetrate the potential customer base; and
|
|
|
|
educate customers in how to use our molecular diagnostic tests.
|
We may utilize outside marketing consultants, as we have done
with our pharmaceutical testing products and services, to assist
in marketing our molecular diagnostic tests. In addition, we
expect to engage third parties to help us market and sell any
molecular diagnostic indications targeting primary care
physicians. If our sales and marketing efforts, or those of any
third-party that we retain, are not successful, our molecular
diagnostic tests may not gain market acceptance, which would
have a material adverse effect on our business, financial
condition and results of operations.
We intend
to rely on third-party billing for our molecular diagnostic
tests. We cannot guarantee that these third parties will bill
accurately and timely enough or submit applications on our
behalf with enough insurers to allow us to maximize
profits.
We have engaged a third party to handle billing and collection
matters relating to our molecular diagnostic tests. Billing for
diagnostic tests can be extremely complicated. Depending on the
billing arrangement and applicable law, we must bill various
payors, such as insurance companies, Medicare, Medicaid,
physicians, hospitals, employer groups, community entities or
foundations, managed care programs and patients, all of which
have different billing requirements. We have limited experience
in billing and collecting from healthcare payors, and so we will
be entirely dependent on the skills and actions of this billing
agent. We cannot assure you that our third-party biller will
bill and collect for our molecular diagnostic tests in a timely
and accurate manner or be successful in implementing strategies
to collect fees from third-party payors. Delays and other
billing and collection problems may require us to take
significant write-offs. Any failure by this third-party biller
to bill and collect in a timely and accurate manner or to submit
applications on our behalf with insurance providers or any
change to a different third-party biller, which could cause
delays in billing, could have a material adverse effect on our
financial condition and results of operations and could expose
us to potential liability.
We may decide in the future to conduct our own billing and
collecting. We have no experience in billing and collecting for
our molecular diagnostic tests. Accordingly, we would need to
build an internal billing and collection
10
infrastructure, which could be a lengthy and expensive process.
We cannot assure you that we would be able to bill and collect
for our molecular diagnostic tests in a timely and accurate
manner.
If payors
do not reimburse us or our customers adequately or at all for
the use of our VeriPsych test or other molecular diagnostic
tests that may be developed in the future, our financial
condition and results of operations will be materially adversely
affected.
We and substantially all of our potential customers depend on
third-party reimbursement for healthcare services. Reimbursement
is provided by payors such as Medicare, Medicaid, private
insurance plans, hospitals, employer groups, community entities
or foundations and managed care programs. Payors may deny
reimbursement if they determine that our molecular diagnostic
tests are not clinically effective or appropriate, were not used
in accordance with cost-effective treatment methods as
determined by the payor, or were used for an unapproved
indication. As sales of our VeriPsych test increase, payors may
be increasingly likely to make any of these determinations,
which could affect reimbursement rates or whether we or our
customers are reimbursed at all. Our VeriPsych test is a novel
molecular diagnostic test and, to our knowledge, no other
blood-based test exists to aid in the diagnosis of mental
illness. Therefore, payors may determine that our VeriPsych test
is experimental and refuse to reimburse us or our customers for
its use. Because each payor individually approves each claim for
payment or reimbursement, obtaining these approvals can be a
time-consuming and costly process. Claims for our VeriPsych test
cannot currently be processed using the payors automated
claims processing systems, so claims for our test will need to
be submitted manually and examined individually. In addition,
with each claim we will need to submit clinical support
documentation for the medical necessity of certain of the assays
included in the test panel. Submitting claims for our VeriPsych
test manually will add to our costs and will likely result in
greater payor scrutiny, initial rejections and delays in claims
approval and payment. We expect that we will need to work with
payors individually to establish the necessary documentation
required for claims processing and payment. It may be difficult
or impossible for us to achieve an automated claims processing
routine. Moreover, this individualized process or any action by
the government negatively affecting payment for or reimbursement
of our molecular diagnostic tests can delay the market
acceptance of new molecular diagnostic tests and may have a
material adverse effect on our business, financial condition and
results of operations.
In the United States, the AMA assigns specific CPT codes, which
are a medical nomenclature used to report medical procedures and
services under public and private health insurance plans. Once a
CPT code is established, the Centers for Medicare and Medicaid
Services, or CMS, establishes reimbursement payment levels and
coverage rules under Medicaid and Medicare, and private payors
establish rates and coverage rules independently. We cannot
guarantee that our VeriPsych test will continue to be covered by
existing CPT codes or will be approved for reimbursement by
Medicare and Medicaid or private payors. Additionally, any or
all of our molecular diagnostic tests developed in the future
may not be approved for reimbursement.
If we are
forced to contract with payors to be an
in-network
provider, we may not achieve maximum revenues from our molecular
diagnostic tests, but if we remain an
out-of-network
provider, we may not be able to collect fully from payors and
patients.
Unless we enter into a contract with a payor, the payor will
consider us an
out-of-network
provider. At the outset of the commercialization of our
VeriPsych test, we do not intend to enter into contracts with
any payors and we may never do so. Use of an
out-of-network
provider typically results in greater coinsurance or co-payment
requirements for the patient. In addition, a higher coinsurance
or co-payment requirement could dissuade psychiatrists and their
patients from using our VeriPsych test.
While agreeing to contract with a payor can increase the
certainty of some payment, should we enter into a contract to
become an
in-network
provider for the molecular diagnostic tests we provide, the
resulting contract may contain pricing and other terms that are
materially less favorable to us than the terms under which we
expect to operate. As our revenues from a particular payor grow,
there is heightened risk that such payor will insist that we
enter into contractual arrangements with them that contain such
terms. If we refuse to enter into a contract with such a payor,
they may refuse to cover and reimburse for our products at all,
which may lead to a decrease in case volume and a corresponding
decrease in our revenues and earnings.
11
Healthcare
reform legislation could adversely affect our financial
condition and results of operations.
There are a number of initiatives on the federal and state
levels for comprehensive reforms affecting the payment for, the
availability of, and the reimbursement for healthcare services
in the United States. These initiatives range from proposals to
fundamentally change federal and state healthcare reimbursement
programs, including providing comprehensive healthcare coverage
to the public under government funded programs, to minor
modifications of existing programs. Government payors, such as
Medicare and Medicaid, as well as private payors, have increased
their efforts to control the cost, utilization and delivery of
healthcare services. Such cost containment measures and
healthcare reforms could adversely affect our ability to sell
our products and services and could adversely affect our
revenues. The ultimate content or timing of any future
healthcare reform legislation, and its impact on us, is
impossible to predict. If significant reforms are made to the
healthcare system in the United States, or in other
jurisdictions, those reforms may have an adverse effect on our
financial condition and results of operations.
The loss
of the licenses granted under a framework agreement between
Psynova, our 77.6%-owned subsidiary, and Cambridge with respect
to two patent applications directed to the biomarker panel being
commercialized in our VeriPsych test could materially adversely
affect our ability to commercialize our VeriPsych test.
Additionally, any failure of Psynova to exercise its rights
under the framework agreement could result in our being unable
to use future Cambridge intellectual property.
Cambridge Enterprise Limited, a company wholly owned by The
Chancellor, Masters and Scholars of the University of Cambridge,
which we collectively refer to as Cambridge, owns intellectual
property related to our VeriPsych test. Psynova, our 77.6%-owned
subsidiary, has certain rights to this intellectual property
from Cambridge pursuant to a framework agreement and related
licenses. From Psynova, we sublicense rights to the Cambridge
intellectual property for purposes of development and
commercialization of molecular diagnostic tests. For more
information on the framework agreement, please see
BusinessOur, Psynova and Cambridge Universitys
Relationship. Of the intellectual property licensed by
Psynova from Cambridge, two separate exclusive patent and
non-exclusive know-how license agreements provide rights to two
patent applications owned by Cambridge directed to the biomarker
panel being commercialized in our VeriPsych test. Psynova is
required to notify Cambridge of certain matters relating to the
commercialization of these two patent applications, and any
failure to so notify could allow Cambridge to claim that Psynova
breached its due diligence obligations under the license
agreements and to seek to terminate the agreements. If these
licenses are terminated, our ability to commercialize our
VeriPsych test could be materially adversely affected and we
could be required to develop a new and different biomarker
panel, which would require us to spend considerable time and
money to complete the necessary research, development,
validation and commercialization of such biomarker panel, which
efforts might be unsuccessful, and would be distracting to
management and key personnel.
Other intellectual property licensed from Cambridge may be
necessary to develop and commercialize future molecular
diagnostic tests that we may pursue, including additional
indications of our VeriPsych test. The framework agreement
between Psynova and Cambridge expires in March 2011. When the
framework agreement between Psynova and Cambridge expires,
Psynovas access, and therefore our access, to any future
unlicensed intellectual property from Cambridge will be
terminated. Psynova is not our wholly owned subsidiary and we do
not hold a majority position on their board of directors and
therefore we do not exercise complete control over Psynova. As a
result, we cannot guarantee that Psynova will be vigilant in
exercising its rights under the framework agreement to take an
option and exercise any option to license future intellectual
property from Cambridge. If Psynova fails to timely exercise its
rights to take or exercise an option in the future, we could
lose the ability to use future intellectual property developed
by Cambridge.
Additionally, the license agreements between Psynova and
Cambridge permit Cambridge to continue using any intellectual
property licensed to Psynova for academic purposes and to
publish information about the licensed intellectual property for
academic purposes. We cannot guarantee that, in the course of
any such use or publication, sensitive information about the
intellectual property that was used in the development of our
VeriPsych test or any future molecular diagnostic tests will not
be made public. Any public disclosure of sensitive information
could impair our ability to prevent competitors from developing
similar or superior products.
12
We
sublicense the intellectual property related to our VeriPsych
test from Psynova. Any disruption in our rights to such
intellectual property could materially adversely affect our
ability to commercialize our VeriPsych test and to develop and
validate our VeriPsych test for additional
indications.
We and Psynova are parties to a co-development and
commercialization agreement, under which we have exclusively
licensed from Psynova certain intellectual property including
two patent applications owned by Cambridge directed to the
biomarker panel being commercialized in our VeriPsych test, with
the right to commercialize such intellectual property in the
area of schizophrenia. If this co-development and
commercialization agreement is terminated due to our breach, all
of our rights, including our rights to the two patent
applications owned by Cambridge, would terminate. And this could
have a material adverse effect on our VeriPsych test. In that
event, we could be required to develop a new and different
biomarker panel, which would require us to spend considerable
time and money to complete the necessary research, development,
validation and commercialization of such biomarker panel, which
efforts might be unsuccessful, and in any event would be
distracting to management and key personnel. In addition, all of
our rights to any other intellectual property licensed from
Psynova, including Cambridge intellectual property sublicensed
to us, would also terminate, which could materially and
adversely affect our ability to develop and validate our
VeriPsych test for additional indications or develop and
validate future molecular diagnostic tests.
Under our co-development and commercialization agreement with
Psynova, we have a right of first refusal and last right of
negotiation to take licenses and commercialize products and
tests developed by Psynova in other psychiatric indications. We
have not entered into any definitive commercialization agreement
with respect to these products or tests, and such an agreement
may not be available to us on commercially reasonable terms, if
at all. If we do not enter into a commercialization agreement
with Psynova with respect to a future product or test, a third
party may be granted rights to and we could be precluded from
commercializing such product or test.
Our
ability to continue to develop molecular diagnostic tests is
dependent on access to patient samples provided by third
parties. Our failure to continue to have access to sufficient
numbers of samples may impact our ability to develop molecular
diagnostic testing products and services in the
future.
Our future growth in the development of new molecular diagnostic
tests, including additional indications for our VeriPsych test,
will depend, in part, on our ability to have access to patient
samples for specific indications. Historically, these patient
samples have been acquired from third parties or have been
provided by our pharmaceutical testing services customers and
our molecular diagnostic collaborators. We may lose access to
patient samples provided to us by our customers, or have that
access limited, because customers decrease the number of, or
contractually limit our use of, patient samples they provide, or
due to changes in privacy laws governing the use and disclosure
of medical information. In addition, we may be forced to
actively pursue patient samples from sources other than our
existing customers and collaborators for diagnostic testing
indications we pursue, which could be expensive and time
consuming. If we fail to secure and maintain a supply of patient
samples for any of the above reasons, our development of
molecular diagnostic tests may be slowed or halted, which could
have a material adverse effect on our business, financial
condition and results of operations.
We are
highly dependent on Luminex for our multiplexed testing services
platform, and the loss of access to such technology could
materially adversely affect our revenues and results of
operations.
We rely on the Luminex xMAP technology platform in our
pharmaceutical testing products and services and molecular
diagnostic tests. Any loss of access to the Luminex technology
platform or problems with our relationship with Luminex, or
internal interruptions or problems at Luminex, could interfere
with our ability to provide services to our customers. These
difficulties could reduce sales of our products, decrease our
competitive market position, increase our costs or cause
production delays, all of which could damage our reputation and
negatively impact our ability to generate the cash flows
necessary for our survival.
We may be required, or may elect in the future, to use a
technology platform other than the Luminex platform for our
laboratory testing services. Transitioning to a new testing
platform would require us to spend considerable time and money
to successfully complete the necessary validation studies, and
would be distracting to management and key personnel. If we
cannot efficiently transition to a new testing platform, we may
suffer significant business disruptions, which could result in
loss of revenue.
13
If we
fail to develop additional indications for our VeriPsych test or
new molecular diagnostic tests, discover novel biomarker
patterns, or develop new immunoassays, our future growth may be
materially adversely affected.
We have begun clinical trials for additional psychiatric
indications for our VeriPsych test. These trials may demonstrate
that our VeriPsych test is not clinically useful with respect to
these additional indications and we may not be able to
commercialize this product for any additional indications. We
intend to invest substantially in the continued development,
marketing and selling of our VeriPsych test. We cannot assure
you that these investments will be successful. Any failure in
the continued development, marketing and selling of our
VeriPsych test could have a material adverse effect on our
growth, business, financial condition, results of operations and
cash flows.
In addition, we intend to continue to develop new molecular
diagnostic tests, identify novel biomarker patterns, and develop
new immunoassays. We cannot assure you that we will be able to
develop any additional molecular diagnostic tests, identify any
novel biomarker patterns, or develop new immunoassays in a
timely manner or at all. This could have a material adverse
effect on our future growth, financial condition and results of
operations.
Our
pharmaceutical testing services customers may reduce the amount
of testing they conduct through us.
Currently, approximately 80% of our revenue is derived from our
laboratory testing services. If global economic conditions
decline, there is a change in the regulatory environment or
intellectual property law, or our pharmaceutical testing
services customers consolidate, our customers may divert
resources from testing, resulting in a reduced demand for our
laboratory testing services. Alternatively, customers may decide
to perform their own laboratory testing services in-house. The
Luminex xMAP technology platform that we use as well as other
single and multiplex bioassay technology platforms may be
purchased for in-house use by any of our customers. A reduction
in the amount of this testing that our pharmaceutical testing
services customers conduct through us could have a material
adverse effect on our business, financial condition and results
of operations.
We
operate in a highly competitive business environment.
The molecular diagnostics industry and testing services industry
are each highly competitive. These industries continue to
expand, and an increasing number of competitors and potential
competitors are entering our markets. Many of these competitors
and potential competitors have substantially greater financial,
technological, managerial, and research and development
resources than we do. In addition, we expect that our molecular
diagnostic tests under development, when commercialized, will
compete with product offerings from competitors, potentially
including large and well-established companies that have greater
marketing and sales experience and capabilities than we do.
Technological developments by our competitors in both the
molecular diagnostics and pharmaceutical testing industries
could reduce demand for our products and services or render our
products and services obsolete. The pharmaceutical testing
industry is characterized by advancing technology that may
enable clinical laboratories, hospitals, physicians, or other
medical providers to perform laboratory testing services similar
to or better than ours in a more efficient or cost-effective
manner than is currently possible. The molecular diagnostics
industry is similarly characterized by advancing technology that
may enable potential competitors to develop and commercialize
molecular diagnostic tests similar to or better than ours in a
more efficient or cost-effective manner than is currently
possible. If these or other advances in technology result in
decreased demand for or render obsolete our laboratory testing
services or molecular diagnostic tests, or we are unable to
compete successfully, our financial condition and results of
operations would be materially adversely affected.
We may no
longer be able to depend on third parties to fund research and
development costs related to assay development in our
pharmaceutical testing products and services.
Historically, we have relied substantially on third-party
sources to fund our assay-development research and development
costs. Our customers and third-party collaborators have paid us
to develop new biomarker immunoassays which may then be offered
to our other customers or become part of our biomarker assay
panels. Customers and collaborators may decide in the future not
to fund these research and development costs. Further, we may
elect to pursue initiatives that are not funded by customers and
collaborators, which would require us to fund our research and
development costs
14
internally. This could result in a substantial increase in our
research and development expense, which would have a material
adverse effect on our business, financial condition and results
of operations.
We
currently rely on third parties to manufacture and supply
certain materials for our business.
We rely on third parties to manufacture all of our laboratory
instruments and equipment, including the Luminex technology
platform, and to manufacture and to supply all of our materials,
including certain reagents that we need to conduct our
laboratory testing. For example, we rely on a single third-party
supplier to provide a significant amount of the reagents we need
to perform our laboratory testing services. In addition, we rely
on a variety of suppliers for certain laboratory materials and
some of the laboratory equipment with which we perform our
molecular diagnostic tests.
If any of our third-party suppliers were to become unwilling or
unable to provide these materials in required quantities or on
our required timelines, we would need to identify acceptable
replacement sources. We may not be able to identify and contract
with acceptable replacement sources on a timely basis or on
acceptable terms or at all. Further, we may become involved in
disputes with our third-party manufacturers or suppliers or we
may become party to disputes between these manufacturers or
suppliers and other parties, which could be expensive and time
consuming. Delays or difficulties experienced with any of our
third-party manufacturers or suppliers would have a material
adverse effect on our business, financial condition and results
of operations.
We rely
on third-party service providers for various aspects of our
pharmaceutical testing products and services, and we intend to
rely on third-party service providers to deliver patient samples
for our molecular diagnostic tests.
We rely on a third party to distribute our Multiplexed
Immunoassay Kits, which we sell as one of our pharmaceutical
testing products. We also intend to rely on third-party service
providers to deliver patient samples for our VeriPsych test as
well as other future molecular diagnostic tests, for our
laboratory testing and for distribution of our other products.
If any of our third-party service providers fail to comply with
applicable laws and regulations, fail to meet expected
deadlines, or otherwise do not carry out their contractual
duties to us, or encounter business disruptions at their
facilities, we would need to identify alternative providers and
our ability to provide molecular diagnostic tests and laboratory
testing services to our customers in a timely and efficient
manner would be significantly impaired. We may not be able to
identify and contract with acceptable replacement service
providers on a timely basis or on acceptable terms or at all.
Further, we may become involved in disputes involving our
third-party service providers, which could be expensive and time
consuming. Delays or difficulties experienced with any of our
third-party service providers would have a material adverse
effect on our business, financial condition, and results of
operations.
Substantially
all of our pharmaceutical testing services are performed, and
all of our molecular diagnostic tests will be performed, at a
single laboratory and, if our facility is affected by man-made
or natural disasters, our business could be materially adversely
affected.
We currently perform all of our pharmaceutical testing services,
and we intend to conduct our VeriPsych test as well as any
future diagnostic tests, in the laboratory located in our
principal offices in Austin, Texas. Despite precautions taken by
us, any future natural or man-made disaster at this laboratory,
such as a fire, earthquake or terrorist activity, could cause
substantial delays in our operations, damage or destroy our
equipment, biological samples, reagents and other inventory or
cause us to incur additional expenses. In the event of an
extended shutdown of this laboratory, or a serious malfunction
of the automated testing processes we have in place at this
laboratory, we may be unable to perform our testing services in
a timely manner or at all and therefore would be unable to
operate our business in a commercially competitive manner. There
is no assurance that we could recover quickly from a serious
natural or man-made disaster or that we would not permanently
lose customers as a result of any such business interruption. In
the event that a man-made or natural disaster results in the
total shut down of our laboratory, we would have to establish a
new facility to conduct our laboratory testing services. In
order to establish such a laboratory facility, we would have to
spend considerable time and money securing adequate space,
constructing the facility and establishing the infrastructure
necessary to support the facility. Additionally, any new
laboratory opened by us in a different location would have to
obtain a new certification under the CLIA and
15
licensure by various states, which would take a significant
amount of time and would result in delays in our ability to
begin operations. This could have a material adverse effect on
our business, financial condition, and results of operations.
Even though we carry business interruption insurance, this
insurance may not compensate us fully from any loss we may incur
relating to these interruptions.
Failure
in our information systems, telephone or other systems could
disrupt our operations and have a material adverse effect on our
business.
Information systems and telephone systems are used extensively
in virtually all aspects of our business, including laboratory
testing, sales, billing, customer service, logistics and
management of biomarker data. Our management relies on our
information systems because:
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samples must be received, tracked, and processed on a timely
basis, and patient samples related to our diagnostic tests
require individual sample identification and tracking;
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test results must be monitored and reported on a timely
basis; and
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proper recordkeeping is required for operating our business,
managing employee compensation and other personnel matters.
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Our success depends, in part, on the continued and uninterrupted
performance of our information systems, telephone and other
systems, including our software and operating systems, which are
vulnerable to damage from a variety of sources, including
telecommunications or network failures, computer viruses,
natural disasters and physical or electronic break-ins. With the
expected commercialization of our VeriPsych test, we are
vulnerable to theft of patient information, which could result
in violations of federal and state privacy laws. Sustained or
repeated system failures that interrupt our ability to process
test orders, deliver test results or perform tests in a timely
manner or that cause us to lose patient information could have a
material adverse effect on our business, financial condition,
and results of operations.
We may
not be able to maintain our current insurance policies covering
our business, assets, directors and officers, product liability
and professional liability claims, and we may not be able to
obtain new policies in the future.
We currently maintain property, product liability, professional
liability, business interruption, directors and
officers, and general liability insurance. Unanticipated
additional insurance costs could have a material adverse effect
on our results of operations and cash flows. We expect that our
insurance costs will increase due to changes that often occur in
the insurance markets from time to time. There can be no
assurance that we will be able to maintain our existing
insurance policies or obtain new policies in meaningful amounts
or at a reasonable cost. Any failure to obtain or maintain any
necessary insurance coverage could have a material adverse
effect on our business, financial condition, results of
operations, and cash flows.
Misdiagnosis
of mental illness can result in harm to a mentally ill patient
or in the mentally ill patient causing harm to others. If any
such misdiagnosis can be linked to a failure of our VeriPsych
test, we could be exposed to significant liability.
Inappropriate medication administered to a patient with
schizophrenia, bipolar disorder or major depressive disorder may
lead to severe adverse reactions and may be ineffective at
limiting psychotic episodes. If a misdiagnosis of such a
mentally ill patient can be linked to the failure of our
VeriPsych test, or if a psychiatrist incorrectly uses or
interprets the results from our VeriPsych test, we could
potentially be held liable for the results of any severe adverse
reactions that may occur. While we currently maintain insurance
for such potential liability, we cannot assure you that this
insurance will cover our exposure. A judgment against us in a
sum significantly above the level of our insurance coverage
could have a material adverse effect on our business, financial
condition and results of operations. In addition, negative
publicity surrounding such a trial and judgment would have a
material adverse effect on our reputation and ability to
continue to market and sell our VeriPsych test as well as future
molecular diagnostic tests.
16
If we are
unable to attract and retain key personnel, our business could
be materially adversely affected.
Our success depends on our continued ability to attract, retain
and motivate highly-qualified management, business development,
sales and marketing, and laboratory personnel. We may not be
able to recruit and retain qualified personnel in the future,
and the failure to do so could have a significant negative
impact on our future revenues and results of operations.
Our
operations in the United Kingdom and Germany expose us to the
risks of conducting business internationally.
Our international operations could be affected by changes in
laws, trade regulations, labor and employment regulations, and
procedures and actions affecting approval, production, pricing,
reimbursement and marketing of products, as well as by
inter-governmental disputes. Any of these changes could
adversely affect our business.
Risks Related to
Regulatory Matters
The loss
or suspension of a license, especially our CLIA license, or the
imposition of a fine or penalties under, or future changes in,
federal or state laws and regulations could have a material
adverse effect on our business.
The clinical laboratory testing industry is subject to extensive
regulation. CLIA, which is implemented and enforced by CMS
extends federal oversight to virtually all clinical laboratories
by requiring that they be certified by the federal government or
by a federally-approved accreditation agency. Our laboratory is
currently CLIA-certified. If we fail to comply with CLIA
requirements, our license could be suspended or revoked, or our
licensed operations could be limited. We could also become
subject to significant fines
and/or
criminal penalties
Our operations are also regulated under state law. We cannot
assure you that we will obtain or maintain any required state
licenses. Before we can accept specimens for our molecular
diagnostic tests from New York, we will need to obtain a
license. Failure to obtain required licenses could jeopardize
our ability to launch and commercialize molecular diagnostic
tests in New York. In some cases, compliance with such federal
or state standards is verified by periodic inspections and may
require participation in proficiency testing programs. We cannot
assure you that our facility will pass all future inspections
conducted to ensure compliance with federal or any other
applicable licensing or certification laws. We may need to incur
substantial expenditures on an ongoing basis to ensure that we
comply with existing regulations and to bring us into compliance
with newly-instituted regulations.
We cannot assure you that applicable statutes and regulations
will not be interpreted or applied by a prosecutorial,
regulatory or judicial authority in a manner that would
adversely affect our business. Potential sanctions for violation
of these statutes and regulations include significant fines and
the suspension or loss of various licenses, certificates and
authorizations, which could have a material adverse effect on
our business. In addition, compliance with future legislation or
regulations could impose additional requirements on us which may
be costly and difficult to implement.
Finalization
of the FDA draft guidance concerning IVDMIAs or the
determination that our VeriPsych test is not a
laboratory-developed test could lead to increased costs and
delays in introducing our molecular diagnostic tests.
The FDA regulates instruments, test kits, reagents and other
devices used to perform diagnostic testing by clinical
laboratories. Currently, the FDA does not exercise regulatory
authority over laboratory-developed tests such as our VeriPsych
test. However, since 2006, the FDA has been considering
extending its regulatory authority to cover one category of such
tests as in vitro diagnostic test systems (i.e., as
medical devices). The FDA calls this category of
laboratory-developed tests In Vitro Diagnostic
Multivariate Index Assays, or IVDMIAs. In 2006, the FDA
issued a draft guidance document on how it would define and
regulate IVDMIAs. The FDA has proposed that IVDMIAs be
regulated as medical devices. Our VeriPsych test fell under the
proposed definition of an IVDMIA. The FDA received numerous
comments in response to the original IVDMIA proposal. In 2007,
the FDA issued a revised IVDMIA draft guidance. Our VeriPsych
test would be regulated as a device under the 2007 version of
the guidance document. The FDA received a number of comments to
this version of the guidance document requesting further
modification. It is not known what changes, if any, the FDA has
made to the guidance document or whether the guidance document
will be issued in final. The 2007 version of the draft guidance
17
included a grandfather clause that would permit
laboratories that had already introduced an IVDMIA to continue
to offer that IVDMIA, for a specified period, while preparing a
marketing application and having it reviewed by the FDA. If a
final IVDMIA guidance is released, it may not have a grandfather
clause, we may not meet the terms of the grandfather clause, or
we may not be able to obtain clearance or approval before the
grandfather clause expires. For more information on other
possible regulatory oversight of laboratory-developed tests,
please see BusinessRegulatory ComplianceFood
and Drug Administration.
We collaborated with Psynova to develop our VeriPsych test.
While the FDAs current position is that it will exercise
enforcement discretion and not regulate laboratory-developed
tests, the FDA has questioned whether some tests offered by
laboratories were tests developed by that laboratory. If the FDA
concludes that a test is not a laboratory-developed test, the
FDA may regulate that test as a device and require clearance or
approval. The FDA has not issued any criteria indicating how the
FDA will evaluate whether a test is a laboratory-developed test
or what role, if any, collaborative developmental work might
play in that evaluation. If the FDA were to conclude that our
VeriPsych test is not a laboratory-developed test, we could be
subject to the regulatory requirements applicable to medical
device manufacturers.
The FDA requires the clearance or approval of new medical
devices. These requirements include registering the manufacturer
with the FDA, listing the device, complying with the Quality
System Regulation, or QSR, establishing procedures for the
submission of medical device reports upon learning of certain
types of malfunctions or adverse events, and submitting these
reports to the FDA as required, reporting corrections and
removals to the FDA, adherence to the FDAs labeling
requirements, and other provisions. The QSR comprehensively
regulates the manufacture of medical devices, including
training, record-keeping, documentation, complaint handling, and
management review. These requirements would be in addition to
and, in some instances, different from, the requirements
applicable to a laboratory under CLIA. To determine compliance
with applicable law, the FDA has a program for inspecting device
manufacturers. The FDA also receives information regarding
compliance issues from other sources, such as competitors,
physicians, and consumers.
Another requirement applicable to medical devices is that they
be cleared or approved before being offered for sale in the
U.S. The FDA may require a company to discontinue offering
a medical device that is being sold if the FDA believes the
offering of that device is unlawful. Obtaining the requisite
clearance or approval requires the submission to the FDA of a
marketing application containing a substantial amount of data.
FDA regulation of laboratory-developed tests or increased
regulation of the various medical devices used in
laboratory-developed testing would lead to an increased
regulatory burden and additional costs and delays in introducing
new tests. If we cannot obtain such FDA clearance or approval in
a timely manner or at all, we may have to stop marketing and
selling diagnostic tests that we have already commercialized and
we may not be able to commercialize tests that are under
development, which would materially adversely affect our
business, financial condition and results of operations.
The FDA regulates promotional activities. Medical devices must
be promoted and advertised in accordance with the labeling
cleared or approved by the FDA. The promotion of a device for
uses outside the labeling is considered off-label
promotion. The FDA reviews promotional materials distributed by
device companies for compliance with applicable laws.
The FDA can take enforcement action against a device company
that has promoted its device for violation of the FDAs
requirements, including the requirement to obtain approval or
clearance or marketing the device for off-label uses. The FDA
can also take enforcement action for violations of other
regulatory provisions. These enforcement actions can include a
warning letter, civil penalties, seizure of the product,
detention, an injunction, or criminal prosecution. If the FDA
determines that we are a medical device manufacturer and that we
have not complied with the regulatory requirements we may be
subject to significant liability, including civil and
administrative remedies as well as criminal sanctions. In
addition, managements attention could be diverted and our
reputation could be damaged.
Compliance
with the HIPAA security regulations and privacy regulations may
increase our costs.
We are subject to regulation under the federal Health Insurance
Portability and Accountability Act of 1996, or HIPAA, and rules
promulgated by the U.S. Department of Health and Human
Services thereunder. The HIPAA privacy and security regulations
establish comprehensive federal standards with respect to the
uses and disclosures
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of protected health information by health plans, healthcare
providers and healthcare clearinghouses, in addition to setting
standards to protect the confidentiality, integrity and
availability of protected health information. The privacy and
security regulations provide for significant fines and other
penalties for wrongful use or disclosure of protected health
information, including potential civil and criminal fines and
penalties. Although the HIPAA statute and regulations do not
expressly provide for a private right of damages, we could incur
damages under state laws to private parties for the wrongful use
or disclosure of confidential health information or other
private personal information. Our failure to maintain compliance
or changes in state or federal laws regarding privacy could
result in civil or criminal penalties and could have a material
adverse effect on our business.
The HIPAA transaction standards are complex and subject to
differences in interpretation by payors. For instance, some
payors may interpret the standards to require us to provide
certain types of information, including demographic information
not usually provided to us by physicians. As a result of
inconsistent application of HIPAA transaction standards by
payors or our inability to obtain certain billing information
that may not be provided to us by physicians, we could face
increased costs and complexity, a temporary delay in collecting
our accounts receivable and ongoing reductions in reimbursements
and net revenues. In addition, requirements for additional
standard transactions, such as claims attachments or use of a
national provider identifier, could prove technically difficult,
time-consuming or expensive to implement, all of which could
have a material adverse effect on our business, financial
condition and results of operations. For more information about
HIPAA, please see BusinessRegulatory
ComplianceHealth Insurance Portability and Accountability
Act.
If we
fail to comply with the Anti-Kickback Statute, the Stark Law,
the False Claims Act, and other similar federal and state laws
governing healthcare fraud and abuse under government payment
programs, we could face substantial penalties and possible
exclusion from governmental payors which may result in a
material adverse effect on our business.
The federal healthcare program Anti-Kickback Statute prohibits,
among other things, knowingly and willfully offering, paying,
soliciting or receiving remuneration to induce or in return for
purchasing, leasing, ordering or arranging for the purchase,
lease or order of any healthcare item or service reimbursable
under Medicare, Medicaid or other federally financed healthcare
programs. Federal false claims laws prohibit any person from
knowingly presenting or causing to be presented a false claim
for payment to the federal government, or knowingly making or
causing to be made a false statement to get a false claim paid.
Under another federal statute, known as the Stark Law or
self-referral prohibition, physicians who have an
investment or compensation relationship with an entity may not
refer Medicare patients for designated health services, which
include clinical laboratory services, regardless of the intent
of the parties, unless an exception applies. There also are
numerous other federal healthcare laws that may be applicable to
federally financed healthcare programs, and private payors as
well, and laws enacted at the state level that affect the
provision of healthcare services, such as laboratory services.
The federal government has made a policy decision to
significantly increase the financial resources allocated to
enforcing the general fraud and abuse laws including, but not
limited to, the federal Anti-Kickback Statute, the Stark Law and
the federal False Claims Act. In addition, private insurers and
various state enforcement agencies have increased their level of
scrutiny of healthcare claims in an effort to identify and
prosecute fraudulent and abusive practices in the healthcare
area. We are subject to these increased enforcement activities
and may be subject to specific subpoenas and requests for
information.
Because of the breadth of these laws, the narrowness of
applicable safe harbors and exceptions, and the recent increase
in enforcement resources and increased scrutiny, it is possible
that some of our business activities could be subject to
challenge under one or more of such laws. Such a challenge,
regardless of the outcome, could have a material adverse effect
on our business, business relationships, reputation, financial
condition and results of operations. If our operations are found
to be in violation of any of the laws described above or any of
the many other federal and state laws that apply to us, we may
be subject to penalties, including civil and criminal penalties,
damages, fines, the curtailment or restructuring of our
operations, exclusion from participation in federal healthcare
programs such as Medicare and Medicaid, or loss of CLIA
licensure. Any penalties, damages, fines, curtailment or
restructuring of our operations or exclusion from participation
in federal healthcare programs or loss of licensure could harm
our ability to operate our business and our financial results.
Any action against us for
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violation of these laws, even if we successfully defend against
it, could cause us to incur significant legal expenses and
divert our managements attention from the operation of our
business.
Our
business involves biomedical waste and we and our third-party
manufacturers must comply with environmental laws and
regulations, which can be expensive and restrict how we do
business.
We and our manufacturers are subject to federal, state and local
laws and regulations governing the use, manufacture, storage,
handling and disposal of biomedical waste. We cannot eliminate
the risk of accidental contamination or injury from these
materials. In the event of an accident, state or federal
authorities may curtail our use of these materials
and/or
interrupt our business operations. We also cannot assure you
that our existing insurance policy would be sufficient to cover
any claims. Any substantial unexpected costs we may incur could
have a material adverse effect on our business, financial
condition and results of operations.
Failure
to comply with environmental, health and safety laws and
regulations, including the federal Occupational Safety and
Health Administration Act and the Needlestick Safety and
Prevention Act, may result in fines and penalties and loss of
licensure, which could have a material adverse effect on our
business.
Our laboratory is subject to applicable federal and state laws
and regulations relating to biohazard disposal of all laboratory
specimens, and we utilize outside vendors for disposal of such
specimens. In addition, the federal Occupational Safety and
Health Administration has established extensive requirements
relating to workplace safety for healthcare employers, including
clinical laboratories, whose workers may be exposed to
blood-borne pathogens such as HIV and the hepatitis B virus. In
addition, the Needlestick Safety and Prevention Act requires,
among other things, that we include in our safety programs the
evaluation and use of engineering controls such as safety
needles if found to be effective at reducing the risk of
needlestick injuries in the workplace. Failure to comply with
federal, state and local laws and regulations could subject us
to denial of the right to conduct business, fines, criminal
penalties
and/or other
enforcement actions which would have a material adverse effect
on our business. In addition, compliance with future legislation
could impose additional requirements on us, which may be costly.
Risks Related to
Intellectual Property
Our
VeriPsych test is not protected by any issued patents.
You should not rely on our patent rights to provide any
competitive advantage for us. Our VeriPsych test and other
molecular diagnostic tests under development are not currently
protected by issued patents. We have filed patent applications
relating to aspects of our technology but these applications
provide us with no protection currently and may not be
sufficient to preclude competitors from entering the market with
identical technology even if our patent applications result in
issued patents. We cannot guarantee that our patent applications
will ever result in issued patents. If patents do not issue, we
will not be able to preclude direct competitors from the market.
We cannot assure you that our intellectual property rights are
sufficient to prevent competitors from developing,
commercializing and marketing molecular diagnostic tests similar
to our VeriPsych test and our other molecular diagnostic tests
currently under development, which could have a material adverse
effect on our ability to compete in the molecular diagnostic
testing market.
We rely
on third-party license agreements for patents or applications
and additional technology related to our products and services,
and the termination of these agreements could delay or prevent
us from being able to commercialize our products and
services.
We depend on a number of licenses related to our products and
services. We depend on a license from Luminex with respect to
commercializing our products and services. Although this license
is irrevocable, we could potentially lose access to the licensed
intellectual property if we fail to meet our material
obligations. Our business might also suffer if Luminex fails to
abide by the terms of the license or fails to prevent
infringement by third parties or if the licensed patents or
other rights are found to be invalid or to infringe the rights
of third parties.
Under our co-development and commercialization agreement with
Psynova, we have a license from Psynova, which is important to
the development and commercialization of our VeriPsych test. For
more information on the risks to our business related to this
agreement with Psynova, please read We sublicense the
intellectual property related to our VeriPsych test from
Psynova. Any disruption in our rights to such intellectual
property could
20
materially adversely affect our ability to commercialize our
VeriPsych test and to develop and validate our VeriPsych test
for additional indications. The license from Psynova
includes intellectual property rights that are in turn licensed
to Psynova by Cambridge, including two patent applications
directed to the biomarker panel being commercialized in our
VeriPsych test. Psynova licenses these rights from Cambridge
pursuant to a framework agreement and exclusive patent and
non-exclusive know-how license agreements. For more information
on the risks to our business related to the relationship between
Psynova and Cambridge, please read The loss of the
licenses granted under a framework agreement between Psynova,
our 77.6%-owned subsidiary, and Cambridge with respect to two
patent applications directed to the biomarker panel being
commercialized in our VeriPsych test could materially adversely
affect our ability to commercialize our VeriPsych test.
Additionally, any failure of Psynova to exercise its rights
under the framework agreement could result in our being unable
to use future Cambridge intellectual property.
We may also need to license other technology or patents to
commercialize future products, but such licenses may not be
available to us on commercially reasonable terms, or at all. If
any of our material licenses were to be terminated or if we were
to be unable to license technology or patents necessary to
commercialize future products, our business, financial condition
and results of operation would be materially adversely affected.
If we are
unable to obtain, maintain and enforce intellectual property
protection covering our products, others may be able to make,
use, or sell our products, which could have a material adverse
effect on our business.
Our success is dependent in part on obtaining, maintaining and
enforcing intellectual property rights, including patents. If we
are unable to obtain, maintain and enforce intellectual property
legal protection covering our products, others may be able to
make, use or sell products that are substantially identical to
ours, which would adversely affect our ability to compete in the
market.
We seek to obtain patents and other intellectual property rights
to restrict the ability of others to market products and
services that compete with us. We have pending patent
applications related to the use of biomarkers in molecular
diagnostic testing for certain mental illnesses. These are
patent applications either filed by RBM or licensed to RBM.
Currently, our patent portfolio is comprised, on a worldwide
basis, of 42 pending patent applications which we own directly
or for which we are the licensee. There are no issued patents
that cover our VeriPsych test, nor any that preclude a third
party from making an identical test, or practicing an identical
method.
Patents may not issue from any pending or future patent
applications owned by or licensed to us, and moreover, issued
patents owned or licensed to us now or in the future may be
found by a court to be invalid or otherwise unenforceable.
Patent applications may not issue or future issued patents may
be found invalid because of changes in the law. The Bilski case
pending before the U.S. Supreme Court may cause the RBM
patents to be invalid or applications to not issue. Also, even
if any patents that are ultimately issued to us or to our
licensors are determined by a court to be valid and enforceable,
they may not be sufficiently broad to prevent others from
marketing products similar to ours or designing around these
patents, despite our patent rights and those of our licensors.
Additionally, we may not be able to file patent applications
related to some of our molecular diagnostic tests because such
inventions are not sufficiently patentable.
Furthermore, we cannot be certain that we were the first to make
the invention claimed in our U.S. issued patent or pending
patent applications, or that we were the first to file for
protection of the inventions claimed in our foreign pending
patent applications. We may become subject to interference
proceedings conducted in the patent and trademark offices of
various countries to determine our entitlement to our patent and
patent application, and these proceedings may conclude that
other patents or patent applications have priority over our
patents or patent applications. It is also possible that a
competitor may successfully challenge our patent or patent
applications through various proceedings and those challenges
may result in the elimination or narrowing of our patent or
patent applications, and therefore reduce our patent protection.
Accordingly, rights under our issued patent, patent applications
or patents we may seek in the future may not provide us with
commercially meaningful protection for our products or afford us
a commercial advantage against our competitors or their
competitive products or processes.
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We have a number of foreign pending patent applications;
however, even if we are issued patents in these foreign
jurisdictions, the laws of some foreign jurisdictions do not
protect intellectual property rights to the same extent as laws
in the United States, and many companies have encountered
significant difficulties in protecting and defending such rights
in foreign jurisdictions. If we encounter such difficulties or
we are otherwise precluded from effectively protecting our
intellectual property rights in foreign jurisdictions, our
business prospects could be substantially materially adversely
affected.
We may initiate litigation to enforce our patent rights, which
may prompt our adversaries in such litigation to challenge the
validity, scope or enforceability of our patent. Patent
litigation is complex and often difficult and expensive, and
would consume the time of our management and other significant
resources. In addition, the outcome of patent litigation is
uncertain. If a court decides that our patent or patents that
may be issued to us in the future are not valid, not enforceable
or of a limited scope, we may not have the right to stop others
from using the subject matter covered by those patents.
If we cannot patent the intellectual property necessary for our
VeriPsych test or if the intellectual property rights to our
other molecular diagnostic test candidates is owned by a third
party, we may be forced to license a right to use such
intellectual property from this third party. We cannot assure
you that we will ever be able to reach agreement on such an
in-license or that any agreement we reach will be on
commercially acceptable terms. If we cannot license the right to
use important third-party intellectual property, we may not be
able to continue marketing our VeriPsych test or to continue
developing our other molecular diagnostic test candidates or
continue conducting our lab testing services. Any disruption in
our ability to continue these activities would have a material
adverse effect on our business, financial condition and results
of operations.
If we are unable to protect the confidentiality of our
proprietary information and know-how, our competitors may use
our technology to develop competing products.
We also rely on trade secrets to protect our products,
technology and services, particularly where we do not believe
patent protection is appropriate or obtainable. However, trade
secrets can be difficult to protect. While we use commercially
reasonable efforts to protect our trade secrets, our licensors,
employees, consultants, contractors, outside scientific
collaborators and other advisors may unintentionally or
willfully disclose such trade secret information to
third-parties and competitors. We attempt to protect our
proprietary technology in large part by entering into
confidentiality and non-disclosure agreements with our
employees, consultants and other contractors. We cannot assure
you, however, that these agreements will not be breached, that
we will have adequate remedies for any breach or that
competitors will not know of, or independently discover our
trade secrets. We cannot assure you that others will not
independently develop substantially equivalent proprietary
information or be issued patents that may prevent the sale of
our products, technologies, services or know-how or require
licensing and the payment of significant fees or royalties by us
in order to produce our products, technologies or services.
Moreover, we cannot assure you that our technology does not
infringe upon any valid claims of patents that other parties
own. Enforcing a claim that a third-party illegally obtained and
is using our trade secrets is expensive and time consuming, and
the outcome is unpredictable. In addition, courts outside the
United States are sometimes less willing to protect trade
secrets.
Our
products could infringe patent rights of others, which may
require costly litigation and, if we are not successful, could
cause us to pay substantial damages or limit our ability to
commercialize our products.
Our commercial success depends on our ability to operate without
infringing the patents and other proprietary rights of third
parties. There may be other patents or applications that relate
to our products and technology of which we are not aware. We may
unintentionally infringe upon valid patent rights of third
parties. For instance, one of the biomarkers used in a MAP might
be found to infringe upon the patents or proprietary rights of a
third party. Although we are currently not involved in any
litigation involving patents, a third-party patent holder could
assert a claim of patent infringement against us in the future.
Alternatively, we may initiate litigation against the
third-party patent holder to request that a court declare that
we are not infringing the third partys patent
and/or that
the third partys patent is invalid or unenforceable. If a
claim of infringement is asserted against us and is successful,
and therefore we are found to infringe, we could be required to
pay damages for infringement, including treble damages if it is
determined that we knew or became aware of such a patent and we
failed to exercise due care in determining whether or not we
infringed the patent. If, in the future, we supply infringing
products to third-parties or license third parties to
manufacture, use or market infringing products, we may be
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obligated to indemnify these third parties for damages they may
be required to pay to the patent holder and for any losses they
may sustain. We can also be prevented from selling or
commercializing any of our products that use the infringing
technology in the future, unless we obtain a license from such
third-party. A license may not be available from such
third-party on commercially reasonable terms, or at all. Any
modification to include a non-infringing technology may not be
possible or, if possible, may be difficult or time-consuming to
develop, and require revalidation, which could delay our ability
to commercialize our products.
Any infringement action asserted against us, even if we are
ultimately successful in defending against such action, would
likely harm our competitive position, be expensive and require
the time and attention of our key management and technical
personnel.
We may be
subject to damages resulting from claims that we, or our
employees, have wrongfully used or disclosed alleged trade
secrets of their former employers.
Many of our employees or consultants were previously employed at
universities or other academic institutions, or other diagnostic
or biotechnology companies, including our current and potential
competitors. Although we are not aware of any claims currently
pending against us, we may be subject to claims that we or these
employees or consultants have inadvertently or otherwise used or
disclosed trade secrets or other proprietary information of
their former employers. Litigation may be necessary to defend
against these claims. Even if we are successful in defending
against these claims, litigation could result in substantial
costs and be a distraction to management. If we fail in
defending such claims, in addition to paying monetary damages,
we may lose valuable intellectual property rights or personnel
or both.
Claims
may arise under our various contracts with pharmaceutical
companies where we develop and use certain techniques and
processes for biomarker detection, challenging our use of the
same or similar techniques and processes in other
contexts.
We perform laboratory services pursuant to various contracts
with pharmaceutical companies where we develop and use certain
techniques and processes for biomarker detection. Claims against
us could arise under these contracts that dispute our use of the
same or similar techniques and processes in other contexts.
Under such circumstances, we may be forced to defend claims in
court and we cannot assure you that we will be successful or
that we will not lose the ability to use these techniques or
processes. Regardless of the outcome, litigation against us or
by us could disrupt or cause delays in our development and
commercialization efforts, divert our managements
attention from our business and consume significant financial
resources.
Risks Related to
Our Finances and Capital Requirements
As we
commercialize our VeriPsych test, we expect that we will incur
operating losses.
In March 2010, we began making our VeriPsych test as an aid in
the diagnosis of recent-onset schizophrenia available for order.
We focused our initial marketing efforts on several leading
academic psychiatric centers and have subsequently begun
marketing our VeriPsych test to selected psychiatric group
practices. We plan a broader launch in the second half of 2010.
We expect the expenses associated with commercially launching
our first diagnostic test panel will cause us to incur operating
losses for at least the next two years. We cannot assure you
that we will return to profitability in the future.
Our
quarterly operating results may fluctuate
significantly.
We expect our operating results to be subject to quarterly
fluctuations. Our operating results will be affected by numerous
factors, including:
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sales and marketing and other expenses incurred in connection
with the commercial launch of our VeriPsych test as well as
future molecular diagnostic tests;
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the pace of adoption of our VeriPsych test and future molecular
diagnostic tests;
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our success in establishing acceptable reimbursement rates for
our VeriPsych test and any future molecular diagnostic tests and
any related changes in third-party insurance coverage and
reimbursement policies;
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billing and collection for our VeriPsych test and future
molecular diagnostic tests;
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acquisitions and licensing of new products, technologies or
businesses and any related impairments and write-downs of
intangible or other assets;
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expenditures incurred to acquire and promote additional
products, technologies or businesses;
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competitive pricing pressures and general economic and industry
conditions which affect customer demand for our products and
services;
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the loss of a significant customer and a changing customer base;
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the mix of products or services that we sell during any time
period;
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supply interruptions;
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varying levels of research and development expenditures due to
the timing of validation studies, clinical trials and related
costs and the amount of research and development funded by third
parties, among other factors;
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expenditures as a result of legal actions and the outcome of any
such legal action;
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federal, state or international regulatory actions;
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additions or departures of key personnel;
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implementation of new or revised accounting or tax rules or
policies; and
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termination or expiration of, or the outcome of disputes
relating to, patents, license agreements, trademarks and other
rights.
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If our quarterly operating results fall below the expectations
of investors or securities analysts, the price of our common
stock could decline substantially. Furthermore, any quarterly
fluctuations in our operating results may, in turn, cause the
price of our stock to fluctuate substantially. We believe that
quarterly comparisons of our financial results are not
necessarily meaningful and should not be relied upon as an
indication of our future performance.
We may
require additional funding, and our future access to capital is
uncertain. Insufficient funds may limit our ability to develop
and commercialize new products, services and
technologies.
Our business can change unpredictably due to a variety of
factors, including competition, regulation, legal proceedings or
other events, which could impact our funding needs or our cash
flow from operations or increase our required capital
expenditures. In addition, our estimates of the funds necessary
to develop and commercialize our VeriPsych test or other
molecular diagnostic tests may be inaccurate or we may acquire
products or other assets in the future, in each case which could
require additional funds. Furthermore, we may seek additional
capital due to favorable market conditions or strategic
considerations even if we believe we have sufficient funds for
our current or future operating plans. We may seek the
additional capital through public or private equity offerings,
debt financings, and collaborative and licensing arrangements.
To the extent that we raise additional capital through the sale
of equity or convertible debt securities, your ownership
interest may be diluted and the terms may include liquidation or
other preferences or rights that adversely affect your rights as
a stockholder. Debt financing, if available, may involve
agreements that include covenants limiting or restricting our
ability to take specific actions such as incurring additional
debt, making capital expenditures, or declaring dividends. If we
raise additional funds through collaboration and licensing
arrangements with third parties, we may have to relinquish
valuable rights to our technologies or products, or grant
licenses on terms that are not favorable to us.
Adequate funds, whether through the financial markets or from
other sources, may not be available when we need them or on
terms acceptable to us. For example, the United States has
recently experienced an economic recession, the
long-term
impact of which cannot be predicted. Furthermore, as a result of
the recent volatility in domestic and international capital
markets, the cost and availability of credit has been and may
continue to be adversely affected as compared to its normal
function. Concern about the stability of the markets generally
and the strength of counterparties specifically has led many
lenders and institutional investors to reduce, and in some
cases, cease to provide funding to borrowers. Insufficient funds
could cause us to delay, scale back or choose not to develop and
commercialize new products and technologies, including molecular
diagnostic tests.
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Substantially
all of our assets have been pledged to secure our revolving line
of credit.
As of April 19, 2010, there was $3.5 million
outstanding under our revolving line of credit. This
indebtedness is secured by substantially all of our assets. In
the event of a default under our senior indebtedness, the lender
could foreclose against the assets securing such obligations.
Under the revolving line of credit agreement, we will be deemed
in default of the agreement if we default on our subordinated
debt agreement or if there is a foreclosure on the pledge of the
equity ownership interest of RBM Holdings, LLC and RBM
Management Group, LLC. Under our subordinated debt agreement, we
may be deemed in default of the agreement if we default on our
revolving line of credit agreement. The subordinated lender has
agreed not to assert, collect, or enforce all, or any part of,
the amounts due from us under the subordinated loan agreement
without the prior written consent of the revolving line of
credit lender. In the event of a foreclosure on all or
substantially all of our assets, we may not be able to continue
to operate as a going concern.
A
substantial portion of our assets are long-lived assets subject
to periodic impairment tests and potential
write-downs.
A substantial portion of our assets are long-lived assets such
as intellectual property and goodwill. We are required to
periodically assess these assets for impairment by assessing
whether current facts or circumstances indicate that their
carrying values are recoverable. We assess goodwill for
impairment using the two-step process. We estimate the fair
value of our intangible assets by determining the undiscounted
cash flows from such assets. To the extent the fair value of our
intangible assets exceeds their carrying value, we are required
to recognize a non-cash impairment charge in our results from
operations. If the recent recession returns or the economy
deteriorates, we may be required to incur impairments to our
intangible assets or goodwill in the future, which could have a
material adverse effect on our financial condition and results
of operations.
We will
incur increased costs as a result of operating as a public
company, and our management will be required to devote
additional time to new compliance standards.
We will incur increased costs as a result of operating as a
public company, and our management will be required to devote
additional time to newly applicable compliance standards. As a
public company, we will be subject to a variety of new rules and
regulations, including those requiring periodic and current
reporting, establishment and maintenance of effective disclosure
and financial controls and changes in corporate governance
practices. These rules and regulations will increase our legal
and financial compliance costs and will render some activities
more time-consuming and costly.
The securities laws applicable to public companies will require,
among other things, that we perform system and process
evaluation and testing to allow management and our independent
registered public accounting firm to report on the effectiveness
of our internal control over financial reporting, beginning with
our Annual Report on
Form 10-K
for the fiscal year ending December 31, 2011. This testing
may reveal deficiencies in our internal controls. We recently
have been upgrading our finance and accounting systems,
procedures and controls and will continue to implement
additional finance and accounting systems, procedures and
controls as we expand our business and organization and to
satisfy new reporting requirements. We expect to incur
significant expense and devote substantial management effort
towards ramping up our financial reporting and compliance
capabilities to ensure compliance with such securities laws. If
after this offering we or our independent registered public
accounting firm identifies deficiencies in our internal controls
over financial reporting, the market price of our stock could
decline and we could be subject to sanctions or investigations
by Nasdaq, the Securities and Exchange Commission, or SEC, or
other regulatory authorities, which would require additional
financial and management resources.
Risks Relating to
Securities Markets and Investment in Our Stock
There may
not be a viable public market for our common stock.
Prior to this offering, there has been no public market for our
common stock. There can be no assurance that a regular trading
market will develop and continue after this offering or that the
market price of our common stock will not decline below the
initial public offering price. The initial public offering price
will be determined through negotiations between us and the
underwriters and may not be indicative of the market price of
our common stock
25
following this offering. Among the factors considered in such
negotiations are the history and prospects for the industry in
which we compete, market valuations of other companies that we
and the representative of the underwriters believe to be
comparable to us, prospects for our future earnings, the present
state of our development and other factors deemed relevant. See
Underwriting for additional information.
As a new
investor, you will experience immediate and substantial dilution
in the net tangible book value of your shares.
The initial public offering price of our common stock is
considerably more than the net tangible book value per share of
our outstanding common stock. Investors purchasing shares of
common stock in this offering will pay a price that
substantially exceeds the value of our tangible assets after
subtracting liabilities. As a result, investors will:
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incur immediate dilution of
$
per share, based on an assumed initial public offering price of
$ per share,
the midpoint of the price range set forth on the cover page of
this prospectus, assuming the conversion of our convertible
preferred stock; and
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contribute % of the total amount
invested to date to fund our company based on an assumed initial
offering price to the public of
$ per
share, the midpoint of the price range set forth on the cover
page of this prospectus, but will own
only % of the shares of common
stock outstanding after the offering.
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To the extent outstanding stock options or warrants are
exercised, there will be further dilution to new investors.
We expect
that the price of our common stock will fluctuate
substantially.
The market price of our common stock is likely to be highly
volatile and may fluctuate substantially due to many factors,
including:
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fluctuations in our operating results;
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acquisitions and sales of new products, services, technologies
or businesses;
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the outcome of legal actions to which we may become a party;
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additions or departures of key personnel;
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announcements concerning product development results or
intellectual property rights of others;
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approvals or disapprovals of regulatory filings we have
submitted;
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changes in regulatory laws and regulations in the United States
or announcements relating to these matters affecting our
products or customers;
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deviations in our operating results from the estimates of
securities analysts or other analyst comments;
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discussion of us or our stock price by the financial and
scientific press and in online investor communities; and
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economic and other external factors, including natural disasters
and other crises.
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The realization of these or any of the risks described in these
Risk Factors could have a dramatic and material
adverse impact on the market price of our common stock.
We may
become involved in securities class action litigation that could
divert managements attention and could have a material
adverse effect on our business.
The stock markets have from time to time experienced significant
price and volume fluctuations that have affected the market
prices for the common stock of healthcare companies. These broad
market fluctuations may cause the market price of our common
stock to decline. In the past, securities class action
litigation has often been brought against a company following a
decline in the market price of its securities. We may become
involved in this type of litigation in the future. Litigation
often is expensive and diverts managements attention and
resources, which could have a material adverse impact on our
business, financial condition and results of operations.
26
Our
management team may invest or spend the proceeds of this
offering in ways with which you may not agree or in ways which
may not yield a return.
Our management will have considerable discretion in the
application of a significant portion of the net proceeds, and
you will not have the opportunity, as part of your investment
decision, to assess whether such proceeds are being used
appropriately. A significant portion of the net proceeds may be
used for working capital and other general corporate purposes
that do not increase our operating results or market value.
Until the net proceeds are used, they may be placed in
investments that do not produce significant income or that may
lose value.
Future
sales of our common stock may depress our stock price.
Sales of a substantial number of shares of our common stock in
the public market could occur at any time. These sales, or the
perception in the market that we or the holders of a large
number of shares intend to sell shares, could reduce the market
price of our common stock. After this offering, we will
have
outstanding shares of common stock based on the number of shares
outstanding as of March 31, 2010, after giving effect to
the conversion of all of the shares of our preferred stock
outstanding as of March 31, 2010 into shares of common
stock in connection with this offering. Of the remaining
shares, shares
are currently restricted as a result of securities laws or
lock-up
agreements but will be available for resale in the public
market. For more information about when these restricted shares
will be available for resale in the public market as well as
certain registration rights that will exist following this
offering, please see Shares Eligible for Future
Sale.
Our
executive officers and directors and their affiliates will
collectively own % of our
outstanding common stock following this offering and will
therefore be able to exercise control over stockholder voting
matters in a manner that may not be in the best interests of all
of our stockholders.
Immediately following this offering, our executive officers and
directors and their affiliates will collectively
own % of our outstanding common
stock. As a result, our executive officers and directors and
their affiliates will be able to exercise control over
stockholder voting matters. They may exercise this control in a
manner that may not be in the best interests of all of our
stockholders. In addition, RBM Holdings, LLC and RBM Management
Group, LLC will together control
approximately % of our outstanding
common stock. Mark Chandler, the chairman of our board of
directors, and Craig Benson, our president and chief executive
officer and a member of our board of directors, collectively own
100% of the membership interests of RBM Holdings, LLC. RBM
Holdings, LLC owns 100% of the voting interest in RBM Management
Group, LLC. Matthew Zell, a member of our board of directors, is
a Managing Director of Equity Group Investments, L.L.C., which
will own approximately % of our
outstanding common stock following this offering. As a result,
Messrs. Chandler and Benson and Mr. Zell will be able
to significantly influence all matters requiring approval of our
stockholders, including the election of directors and approval
of significant corporate transactions. The concentration of
ownership may delay, prevent or deter a change in control of our
company even when such a change may be in the best interests of
some stockholders, could deprive our stockholders of an
opportunity to receive a premium for their common stock as part
of a sale of our company or our assets and might affect the
prevailing market price of our common stock.
Anti-takeover
provisions under our charter documents and Delaware law could
delay or prevent a change in control which could limit the
market price of our common stock and may prevent or frustrate
attempts by our stockholders to replace or remove our current
management and the current Board.
Our amended and restated certificate of incorporation and
amended and restated bylaws, which are to become effective at
the closing of this offering, contain provisions that could
delay or prevent a change in control of our company or changes
in our board of directors that our stockholders might consider
favorable. For more information about these anti-takeover
provisions as well as anti-takeover provisions under the
Delaware General Corporation Law, please see Description
of Capital StockAnti-Takeover Effects of Provisions of our
Amended and Restated Certificate of Incorporation, our Amended
and Restated Bylaws and Delaware Law. These and other
provisions in our corporate documents and Delaware law might
discourage, delay or prevent a change in control or changes in
our board of directors. These provisions could also discourage
proxy contests and make it more difficult for you and other
stockholders to elect directors and cause us to take other
corporate actions. Furthermore, the
27
existence of these provisions, together with Delaware law, might
hinder or delay an attempted takeover other than through
negotiations with our board of directors.
In addition, our development and supply agreement with Luminex,
as amended, may be terminated by Luminex in the event we are
acquired by or merge with Illumina, Inc., Beckman Coulter, Inc.,
Affymetrix, Inc., Cepheid, Ciphergen Biosystems, Inc., Nanogen,
Inc. or Becton, Dickinson and Company. Because our business is
substantially dependent upon this agreement with Luminex, this
provision may hinder or delay an attempted takeover by these
entities or their affiliates.
28
Special
Note Regarding Forward-Looking Statements
This prospectus contains forward-looking statements. These
forward-looking statements are contained in the sections
entitled Prospectus Summary, Risk
Factors, Managements Discussion and Analysis
of Financial Condition and Results of Operations and
Business included elsewhere in this prospectus.
These statements relate to future events or our future financial
performance and involve known and unknown risks, uncertainties
and other factors that could cause our actual results, levels of
activity, performance or achievement to differ materially from
those expressed or implied by these forward-looking statements.
These risks and uncertainties include, among others:
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the commercial success of our VeriPsych test;
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our ability to market, sell and provide customer support for our
VeriPsych test;
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our ability to bill and collect for our molecular diagnostic
tests and successfully register with insurers;
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our ability to be reimbursed for the use of, and the
reimbursement levels for, our VeriPsych test or future molecular
diagnostic tests;
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the impact of any healthcare reform legislation;
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our ability to license the intellectual property related to our
VeriPsych test;
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our ability to acquire samples and to continue to develop
molecular diagnostic tests;
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liability arising from the use of our molecular diagnostic tests
or sale of products;
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our ability to retain and expand our customer base;
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our dependence on Luminex Corporation for our multiplexed
testing services platform;
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the competitive environment in which we operate;
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our ability to continue to fund research and development costs;
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the ability of our third-party service providers to manufacture
and supply certain materials, for various aspects of our
pharmaceutical testing products and services and to deliver
patient samples for our molecular diagnostic tests;
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our ability to attract and retain key personnel;
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the impact of any man-made or natural disaster on our laboratory;
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disruption to our operations from failures in our information
systems;
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our ability to maintain adequate insurance policies;
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the impact of any risks related to conducting business
internationally due to our operations in the United Kingdom and
Germany;
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our ability to maintain our CLIA license and to comply with
other federal or state laws and regulations;
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FDA draft guidance concerning IVDMIAs or the determination that
our VeriPsych test is not a laboratory-developed test;
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our ability to comply with the HIPAA security regulations and
privacy regulations;
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liability if our continuing medical or health education programs
or product promotions are determined, or are perceived, to be
inconsistent with regulatory guidelines;
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our ability to comply with anti-kickback and anti-fraud rules
under government payment programs;
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our ability to comply with environmental, health and safety laws
and regulations;
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our ability to patent our VeriPsych test;
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our ability to maintain and renew third-party license agreements
for patents or applications and additional technology;
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our ability to obtain, maintain and enforce intellectual
property protection covering our products;
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29
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the effects of material litigation, including potential patent
infringement litigation resulting from the commercialization of
our products;
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our ability to withstand operating losses relating to our
VeriPsych test; and
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other risks described under Risk Factors.
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Forward-looking statements include all statements that are not
historical facts. In some cases, you can identify
forward-looking statements by terms such as may,
will, should, could,
would, expect, plan,
anticipate, believe,
estimate, project, predict,
potential, target, goal,
intend or seek or the negative of those
terms, and similar expressions and comparable terminology
intended to identify forward-looking statements. You should read
statements that contain these words carefully because they
reflect our current views with respect to future events and are
based on assumptions and subject to known and unknown risks,
uncertainties and other factors. Should one or more of the known
risks, uncertainties or other factors described above or
elsewhere occur, or should unknown risks, uncertainties or other
factors occur, or should underlying assumptions prove incorrect,
our actual results and plans could materially differ from those
expressed in any forward-looking statements. Given these
uncertainties, you should not place undue reliance on these
forward-looking statements. We discuss many of these risks in
this prospectus in greater detail under the heading entitled
Risk Factors. These forward-looking statements
represent our estimates and assumptions only as of the date of
this prospectus and, except as required by law, we undertake no
obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future
events or otherwise after the date of this prospectus.
You should read this prospectus and the documents that we
reference in this prospectus and have filed as exhibits to the
registration statement of which this prospectus is a part
completely and with the understanding that our actual future
results may be materially different from what we expect. All
forward-looking statements, expressed or implied, contained in
this prospectus are expressly qualified in their entirety by
this cautionary statement.
30
Use of
Proceeds
We estimate that we will receive net proceeds of approximately
$ million from the sale of
the shares of common stock offered by us in this offering, or
approximately $ million if
the underwriters exercise their option to purchase additional
shares in full, in each case based on an assumed initial public
offering price of $ per share,
which is the midpoint of the price range set forth on the cover
of this prospectus, and after deducting estimated underwriting
discounts and commissions and estimated offering expenses
payable by us.
We currently expect to use our net proceeds from this offering
as follows:
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approximately $ to pay dividends
accrued relating to our outstanding Series
A-1
preferred stock;
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approximately $ million to
repay all borrowings outstanding under our revolving line of
credit and our subordinated debt;
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up to £4.1 million (or approximately $6.1 million
based on the exchange rate of pounds sterling to US dollars
on March 5, 2010) for the cash portion of the purchase
price for the acquisition of the remaining 22.4% outstanding
equity interest in Psynova; and
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the remainder for working capital and other general corporate
purposes, including, but not limited to the following:
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approximately $ million to build our commercial
capabilities in selling and marketing relating to our VeriPsych
test;
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approximately $ million to fund research and
development programs for our VeriPsych test and other diagnostic
initiatives;
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approximately $ million to expand our
facilities and laboratory operations capacity; and
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the remaining $ million for other general
corporate purposes.
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On August 10, 2009, we entered into a revolving line of
credit with BBVA Compass Bank, or Compass, for up to
$9.0 million. The balance drawn under the revolving line of
credit was $3.5 million at March 31, 2010. No
additional amounts were drawn on the revolving line of credit as
of April 19, 2010. The monthly interest is calculated at
the lesser of the (i) Compass prime rate plus 0.375%; and
(ii) maximum rate which is the greater of the highest rate
allowed per law and the highest rate allowed under the Texas
Finance Code; except the interest rate can never be less than 4%
per annum. The line of credit also bears a 0.25% quarterly fee
for any unused portion of the line of credit. Interest is due
and payable monthly beginning one month after the loan date.
Monthly principal payments are not required; however, any unpaid
principal balance is due and payable on the maturity date. The
revolving line of credit matures on August 10, 2011.
On September 17, 2009, we entered into a Loan and Security
Agreement for subordinated debt with Heartland Community Bank
for $5.0 million. We used proceeds from this loan to
acquire an additional 21,718,276 shares of Preferred A
Ordinary Shares in Psynova pursuant to a Share Purchase and Sale
Agreement by and among Porton Capital Inc, Porton Capital
Technology Funds and us. The subordinated debt bears interest at
a fixed rate of 8.00% per annum and matures on
September 17, 2011. See Managements Discussion
and Analysis of Financial Condition and Results of
OperationsLiquidity and Capital ResourcesCapital
Resources for a more detailed description.
On December 31, 2009, we amended our Loan and Security
Agreement with Heartland to increase the subordinated debt to
$10.0 million to fund the launch of our VeriPsych test and
to support general working capital needs. The additional
$5.0 million of subordinated debt bears interest at a fixed
rate of 8.00% per annum and matures on September 17,
2011. See Managements Discussion and Analysis of
Financial Condition and Results of
Operations Liquidity and Capital
Resources Capital Resources for a more
detailed description.
In connection with our prepayment of the subordinated debt with
the proceeds from this offering, we will recognize a one-time
non-cash expense relating to the write-off of deferred financing
costs, which was approximately $1.0 million as of
March 31, 2010, in the period in which the debt is repaid.
31
Pending the use of proceeds described above, we plan to invest
the net proceeds from this offering in short-term and
intermediate-term, interest-bearing obligations,
investment-grade instruments, certificates of deposit or direct
or guaranteed obligations of the U.S. government.
On March 5, 2010, we entered into share acquisition
agreements with the remaining shareholders of Psynova as part of
a plan of acquisition to purchase the remaining 3,515,116
Preferred A Ordinary Shares and 14,465,427 Ordinary Shares
(including shares issued in connection with options to purchase
1,562,427 Ordinary Shares) in Psynova for an aggregate of
£4.7 million (or approximately $7.0 million based
on the exchange rate of pounds sterling to US dollars on
March 5, 2010). Under the terms of the share acquisition
agreements, the aggregate purchase price is payable in two
installments. £0.3 million of the first installment
must be paid in cash and £3.4 million may be paid at
our option in cash or with shares of our common stock. Of the
second installment, £0.1 million must be paid in cash,
£0.6 million must be paid through the issuance of
shares of our common stock and £0.3 million may be
paid at our option in cash or with shares of our common stock.
See Certain Relationships and Related Party
TransactionsAcquisition of Shares of Psynova Neurotech
Ltd. for a description of this acquisition.
32
Dividend
Policy
We currently intend to retain all future earnings, if any, for
use in the operation and expansion of our business and do not
anticipate paying any cash dividends in the foreseeable future.
Any future determination related to dividend policy will be made
at the discretion of our board of directors and will depend upon
our results of operations, financial condition, capital
requirements, contractual restrictions and such other factors as
our board of directors deems relevant.
33
Capitalization
The following table sets forth our capitalization as of
March 31, 2010:
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on an actual basis;
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on a pro forma basis to give effect to the automatic conversion
of all of the outstanding shares of our preferred stock into an
aggregate
of shares
of our common stock immediately prior to the closing of this
offering; and
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on a pro forma as adjusted basis to give further effect to the
sale
of shares
of common stock at an assumed initial public offering price of
$ per share, which is the midpoint
of the price range listed on the cover of this prospectus, after
deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us.
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Pro
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Pro Forma as
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Actual
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Forma
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Adjusted(1)
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(In thousands, except share amounts)
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Cash and cash equivalents
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$
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5,045
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$
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$
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Long-term debt, less current portion
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$
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13,642
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$
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$
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Series A-1
preferred stock, $0.001 par value: authorized
shares8,475,231
actual, pro
forma
and pro
forma as adjusted; issued and outstanding shares7,485,231
actual, pro
forma
and pro
forma as adjusted
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26,167
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Stockholders equity:
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Common stock, $0.001 par value: authorized
shares17,315,980
actual, pro
forma
and pro
forma as adjusted; issued and outstanding shares8,446,838
actual, pro
forma
and pro
forma as adjusted
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8
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Additional paid-in capital
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2,147
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Accumulated other comprehensive income
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(95
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)
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Accumulated deficit
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(6,689
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)
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Total RBM stockholders deficit
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(4,629
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)
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Total capitalization
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$
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35,180
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$
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$
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(1)
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Each $1.00 increase or decrease in
the assumed public offering price of
$ per share, which is the midpoint
of the price range listed on the cover of this prospectus, would
increase or decrease the net proceeds to us from this offering
by approximately $ million,
or approximately $ million if
the underwriters exercise their option to purchase additional
shares of our common stock, in each case assuming the number of
shares of our common stock offered by us, as set forth on the
cover of this prospectus, remains the same and after deducting
the estimated underwriting discounts and commissions and
estimated offering expenses payable by us.
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The table above does not include as of March 31, 2010:
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200,000 shares of common stock issuable upon the exercise
of outstanding warrants at an exercise price of $9.00 per share;
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796,950 shares of common stock issuable upon the exercise
of outstanding options at a weighted average exercise price of
$4.17 per share;
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23,799 shares of common stock reserved for future issuance
under our 2007 Long Term Incentive Plan;
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2,200,000 shares of common stock reserved for future
issuance under our 2010 Long Term Incentive Plan; and
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any shares of common stock to be issued in connection with our
acquisition of the remaining 22.4% interest in Psynova. See
Certain Relationships and Related Party
TransactionsAcquisition of Shares of Psynova Neurotech
Ltd.
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34
Prior to the commencement of this offering, we intend to amend
our certificate of incorporation to amend the conversion
provisions of our
Series A-1
preferred stock. The amended conversion provisions will provide
that upon the completion of this offering, the number of shares
of our common stock issuable upon conversion of each share of
our
Series A-1
preferred stock varies according to a formula that depends on
the initial public offering price. As a result, the total number
of shares of our common stock that will be outstanding following
this offering depends on the initial public offering price. The
conversion ratio will vary based on a set of six predetermined
ranges. The following table shows how the number of shares
varies over a range of predetermined initial public offering
prices:
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Initial Public Offering Price
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$
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$
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$
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$
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$
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$
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Number of shares of common stock outstanding, actual
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Number of shares of common stock issued upon conversion of
Series A-1
preferred stock
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Number of shares of our common stock issued in the offering
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|
|
|
|
|
|
Total number of shares of common stock outstanding following the
offering, as adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For more information on the conversion provisions of our
Series A-1
preferred stock, see Description of Capital Stock.
35
Dilution
If you invest in our common stock in this offering, your
interest will be diluted to the extent the initial public
offering price per share of our common stock exceeds the
historical net tangible book value per share of our common
stock. As of March 31, 2010, our historical net tangible
book value was $(3.0) million, or $(0.19) per share of
common stock, based on 8,446,838 shares of our common stock
outstanding and the assumed conversion of all outstanding shares
of our preferred stock into 7,485,231 shares of common
stock. Our historical net tangible book value represents the
amount of our total tangible assets reduced by the amount of our
total liabilities and noncontrolling interest.
Pro forma net tangible book value per share gives effect to the
conversion of all of our preferred stock
into shares of our common
stock, which will occur upon completion of this offering.
After giving further effect to the sale by us
of shares of common stock in
this offering at an assumed initial public offering price of
$ per share, after taking into
account the automatic conversion of our
Series A-1
preferred stock upon completion of this offering, and after
deducting underwriting discounts and commissions and estimated
offering expenses payable by us, our pro forma as adjusted net
tangible book value as of March 31, 2010 would have been
approximately $ million, or
approximately $ per share. This
amount represents an immediate increase in pro forma net
tangible book value of $ per share
to our existing shareholders and an immediate dilution in pro
forma net tangible book value of approximately
$ per share to new investors
purchasing shares of common stock in this offering. We determine
dilution by subtracting the pro forma as adjusted net tangible
book value per share after this offering from the amount of cash
that a new investor paid for a share of common stock. The
following table illustrates this dilution on a per share basis:
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share
|
|
|
|
|
|
$
|
|
|
Historical net tangible book value per share as of
March 31, 2010
|
|
$
|
(0.19
|
)
|
|
|
|
|
Effect on net tangible book value per share attributable to
conversion of preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share as of March 31, 2010
|
|
|
|
|
|
|
|
|
Increase per share attributable to investors purchasing shares
in this offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net tangible book value per share after
this offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to new investors
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Each $1.00 increase or decrease in the assumed initial public
offering price of
$ per
share, which is the midpoint of the price range set forth on the
cover of this prospectus, would increase or decrease our pro
forma as adjusted net tangible book value by approximately
$ , our pro forma as adjusted net
tangible book value per share by approximately
$ per
share and the dilution to investors in this offering by
approximately
$ per
share, assuming the number of shares offered by us, as set forth
on the cover of this prospectus, remains the same and after
deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us.
The following table summarizes, as of March 31, 2010, on a
pro forma as adjusted basis, the differences between the number
of shares of common stock purchased from us, the total effective
cash consideration paid to us and the average price per share
paid by our existing stockholders and by our new investors
purchasing stock in this offering at an assumed initial public
offering price of
$ per
share, which is the midpoint of the price range set forth on the
cover of this prospectus, before deducting the estimated
underwriting discounts and commissions and estimated offering
expenses payable by us. The following table is illustrative only
and the total consideration paid
36
and the average price per share are subject to adjustment based
on the actual initial public offering price and other terms of
this offering determined at pricing.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
per Share
|
|
|
|
(In thousands, except per share data)
|
|
|
Existing stockholders before this offering
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
New investors participating in this offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
100.0
|
%
|
|
|
|
|
|
$
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Each $1.00 increase or decrease in the assumed initial public
offering price of
$ per
share, which is the midpoint of the price range set forth on the
cover of this prospectus, would increase or decrease total gross
consideration paid by new investors, total gross consideration
paid by all stockholders and the average price per share paid by
all stockholders by
$ million,
$ million and
$ per
share, respectively, assuming the number of shares offered by
us, as set forth on the cover of this prospectus, exclusive of
the additional shares subject to the underwriters option
to purchase, remains the same and after deducting the estimated
underwriting discounts and commissions and estimated offering
expenses payable by us.
The discussions and tables above assume no exercise of the
outstanding options or warrants with exercise prices that are
below the assumed initial public offering price. To the extent
any of these options or warrants are exercised, there will be
further dilution to investors in the offering. The discussions
and tables above do not include any shares of our common stock
that may be issued in connection with our acquisition of the
remaining 22.4% interest in Psynova because the shares will not
be issued before the completion of this offering and, if issued
within 30 days after completion of this offering, will be issued
at the same price per share as the shares sold in this offering
resulting in no dilution to new investors purchasing shares of
common stock in this offering.
If the underwriters exercise their option to purchase additional
shares in full, the following will occur:
|
|
|
|
|
the percentage of shares of our common stock held by existing
stockholders will decrease to
approximately % of the total number
of shares of our common stock outstanding after this offering;
|
|
|
|
the number of shares of our common stock held by new public
investors will increase
to ,
or approximately % of the total
number of shares of our common stock outstanding after this
offering; and
|
|
|
|
our pro forma as adjusted net tangible book value will increase
to
$ per
share to existing stockholders and our pro forma as adjusted net
tangible book value will be diluted by
$ per
share to new investors.
|
37
Unaudited Pro
Forma Financial Data
The following unaudited pro forma consolidated statement of
operations for the year ended December 31, 2009 give effect
to the acquisition of our controlling interest in Psynova as if
it had been completed on January 1, 2009. Our consolidated
financial statements for the year ended December 31, 2009
include the results of operations of Psynova from
September 18, 2009, the date on which we acquired our
controlling interest, to December 31, 2009. The statement
of operations of Psynova for the year ended December 31,
2009 includes its results of operations for the period from
January 1, 2009 to September 17, 2009, which were
derived from Psynovas interim financial statements as
adjusted to reflect the conversion to US GAAP. The
following unaudited pro forma condensed consolidated statement
of operations and balance sheet as of and for the three months
ended March 31, 2010 give effect to the pending transaction
to purchase the remaining interest in Psynova as described in
Certain Relationships and Related Party
TransactionsAcquisition of Shares of Psynova Neurotech
Ltd. as if it had occurred on January 1, 2010.
The unaudited pro forma consolidated financial data has been
prepared by our management based upon the financial statements
of Psynova included elsewhere within this prospectus and reflect
certain estimates and assumptions described in the accompanying
notes to the unaudited pro forma consolidated statement of
operations and unaudited pro forma consolidated balance sheet.
The unaudited pro forma consolidated statements of operations
and unaudited pro forma consolidated balance sheet should be
read in conjunction with our audited consolidated financial
statements, our unaudited condensed consolidated financial
statements and the audited financial statements of Psynova,
which are included elsewhere in this prospectus.
The unaudited pro forma consolidated statement of operations is
not necessarily indicative of operating results that would have
been achieved had the acquisition of Psynova actually been
completed on January 1, 2009 and should not be construed as
representative of future operating results. The unaudited pro
forma consolidated balance sheet is not necessarily indicative
of the pending transaction to acquire the remaining interest in
Psynova had it been achieved on January 1, 2010 and is
subject to adjustment upon completion of the transaction.
38
Rules-Based
Medicine, Inc.
Unaudited Pro
Forma Consolidated Statements of Operations
for the Year
Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
RBM
|
|
|
Psynova
|
|
|
Adjustments
|
|
|
Consolidated
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Pharmaceutical testing products and services revenues
|
|
$
|
24,641
|
|
|
$
|
184
|
|
|
$
|
(1,352
|
)(1)
|
|
$
|
23,473
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
9,985
|
|
|
|
|
|
|
|
|
|
|
|
9,985
|
|
Research and development
|
|
|
4,803
|
|
|
|
2,043
|
|
|
|
(1,352
|
)(2)
|
|
|
5,494
|
|
Sales and marketing
|
|
|
5,252
|
|
|
|
|
|
|
|
|
|
|
|
5,252
|
|
General and administrative
|
|
|
2,867
|
|
|
|
166
|
|
|
|
|
|
|
|
3,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
22,907
|
|
|
|
2,209
|
|
|
|
(1,352
|
)
|
|
|
23,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
1,734
|
|
|
|
(2,025
|
)
|
|
|
|
|
|
|
(291
|
)
|
Gain on re-measurement of Psynova
|
|
|
1,947
|
|
|
|
|
|
|
|
(997
|
)(3)
|
|
|
950
|
|
Interest and other income (expense), net
|
|
|
(1,293
|
)
|
|
|
(58
|
)
|
|
|
597
|
(3)(4)
|
|
|
(754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
2,388
|
|
|
|
(2,083
|
)
|
|
|
(400
|
)
|
|
|
(95
|
)
|
Provision for income taxes
|
|
|
708
|
|
|
|
|
|
|
|
(685
|
)(5)
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,680
|
|
|
$
|
(2,083
|
)
|
|
$
|
285
|
|
|
$
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less net income (loss) attributable to noncontrolling interests
|
|
|
(21
|
)
|
|
|
(467
|
)
|
|
|
|
|
|
|
(488
|
)
|
Net income (loss) attributable to RBM
|
|
$
|
1,701
|
|
|
$
|
(1,616
|
)
|
|
$
|
285
|
|
|
$
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to preferred stockholders
|
|
|
1,528
|
|
|
|
|
|
|
|
|
|
|
|
1,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to RBM common stockholders
|
|
$
|
173
|
|
|
$
|
(1,616
|
)
|
|
$
|
285
|
|
|
$
|
(1,158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to RBM common
stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
8,446,838
|
|
|
|
|
|
|
|
|
|
|
|
8,446,838
|
|
|
39
Rules-Based
Medicine, Inc.
Unaudited Pro
Forma Condensed Consolidated Statements of Operations
for the Three
Months Ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RBM
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
Consolidated
|
|
|
Adjustments
|
|
|
Consolidated
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Pharmaceutical testing products and services revenues
|
|
$
|
5,616
|
|
|
$
|
|
|
|
$
|
5,616
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
2,383
|
|
|
|
|
|
|
|
2,383
|
|
Research and development
|
|
|
1,372
|
|
|
|
|
|
|
|
1,372
|
|
Sales and marketing
|
|
|
1,727
|
|
|
|
|
|
|
|
1,727
|
|
General and administrative
|
|
|
1,212
|
|
|
|
|
|
|
|
1,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
6,694
|
|
|
|
|
|
|
|
6,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,078
|
)
|
|
|
|
|
|
|
(1,078
|
)
|
Interest and other income (expense), net
|
|
|
(354
|
)
|
|
|
(56
|
)(4)
|
|
|
(410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income loss before income taxes
|
|
|
(1,432
|
)
|
|
|
(56
|
)
|
|
|
(1,488
|
)
|
Benefit for income taxes
|
|
|
(357
|
)
|
|
|
(19
|
)(5)
|
|
|
(376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,075
|
)
|
|
$
|
(37
|
)
|
|
$
|
(1,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less net loss attributable to noncontrolling interests
|
|
|
(168
|
)
|
|
|
168
|
(6)
|
|
|
|
|
Net loss attributable to RBM
|
|
$
|
(907
|
)
|
|
$
|
(205
|
)
|
|
$
|
(1,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to preferred shareholders
|
|
|
399
|
|
|
|
|
|
|
|
399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to RBM common stockholders
|
|
$
|
(1,306
|
)
|
|
$
|
(205
|
)
|
|
$
|
(1,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
8,446,838
|
|
|
|
|
|
|
|
8,757,920
|
|
|
40
Rules-Based
Medicine, Inc.
Unaudited Pro
Forma Condensed Consolidated Balance Sheet
As of
March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RBM
|
|
|
Pro Forma
|
|
|
|
|
|
|
Consolidated
|
|
|
Adjustments
|
|
|
Proforma
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,045
|
|
|
|
(2,814
|
)(7)
|
|
$
|
2,231
|
|
Restricted cash
|
|
|
832
|
|
|
|
|
|
|
|
832
|
|
Accounts receivable and related party receivable
|
|
|
4,195
|
|
|
|
|
|
|
|
4,195
|
|
Inventory, net
|
|
|
7,226
|
|
|
|
|
|
|
|
7,226
|
|
Deferred equity financing costs
|
|
|
2,167
|
|
|
|
|
|
|
|
2,167
|
|
Prepaid expenses and other current assets
|
|
|
1,157
|
|
|
|
|
|
|
|
1,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
20,622
|
|
|
|
(2,814
|
)
|
|
$
|
17,808
|
|
Property and equipment, net
|
|
|
3,204
|
|
|
|
|
|
|
|
3,204
|
|
Goodwill
|
|
|
4,884
|
|
|
|
|
|
|
|
4,884
|
|
Intangibles, net
|
|
|
19,693
|
|
|
|
|
|
|
|
19,693
|
|
Investments in private companies, at cost
|
|
|
1,669
|
|
|
|
|
|
|
|
1,669
|
|
Other long-term assets
|
|
|
1,273
|
|
|
|
|
|
|
|
1,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
51,345
|
|
|
$
|
(2,814
|
)
|
|
$
|
48,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Account payable
|
|
$
|
4,559
|
|
|
|
|
|
|
$
|
4,559
|
|
Accrued expenses and other current liabilities
|
|
|
4,129
|
|
|
|
|
|
|
|
4,129
|
|
Deferred revenue
|
|
|
1,172
|
|
|
|
|
|
|
|
1,172
|
|
Current portion of long-term debt and capital leases
|
|
|
229
|
|
|
|
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
10,089
|
|
|
|
|
|
|
|
10,089
|
|
Long-term debt and capital leases, less current portion
|
|
|
13,691
|
|
|
|
|
|
|
|
13,691
|
|
Deferred income tax
|
|
|
3,902
|
|
|
|
|
|
|
|
3,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
27,682
|
|
|
|
|
|
|
|
27,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
26,167
|
|
|
|
|
|
|
|
26,167
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
8
|
|
|
|
1
|
(8)
|
|
|
9
|
|
Additional paid-in capital
|
|
|
2,147
|
|
|
|
(690
|
)(8)(9)
|
|
|
1,457
|
|
Accumulated other comprehensive income
|
|
|
(95
|
)
|
|
|
|
|
|
|
(95
|
)
|
Accumulated deficit
|
|
|
(6,689
|
)
|
|
|
|
|
|
|
(6,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(4,629
|
)
|
|
|
(689
|
)
|
|
|
(5,318
|
)
|
Noncontrolling interest
|
|
|
2,125
|
|
|
|
(2,125
|
)(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
51,345
|
|
|
$
|
(2,814
|
)
|
|
$
|
48,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
Rules-Based
Medicine, Inc.
Notes to the
Unaudited Pro Forma Consolidated Financial Statements
|
|
|
(1)
|
|
Includes the elimination of
revenues recorded by us for sales to Psynova of
$1.4 million in the year ended December 31, 2009.
|
|
(2)
|
|
Includes the elimination of costs
recorded by Psynova as research and development associated with
revenues recorded by RBM described in (1) above.
|
|
(3)
|
|
Elimination of the equity interest
in the loss of Psynova of $1.0 million in the year ended
December 31, 2009 against the gain on our re-measurement of
Psynova in September 2009, which resulted in Psynova being
accounted for as a business combination rather than under the
equity method.
|
|
|
|
(4)
|
|
Addition of interest expense of
$0.4 million assuming the $5.0 million subordinated
debt was incurred on January 1, 2009 to purchase our
additional interest in Psynova. The addition of
$0.1 million of interest assuming $2.8 million of cash
was borrowed on January 1, 2010 to purchase the
noncontrolling interest of Psynova in the three months ended
March 31, 2010.
|
|
|
|
(5)
|
|
To record a 28% tax benefit of
$0.6 million on the net loss recorded by Psynova in the
year ended December 31, 2009. The corporate tax rate in the
United Kingdom is 28%. In addition, there was a 34% tax benefit
of $0.1 million and $19,000 for the decrease in interest
and other income (expense), net in the year ended
December 31, 2009 and three months ended March 31,
2010, respectively.
|
|
(6)
|
|
Elimination of the net loss
attributable to noncontrolling interest in Psynova of
$0.2 million as a result of the pending transaction to
purchase the remaining interest in Psynova.
|
|
(7)
|
|
To record 40% of the purchase price
of the remaining interest in Psynova as outlined in
Certain Relationships and Related Party
Transactions Acquisition of Shares of Psynova
Neurotech Ltd as paid in cash using the exchange rate of
£1.51 to $1.00 at March 31, 2010. This USD price is
subject to adjustment upon completion of the transaction.
|
|
(8)
|
|
To record 60% of the purchase price
of the remaining interest in Psynova as outlined in
Certain Relationships and Related Party
Transactions Acquisition of Shares of Psynova
Neurotech Ltd as paid in restricted stock using the
exchange rate of £1.51 to $1.00 at March 31, 2010.
This USD price is subject to adjustment upon completion of the
transaction.
|
|
(9)
|
|
Elimination of the noncontrolling
interest in Psynova of $2.1 million for $7.0 million
in consideration with $2.8 million in cash and
$4.2 million in RBM common stock. The cash consideration in
excess of the noncontrolling interest of $2.1 million
results in a reduction of total stockholders equity of
$0.7 million. Under FASB guidance for business
combinations, the acquisition of additional equity interests
after the acquirer has obtain control of the acquiree is
accounted for as an equity transaction.
|
42
Selected
Consolidated Historical Financial Data
The following table provides our selected consolidated
historical financial data for the periods indicated. The
selected consolidated historical financial data as of and for
the years ended December 31, 2005 and 2006 have been
derived from our audited consolidated financial statements for
the years ended June 30, 2005, 2006 and 2007 by applying
appropriate cutoff procedures. The selected consolidated
historical financial data as of and for each of the years ended
December 31, 2007, 2008 and 2009 have been derived from our
audited consolidated financial statements, which are included
elsewhere in this prospectus. We have derived the following
consolidated financial data for the three months ended
March 31, 2009 and 2010 and consolidated balance sheet data
as of March 31, 2010 from our unaudited condensed
consolidated financial statements included elsewhere in this
prospectus. Such data may not be indicative of the financial
results to be achieved for the full year. Upon our acquisition
of a controlling interest in Psynova on September 18, 2009,
we consolidated Psynovas financial position and results of
operations with our own as of and for the periods subsequent to
the date of such acquisition. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations. You should read this information together with
our consolidated financial statements and related notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
March 31,
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pharmaceutical testing products and services revenues
|
|
$
|
4,847
|
|
|
$
|
7,204
|
|
|
$
|
13,037
|
|
|
$
|
21,669
|
|
|
$
|
24,641
|
|
|
$
|
5,830
|
|
|
$
|
5,616
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
1,813
|
|
|
|
3,053
|
|
|
|
4,868
|
|
|
|
8,590
|
|
|
|
9,985
|
|
|
|
2,457
|
|
|
|
2,383
|
|
|
|
|
|
Research and development
|
|
|
685
|
|
|
|
1,272
|
|
|
|
1,544
|
|
|
|
3,235
|
|
|
|
4,803
|
|
|
|
896
|
|
|
|
1,372
|
|
|
|
|
|
Sales and marketing
|
|
|
617
|
|
|
|
1,096
|
|
|
|
2,575
|
|
|
|
4,368
|
|
|
|
5,252
|
|
|
|
1,228
|
|
|
|
1,727
|
|
|
|
|
|
General and administrative
|
|
|
630
|
|
|
|
1,216
|
|
|
|
1,676
|
|
|
|
2,520
|
|
|
|
2,867
|
|
|
|
770
|
|
|
|
1,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,745
|
|
|
|
6,637
|
|
|
|
10,663
|
|
|
|
18,713
|
|
|
|
22,907
|
|
|
|
5,351
|
|
|
|
6,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
1,102
|
|
|
|
567
|
|
|
|
2,374
|
|
|
|
2,956
|
|
|
|
1,734
|
|
|
|
479
|
|
|
|
(1,078
|
)
|
|
|
|
|
Gain on re-measurement of Psynova
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in loss of Pysnova
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(997
|
)
|
|
|
(263
|
)
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
|
(63
|
)
|
|
|
(41
|
)
|
|
|
51
|
|
|
|
138
|
|
|
|
(296
|
)
|
|
|
(51
|
)
|
|
|
(354
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
1,039
|
|
|
|
526
|
|
|
|
2,425
|
|
|
|
3,094
|
|
|
|
2,388
|
|
|
|
165
|
|
|
|
(1,432
|
)
|
|
|
|
|
Provision (benefit) for income taxes
|
|
|
|
|
|
|
|
|
|
|
433
|
|
|
|
1,218
|
|
|
|
708
|
|
|
|
45
|
|
|
|
(357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,039
|
|
|
$
|
526
|
|
|
$
|
1,992
|
|
|
$
|
1,876
|
|
|
$
|
1,680
|
|
|
$
|
120
|
|
|
$
|
(1,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less net loss attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to RBM
|
|
$
|
1,039
|
|
|
$
|
526
|
|
|
$
|
1,992
|
|
|
$
|
1,876
|
|
|
$
|
1,701
|
|
|
$
|
120
|
|
|
$
|
(907
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to preferred stockholders
|
|
|
310
|
|
|
|
310
|
|
|
|
598
|
|
|
|
1,441
|
|
|
|
1,528
|
|
|
|
376
|
|
|
|
399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
729
|
|
|
$
|
216
|
|
|
$
|
1,394
|
|
|
$
|
435
|
|
|
$
|
173
|
|
|
$
|
(256
|
)
|
|
$
|
(1,306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.08
|
|
|
$
|
0.02
|
|
|
$
|
0.16
|
|
|
$
|
0.05
|
|
|
$
|
0.02
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute net income (loss) per share attributable
to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
9,010,000
|
|
|
|
9,010,000
|
|
|
|
8,814,989
|
|
|
|
8,326,512
|
|
|
|
8,446,838
|
|
|
|
8,446,838
|
|
|
|
8,446,838
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,211
|
|
|
$
|
976
|
|
|
$
|
9,380
|
|
|
$
|
2,536
|
|
|
$
|
7,049
|
|
|
$
|
5,045
|
|
Working capital
|
|
|
1,115
|
|
|
|
951
|
|
|
|
10,617
|
|
|
|
7,955
|
|
|
|
12,685
|
|
|
|
10,533
|
|
Total assets
|
|
|
6,323
|
|
|
|
7,485
|
|
|
|
25,234
|
|
|
|
28,708
|
|
|
|
51,430
|
|
|
|
51,345
|
|
Long-term debt, less current portion
|
|
|
1,472
|
|
|
|
1,611
|
|
|
|
81
|
|
|
|
506
|
|
|
|
13,651
|
|
|
|
13,642
|
|
Total liabilities
|
|
|
3,176
|
|
|
|
3,899
|
|
|
|
7,295
|
|
|
|
7,707
|
|
|
|
26,152
|
|
|
|
27,682
|
|
Series A-1
preferred stock
|
|
|
|
|
|
|
|
|
|
|
23,716
|
|
|
|
25,156
|
|
|
|
26,267
|
|
|
|
26,167
|
|
Total stockholders equity (deficit) attributable to RBM
|
|
|
3,145
|
|
|
|
3,585
|
|
|
|
(5,777
|
)
|
|
|
(4,155
|
)
|
|
|
(3,282
|
)
|
|
|
(4,629
|
)
|
|
44
Managements
Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with our consolidated financial statements and
related notes included elsewhere in this prospectus. In addition
to historical consolidated financial information, the following
discussion contains forward-looking statements that reflect our
plans, estimates and beliefs. Our actual results could differ
materially from those discussed in the forward-looking
statements. Factors that could cause or contribute to these
differences include those discussed below and elsewhere in this
prospectus, particularly in Risk Factors.
Overview
We are a life sciences company focused on the development and
commercialization of molecular diagnostic tests based on novel
biomarker patterns, initially for the psychiatric market. We
believe these novel biomarker patterns can provide quantitative,
objective information to aid in the diagnosis and treatment of
diseases or disorders where current objective tests either do
not exist or are not sufficiently accurate. We develop molecular
diagnostic tests using our proprietary multi-analyte profiling,
or MAP, technology. We intend to commercialize our initial
molecular diagnostic immunoassays as Laboratory Developed Tests,
or LDTs, using our high complexity Clinical Laboratory
Improvement Amendments of 1988, or CLIA, certified laboratory.
We believe we have assembled the largest collection of validated
multiplexed biomarker immunoassays in the life sciences
industry, allowing us to cast a wide net in the search for
clinically relevant biomarker patterns.
We provide testing products and services to the pharmaceutical,
biotechnology and medical research industries. We believe our
proprietary MAP technology creates efficiencies in the drug
discovery and development process by providing researchers with
more information on the effect of a particular drug on specific
biomarkers. Our testing services are based on our menu of
validated biomarker immunoassays, which we developed for our
multinational pharmaceutical and biotechnology company customers.
Our proprietary MAP technology was initially developed at
Luminex Corporation, or Luminex, beginning in 1998 by our
founding management team. To facilitate our acquisition of this
technology, Rules-Based Medicine, Inc. was incorporated in
Delaware on August 1, 2002, and we acquired the MAP
technology and associated assets from Luminex in September 2002.
In connection with the acquisition, we issued to Luminex
990,000 shares of our Series A preferred stock and
901,000 shares of our common stock. In October 2007, we
paid $12.5 million to Luminex to redeem all of its shares
of our Series A preferred stock, including accrued
dividends, all of its shares of our common stock and to license
certain diagnostic fields.
In November 2006, we acquired Multiplex Biosciences, Inc., a
provider of contract multiplex immunoassay development and
manufacturing services to augment our assay development and kit
manufacturing capabilities. In October 2007, we acquired the
capital stock of Experimentelle und Diagnostische Immunologie
GmbH, or EDI, a developer of human organotypic cell culture test
systems including our TruCulture product.
In May 2008, we entered into an agreement with Psynova to
co-develop and commercialize a blood-based test for the
diagnosis of recent-onset schizophrenia, which is described in
more detail below. Psynova was founded in 2005 as a spin-off
from the University of Cambridge for the commercial development
and exploitation of novel biomarkers for psychiatric illnesses.
Psynova licenses certain intellectual property from Cambridge,
including two patent applications owned by Cambridge directed to
the biomarker panel being commercialized in our VeriPsych test.
We have sublicensed from Psynova certain intellectual property,
including those two patent applications relating to the
development and commercialization of our VeriPsych test. The
Cambridge Centre for Neuropsychiatric Research, or The Bahn
Laboratory, a research unit under the direction of
Dr. Sabine Bahn that has been established within the
Institute of Biotechnology at the University of Cambridge, has
developed additional intellectual property, including submitted
patent applications and know-how, that we believe will be
important for the development of additional novel biomarker
patterns that may form the basis of future products such as the
differential diagnosis of
recent-onset
schizophrenia, bipolar disorder and major depressive disorder.
Psynova has the option to take licenses to all intellectual
property developed in The Bahn Laboratory. We have the
45
right of first refusal and right of last negotiation to take
licenses from Psynova to commercialize this intellectual
property.
In connection with our agreement with Psynova, we loaned Psynova
$1.4 million in cash on various dates in 2008 and provided
a credit towards our MAP testing services of $1.0 million.
Psynova used the credit for services in full during 2008.
Interest on the outstanding amount of the loan drawn by Psynova
accrued at 8% per year on a monthly basis and was added to
principal. We granted Psynova the right to require us to
purchase an additional 19,562,716 Preferred A Ordinary Shares if
certain performance milestones were reached on or before
December 31, 2008. In November 2008, Psynova achieved these
milestones with respect to the schizophrenia blood-based test
and the amounts under the loan, including all accrued interest,
plus the credit for services, converted into 15,558,003
Preferred A Ordinary Shares of Psynova. During this time,
Psynova exercised its right to require us to purchase an
additional 19,562,716 Preferred A Ordinary Shares for
$1.3 million in cash and $1.2 million in credit toward
future services, giving us a 47.9% equity interest in Psynova.
This investment was accounted for using the equity method for a
minority interest. In September 2009, we purchased an additional
21,718,276 Preferred A Ordinary Shares in Psynova pursuant to a
Share Purchase and Sale Agreement by and between Porton Capital
Inc., Porton Capital Technology Funds, both third-party
investors in Psynova, and us for $5.5 million, bringing our
total investment in Psynova to $9.8 million, or 77.6%, net
of our equity interest in the losses of Psynova. As a result of
this further acquisition in September 2009, we have consolidated
Psynovas financial position and results of operations with
our own as of and for the year ended December 31, 2009.
On March 5, 2010, we entered into share acquisition
agreements with the remaining shareholders of Psynova as part of
a plan of acquisition to purchase the remaining 22.4% interest
for an aggregate of £4.7 million. At the closing of
the transaction, Psynova will become a wholly owned subsidiary.
The closing date will occur on the earlier of 30 days
following the consummation of our initial public offering or
another date designated by us upon ten days written notice to
the selling shareholders.
Factors Affecting
Comparability
Historically, almost all of our revenue and substantially all of
our expenses have resulted from our pharmaceutical testing
products and services. Over the last two years, we have
committed substantial resources to applying our technology to
the development of proprietary diagnostic tests, which
represents a new field for us. In March 2010, we began making
our VeriPsych test as an aid in the diagnosis of
recent-onset
schizophrenia available for order. We focused our initial
marketing efforts on several leading academic psychiatry centers
and have subsequently begun marketing our VeriPsych test to
selected psychiatric group practices. We plan a broader launch
in the second half of 2010. Based on preliminary clinical data,
we believe that our VeriPsych test can also assist psychiatrists
in differentiating among patients with schizophrenia, patients
with bipolar disorder and patients with major depressive
disorder, which we intend to market in 2011.
There are inherent risks in entering into a new service
offering. We expect that our expansion into the molecular
diagnostic testing industry will have the following impact on
our financial results:
|
|
|
|
|
RevenueWe expect revenues from our molecular
diagnostic tests to be a substantial portion of our future
revenues. The extent of our future diagnostic testing revenue
will, however, depend greatly on whether the psychiatric
community accepts our products and services and whether health
insurers and other payors will pay for our VeriPsych test or
other future psychiatric diagnostic testing products and
services.
|
|
|
|
Cost of RevenuesOur cost of revenues as a
percentage of total revenues will increase during the initial
launch of our molecular diagnostic tests as a result of our
start-up
costs associated with launching the service offering. Longer
term, we expect cost of revenues, as a percentage of revenue, to
decrease as we allocate these relatively predictable operating
costs over an expanding revenue base.
|
|
|
|
Research and DevelopmentOur research and
development expenses will increase as result of our need for
more self-directed research and development programs.
Historically, we have relied principally on research and
development accumulated through our testing work with
pharmaceutical and biotechnology companies.
|
|
|
|
Sales and MarketingOur sales and marketing expense
will increase significantly during 2010 as we add additional
sales professionals to our staff and engage in expanded sales
and marketing activities. Additionally,
|
46
|
|
|
|
|
if, as we expect, we launch our VeriPsych test on a broader
scale in the second half of 2010, we expect this expense to
further increase.
|
|
|
|
|
|
General and AdministrativeAs a result of our
efforts to expand our molecular diagnostic tests and become a
public company, we anticipate hiring additional administrative
and financial staff to effectively manage a larger organization
and comply with the requirements of being a public company.
|
|
|
|
Allowance for Doubtful AccountsAs we commercialize
our molecular diagnostic tests, we will need to evaluate
estimated losses from potential customer non-payment and
insufficient reimbursement from payors. Historically, our
accounts receivable write-offs have been nominal.
|
|
|
|
Working CapitalOur working capital needs will
likely increase as we rely more on reimbursements from payors,
causing our accounts receivables to increase, which may require
us to finance our operations, in large part, through means other
than cash on hand, such as borrowings under our revolving line
of credit. In addition, it will be difficult for us, at least
initially, to estimate our allowance for doubtful accounts,
given the uncertainty of reimbursement and payment patterns.
|
In the years ended December 31, 2007, 2008 and 2009, our
revenues were $13.0 million, $21.7 million and
$24.6 million, respectively, and our income from operations
was $2.4 million, $2.9 million and $1.7 million,
respectively. Our net income attributable to our common
stockholders during these periods was $1.4 million,
$0.4 million and $0.2 million, respectively. We will
devote a significant amount of our efforts and cash resources
towards our development and commercialization of molecular
diagnostic tests including researching and pursuing potential
new opportunities. Although we have generated operating income
in previous years, we expect to incur operating losses for at
least the next two years as we expand our molecular diagnostic
tests and make significant expenditures in research and
development, sales and marketing and general and administrative
activities.
Key Components of
Our Results of Operations
Sources
of Revenue
Our business is the development and commercialization of
multiplexed immunoassay products and services. To date, a
substantial portion of our revenue has been derived from our
testing services, consisting largely of our MAP testing services
and sales of our TruCulture cell systems and human co-culture
cell systems projects. We also depend, to a lesser extent, on
revenues produced by our assay and kit development services, kit
products, research grants and government contracts. To date, we
have received nominal revenue from our molecular diagnostic
tests.
Operating
Expenses
We classify our operating expenses into four categories: cost of
revenues, research and development, sales and marketing and
general and administrative. Our operating expenses primarily
consist of personnel costs, overhead and supplies, royalties,
reagents, development costs, marketing program costs, legal,
accounting, information technology, consulting and other
professional service fees. Costs associated with laboratory
testing are recorded as tests are performed. Personnel costs for
each category of operating expenses include salaries, bonuses,
employee benefit costs and stock-based compensation for
personnel in that category. We allocate stock-based compensation
expense resulting from the amortization of the fair value of
options and restricted stock granted to the department in which
the employee works. We allocate overhead, such as rent and
depreciation, based on a combination of headcount and square
footage used by each department.
Cost of
revenues
Cost of revenues represents personnel costs, reagent costs,
laboratory supplies, depreciation and rent expense. Reagent
expenses are a significant component of our cost structure and
are expected to remain so for the foreseeable future.
Research
and development
Research and development expenses represent costs incurred to
develop our testing services and products and our technology.
These expenses include the cost of personnel, automation, rent,
reagents, supplies, sample acquisition
47
and the costs of professional services to secure and maintain
intellectual property rights. Our development efforts have been
devoted primarily to expanding our product offerings including
development of our molecular diagnostic tests. Historically, we
have relied principally on research and development accumulated
through our testing work with pharmaceutical and biotechnology
companies. In addition to the factors mentioned above, we expect
our research and development expenses to continue to increase in
2010 and beyond as a result of the acquisition of a controlling
interest in Psynova in September 2009, which will primarily
function as a research and development department.
Sales and
marketing
Our sales and marketing expenses consist primarily of personnel
costs including commissions paid to our direct sales team,
commissions paid to outside distributors, trade shows and
conferences, marketing collateral and travel. Sales and
marketing expenses also include the costs of advertising, public
relations and web site related costs. As we launch our molecular
diagnostic tests into markets that are new to us, we intend to
hire additional sales personnel for our pharmaceutical testing
products and services to expand our product and service
offerings into these new markets.
General
and administrative
Our general and administrative expenses include personnel costs,
legal, rent, business insurance, accounting and other
professional services, administrative costs and corporate costs.
We expect to incur significant additional costs in the year
ended December 31, 2010 and beyond associated with being a
public company, including higher legal, corporate insurance and
financial reporting costs and we expect that the additional
costs of achieving and maintaining compliance with
Section 404 of the Sarbanes-Oxley Act. As a result, our
general and administrative expenses will increase.
Other
Income (Expense)
Other income (expense) primarily consists of interest income,
interest expense and foreign currency gains and losses. For the
year ended December 31, 2009, other income (expense) also
includes our equity interest in the losses of Psynova and our
gain on the re-measurement of Psynova. Interest income
represents interest received on our cash and cash equivalents.
Interest expense represents interest and fees associated with
our line of credit with a national bank, our subordinated debt
outstanding and other outstanding indebtedness. Foreign currency
gains and losses arise from currency transactions denominated in
currencies other than U.S. dollars. These transactions have
historically not had a material impact on our results of
operations.
Provision
for Income Taxes
Provision for income taxes primarily consists of corporate
income taxes related to profits resulting from the sale of our
products and service offerings.
Critical
Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance
with accounting principles generally accepted in the United
States, or GAAP. The preparation of these financial statements
requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, costs and
expenses and related disclosures. We base our estimates on
historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. In many
instances, we could reasonably use different accounting
estimates, and in some instances changes in the accounting
estimates are reasonably likely to occur from
period-to-period.
Accordingly, actual results could differ significantly from the
estimates made by our management. To the extent that there are
differences between our estimates and actual results, our future
financial statement presentation, financial condition, results
of operations and cash flows will be affected. We believe that
the accounting policies discussed below are critical to
understanding our historical and future performance, as these
policies relate to the more significant areas involving
managements judgments and estimates.
48
Revenue
Recognition
Revenue is recognized when persuasive evidence of an agreement
exists, delivery has occurred, the fee is fixed and
determinable, and collection is probable. Such revenue
recognition generally occurs as the related service is
performed. Customer advances and amounts billed to customers in
excess of revenue recognized are recorded as deferred revenue.
Testing revenues, including testing related to TruCulture, are
recognized upon the delivery of the results of the tests to our
customers. Kit product and TruCulture tube sales are recognized
when the kit or tube, respectively, are shipped to customers.
We have received grants from federal agencies to provide testing
services to government researchers. These contracts are
generally established as cost reimbursement contracts. These
contracts are recognized based on a time and materials incurred
method of accounting. We record grants and government contracts
as revenue in accordance with FASB guidance for revenue
recognition for federal government contractors.
We expect to recognize revenue from sales of our VeriPsych test
in a manner consistent with our revenue recognition policies for
our existing testing services.
Allowance
for Doubtful Accounts
We have not historically maintained an allowance for doubtful
accounts as we have not experienced collectability issues in the
past. As we sell molecular diagnostic tests, we will need to
evaluate and make certain assumptions and judgments with respect
to estimated losses from potential customer non-payment and
insufficient reimbursement from payors. We will determine the
adequacy of the allowance on a periodic basis evaluating the
aging and past due nature of individual customer accounts
receivable balances and considering the customers current
financial situation as well as the existing economic conditions.
If our assumptions and judgments prove to be inaccurate, this
could have a material adverse effect on our revenues, results of
operations and earnings.
Inventory
Inventories consist primarily of raw reagents and testing kits.
Inventory is stated at the lower of cost or market on a
first-in, first-out basis through the use of an inventory
valuation allowance. In order to assess the ultimate realization
of inventories, we are required to make judgments as to future
demand requirements compared to current or committed inventory
levels. Allowance requirements generally increase as the
projected demand requirement decreases due to market conditions,
technological changes and product life cycle changes.
We review the components of our inventory on a quarterly basis
for excess and obsolete inventory based on estimated future
usage and sales. Inventories that are considered obsolete are
written off. Remaining inventory balances are adjusted to
approximate the lower of cost or market value. Historically, our
reserve has been adequate to cover inventory losses. Inventory
totaled $5.5 million and $5.9 million net of the
allowance for excess and obsolete inventory of $0.3 million
and $0.3 million at December 31, 2008 and 2009,
respectively. Inventory totaled $7.2 million net of the
allowance for excess and obsolete inventory of $0.4 million
at March 31, 2010.
Allocation
of Purchase Price to Acquired Assets and Liabilities in Business
Combinations
The cost of an acquired business is assigned to the tangible and
identifiable intangible assets acquired and liabilities assumed
on the basis of their fair values at the date of acquisition. We
assess fair value using a variety of methods including the use
of independent appraisers, present value models, and estimates
of current selling prices and replacement values. Amounts
recorded as intangible assets, including acquired in-process
research and development are based on assumptions and estimates
regarding the amount and timing of projected revenues and costs,
appropriate risk-adjusted discount rates, as well as assessing
the competitions ability to commercialize products before
we can. An estimate of fair value can be affected by many
assumptions which require judgment. For example, the income
approach generally requires assumptions related to the
appropriate business model to be used to estimate cash flows,
total addressable market, pricing forecasts, competition,
technological obsolescence, future tax rates and discount rates.
Our estimates of fair value, or our conclusion that the value of
certain assets is not
49
reliably estimable, may differ materially from that determined
by others who use different assumptions or business models. Upon
acquisition, we determine the estimated economic lives of the
acquired intangible assets for amortization purposes, which are
based on the underlying expected cash flows of such assets. We
assign fair values to acquired assets and liabilities in a
similar manner. Goodwill is determined based on the remaining
unallocated purchase price. We recorded a gain of
$1.9 million during the year ended December 31, 2009
in association with re-measuring our investment in Psynova.
Stock-Based
Compensation
We have granted our employees stock options for common stock and
restricted limited liability company interests in RBM Management
Group, LLC. Prior to the initiation of the stock option plan,
employees and management were issued limited liability company
interests in RBM Management Group, LLC, a holder of
4,514,010 shares of our common stock. The expense related
to these interests is treated as a capital contribution, and
recorded as such in the consolidated statements of
stockholders deficit. On January 1, 2006, we adopted
the Financial Accounting Standards Board, or FASB, guidance
relating to share-based payments. The FASB guidance requires
recognition of compensation costs for all share-based payment
awards made to employees based upon each awards estimated
grant date fair value. It covers employee stock options,
restricted stock and employee stock purchases related to
employee stock purchase plans.
We used the modified prospective transition method when we
adopted the FASB guidance for share-based payments. Under this
method, FASB guidance for share-based payments applies to new
equity awards and to equity awards modified, repurchased or
canceled after the adoption date. Additionally, compensation
cost for the portion of awards granted prior to the adoption
date for which the requisite service had not been rendered as of
the adoption date must be recognized as the employee renders the
requisite service. The compensation cost for that portion of
awards must be based on the grant-date fair value of those
awards as calculated in the prior period pro forma disclosures
under the FASB guidance for accounting for stock-based
compensation. The compensation cost for those earlier awards is
attributed to periods beginning on or after the adoption date
using the straight-line attribution method. Instead of
recognizing forfeitures only as they occur, we now estimate an
expected forfeiture rate and utilize it to determine our expense.
We utilize the Black-Scholes option-pricing model to determine
the fair value of our stock option awards. For stock options
that contain only a service vesting feature, we recognize
compensation cost on a straight-line basis over the respective
vesting periods.
During the years ended December 31, 2007, 2008 and 2009, we
recorded stock-based compensation expense of $0.2 million,
$0.2 million and $0.3 million, respectively. During
the three months ended March 31, 2009 and 2010, we recorded
stock-based compensation expense of $48,000 and
$0.1 million, respectively,
The following table summarizes the number of shares of common
stock subject to options granted in the years ended
December 31, 2007, 2008 and 2009 and the three months ended
March 31, 2010 and the associated per share exercise price
for each grant and the overall fair value of such grants. For
all stock options granted, the exercise price was set by our
board of directors. In each instance, the exercise price
exceeded the estimated fair value of our common stock at the
grant date, as determined by an independent valuation
consultant. As noted above, we utilize the Black-Scholes
option-pricing model to determine the fair value of our stock
option awards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Per Share
|
|
|
|
|
Year
|
|
Options Granted
|
|
|
Exercise Price
|
|
|
Fair Value
|
|
|
2007
|
|
|
12,500
|
|
|
$
|
2.85
|
|
|
$
|
7,213
|
|
2008
|
|
|
214,500
|
|
|
|
2.85
|
|
|
|
123,764
|
|
2009
|
|
|
446,500
|
|
|
|
3.98
|
|
|
|
922,565
|
|
Three months ended March 31, 2010
|
|
|
123,450
|
|
|
|
7.04
|
|
|
|
573,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
796,950
|
|
|
|
|
|
|
$
|
1,626,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
The estimated per share value of our common stock is based on
the option-pricing method, which is appropriate to use when the
range of possible future outcomes is difficult to predict. Under
the option-pricing method, the value of our business is
initially allocated to the preferred stock by determining a
series of call options with exercise prices based on liquidation
preferences and conversion rights, with the balance of the value
allocated to the common stock.
Goodwill
Goodwill is tested for impairment on an annual basis in
accordance with the authoritative guidance for goodwill.
Additionally, goodwill is tested in the interim if events and
circumstances indicate that goodwill may be impaired. The events
and circumstances that are considered include business climate,
legal factors, operating performance indicators and competition.
Impairment of goodwill is evaluated using a two-step process.
The first step involves a comparison of the fair value of the
reporting unit with its carrying amount. If the carrying amount
of the reporting unit exceeds its fair value, the second step of
the process involves a comparison of the fair value and the
carrying amount of the goodwill of that reporting unit. If the
carrying amount of the goodwill of a reporting unit exceeds the
fair value of that goodwill, an impairment loss would be
recognized in an amount equal to the excess of carrying value
over fair value. If an event occurs that would cause a revision
to the estimates and assumptions used in analyzing the value of
the goodwill, the revision could result in a non-cash impairment
charge that could have a material impact on the financial
results.
For the years ended December 31, 2008 and 2009 and the
three months ended March 31, 2010, we had goodwill in the
amount of $4.9 million, with $3.0 million related to
the acquisition of our MAP technology and associated assets from
Luminex in 2002, $0.1 million related to the acquisition of
Multiplex Biosciences, Inc. in November 2006, and
$1.8 million related to the acquisition of EDI in October
2007. These acquisitions were accounted for using the purchase
method of accounting. In accordance with the FASB issued
guidance on accounting for goodwill and other intangible assets,
we will assess the impairment of goodwill annually, or more
frequently if other indicators of potential impairment arise. As
of December 31, 2008 and 2009 and March 31, 2010, we
had assessed goodwill and determined that no impairment is
required.
Intangible
Assets
We capitalize the costs of internally developed software once
technological feasibility has been established. We also acquire
and may continue to acquire intangible assets. We amortize the
cost of each type of intangible asset to income over the period
estimated to be benefited. Intangible assets are continually
monitored and are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of
any such asset may not be recoverable. The determination of
recoverability is based on an estimate of undiscounted cash
flows expected to result from the use of an asset and its
eventual disposition. The estimate of undiscounted cash flows is
based upon, among other things, certain assumptions about
expected future operating performance, growth rates and other
factors. Our estimates of undiscounted cash flows may differ
from actual cash flows due to, among other things, technological
changes, economic conditions, changes to our business model or
changes in our operating performance. If the sum of the
undiscounted cash flows is less than the carrying value of the
asset, we recognize an impairment charge, measured as the amount
by which the carrying value exceeds the fair value of the asset.
We estimate fair value by discounting the projected cash flows
expected to be generated by the applicable asset over their
remaining useful life.
We believe the fair values and the useful lives of our
intangible assets are appropriate based upon the current and
future cash flows expected from such assets and our estimates
and assumptions used in projecting such cash flows to be
reasonable given available facts and circumstances for the years
ended December 31, 2008 and 2009 and the three months ended
March 31, 2010.
Income
Taxes
In the ordinary course of business, there are many transactions
for which the ultimate tax outcome is uncertain. We account for
income taxes in accordance with the FASB guidance for accounting
for income taxes. This statement prescribes the use of the
liability method whereby deferred tax asset and liability
account balances are
51
determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances are
established, when necessary, to reduce deferred tax assets to
the amount expected to be realized.
In June 2006, FASB issued guidance which supplements the
guidance for accounting for income taxes. This guidance defines
the confidence level that a tax position must meet in order to
be recognized in the financial statements. We regularly assess
uncertain tax positions in each of the tax jurisdictions in
which we have operations and account for the related financial
statement implications. Unrecognized tax benefits are reported
using the two-step approach under which tax effects of a
position is recognized only if it is
more-likely-than-not to be sustained and the amount
of the tax benefit recognized is equal to the largest tax
benefit that is greater than fifty percent likely of being
realized upon ultimate settlement of the tax position.
Determining the appropriate level of unrecognized tax benefits
requires us to exercise judgment regarding the uncertain
application of tax law. The amount of unrecognized tax benefits
is adjusted when information becomes available or when an event
occurs indicating a change is appropriate. Future changes in
unrecognized tax benefits requirements could have a material
impact on our results of operations.
On January 1, 2007, we adopted FASB issued guidance that
clarifies the accounting for uncertainty in income taxes
recognized in financial statements and requires the impact of a
tax position to be recognized in the financial statements if
that position is more likely than not to be sustained by the
taxing authority. Our practice is to recognize interest,
penalties, or both related to income tax matters in income tax
expense. During the years ended December 31, 2007, 2008 and
2009, we did not recognize any interest or penalties. During the
three months ended March 31, 2009 and 2010, we did not
recognize any interest or penalties.
A tax law change in the state of Texas became effective for our
fiscal year ended December 31, 2007. The tax is based on
taxable margin, as defined under the law, and is computed on
total gross revenues reduced by the greatest of three defined
amounts, rather than being based on federal taxable income. The
Texas margin tax is accounted for as an income tax. For the
years ended December 31, 2007, 2008 and 2009, we recorded
state tax expense of $0.1 million, $0.2 million and
$0.1 million, respectively. During the three months ended
March 31, 2009 and 2010, we recorded state tax expense of
$22,000 and $26,000, respectively.
Results of
Operations
Comparison
of the Three Months Ended March 31, 2010 and
2009
Pharmaceutical
Testing Products and Services Revenues
Pharmaceutical testing products and services revenues were
$5.6 million for the three months ended March 31, 2010
compared to $5.8 million for the comparable period in 2009,
a decrease of $0.2 million, or 3.7%. The decrease was
primarily attributable to a one-time recognition of testing
services performed for Satoris, Inc. in the three months ended
March 31, 2009 offset by an increase in RodentMAP testing
services as well as by an increase in grant revenues as a result
of increased grant awards in the three months ended
March 31, 2010.
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
|
Operating Expenses
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
2,457
|
|
|
|
42
|
%
|
|
$
|
2,383
|
|
|
|
42
|
%
|
|
$
|
(74
|
)
|
|
|
(3
|
)%
|
Research and development
|
|
|
896
|
|
|
|
15
|
%
|
|
|
1,372
|
|
|
|
24
|
%
|
|
|
476
|
|
|
|
53
|
%
|
Sales and marketing
|
|
|
1,228
|
|
|
|
21
|
%
|
|
|
1,727
|
|
|
|
31
|
%
|
|
|
499
|
|
|
|
41
|
%
|
General and administrative
|
|
|
770
|
|
|
|
13
|
%
|
|
|
1,212
|
|
|
|
22
|
%
|
|
|
442
|
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,351
|
|
|
|
92
|
%
|
|
$
|
6,694
|
|
|
|
119
|
%
|
|
$
|
1,343
|
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
Cost of Revenues. Cost of revenues were $2.4 million
for the three months ended March 31, 2010 compared to
$2.5 million for the three months ended March 31,
2009. The decrease of $0.1 million, or 3%, is related to
the corresponding decrease in demand for our testing products
and services. Cost of revenues remained constant at 42% percent
of revenue for both periods.
Research and Development Expenses. Research and
development expenses were $1.4 million for the three months
ended March 31, 2010 compared to $0.9 million for the
comparable period in 2009, an increase of $0.5 million, or
53%. This increase was primarily related to our acquisition of
the controlling interest of Psynova in September 2009, which
resulted in consolidating $0.3 million in research and
development costs in the three months ended March 31, 2010
compared to zero in the comparable period in 2009. In addition,
there was a $0.2 million increase related to the continued
investment in diagnostic research and development programs.
Sales and Marketing Expenses. Sales and marketing
expenses were $1.7 million for the three months ended
March 31, 2010 compared to $1.2 million for the
comparable period in 2009, an increase of $0.5 million, or
41%. The increase is a result of the addition of sales personnel
to focus on the promotion of our diagnostic test, VeriPsych,
increased salaries and increased advertising to enhance
awareness of new pharmaceutical testing products and services.
General and Administrative Expenses. General and
administrative expenses were $1.2 million for the three
months ended March 31, 2010 compared to $0.8 million
for the comparable period in 2009, an increase of
$0.4 million, or 57%. This increase is the result of the
additional infrastructure related to our expansion into
diagnostic testing as well as increased salary expense.
Equity in
Loss of Psynova
Based on our 47.9% equity interest in Psynova during the three
months ended March 31, 2009, we recognized 47.9% of
Psynovas net loss for the period using the equity method
of accounting. In September 2009 we obtained controlling
interest of Psynova, as a result, their results are included in
the consolidated results of operations for the three months
ended March 31, 2010.
Provision
(Benefit) for Income Taxes
The benefit for income taxes for the three months ended
March 31, 2010 was $0.4 million, or 25% of income
before taxes. This benefit includes a 29% effective tax rate on
the net operating losses in the U.S. and Germany as well as
adjustments to properly reflect deferred tax liabilities. The
provision for income taxes for the three months ended
March 31, 2009 was $45,000, or 27% of income before taxes.
The 27% effective tax rate is the combination of the federal and
state income tax rate after adjustments for deferred tax
liabilities.
Comparison
of the Years Ended December 31, 2009 and 2008
Pharmaceutical
Testing Products and Services Revenues
Pharmaceutical testing products and services revenues were
$24.6 million for the year ended December 31, 2009
compared to $21.7 million for the comparable period in
2008, an increase of $2.9 million, or 13.5%. The increase
was primarily attributable to an increase in testing revenue of
$4.7 million as we launched new HumanMAP product offerings
in 2009 and was offset by a $1.8 million decline in assay
and kit development revenue due in part to a one-time
recognition of kit development fees for the year ended
December 31, 2008.
53
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
Operating Expenses
|
|
Amount
|
|
|
of Revenue
|
|
|
Amount
|
|
|
of Revenue
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
8,590
|
|
|
|
40
|
%
|
|
$
|
9,985
|
|
|
|
41
|
%
|
|
$
|
1,395
|
|
|
|
16
|
%
|
Research and development
|
|
|
3,235
|
|
|
|
15
|
%
|
|
|
4,803
|
|
|
|
19
|
%
|
|
|
1,568
|
|
|
|
48
|
%
|
Sales and marketing
|
|
|
4,368
|
|
|
|
20
|
%
|
|
|
5,252
|
|
|
|
21
|
%
|
|
|
884
|
|
|
|
20
|
%
|
General and administrative
|
|
|
2,520
|
|
|
|
11
|
%
|
|
|
2,867
|
|
|
|
12
|
%
|
|
|
347
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,713
|
|
|
|
86
|
%
|
|
$
|
22,907
|
|
|
|
93
|
%
|
|
$
|
4,194
|
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues. Cost of revenues was $10.0 million
for the year ended December 31, 2009 compared to
$8.6 million for the year ended December 31, 2008. The
increase of $1.4 million, or 16%, was due primarily to an
increase in staffing in lab operations necessary to support our
33.1% increase in testing revenue and our expanded menu of
assays.
Research and Development Expenses. Research and
development expenses were $4.8 million for the year ended
December 31, 2009 compared to $3.2 million for the
comparable period in 2008, an increase of $1.6 million, or
48%. This increase was the result of additional systems and
personnel expense related to our continued investment in
diagnostic research and development programs, particularly
relating to the development of our VeriPsych test.
Sales and Marketing Expenses. Sales and marketing
expenses were $5.3 million for the year ended
December 31, 2009 compared to $4.4 million for the
comparable period in 2008. The increase of $0.9 million, or
20%, was primarily the result of the growth of our direct sales
team and spending associated with a promotional campaign to
increase awareness of our new product offerings.
General and Administrative Expenses. General and
administrative expenses were $2.9 million for the year
ended December 31, 2009 compared to $2.5 million for
the comparable period in 2008. The increase of
$0.4 million, or 14%, was due to an increase in salary and
benefit expenses, primarily resulting from an increase in our
overall headcount.
Equity in
Loss of Psynova
Based on our 47.9% equity interest in Psynova during the period
from January 1, 2009 to August 31, 2009, we recognized
47.9% of Psynovas net loss for the period using the equity
method of accounting. For the year ended December 31, 2009,
we recorded a loss of $1.0 million relating to our equity
interest in Psynova.
Gain on
Re-measurement of Psynova
Due to the acquisition of an additional 29.7% of the outstanding
equity interest of Psynova, our ownership interest in Psynova
increased from 47.9% to 77.6%. As a result, we re-measured our
investment in Psynova and recorded a gain on $1.9 million
during the year ended December 31, 2009.
Provision
for Income Taxes
The provision for income taxes for the year ended
December 31, 2009 was $0.7 million, or 30% of income
before taxes. The provision for income taxes for the year ended
December 31, 2008 was $1.2 million, or 39% of income
before taxes. We did not recognize a deferred tax liability for
the temporary difference that resulted from the gain on
re-measurement of Psynova in the year ended December 31,
2009. This resulted in a lower effective tax rate for this
period.
54
Comparison
of the Years Ended December 31, 2008 and 2007
Pharmaceutical
Testing Products and Services Revenues
Pharmaceutical services revenues were $21.7 million for the
year ended December 31, 2008 compared to $13.0 million
for the year ended December 31, 2007, an increase of
$8.6 million, or 66%. This increase was primarily
attributable to a $5.9 million increase in our testing
revenues related to our HumanMAP sales and RodentMAP sales as a
result of increased unit orders. We also launched our TruCulture
and other co-culture products and services, which represented
$2.0 million in testing revenue growth during the year
ended December 31, 2008. Kit development revenues increased
by $1.4 million primarily due to the recognition of
$1.0 million in kit development fees and grant revenues
increased $1.3 million as a result of an expansion of our
grant application program, including programs in the areas of
ovarian cancer and neonatal sepsis.
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
Operating Expenses
|
|
Amount
|
|
|
of Revenue
|
|
|
Amount
|
|
|
of Revenue
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
4,868
|
|
|
|
37
|
%
|
|
$
|
8,590
|
|
|
|
40
|
%
|
|
$
|
3,722
|
|
|
|
76
|
%
|
Research and development
|
|
|
1,544
|
|
|
|
12
|
%
|
|
|
3,235
|
|
|
|
15
|
%
|
|
|
1,691
|
|
|
|
110
|
%
|
Sales and marketing
|
|
|
2,575
|
|
|
|
20
|
%
|
|
|
4,368
|
|
|
|
20
|
%
|
|
|
1,793
|
|
|
|
70
|
%
|
General and administrative
|
|
|
1,676
|
|
|
|
13
|
%
|
|
|
2,520
|
|
|
|
11
|
%
|
|
|
844
|
|
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,663
|
|
|
|
82
|
%
|
|
$
|
18,713
|
|
|
|
86
|
%
|
|
$
|
8,050
|
|
|
|
75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues. Cost of revenues was $8.6 million
for the year ended December 31, 2008 compared to
$4.9 million for the year ended December 31, 2007. The
increase of $3.7 million, or 76%, was due primarily to an
increase in the cost of payroll-related expenses at our Austin,
Texas and Lake Placid, New York laboratories and increased
reagent costs which tracked consistently with testing revenue.
As a percentage of total revenues, this represented an increase
from 37% to 40%, resulting primarily from an increase in
headcount for laboratory operations as well as additional rent
and depreciation expense as we expanded our testing services
capacity.
Research and Development Expenses. Research and
development expenses were $3.2 million in the year ended
December 31, 2008 compared to $1.5 million in the year
ended December 31, 2007. The increase of $1.7 million,
or 110%, is a result of the increase in the size of our research
and development organization to support our product development
strategy. During the year ended December 31, 2008, we
increased staffing in research and development by 80%
contributing toward an overall increase in payroll-related
expenses of $0.7 million. Additionally, research and
development spending increased by $0.8 million as a result
of continued expansion of our testing content and further
development of molecular diagnostic tests.
Sales and Marketing Expenses. Sales and marketing
expenses were $4.4 million in the year ended
December 31, 2008 compared to $2.6 million for the
year ended December 31, 2007. The increase of
$1.8 million, or 70%, was primarily due to an increase in
the size of our sales and marketing staff and increased spending
relating to the promotion of our products and services. The
increase in headcount was primarily to add additional sales
personnel in Europe as well as increase our product management
personnel.
General and Administrative Expenses. General and
administrative expenses were $2.5 million in the year ended
December 31, 2008 compared to $1.7 million in the year
ended December 31, 2007. The increase of $0.8 million,
or 50%, was due primarily to an increase in personnel costs,
legal expenses, and rent necessary to provide adequate
infrastructure to the business.
Provision
for Income Taxes
The provision for income taxes for the year ended
December 31, 2008 was $1.2 million, or 39%, of income
55
before taxes. The provision for income taxes for the year ended
December 31, 2007 was $0.4 million, or 18%, of income
before taxes. In the year ended December 31, 2007, we
utilized our final net operating loss carryforward, which
reduced our provision for income taxes in 2007.
Liquidity and
Capital Resources
As of March 31, 2010, we had $5.0 million of cash and
cash equivalents and $10.3 million of working capital. We
have financed our operations through internally generated funds,
borrowings and the sale of preferred and common stock. We
received $23.4 million through the sale of
7,485,231 shares of
Series A-1
preferred stock in the year ended December 31, 2007 and an
additional $1.0 million through the sale of
337,838 shares of common stock in the year ended
December 31, 2008. Some of these proceeds were used to
repurchase common stock, redeem preferred stock and pay
preferred stock dividends and repay principal on
long-term
debt.
Although we have generated operating income in previous years,
we expect to incur operating losses for at least the next two
years as we expand our molecular diagnostic tests. We expect
that we will make additional capital expenditures to expand our
research and development programs and incur additional operating
expenses related to the
scale-up of
our commercial operations, which we expect to fund, in part,
with the net proceeds of this offering. We expect that the
remainder of the net proceeds and our existing cash and cash
equivalents will be used to fund working capital and for capital
expenditures, repay our revolving line of credit and our
subordinated debt and other general corporate purposes.
Net
Cash Provided by (Used in) Operating Activities
Net cash provided by operating activities of $0.2 million
during the three months ended March 31, 2009 resulted
primarily from a decrease in accounts receivable due to the
collection of invoices generated at the end of 2008, offset in
part with testing services that were performed in return for an
investment in the customers company. Net cash used in
operating activities of $0.4 million for the three months
ended March 31, 2010 resulted from an increase in our
inventory balance in preparation for anticipated demand and a
decrease in accrued expenses and other liabilities offset in
part by an increase in accounts payable resulting from an
increase in legal and professional service expense associated
with our initial public offering and purchases of property and
equipment.
Net cash provided by operating activities during the year ended
December 31, 2007 of $0.2 million resulted primarily
from recording deferred revenue from billing customers in
accordance with their contracts at December 31, 2007 for
services that were completed in the first quarter of 2008 and
from increased revenues offset in part by an increase in
inventory and accounts receivable as a result of increased
sales. Net cash used in operating activities of
$2.3 million in the year ended December 31, 2008 was
primarily from an increase in inventory and accounts receivable
as a result of increased sales offset in part by a deferred tax
liability that resulted from the patents acquired in our
acquisition of EDI. Net cash provided by operating activities
during the year ended December 31, 2009 of
$0.5 million was primarily a result of an increase in
accounts payable and accrued liabilities from an increase in
legal and professional services associated with our initial
public offering incurred late in the year offset in part by a
decrease in deferred revenue as a result of more timely
completion of services in line with the contractual billings.
Net
Cash Used in Investing Activities
Net cash used in investing activities of $0.4 million for
the three months ended March 31, 2009 was from purchases of
property and equipment and internally developed intangible
assets. Net cash used in investing activities of
$0.8 million for the three months ended March 31, 2010 was
from purchases of property and equipment and internally
developed intangible assets.
Net cash used in investing activities was $2.5 million,
$6.0 million and $6.9 million in the years ended
December 31, 2007, 2008 and 2009, respectively. During the
year ended December 31, 2007, cash used in investing
activities was primarily used for the purchase of assay
licenses, the purchase of property and equipment and the
acquisition of EDI. In the year ended December 31, 2008,
net cash used in investing activities was primarily used for
acquiring a 47.9% interest in Psynova as well as purchasing
property and equipment. During the year ended December 31,
2009, net cash used in investing activities was used for
acquiring an additional
56
29.7% interest in Psynova, internally developed intangible
assets as well as the purchase of property and equipment.
Net
Cash Provided by (Used in) Financing Activities
Net cash used in financing activities of $37,000 for the three
months ended March 31, 2009 was due to the payment of
principal on long-term debt. Net cash used in financing
activities of $0.7 million for the three months ended
March 31, 2010 was primarily due to the deferral of costs
associated with our initial public offering and to a lesser
extent from the payment of principal on long-term debt and
capital leases partially offset by the amortization of debt
issuance costs and the payment of interest on our subordinated
debt.
Net cash provided by financing activities was
$10.7 million, $1.5 million and $11.3 million in
the years ended December 31, 2007, 2008 and 2009,
respectively. During the year ended December 31, 2007, we
received our first outside capital investment with the issuance
of $23.4 million in
Series A-1
preferred stock. This was offset in part by a $5.1 million
repurchase of common stock, $4.4 million redemption of
Series A preferred stock, a $1.5 million payment of
principal on long-term debt and a $1.6 million payment of
Series A preferred stock dividends. During the year ended
December 31, 2008, we issued $1.0 million in common
stock and $0.6 million in long-term debt. This was offset
in part by payments on long-term debt of $0.1 million.
During the year ended December 31, 2009, we received
$10.0 million in subordinated debt and drew down
$3.5 million on the revolving line of credit offset in part
by payments on long-term debt and capital leases of
$0.2 million, the creation of an escrow balance of
$1.0 million for interest payments on the subordinated debt
and the deferral of $1.2 million in costs associated with
our initial public offering.
Capital
Resources
Since our inception, we have financed our operations
through cash flows generated by operations and, to a lesser
extent, borrowings and the sale of preferred and common stock.
Our long-term subordinated debt, which had an outstanding
balance of $10.0 million at March 31, 2010, matures on
September 17, 2011. We expect to prepay the subordinated
debt in full from the net proceeds of this offering.
In September 2007, we acquired the capital stock of EDI for a
purchase price of 0.7 million, or $1.0 million.
The purchase price was comprised of three components: (a) a
payment of 0.3 million, or $0.4 million, upon
the closing of the transaction; (b) 0.3 million,
or $0.4 million, payable on the one-year anniversary of the
closing of the transaction; and (c) 250,000 shares of
Class B limited liability company interests of RBM
Management Group, LLC upon closing in lieu of 0.2 million,
or $0.2 million, in cash. The overall purchase price was
$2.4 million which included the put option obligation,
taxes paid on behalf of the seller and acquisition costs. We
acquired EDI due to the immediate availability of product
offerings that complemented our existing products. We assumed
$53,000 in notes payable upon our acquisition of EDI, which was
paid in full during the year ended December 31, 2009.
In May 2008, pursuant to the terms of a co-development and
commercialization agreement we entered into with Psynova, we
loaned Psynova $1.4 million in cash and provided a credit
towards our MAP testing services of $1.0 million. Interest
on the outstanding amount of the loan drawn by Psynova accrued
at 8% per year on a monthly basis and was added to principal. In
addition, Psynova granted to us the right to purchase 19,562,716
Preferred A Ordinary Shares at $0.13 per share. We granted
Psynova the right to require us to purchase an additional
19,562,716 Preferred A Ordinary Shares if certain milestones
were reached on or before December 31, 2008.
In November 2008, pursuant to Psynova achieving milestones
related to our schizophrenia product, the amounts drawn under
the loan, including all accrued interest, plus the credit for
services converted into 15,558,003 of Preferred A Ordinary
Shares. In addition, as a result of Psynova exercising its right
to require us to purchase 19,562,716 Preferred A Ordinary Shares
from it, we paid $1.3 million in cash and $1.2 million
in credit toward future services. On November 21, 2008, we
invested a total of $4.9 million in Psynova equity
securities and owned 47.9% of the outstanding stock of Psynova.
The investment was accounted for using the equity method
beginning on December 1, 2008. In September 2009, we purchased
an additional 21,718,276 shares of Preferred A Ordinary
Shares in Psynova pursuant to a share purchase agreement by and
between Porton Capital Inc., Porton
57
Capital Technology Funds, both third-party investors, and us for
$5.5 million, bringing our total investment in Psynova to
$9.8 million, net of our equity interest in the losses of
Psynova. This brought our ownership interest to 77.6% resulting
in Psynovas financial position and results of operations
being consolidated with our own as of and for the year ended
December 31, 2009.
On August 10, 2009, we entered into a revolving line of
credit with BBVA Compass Bank, or Compass, for up to
$9.0 million. The monthly interest is calculated at the
lesser of (i) the Compass prime rate plus 0.375% and
(ii) the maximum rate which is the greater of the
highest rate allowed per law and the highest rate allowed under
the Texas Finance Code; the interest rate can never be less than
4% per annum. The line of credit also bears a 0.25% quarterly
fee for any unused portion of the line of credit. Interest is
due and payable monthly beginning one month after the loan date.
Although monthly principal payments are not required, any unpaid
principal balance is due and payable on the maturity date, which
is August 10, 2011.
The balance drawn on the revolving line of credit was
$3.5 million at March 31, 2010. The amount available
to borrow at March 31, 2010 was $2.3 million. No
additional amount was drawn on the revolving line of credit as
of April 19, 2010. The maximum amount available to borrow
on the line of credit is determined by taking the sum of
(i) 85% of our eligible accounts receivable from domestic
and Canadian accounts receivable, (ii) 90% of our eligible
accounts receivable from international and foreign accounts
receivable covered by receivable insurance, (iii) 70% of
our eligible accounts receivable from international and foreign
accounts receivable of a domestic public company not covered by
receivable insurance not to exceed $0.5 million,
(iv) 50% of our eligible accounts receivable from
international and foreign accounts receivable not covered by
receivable insurance not to exceed $0.5 million and
(v) 60% of the value of eligible inventory; provided that
the outstanding principal balance of all advances against
eligible inventory shall not at any time exceed the lesser of
150% of our eligible accounts receivable or $4.5 million.
The agreement includes customary covenants for a credit
agreement, including certain financial covenants. The financial
covenants require a minimum tangible net worth of
$6.5 million on a quarterly basis, pro-forma debt service
coverage not less than 1.35 to 1 on a rolling quarterly basis
and not less than 1.5 to 1 on a quarterly basis during the
quarter ended March 31, 2010 and a fixed charge coverage
ratio of at least 1.5 to 1 on a rolling quarterly basis. The
Company was in compliance with all covenants as of
March 31, 2010.
On September 17, 2009, we entered into a Loan and Security
Agreement for subordinated debt with Heartland Community Bank,
or Heartland, for $5.0 million in connection with our
acquisition of an additional stake of 21,718,276 Preferred A
Ordinary Shares in Psynova. The subordinated debt is secured by
the equity ownership interest of RBM Holdings, LLC and RBM
Management Group, LLC in us. The debt bears interest at a fixed
rate of 8% per annum. Quarterly interest payments of
$0.1 million are due beginning on December 17, 2009.
The first draw on the debt included $0.6 million that was
deposited into an escrow account with the bank from which the
quarterly interest payments will be made.
On December 31, 2009, we amended our Loan and Security
Agreement with Heartland to increase the subordinated debt to
$10.0 million to fund the launch of our VeriPsych test and
to support general working capital needs. The additional
$5.0 million of subordinated debt bears interest at a fixed
rate of 8.00% per annum and matures on September 17, 2011.
The additional subordinated debt is secured by the equity
ownership interest of RBM Holdings, LLC and RBM Management
Group, LLC in us. As of March 17, 2010, quarterly interest
payments of $0.1 million became due. The first draw on the
debt included $0.5 million that was deposited into an
escrow account with the bank from which the quarterly interest
payments will be made.
The outstanding balance in the escrow account of
$0.8 million at March 31, 2010 was included in
restricted cash on the condensed consolidated balance sheet.
Full payment of the accrued interest and unpaid principal
balance will be due on the termination date of
September 17, 2011.
Under the line of credit agreement with Compass, we will be
deemed in default of the agreement if we default on our
subordinated debt agreement with Heartland or if there is a
foreclosure on the pledge of the equity ownership interest of
RBM Holdings, LLC and RBM Management Group, LLC. Under the
Heartland subordinated debt agreement, we may be deemed in
default of the agreement if we default on our line of credit
agreement with
58
Compass. Heartland has agreed not to assert, collect, or enforce
all, or any part of, the amounts due from us under the
subordinated loan agreement without the prior written consent of
Compass.
Capital
Requirements
Our capital expenditures for the three months ended
March 31, 2010 were $0.7 million. Our capital
expenditures for the years ended December 31, 2007, 2008
and 2009 were $0.7 million, $1.4 million and
$1.2 million, respectively. Our capital expenditures were
primarily for laboratory equipment and corporate software.
We believe that our existing cash and cash equivalents, together
with the net proceeds from this offering, will be sufficient to
fund our operations and capital expenditures and pay our debt
service for at least the next 12 months. We cannot be
certain that any of the products we have in development will be
successful nor do we know if we will eventually be reimbursed by
payors. Additionally, the nature and timing of the commercial
launch of our VeriPsych test will depend, in part, on the amount
of net proceeds we receive from this offering.
The amount and timing of actual expenditures may vary
significantly depending upon a number of factors, including the
following:
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the rate of progress in establishing reimbursement arrangements
with third-party payors;
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the cost of expanding our commercial and laboratory operations,
including our selling and marketing efforts;
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the rate of progress and cost of research and development
activities associated with expansion of our molecular diagnostic
tests;
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the rate of progress and cost of research and development
activities associated with products and services in the research
phase focused on molecular diagnostics;
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the cost of acquiring or achieving access to tissue samples and
technologies;
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the costs of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights;
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the effect of competing technological and market developments;
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the cost and delays in product development as a result of any
changes in regulatory oversight applicable to our
products; and
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the expansion of our laboratory space at our principal executive
offices in connection with the development of our molecular
diagnostic tests, including the recruiting and training of
employees and establishing additional operational, logistical
and administrative infrastructure necessary to support a second
laboratory facility.
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Until we can generate a sufficient amount of product revenues to
finance our cash requirements, we expect to finance future cash
needs primarily through public or private equity offerings, debt
financings, borrowings or strategic collaborations. The issuance
of equity securities may result in dilution to stockholders. If
we raise additional funds by incurring additional debt
financing, the terms of the debt may involve significant cash
payment obligations as well as covenants and specific financial
ratios that may restrict our ability to operate our business. If
we raise additional funds through collaboration and licensing
arrangements with third parties, it may be necessary to
relinquish some rights to our technologies or our products or
grant licenses on terms that are not favorable to us. We do not
know whether additional funding will be available on acceptable
terms, or at all. If we are not able to secure additional
funding when needed, we may have to delay, reduce the scope of
or eliminate one or more research and development programs or
selling and marketing initiatives. In addition, we may have to
work with a partner on one or more of our product development
programs or market development programs, which would lower the
economic value of those programs to us. Although we are not
currently a party to any agreement or letter of intent regarding
potential investments in, or acquisitions of, complementary
businesses, applications or technologies, we may enter into
these types of arrangements, which could require us to seek
additional equity or debt financing.
59
Contractual
Obligations, Commitments and Contingencies
We generally do not enter into
long-term
minimum purchase commitments. Our principal commitments, in
addition to those related to our
long-term
debt discussed below, consist of obligations under facility
leases for office space in Austin, Texas, Lake Placid, New York
and our EDI facility in Reutlingen, Germany.
The following table summarizes our outstanding contractual
obligations as of December 31, 2009 (dollars in thousands):
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|
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|
|
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|
|
|
|
|
|
|
|
Total(2)
|
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|
< 1 Year
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|
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1-3 Years
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|
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3-5 Years
|
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Operating lease obligations(3)
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$
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683
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|
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$
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313
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|
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$
|
370
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|
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$
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Note principal payments
|
|
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13,796
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|
|
|
145
|
|
|
|
13,571
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|
|
|
80
|
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Note interest payments
|
|
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1,019
|
|
|
|
577
|
|
|
|
440
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|
|
|
2
|
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Contractual dividend payments(1)
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|
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6,000
|
|
|
|
2,000
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
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$
|
21,498
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|
|
$
|
3,035
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|
|
$
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18,381
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|
|
$
|
82
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(1)
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The contractual dividend payments
for the
Series A-1
preferred stock are $1.0 million bi-annually beginning
April 12, 2010. It is assumed that the
Series A-1
preferred stock will convert on the fifth anniversary after the
issuance. A payment of $1.0 million was made to the
Series A-1
preferred stockholders on April 13, 2010.
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(2)
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There are no contractual
obligations beyond five years.
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(3)
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In March 2010, we amended our lease
for our corporate headquarters and laboratory in Austin, Texas
to, among other things, acquire additional space to accommodate
our growth. The lease amendment was effective March 1,
2010. The increase in our total operating lease obligations
resulting from the lease amendment is shown in the table
presented below.
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Payments Due by Period
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Total
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< 1 Year
|
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1-3 Years
|
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3-5 Years
|
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|
|
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(In thousands)
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Operating lease obligations
|
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$
|
2,220
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|
|
$
|
107
|
|
|
$
|
737
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|
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$
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1,376
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Off-Balance Sheet
Arrangements
Since inception, we have not engaged in any off-balance sheet
activities as defined in Item 303(a)(4) of
Regulation S-K.
Recent Accounting
Pronouncements
In December 2007, the FASB issued guidance for noncontrolling
interests in consolidated financial statements. This guidance
establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary, and for the
deconsolidation of a subsidiary. Specifically, this guidance
clarifies that noncontrolling interests in a subsidiary should
be reported as equity in the consolidated financial statements.
We adopted this guidance in the first quarter of 2009 and it did
not have a material effect on the our results of operations and
financial position.
In December 2007, the FASB issued guidance which impacts the
accounting for business combinations. This guidance requires
changes in the measurement of the assets and liabilities to a
fair value method consistent with the guidance for fair value
measurements. The guidance also requires a change in accounting
for certain acquisition related expenses and business
adjustments which are no longer considered part of the purchase
price. This guidance is effective for fiscal years beginning on
or after December 15, 2008, and was adopted by us on
January 1, 2009. The adoption of this statement had a
material impact on our consolidated financial statements as a
result of our acquisition of a controlling interest in Psynova
in September 2009.
In February 2008, the FASB issued guidance which delays the
effective date of adopting guidance for measuring the fair value
under GAAP for all non-financial assets and non-financial
liabilities, excluding those assets that are recognized or
disclosed at fair value on a recurring basis for fiscal years
beginning after November 15, 2008, and interim periods
within those fiscal years. We elected a partial deferral of the
fair value guidance under the provisions associated with the
measurement of fair value used when evaluating goodwill, other
intangible assets and
60
other long-lived assets for impairment. We are currently
evaluating the impact of this standard on our financial
statements.
In April 2008, the FASB issued guidance clarifying the
determination of the useful life of intangible assets. This
guidance amends the factors to be considered in developing
renewal or extension assumptions used to determine the useful
life of intangible assets. The intent of this guidance is to
improve the consistency between the useful life of an intangible
asset and the period of expected cash flows used to measure its
fair value. This guidance was effective for financial statements
in the first quarter of 2009. This guidance did not to have a
material impact on our consolidated financial statements, but
the potential impact is dependent upon the acquisitions of
intangible assets in the future.
In March 2009, the FASB issued guidance clarifying accounting
for research and development assets acquired in an asset
acquisition. The guidance clarifies that all tangible and
intangible research and development assets acquired in an asset
acquisition shall be capitalized regardless of whether the
assets have future use and they will be considered
indefinite-lived until completion or abandonment of the
associated research and development activities. This guidance
was adopted on January 1, 2009 and had a material impact on
our consolidated financial statements.
In April 2009, the FASB and the Accounting Principles Board
issued guidance about interim disclosures about value of
financial instruments that requires an entity to provide
disclosures about fair value of financial instruments in interim
financial information. The new guidance is to be applied
prospectively and is effective for interim and annual periods
ending after June 15, 2009 with early adoption permitted
for periods ending after March 15, 2009. We adopted the new
guidance in the quarter ended June 30, 2009. There was no
impact on our consolidated financial statements as it relates
only to additional disclosures.
In May 2009, the FASB issued a standard that sets forth the
period after the balance sheet date during which the management
of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the
financial statements, the circumstances under which an entity
should recognize events or transactions occurring after the
balance sheet date in its financial statements, and the
disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. This
standard is effective for interim and annual periods ending
after June 15, 2009. We adopted this standard in the
quarter ended June 30, 2009 and it did not impact the
consolidated financial results. Management has evaluated
subsequent events up to the date of our issued financial
statements.
In June 2009, FASB issued The FASB Accounting Standards
Codification, or the Codification, authorizing the Codification
as the sole source for authoritative guidance in accordance with
U.S. GAAP. The Codification is effective for financial
statements issued for reporting periods that end after
September 15, 2009. The position supersedes all accounting
standards in U.S. GAAP, aside from guidance issued by the
SEC.
In August 2009, the FASB issued guidance on measuring
liabilities at fair value, which provides clarification that in
circumstances where a quoted market price in an active market
for an identical liability is not available, a reporting entity
must measure fair value of the liability using one of the
following techniques: the quoted price of the identical
liability when traded as an asset; quoted prices for similar
liabilities or similar liabilities when traded as assets; or
another valuation technique, such as a present value technique
or the amount that the reporting entity would pay to transfer
the identical liability or would receive to enter into the
identical liability that is consistent with the provisions of
authoritative guidance. This statement becomes effective for the
first reporting period, including interim periods, beginning
after issuance. We adopted this statement in the year ended
December 31, 2009 and it did not impact the consolidated
financial results.
The FASB issued a standard that established a framework for
measuring fair value in GAAP and clarified the definition of
fair value within that framework. This standard does not require
assets and liabilities that were previously recorded at cost to
be recorded at fair value or for assets and liabilities that are
already required to be disclosed at fair value. This standard
introduced, or reiterated, a number of key concepts which form
the foundation of the fair value measurement approach to be used
for financial reporting purposes. The fair value of the our
financial instruments reflects the amounts that we estimate to
receive in connection with the sale of an asset or paid in
connection with the transfer of a liability in an orderly
transaction between market participants at
61
the measurement date (exit price). This standard also
established a fair value hierarchy that prioritizes the use of
inputs used in valuation techniques into the following three
levels:
Level 1 quoted prices in active markets for
identical assets and liabilities.
Level 2 observable inputs other than quoted
prices in active markets for identical assets and liabilities.
Level 3 unobservable inputs.
The adoption of this standard did not have an effect on our
financial condition or results of operations, but it introduced
new disclosures about how we value certain assets and
liabilities. Much of the disclosure is focused on the inputs
used to measure fair value, particularly in instances where the
measurement uses significant unobservable
(Level 3) inputs. As of December 31, 2008 and
2009, we did not have financial assets or liabilities that would
require measurement on a recurring basis. At December 31,
2008 and 2009 all financial assets consisted of cash and cash
equivalents at financial institutions in the United States.
In October 2009 FASB issued guidance for fair value
measurements and improving disclosures about fair value
measurements. This new guidance requires some new disclosures
and clarifies some existing disclosure requirements about fair
value measurement. The objective of the guidance is to improve
these disclosures and improve transparency in financial
reporting. The guidance now requires a reporting entity to (1)
separately disclose the amounts of significant transfers in and
out of Level 1 and Level 2 fair value measurements and
describe the reasons for the transfers and (2) present
separately information about purchases, sales, issuances and
settlements in the reconciliation of fair value measurements. In
addition, a reporting entity needs to use judgment in
determining the appropriate classes of assets and liabilities
for purposes of reporting fair value measurement and the entity
should provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and
nonrecurring fair value measurements. This guidance is effective
for interim and annual reporting periods beginning after
December 15, 2009, except for disclosures about purchases,
sales, issuances and settlements in the roll-forward activity in
Level 3 fair value measurements. These disclosures are
effective for fiscal years beginning after December 15,
2010 and for interim periods within those fiscal years. We are
currently evaluating the impact of this standard on our
financial statements.
In October 2009, the FASB issued guidance for
multiple-deliverable revenue arrangements. This guidance
requires an entity to use an estimated selling price when
vendor-specific
objective evidence or acceptable third party evidence does not
exist for any products or services included in a
multiple-element arrangement. The arrangement consideration
should be allocated among the products and services based upon
their relative selling prices, thus eliminating the use of the
residual method of allocation. This guidance also requires
expanded qualitative and quantitative disclosures regarding
significant judgments made and changes in applying this
guidance. This guidance is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Early adoption and
retrospective application are also permitted. We are currently
evaluating the impact of adopting this new provision.
Qualitative and
Quantitative Disclosure About Market Risk
Interest
Rate Sensitivity
We had cash and cash equivalents of $5.0 million at
March 31, 2010, $7.0 million at December 31, 2009
and $2.5 million at December 31, 2008. We held these
amounts primarily in cash or money market funds.
We hold cash and cash equivalents for working capital purposes.
We do not have material exposure to market risk with respect to
investments, as our investments consist primarily of highly
liquid securities with original maturities of three months or
less. We do not use derivative financial instruments for
speculative or trading purposes; however, we may adopt specific
hedging strategies in the future. Any declines in interest rates
will reduce future interest income.
We had $3.5 million outstanding on our revolving line of
credit at March 31, 2010. The interest rate on this debt is
variable and adjusts periodically based on the lesser of the
(i) Compass prime rate plus 0.375%; and (ii) maximum
rate which is the greater of the highest rate allowed per law
and the highest rate allowed under the Texas Finance Code;
except the interest rate can never be less than 4% per annum. If
the interest rate were to
62
increase by 1%, our annual interest expense would change by
approximately $22,000. If the interest rate were to decrease by
1%, there would be no effect on our annual interest expense.
Foreign
Currency Risk
Our results of operations and cash flows will be subject to
fluctuations because of changes in foreign currency exchange
rates, particularly changes in exchange rates between the
U.S. dollar and the Euro and British Pound Sterling. Our
historical revenue has generally been denominated in
U.S. dollars and a significant majority of our current
revenue continues to be denominated in U.S. dollars. Our
expenses are generally denominated in the currencies of the
countries in which our operations are located, primarily the
United States, Germany and the United Kingdom. Fluctuations in
currency exchange rates could harm our business in the future.
Our objective in managing our exposures to foreign currency
exchange rate fluctuations is to reduce the impact of adverse
fluctuations on earnings and cash flows associated with foreign
currency exchange rate changes. Accordingly, we utilize foreign
currency forward contracts to hedge our exposure on firm
commitments. Our exposure to foreign currency movements was in
the Euro, Japanese Yen and British Pound currencies. We monitor
our foreign currency exchange exposures to ensure the overall
effectiveness of our foreign currency hedge positions. However,
there can be no assurance that our foreign currency hedging
activities will continue to substantially offset the impact of
fluctuations in currency exchange rates on our results of
operations and financial position in the future. We had no
foreign currency forward contracts outstanding at
December 31, 2008. We had one foreign currency forward
contract as of December 31, 2009 for a firm commitment of
$0.1 million. We had two foreign currency forward contracts
at March 31, 2010 for firm commitments of
$0.1 million. Since the forward contracts are for firm
commitments, there is no risk on these contracts.
63
Business
Overview
We are a life sciences company focused on the development and
commercialization of molecular diagnostic tests based on novel
biomarker patterns, initially for the psychiatric market. We
believe these patterns can provide quantitative, objective
information to aid in the diagnosis and treatment of diseases or
disorders where current objective tests either do not exist or
are not sufficiently accurate. We develop molecular diagnostic
tests using our proprietary multi-analyte profiling, or MAP,
technology that qualifies biomarkers, such as proteins and
hormones in biological fluid. Our technology enables us to
efficiently screen large sets of well-characterized clinical
samples from both diseased and non-diseased populations against
our extensive menu of biomarker tests. Analyzing the data
generated from these tests, we attempt to discover biomarker
patterns that indicate a particular disease or disorder with a
high degree of accuracy. We then create and validate diagnostic
test panels that allow us to analyze a patient sample and
deliver a result that can aid the physician in making diagnostic
and treatment decisions. We are commercializing our initial
molecular diagnostic test panels as Laboratory Developed Tests,
or LDTs, using our
high-complexity
Clinical Laboratory Improvement Amendments of 1988, or CLIA,
certified laboratory. Our molecular diagnostics testing
leverages the logistical infrastructure and technology used for
the last eight years in our pharmaceutical testing products and
services. During this period we have developed and validated our
menu of immunoassays in the course of serving the needs of our
pharmaceutical, biotechnology and medical research customers. We
believe we have assembled the largest collection of validated
multiplexed biomarker immunoassays in the life sciences
industry, allowing us to cast a wide net in the search for
clinically relevant biomarker patterns.
Our initial molecular diagnostic test panel, our VeriPsych test,
is a blood-based test that evaluates a proprietary set of 51
biomarker tests. These biomarkers are associated with various
biochemical pathways, including inflammation, metabolism and
cell-to-cell
signaling. Many of these pathways, as well as most of the
individual biomarkers that our panel measures, have been
associated with mental illness in hundreds of peer-reviewed
publications. Based on our clinical studies, we believe our
VeriPsych test will aid psychiatrists in the diagnosis of
recent-onset schizophrenia, bipolar disorder, and major
depressive disorder. According to the National Institute of
Mental Health, approximately 22.9 million patients in the
United States exhibit symptoms consistent with these disorders.
These disorders are often chronic and progressive, and are
expensive to the healthcare system and society in general.
Diagnosis is currently based on the patients self-reported
experiences and observed behavior. The clinical similarity in
experiences and behaviors among these patients creates a
formidable diagnostic challenge that frequently leads to
misdiagnosis and potentially years of inappropriate and
ineffective treatment. Our studies suggest that these disorders
have distinct biochemical patterns that can be objectively
measured by blood-based diagnostic tests.
We conducted a three-site clinical validation study with over
1,200 well-characterized samples from patients with various
mental illnesses, including 593 samples from confirmed
schizophrenics and 245 samples from normal controls. Our
VeriPsych test differentiated patients with recent-onset
schizophrenia from normal controls with a sensitivity of 84%,
specificity of 85% and an Area Under the Receiver Operator
Curve, or AUROC, of 0.89. Based on these results we believe our
VeriPsych test can be a valuable tool for psychiatrists seeking
an objective test to aid in the initial diagnosis of
recent-onset schizophrenia.
In March 2010, we began making our VeriPsych test as an aid in
the diagnosis of recent-onset schizophrenia available for order.
We focused our initial marketing efforts on several leading
academic psychiatry centers including the Laureate Psychiatric
Clinic and Hospital in Tulsa, Oklahoma, the Department of
Psychiatry at the University of Minnesota in Minneapolis,
Minnesota, and at the Department of Psychiatry and Behavioral
Science at the KU School of Medicine-Wichita in Wichita, Kansas.
We have also begun marketing our VeriPsych test to selected
psychiatric group practices including the Austin
Neuropsychiatric Clinic, Carolina Partners in Mental Health and
the Johns Hopkins Mood Disorders Center. We plan a broader
launch of our VeriPsych test for this use in the second half of
2010.
During development and validation of our initial schizophrenia
indication, our VeriPsych test also differentiated between
patients with schizophrenia, patients with bipolar disorder and
patients with major depressive disorder, based on a limited
number of samples. We are currently conducting clinical studies
on the expanded populations of bipolar disorder and major
depressive disorder patients that we expect will be sufficient
to validate a differential diagnosis
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indication for our VeriPsych test. Because of the challenge in
diagnosing patients with these three disorders, this test may
significantly increase our VeriPsych tests utility for a
broader group of patients. We expect results from these studies
to be available for bipolar disorder and major depressive
disorder in the second half of 2010 and, if the results are
compelling, we intend to begin marketing our test for the
differential diagnosis indication in early 2011. As we continue
to collect additional patient samples, we intend to further
validate and commercialize our VeriPsych test for additional
indications that will expand the utility and market for our test.
We also have several development-stage programs with significant
commercial potential targeting diseases and disorders where
there are limited diagnostic testing options currently
available. We are developing two tests using a subset of the
biomarkers in our VeriPsych test that, based on the results of
two clinical studies, we believe may be useful to primary care
physicians, military healthcare professionals and other
non-psychiatrists as a first-line tool for the early
identification of patients in need of psychiatric care. In
addition, we, through Psynova, are collaborating with Roche to
develop a companion diagnostic test to be used in tandem with a
Roche drug that is in clinical development. Finally, we are also
collaborating to develop diagnostic tests in several other areas
including cancer, infectious diseases, kidney disease and
neurodegenerative disease. We do not intend to commercialize all
future opportunities ourselves and expect that where we
determine it is appropriate we will license the
commercialization rights for certain opportunities to third
parties or enter into other agreements with strategic partners.
In addition to developing molecular diagnostic tests, we provide
testing products and services to the pharmaceutical,
biotechnology and medical research industries based on our menu
of validated biomarker immunoassays. We believe our proprietary
MAP technology creates efficiencies in the drug discovery and
development process by providing researchers with more
information on the effect of a particular drug on specific
biomarkers. Our testing services are based on our menu of
validated biomarker immunoassays, which we developed for our
multinational pharmaceutical and biotechnology company
customers. The 51 biomarkers included in our VeriPsych test are
part of this menu of immunoassays.
Industry
Overview
Molecular diagnostic medicine is based on the analysis of
biological processes at the molecular level through the
measurement of biomarkers. A biomarker can be a gene, nucleic
acid, protein, peptide, enzyme, hormone or other biochemical
that can be objectively measured as an indicator of normal
biologic processes, disease processes, or biologic responses to
a therapeutic intervention. Almost every disease or disorder
changes the levels of certain biomarkers in a manner
characteristic of that condition. When these changes can be
measured they help physicians:
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identify the presence of disease or disorder, either before or
after the appearance of symptoms;
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predict the likely future course of a disease or disorder;
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predict treatment response before initiation of therapy, or
predict treatment outcomes early in the course of therapy;
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predict toxicity and side effects of therapy before initiation,
or detect such effects before symptoms appear; and
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indicate whether or not a patient is responding to therapy.
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In drug development, biomarkers can provide information to
create effective drug development strategies that minimize risk
and time to market and enable researchers to:
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identify potential drug targets;
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predict toxicological effects in the early stages of drug
development;
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assess drug safety and efficacy; and
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stratify patient populations during the later stages of drug
development and clinical trials.
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We believe the ability to identify and accurately measure, in an
efficient,
cost-effective
way, the concentrations of specific biomarkers and, more
importantly, biomarker patterns that correlate to diseases or
medical conditions, will become increasingly important in both
medicine and pharmaceutical research and development. According
to a
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report by Global Industry Analysts, Inc., the global molecular
diagnostics market will be $3.7 billion in 2010 and will
grow to $6.4 billion by 2015.
Limitations of
the Current Diagnostic Paradigm
Some diseases can be easily diagnosed and monitored using a
single, unequivocal biomarker associated with the disease. For
example, glucose levels provide all the essential information a
physician needs to diagnose diabetes and all the information the
patient needs to self-monitor and treat. Many diseases, however,
are complex and multi-factorial, involving multiple biochemical
pathways and biomarkers. Due to the natural variation in
observable biochemical traits in the general population, there
are few single-biomarker tests that can diagnose complex and
multi-factorial diseases with clinically acceptable sensitivity
and specificity.
Until recently, diagnostic researchers did not have the
biochemical and engineering technology necessary to
cost-effectively quantify multiple biomarkers simultaneously
from large numbers of blood samples. Researchers have been
limited by the higher cost and fluid requirements that are
necessary to study large numbers of biomarkers using
enzyme-linked immunosorbent assay, or ELISA, technology.
High-throughput, multiplexed diagnostic technologies have
recently been developed to analyze a larger number of biomarkers
simultaneously in order to discover patterns of biomarkers that
may lead to more accurate diagnosis of disease or medical
conditions. Some of these technologies have faced limitations,
however, in their ability to reproducibly provide a high level
of sensitivity and specificity, while using a commercially
viable sample volume.
Our
Solution
We develop molecular diagnostic tests using our proprietary MAP
technology. We have developed over 400 distinct immunoassays
that we configure into panels for use in diagnostic and research
applications. Using a bead-based multiplexing technology
combined with laboratory robotics, we are able to rapidly
conduct simultaneous quantitative analysis of a large number of
biomarkers from a small sample of serum, plasma or other bodily
fluids. Statistical analysis identifies the most relevant
biomarkers in clinical samples from patients known to have a
given disease or disorder. We then create and validate
diagnostic immunoassay panels that allow us to analyze a patient
sample and deliver a result that can aid the physician in making
diagnostic and treatment decisions.
We believe our proprietary MAP technology offers several
important advantages over existing biomarker discovery and
diagnostic methods for complex, multi-factorial diseases,
including:
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An extensive menu of immunoassays. We believe we have the
most extensive menu of validated multiplexed biomarker
immunoassays in the industry, enabling us to cast a wide net in
the search for clinically relevant biomarker patterns.
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Greater diagnostic accuracy. We believe we can measure
more biomarkers than any other immunoassay platform using a
comparable sample volume, resulting in molecular diagnostic
tests with high sensitivity and specificity.
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Precise, reproducible data. Our solution is highly
standardized, combining the precision of Luminex technology and
liquid handling robots. Together with other proprietary
immunoassay processes, we are able to deliver data with a high
degree of precision and reproducibility.
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Cost-effective results. By rapidly analyzing a large
number of biomarkers in a small sample volume, we are able to
efficiently and cost-effectively deliver results that would
otherwise require a large sample volume, multiple tests, and
ultimately higher costs and greater complexity using less
sensitive or less precise techniques.
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We have applied our proprietary MAP technology to discover
unique biomarker patterns characteristic of several diseases and
disorders, initially in psychiatry, for which blood-based
diagnostic tests are currently unavailable or inadequate. We
believe these patterns provide clinically relevant information
for the diagnosis of these conditions. Our VeriPsych test
represents our first commercial molecular diagnostic test
resulting from this approach with an initial indication for
recent-onset schizophrenia.
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Our
Strategy
Our strategy is to become a leader in the development and
commercialization of molecular diagnostic tests based on novel
biomarker patterns discovered using our proprietary MAP
technology. To achieve this strategy, we plan to:
Successfully
Commercialize Our VeriPsych Test as an Aid in the Diagnosis of
Recent-Onset Schizophrenia
We have developed a marketing strategy to establish our
VeriPsych test as the standard of care in the diagnosis of major
mental illness. We initially marketed our VeriPsych test at
several leading academic psychiatric centers and have
subsequently begun marketing it to selected psychiatric group
practices as an aid to psychiatrists in the diagnosis of
recent-onset schizophrenia. We expect that feedback from
psychiatrists at these centers and practice groups will allow us
to refine the reports provided to psychiatrists and to optimize
our logistical infrastructure for our broader launch of the
test. If this limited launch generates positive experiences and
endorsements by psychiatrists at these institutions and practice
groups, we would leverage this group as a validating base for
our broader launch in the second half of 2010. As we expand our
sales and marketing department, our molecular diagnostics sales
force will leverage anticipated peer-reviewed publications,
presentations at psychiatric meetings and targeted educational
efforts to market our VeriPsych test to psychiatrists and other
mental health professionals. We also intend to seek support of
mental health advocacy groups, such as the National Depression
and Bipolar Support Alliance and the National Association on
Mental Illness, for our VeriPsych test. We believe the support
of these groups would raise awareness of the benefits and uses
of our VeriPsych test in the mental health community. Finally,
in connection with these activities, we believe it is important
to work with the American Psychiatric Association to establish
our VeriPsych test as the standard of care for assisting in the
diagnosis of major mental illness.
Validate
and Commercialize Additional Indications for Our VeriPsych
Test
We intend to further validate and commercialize additional
indications for our VeriPsych test that will expand its utility
and potential market. The first expanded indication is a test
for the differential diagnosis of recent-onset schizophrenia,
bipolar disorder and major depressive disorder. We have
initiated multiple clinical trials to validate the use of our
VeriPsych test for these indications with the intent of
commercializing this test in 2011. If successful, we expect that
these additional indications would substantially increase the
utility and market for our test as an initial diagnostic tool.
In addition, we are exploring further indications for our
VeriPsych test based on data observed in our clinical trials,
including the ability to diagnose minimally drug-treated
patients and to confirm the diagnosis of patients up to five
years following their initial diagnosis. These indications, if
successful, could expand the use of our test beyond the
recent-onset diagnostic market to include portions of the larger
prevalence market of patients already carrying a diagnosis.
Continue
to Expand our Molecular Diagnostic Offerings in the Psychiatric
Market
We intend to leverage the research, development,
commercialization and marketing infrastructure developed in
connection with our VeriPsych test to introduce other molecular
diagnostic tests targeting the psychiatric market. We have
several programs currently in development, including diagnostic
test that would be marketed to primary care physicians and other
non-psychiatrists, a second version of this test for military
healthcare providers, and a companion diagnostic test currently
being developed in collaboration with Roche to be used in tandem
with a Roche drug that is in clinical development. In addition
to these programs currently in development, we intend to explore
other significant opportunities within the psychiatric market,
including the development of additional companion diagnostic and
therapeutic monitoring tests, tests that may predict impending
psychosis, and tests that may predict specific therapeutic
response prior to treatment.
Advance
and Expand Our Pipeline of Molecular Diagnostic Tests Across
Multiple Attractive Indications By Leveraging our Pharmaceutical
Testing Products and Services
We have a robust pipeline of molecular diagnostic tests under
development that we believe is capable of generating a series of
new products over the next several years. We are focusing our
development efforts in areas unserved or underserved by other
molecular diagnostic tests. We are pursuing companion diagnostic
opportunities with customers of
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our pharmaceutical testing products and services. We believe we
can leverage this part of our business to identify additional
molecular diagnostic opportunities, discover novel diagnostic
biomarker patterns and gain access to patient samples. The
continued growth of our pharmaceutical testing products and
services is an important part of our strategy to expand our
molecular diagnostic tests.
Expand
Our Existing Pharmaceutical Testing Products and
Services
We intend to continue expanding our menu of immunoassays and
focused biomarker panels for specific research applications. We
currently market our pharmaceutical testing products and
services primarily through a direct sales force and we intend to
add sales professionals in the United States and
internationally. We also intend to add distributors to further
access international markets. Additionally, as part of our
overall marketing strategy, we have entered into co-marketing
agreements with Charles River Laboratories, Inc. and Covance
Central Laboratory Services Limited Partnership, a subsidiary of
Covance Inc., to gain additional access to certain pre-clinical
and clinical markets.
Our Molecular
Diagnostic Tests
We develop and commercialize molecular diagnostic tests based on
novel biomarker patterns. We develop our tests using our
proprietary MAP technology, which allows us to screen large sets
of patient samples against our extensive menu of multiplexed
biomarker immunoassays. We intend to commercialize our initial
molecular diagnostic test as a LDT using our high-complexity
CLIA-certified laboratory. Our molecular diagnostic tests
leverage the logistical infrastructure and technology used for
the last eight years for our pharmaceutical testing products and
services. Our initial molecular diagnostic tests will be focused
on the psychiatric market.
The
Challenge of Diagnosing and Treating Psychiatric
Disorders
Psychiatric disorders are widely recognized as difficult to
diagnose even for the most experienced psychiatrists. Diagnosis
is currently based on the patients self-reported
experiences and observed behavior. Accurate and timely diagnosis
is critical to the successful treatment of recent-onset
schizophrenia as well as other mental disorders. However, the
subjective nature of current diagnostic criteria and symptom
overlap with other mental disorders frequently leads to
misdiagnosis and potentially years of inappropriate and
ineffective treatment. According to a study presented by the
National Depression and Bipolar Support Alliance, there is an
average delay of 10 years from the first onset of symptoms
to correct diagnosis and treatment of psychiatric disorders. The
use of illicit drugs, severe depression, bipolar disorder and
delirium can all cause psychotic symptoms similar to those
associated with schizophrenia. For this reason, the diagnosis
often changes over time.
The
Initial Diagnosis Market
We define the initial diagnosis market as the number of patients
each year that present to hospitals or clinics with symptoms of
major mental illness that may lead to a diagnosis of
schizophrenia, bipolar disorder or major depressive disorder.
According to a report published by the United States Centers for
Disease Control and Prevention, or CDC, approximately
1.7 million patients were discharged from
U.S. non-federal short-stay hospitals in 2005 with a
primary diagnosis that may have symptoms that overlap with these
disorders, including schizophrenic disorders, affective
psychoses such as manic, major depressive and bipolar disorders,
paranoid states, nonorganic psychoses, alcoholic psychoses and
drug psychoses. This number does not include the additional
patients that are initially diagnosed each year in a psychiatric
clinic or other outpatient setting. While there is limited data
available to quantify the size of this market, we believe that
the majority of patients are diagnosed in these outpatient
settings.
The
Prevalence Market
According to the National Institute of Mental Health,
approximately 22.9 million patients in the United States
carry a diagnosis of schizophrenia, bipolar disorder, or major
depressive disorder. In a given year, approximately:
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2.4 million American adults, or about 1.1% of the
U.S. population age 18 and older, have schizophrenia.
Schizophrenia often first appears in men in their late teens or
early twenties. In contrast, women are generally affected in
their twenties or early thirties.
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5.7 million American adults have bipolar disorder, or about
2.6% of the U.S. population age 18 and older, with a
median age of onset of 25.
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14.8 million American adults have major depressive
disorder, or about 6.7% of the U.S. population age 18
and older. Major depressive disorder is the leading cause of
disability in the United States for ages 15 to 44 and has a
median age of onset of 32.
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Our
VeriPsych Test
Our VeriPsych test is a blood-based test consisting of 51
individual biomarker immunoassays and an associated algorithm.
We believe this test can be useful as an aid in the diagnosis of
recent-onset schizophrenia, bipolar disorder and major
depressive disorder. Our first indication targets the initial
diagnosis market for schizophrenia. Additionally, we believe
there is an unmet need for tests addressing the prevalence
market, patients switching to new physicians, patients switching
to different medication or patients who are unresponsive to
treatment.
Over the last three years, we and Psynova have independently
conducted surveys of approximately 225 psychiatrists to
determine the potential demand for a blood-based diagnostic test
for use in connection with the diagnosis of psychiatric
disorders. Of the psychiatrists surveyed, 93% said they would
use a blood-based test for new patients with symptoms of a
potentially serious mental illness. These surveys also showed
that 73% of these psychiatrists would use a blood-based test on
patients already carrying a diagnosis of schizophrenia.
Schizophrenia
Diagnosis Indication
Schizophrenia is characterized by abnormalities in a
persons perception or expression of reality. Onset of
symptoms typically occurs in men in their late teens or early
twenties and women in their twenties and thirties. Symptoms
include hallucinations, delusions, disordered thinking, movement
disorders, social withdrawal and cognitive deficits.
Schizophrenia is a devastating disorder that is very costly to
families of afflicted persons and society in general. According
to an article published by the Journal of Clinical Psychiatry,
the overall cost of schizophrenia in the United States in 2002
was estimated to be $62.7 billion, including
$22.7 billion in excess direct healthcare costs. Other
costs include incremental social burdens, such as homeless
shelters and law enforcement as well as productivity losses.
Schizophrenia is a progressive, degenerative disorder, and the
patients chances for a normal life diminish with each
psychotic episode. Consequently, psychiatrists are faced with
the challenge of choosing the right drug for a given patient as
soon as possible. In general there are different drugs used in
the treatment of schizophrenia, bipolar disorder and major
depressive disorder. Inappropriate medication is likely to be
ineffective at limiting psychotic episodes and disease
progression, and may lead to severe adverse reactions.
We have completed clinical validation of our first indication
and are commercializing our VeriPsych test to aid psychiatrists
in the diagnosis of recent-onset schizophrenia. The test
includes an algorithm that estimates the mathematical similarity
of a patients biomarker pattern to that of confirmed
schizophrenics. In March 2010, we began making our VeriPsych
test as an aid in the diagnosis of recent-onset schizophrenia
available for order. We focused our initial marketing efforts on
several leading academic psychiatry centers including the
Laureate Psychiatric Clinic and Hospital in Tulsa, Oklahoma, the
Department of Psychiatry at the University of Minnesota in
Minneapolis, Minnesota, and at the Department of Psychiatry and
Behavioral Science at the KU School of Medicine-Wichita in
Wichita, Kansas. We have also begun marketing our VeriPsych test
to selected psychiatric group practices including the Austin
Neuropsychiatric Clinic, Carolina Partners in Mental Health and
the Johns Hopkins Mood Disorders Center. We intend to use our
early experience with these psychiatric centers and group
practices to refine the process by which psychiatrists order and
use the results of our VeriPsych test, the manner in which the
results are reported and our educational programs. We expect
that this limited initial launch will assist in the broader
launch of our VeriPsych test for this use in the second half of
2010.
Differential
Diagnosis Indication
We are currently conducting additional clinical studies to
validate a second use of our VeriPsych test as an aid in
differentiating among patients with schizophrenia, patients with
bipolar disorder and patients with major depressive disorder.
The three major diseases have a continuum of symptoms that,
based on the phase of the disease, can
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present significant diagnostic difficulties. For example, the
manic state of bipolar disorder can have symptoms virtually
identical to recent-onset schizophrenia, while the depressive
phase of bipolar is often indistinguishable from major
depressive disorder. Occasionally, early schizophrenia may cause
negative symptoms which can be confused with depression. We
expect that this indication will utilize separate algorithms for
patients expressing primarily psychotic symptoms and for
patients expressing primarily depressive symptoms, which would
be selected based on the initial clinical evaluation of the
ordering physician. Results for this test would also be reported
using a linear scale of similarity, with separate reports
indicating the mathematical similarity of a patients
biomarker pattern to patterns indicative of schizophrenia,
bipolar disorder and major depressive disorder. Because of the
challenge in diagnosing patients with these three conditions,
the differential diagnosis indication for this product is likely
to significantly increase our VeriPsych tests utility for
a broader group of patients and is expected to result in
significant growth in adoption and utilization by physicians.
Clinical
Development and Validation of Our VeriPsych Test
We developed our VeriPsych test by analyzing over
2,900 well-characterized samples from patients with a
variety of mental illnesses. These samples were collected from
patients followed for as many as nine years to ensure accurate
patient diagnosis. We, along with the Bahn Laboratory of
Cambridge University and Psynova, worked with ten different
research institutions collecting samples from six different
clinical sites to develop and validate a biomarker panel that
differentiates schizophrenia from controls and other psychiatric
and neurologic disorders with a high degree of sensitivity and
specificity. The research and clinical sites were:
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Walter Reed Army Institute of Research, Silver Spring, Maryland
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Johns Hopkins Hospital, Baltimore, Maryland;
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The Stanley Medical Research Institute, Chevy Chase, Maryland;
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Department of Psychiatry and Psychotherapy, University of
Cologne, Germany;
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Central Institute of Mental Health, University of Heidelberg,
Mannheim, Germany;
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Department of Psychiatry, University of Muenster, Germany;
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Department of Psychiatry, University of Magdeburg, Germany;
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Department of Psychiatry, Erasmus University Medical Center,
Rotterdam, Netherlands;
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The Autism Research Centre, Department of Psychiatry, University
of Cambridge, Cambridge, United Kingdom; and
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Institute of Biotechnology, University of Cambridge, Cambridge,
United Kingdom.
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VeriPsych
Test Pattern Discovery Phase
Our DiscoveryMAP was used in a three-site retrospective trial to
measure biomarkers in samples collected from a total of 445
individuals with known clinical outcomes, including 163
recent-onset schizophrenia patients, 32 bipolar disorder
patients, 50 major depressive disorder patients, and
200 healthy, matched control subjects. These individuals
were recruited between 2000 and 2008 from the Departments of
Psychiatry at the Universities of Cologne, Muenster and
Magdeburg in Germany. The samples were collected under standard
operating procedures, or SOPs, and patients were ultimately
diagnosed based on the Structured Clinical Interview method as
outlined in DSM-IV, the standard method currently used for the
diagnosis of psychiatric disorders. These sites were chosen for
our discovery phase due to their rigorous evaluation techniques,
including an initial
40-day
inpatient evaluation period and a multi-year
follow-up
program, which we believe results in highly accurate diagnosis.
Using the results from the University of Cologne site, which we
believe had the most closely matched schizophrenics and healthy
controls of the three sites, we discovered a pattern based on
the concentrations of 36 individual biomarkers that best
discriminated the schizophrenia patients from the healthy
controls. The biomarker pattern identified in this study was
then tested as a potential diagnostic tool using blinded samples
from all three clinical sites. The results of this test
suggested that the biomarker pattern could be used to
successfully and reproducibly identify schizophrenia patients
compared to healthy controls across the three sites with
clinically relevant sensitivity and specificity.
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VeriPsych
Test Clinical Evaluation
We next applied DiscoveryMAP to samples from two additional
European sites, as well as United States Military samples
collected prior to a patients first psychotic episode. The
goal of this study was to further evaluate the 36 biomarker
panel as an aid in the diagnosis of recent-onset schizophrenia
and to identify additional biomarkers that could aid in the
differentiation of schizophrenia from other psychiatric
disorders, primarily bipolar disorder. In this study we had a
large group of drug-naïve bipolar patients (112 samples),
schizophrenics (177 samples), controls (273 samples),
recent-onset major depression patients (35 samples) and patients
with other neurologic disorders including multiple sclerosis,
dementia, and autism spectrum disorder (650 samples).
The European samples were collected at Erasmus University and
the University of Magdeburg. The diagnostic criteria were the
same as those used in the prior
three-site
study. The U.S. Military samples were from patients later
confirmed to have schizophrenia or bipolar disorder, again using
the same diagnostic criteria. From this study, we were able to
confirm the performance of the 36-biomarker panel and identify
an additional 15 biomarkers that enhanced the sensitivity and
specificity of our product to aid in the diagnosis of
recent-onset schizophrenia. This combined
51-biomarker
pattern demonstrated utility in differentiating schizophrenia
from bipolar disorder, major depressive disorder and healthy
controls. We then manufactured the commercial test for use in
the clinical validation phase.
Clinical
Validation of Our VeriPsych Test as an Aid in the Diagnosis of
Resent-Onset Schizophrenia
For clinical validation, we applied this 51-biomarker test to
838
well-characterized
samples obtained from three sites in Germany, including the
Universities of Magdeburg, Cologne, and Muenster. Patients were
diagnosed based on the Structured Clinical Interview for DSM-IV.
Any patient whose clinical diagnosis required later revision was
not used in this study, and those with a family history of
mental disease or other medical conditions such as type II
diabetes, hypertension, cardiovascular or autoimmune diseases,
were excluded. Control subjects were again recruited from the
same geographical area and matched to the respective patient
populations based on social demographics. In this sample set,
there were 593 schizophrenics and 245 controls. We analyzed the
samples, employing the same protocols as those used in previous
studies. Michael Walker, Ph.D., an experienced statistician
affiliated with Stanford University, acted as the study
coordinator for the validation and development of the algorithm.
Dr. Walker randomized the data and provided half of the
test results to Vladimir Vapnik, Ph.D., formerly of Bell
Labs and the developer of the Support Vector Machine, a
sophisticated statistical method for identifying patterns in
complex data sets. Dr. Vapnik used this set of data, known
as the training set, to develop the algorithm. With this
algorithm in place, the second half of the test results were
analyzed blinded (without patient demographics) by
Dr. Vapnik for final validation of our VeriPsych test.
Based on the results of this trial, our VeriPsych test was shown
to differentiate between recent-onset schizophrenia patients and
controls with the degrees of diagnostic accuracy as shown in the
table below. The results of this study are described in a
peer-reviewed article that has been accepted for publication in
a biomarker focused journal. Drs. Walker and Vapnik are
members of our Scientific Advisory Board.
Performance
of Our VeriPsych Test for Recent-Onset Schizophrenia vs.
Controls in the Clinical Validation Phase:
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Sensitivity
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Specificity
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AUROC
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Recent-Onset Schizophrenia vs. Controls
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84%
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85%
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0.89
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Clinical
Validation of Our VeriPsych Test as an Aid to Differential
Diagnosis
During development and validation of our initial schizophrenia
indication, our VeriPsych test was found to differentiate
between patients with schizophrenia, bipolar disorder and major
depressive disorder. However, the number of patients with
bipolar disorder and major depressive disorder enrolled in our
studies was insufficient to fully validate a differential
diagnostic test. Therefore, we are currently conducting clinical
studies on an expanded population of patients with bipolar
disorder and major depressive disorder using the same validation
process employed previously. We anticipate needing approximately
400 well-characterized samples from each disease state to
complete this validation. We expect results to be available for
bipolar disorder and major depressive disorder in the second
half of 2010.
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VeriPsych
Test Line Extension
During development and validation of our initial schizophrenia
indication, our VeriPsych test demonstrated the ability to
distinguish schizophrenics already on drug treatment from
controls and other major mental illnesses based on a limited
number of samples. In connection with our Roche collaboration,
we plan to test additional samples from patients on a variety of
anti-psychotic medications. If these additional trials confirm
the ability of our VeriPsych test to distinguish drug-treated
schizophrenia patients from controls with a sufficient level of
diagnostic accuracy, we believe this will allow us to expand the
indication of our test into the prevalence market of patients
already carrying the diagnosis of schizophrenia.
Third-Party
Affirmation of Our VeriPsych Test Biomarkers
Affirmation of the relevance of a biomarker pattern to a
particular disease often involves a review of the scientific
literature to assess their association with that disease at the
individual biomarker level. At least 31 of the biomarkers in our
VeriPsych test have been associated with schizophrenia, bipolar
disorder or major depressive disorder in hundreds of
peer-reviewed publications on major mental illness over the last
ten years. It is well-established that individual
biomarkers may be useful for identifying a particular disorder.
However, we believe that identification of individual biomarkers
alone should not prevent the patentability of a particular novel
panel that utilizes multiple biomarkers in combination to
produce a unique and more accurate result.
Our Product
Development Process
We developed our VeriPsych test using the multi-phased clinical
development process described below.
Development of DiscoveryMAP: To date, we have compiled a
menu of over 400 individual human and rodent immunoassays for
use in multiple products and new assays are continuously added
to this library. We have assembled what we believe are the most
clinically relevant human immunoassays from our library into our
DiscoveryMAP assay panel, which we use in our Pattern Discovery
and Clinical Evaluation Phases. Historically, the biomarker
selection process has been conducted in collaboration with our
pharmaceutical testing services customers, including leading
pharmaceutical, biotechnology, government and academic research
laboratories. Together with these customers we select relevant
biomarkers of key biochemical pathways based on the
peer-reviewed literature and our own biomarker expertise.
Pattern Discovery Phase: The goal of this phase is to
identify disease-specific biomarker patterns from samples tested
on our DiscoveryMAP prior to moving the program into
development. Studies in this phase are typically small,
involving several hundred well-characterized disease samples and
normal controls obtained from just a few clinical sites. We then
apply a variety of statistical techniques to a subset of these
data sets to detect the characteristic changes in certain
biomarker levels in diseased patients as compared to controls.
This biomarker pattern is then applied, on a blinded basis, to
the remaining data set to evaluate its potential diagnostic
utility.
Clinical Evaluation Phase: In this phase, new sample sets
focused on the specific patient population of interest are
collected from additional clinical sites to evaluate the
performance characteristics of the pattern found in discovery
phase and to uncover any additional biomarkers that can improve
the sensitivity and specificity of the diagnostic pattern. We
apply DiscoveryMAP to these sample sets and then conduct
biostatistical modeling of the biomarker data to develop the
best quantitative correlation to the target disease. Based on
the results of this evaluation, we select the final set of
immunoassays to be used in our molecular diagnostic panel. We
then manufacture the commercial test for use in the clinical
validation phase.
Clinical Validation Phase: In this phase, we conduct one
or more validation studies to test our candidate immunoassay
panel. A study in this phase is typically multi-site with larger
sample numbers and with data controlled by a neutral study
coordinator. Our statisticians use a random subset of the data
with the patient demographics as a training set for diagnostic
algorithm development. Once the algorithm is finalized, the
remaining data are analyzed on a blinded basis by our
statisticians for final test validation.
Commercialization and Line Extension Phase: Once a test
is commercialized, we may perform additional studies designed to
support the tests clinical utility and to broaden its use
in additional patient populations or for
72
additional indications. Such studies may be prospective to
verify that our test is improving patient outcomes. These types
of studies may be useful for driving adoption and reimbursement
by physicians and payors.
Diagnostic Test
Development Pipeline
Our pipeline of molecular diagnostic tests includes both early
and later-stage products. Some of our programs are summarized or
listed below.
Nonspecific
Mental Illness
Primary
Care Application
We are developing a test using a subset of biomarkers in our
VeriPsych test that, based on the results of two clinical
studies, we believe may be useful to primary care physicians and
other non-psychiatrists as a first-line tool for patients who
may require further evaluation by a mental health specialist.
The initial point of contact with the healthcare system for
patients at the earliest stages of mental illness is often at
the primary care physician level. These physicians may prescribe
treatments themselves. However, in most cases they choose to
refer patients to a mental health specialist for further
evaluation and treatment. Because most primary care physicians
are not specifically trained in psychiatry, they may fail to
recognize, or may improperly classify these patients,
potentially leading to delayed or inappropriate treatment.
Additionally, primary care physicians face the challenge of
determining the appropriate course of treatment for patients
with emotional or behavioral disturbances that may not be mental
health related, such as those caused by drugs, alcohol, injury
or other disabilities. When these patients are incorrectly
determined to have a mental illness, improper therapy or
unnecessary specialist referrals may lead to increased costs to
the healthcare system, while also potentially delaying
appropriate treatment. This project is now in the clinical
evaluation phase, and we are planning clinical trials to further
advance this application in 2010. Assuming successful progress
through this phase and the subsequent clinical validation phase,
we anticipate possible commercialization of this application in
2012. However, we cannot assure you that we will successfully
commercialize this application in this time period, or at all.
For more information on the risks associated with successfully
commercializing new products and applications, see Risk
FactorsRisks Related to Our BusinessIf we fail to
develop additional indications for our VeriPsych test or new
molecular diagnostic tests, discover novel biomarker patterns,
or develop new immunoassays, our future growth may be materially
adversely affected.
Military
Application
Military healthcare providers have expressed interest in a test
that could help them determine those who are at greatest risk of
developing some form of mental illness. In addition, this test
may be valuable in determining who among those currently
displaying abnormal behavior will require substantial treatment
intervention. Based on data from two clinical studies, we
believe that a modified version of the test developed for the
primary care market may be used for this application. This
project is now in the clinical evaluation phase, and we are
planning clinical trials to further advance this application in
2010. Assuming successful progress through this phase and the
subsequent clinical validation phase, we anticipate possible
commercialization of this application in 2012. However, we
cannot assure you that we will successfully commercialize this
application in this time period, or at all. For more information
on the risks associated with successfully commercializing new
products and applications, see Risk FactorsRisks
Related to Our BusinessIf we fail to develop additional
indications for our VeriPsych test or new molecular diagnostic
tests, discover novel biomarker patterns, or develop new
immunoassays, our future growth may be materially adversely
affected.
Schizophrenia
Companion Diagnostic
Through Psynova, we are collaborating with Roche on a companion
diagnostic test to be used in tandem with a Roche drug that is
in clinical development. Companion diagnostic tests are designed
to assist physicians in making treatment decisions by predicting
or monitoring the safety or efficacy of a drug. We are
developing a companion diagnostic that will indicate whether the
Roche drug will improve certain patient outcomes. Roche has
provided us with patient samples from a previously conducted
clinical trial. During the pattern discovery phase, we will use
73
DiscoveryMAP to search for biomarker patterns that correlate
with positive clinical outcomes. If an appropriate biomarker
pattern is identified, we expect Roche to supply us with
additional samples in connection with a subsequent clinical
trial. Any resulting companion diagnostic would be developed
either by Psynova, as the preferred developer of the companion
diagnostic in partnership with Roche, or by Roche, which would
result in milestone and royalty payments to Psynova.
Other
Diagnostic Test Candidates
We are developing a variety of molecular diagnostic tests as
reflected in the table below. None of our molecular diagnostic
tests shown below will be commercialized prior to 2012, except
as indicated in the table below. However, we cannot assure you
that we will successfully commercialize any of these products in
these time periods, or at all. For more information on the risks
associated with successfully commercializing new products and
applications, see Risk FactorsRisks Related to Our
BusinessIf we fail to develop additional indications for
our VeriPsych test or new molecular diagnostic tests, discover
novel biomarker patterns, or develop new immunoassays, our
future growth may be materially adversely affected.
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Product Area
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Indication
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Development Status
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Partner
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Ovarian Cancer
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Need for gynecological oncologist for pelvic mass surgery
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Clinical Validation Phase, commercialization decision in 2011
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Correlogic, Inc.
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Hepatitis C
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Predict responsiveness to Interferon-alpha therapy
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Clinical Evaluation Phase
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European collaborator
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Alzheimers disease
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Early diagnosis
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Clinical Evaluation Phase
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Satoris Inc., Pfizer Inc., University of Pennsylvania,
Commonwealth Scientific and Industrial Research Organisation,
Texas Alzheimers Research Counsel
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Kidney transplant
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Early detection of transplant rejection
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Pattern Discovery Phase
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Northwestern University, Scripps Research Institute
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Kidney disease
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Detection of kidney toxicity
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Pattern Discovery Phase
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Boehringer Ingelheim GmbH
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Clinical Advisory
Board
We engage a Clinical Advisory Board to provide us with expert
guidance in the areas of clinical trial development, clinical
strategy, and product development strategy. The Clinical
Advisory Board is composed of nationally recognized thought
leaders in psychiatry and will meet with us semiannually to
advise us in clinical and development strategy and to provide
input and advice on emerging trends, competitive strategy and
new opportunities. For more information on our Clinical Advisory
Board, see ManagementClinical Advisory Board.
Principal
Investigators
Several of our academic collaborators have chosen to work with
us as principal investigators, in which the collaborator has no
direct payment from the company, but does have a confidentiality
obligation. These experts will assist in the design of clinical
trials and the interpretation of the results. There is a
potential for these relationships to change as the different
diagnostic tests progress through validation, evaluation and
general usage in clinical practice. For more information on our
Principal Investigators, see ManagementPrincipal
Investigators.
Our
Pharmaceutical Testing Products and Services
In addition to the development of molecular diagnostic tests, we
provide MAP services to the pharmaceutical, biotechnology, and
medical research industries. We believe that we are the largest
biomarker testing laboratory
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specializing in delivering quantitative multiplexed immunoassay
data on humans and rodents. Our MAPs measure up to hundreds of
biomarkers in a small sample volume of a variety of biological
sample types including serum, plasma and other biological
fluids. These MAPs provide a comprehensive and cost-effective
evaluation of the biomarker patterns critical to applications
such as drug safety and efficacy, disease diagnosis, disease
modeling, patient stratification as well as personal health
assessments. Our lab services are typically delivered on a fee
per sample basis as an outsourced service provider. Revenues
generated by our MAP and custom MAP services were
$10.5 million, $14.3 million and $19.2 million
for the years ended December 31, 2007, 2008 and 2009,
respectively. Revenues generated by our MAP and custom MAP
services were $4.6 million and $4.2 million for the
three months ended March 31, 2009 and 2010, respectively.
Our pharmaceutical testing products and services consists of
four offerings:
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MAP testing services;
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custom MAP services;
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multiplexed immunoassay kits; and
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TruCulture and other co-culture services.
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MAP
Services
Our MAP services are built around our primary commercial
products, including (i) DiscoveryMAP for use with human
clinical samples, and (ii) RodentMAP for preclinical animal
model testing. These provide cost-effective, reproducible,
quantitative data from small biological sample volumes because
of our miniaturized immunoassay format combined with robotic
liquid handling. Our MAP services customers have historically
included pharmaceutical and biotechnology companies and medical
researchers.
Our MAP testing and new assay development service has enabled us
to develop, expand, and validate our menu of biomarker
immunoassays. This approach has resulted in an extensive menu of
more than 400 biomarker immunoassays that address the full range
of the drug development pipeline from cellular research through
animal testing and into human clinical trials.
Customers using our MAP services provide us with samples from
ongoing pharmaceutical research projects. Outsourced testing
enables customers to reduce the costs of research and drug
development. The data generated allows for better and more rapid
decision making in the drug or consumer product development
process, provides new insights for life scientists into
biological systems and helps to generate new potential molecular
diagnostic tests that may enable earlier detection of disease.
Service
Offerings
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Product
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Species
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Biomarkers
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Application
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DiscoveryMAP
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Human
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188
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Comprehensive biomarker discovery panel
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HumanMAP v. 1.6 antigens
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Human
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88
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Biomarker discovery panel
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HumanMAP v. 1.6 serology
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Human
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100
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Auto-immune and infectious disease serology panels
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InflammationMAP
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Human
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46
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Inflammatory disease research
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CardiovascularMAP
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Human
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50
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Cardiovascular disease research
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MetabolicMAP
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Human
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21
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Metabolic disease research
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KidneyMAP
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Human
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16
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Kidney disease and toxicology
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RodentMAP
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Mouse/Rat
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71
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Biomarker discovery panel
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Rat MetabolicMAP
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Rat
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21
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Metabolic disease research
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Rat KidneyMAP
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Rat
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12
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Kidney disease and toxicology
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Custom
MAP Services
Our customers typically utilize one of the larger MAPs to
identify useful biomarker patterns. As their research or
clinical trial progresses they tend to use smaller, more focused
panels of immunoassays. We have addressed this need by offering
smaller custom MAPs for those customers pursuing more targeted
research. In some cases, usually by customer request, we combine
our MAPs with immunoassays performed on other platforms to
supplement our menu of offerings.
Multiplexed
Immunoassay Kits
Customers in all segments of the life sciences market often
require both outsourced and in-house testing. Many of our
customers have purchased bioassay technology platforms and have
personnel dedicated to in-house testing. Therefore, we have
developed multiplexed immunoassay kits that enable our customers
to leverage our technology services with their in-house
capabilities.
In 2008, we entered into a distribution agreement with EMD
Chemicals Inc., or EMD, a U.S. affiliate of Merck KGaA,
Darmstadt, Germany, to produce and market our multiplexed
immunoassay kits. Our multiplexed immunoassay kits include all
of the components necessary for a customer to perform a test on
their own Luminex instrument. We have delivered 12 multiplexed
kit products to EMD, which they have the exclusive right to
market to existing users of the Luminex bioassay technology
platform.
We believe our multiplexed immunoassay kits will allow us to
access the in-house testing market and complement our existing
out-sourced testing services.
TruCulture
and Other Co-Culture Services
TruCulture is a simple, self-contained whole blood culture that
can be deployed to clinical sites around the world for acquiring
cell culture data without specialized facilities or training.
The TruCulture system may allow pharmaceutical companies to
identify drug toxicity prior to any human trials, potentially
enabling a decision as to whether to continue a drugs
development earlier in the development process saving
significant research and development costs. Our technology also
includes human co-culture cell systems that mimic the immune
system, blood, skin, gut and lung systems, which represents the
major routes of system entry for most drugs.
Sales and
Marketing
Molecular
Diagnostic Tests
Our molecular diagnostic testing group is led by Anthony Barnes.
Dr. Barnes has extensive experience in the marketing of
immunodiagnostics and esoteric laboratory tests along with
experience consulting in the development and marketing of
pharmaceuticals. Don Beamish joined our diagnostic sales
and marketing team to lead the commercial launch of our
VeriPsych test and other molecular diagnostic tests. Mr. Beamish
has extensive experience in leading marketing and sales teams in
the neuroscience pharmaceutical area, most notably the marketing
program for Seroquel, a leading atypical anti-psychotic drug
marketed by AstraZeneca. We plan to have a team of 10
field-based sales professionals, in addition to four highly
skilled medical science liasons (three of which are already on
staff), and an office based marketing and customer service
support team in place by the end of 2010. Our diagnostics sales
and marketing team will initially target high-prescribing
psychiatrists, high-patient-volume psychiatric hospitals and
community mental health clinics, which we believe will represent
approximately 40% to 50% of the total target population.
We are developing a highly technical sales approach for our
molecular diagnostic sales force. We intend to train our sales
team to promote the clinical benefits of our VeriPsych test, as
well as to ensure that psychiatrists face minimal technical and
logistical obstacles in adoption and repeat testing. Our
tactical marketing representatives and technical sales
specialists, when in place, will focus on educating physicians
on the benefits of our VeriPsych test and presenting clinical
validation data to support adoption of the test. Additionally,
we plan to train our customer service representatives to offer
ongoing support, including initial assistance with blood
collection and sample shipment, reimbursement and other typical
customer service functions.
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Pharmaceutical
Testing Products and Services
As of April 19, 2010, our sales and marketing team for our
pharmaceutical testing products and services consisted of
13 employees including six regional sales representatives
in the United States and three in Europe, supported by a
four-member
marketing team and outside marketing consultants. We market our
testing services for drug discovery and development through
technical presentation by our sales force in both domestic and
international markets, participation in private and public
research and development meetings, as well as newsletters,
online communications, industry journals and other public
relations and marketing activities. In addition, as part of our
overall marketing strategy, we have entered into co-marketing
agreements with Charles River Laboratories, Inc. and a
subsidiary of Covance Inc., which allow us to leverage their
extensive sales forces in certain preclinical and clinical
markets.
Research and
Development
We invest in research and development relating to our
pharmaceutical testing products and services to expand our
product offerings by adding new immunoassay panels and further
improving our technology. For example, in recent years, we
introduced several new immunoassay panels including Rat and
Human KidneyMAP and DiscoveryMAP. We continually improve our
technology by investing in laboratory automation, novel
immunoassay processes, complex cell culture models, and
information technology and software processes. Research and
development expenses represent costs incurred to develop our
testing services, products and technology as well as our
molecular diagnostic tests and include the cost of personnel,
software development, rent, reagents, lab supplies, sample
acquisition costs and the costs of professional services to
secure and maintain intellectual property rights.
Historically, we have relied principally on information
accumulated through our testing work with pharmaceutical and
biotechnology companies to direct our research and development
activities. As we develop our molecular diagnostic tests, we
expect to invest substantially in research and development. For
example, we expect research and development expenses to increase
in 2010 and beyond as a result of the acquisition of a majority
interest in Psynova in September 2009, which will primarily
function as a research and development department. In addition,
we expect an increase in our research and development expenses
as a result of our need for more self-directed research and
development programs. As of April 19, 2010, our research
and development team consisted of 27 employees. Research
and development expenses were $1.5 million,
$3.2 million and $4.8 million for the years ended
December 31, 2007, 2008 and 2009, respectively. Research
and development expenses were $0.9 million and
$1.4 million for the three months ended March 31, 2009
and 2010, respectively.
Customers and
Suppliers
We market our laboratory testing products and services primarily
to drug development professionals at pharmaceutical and
biotechnology companies. We provide pharmaceutical testing
products and services to more than 300 pharmaceutical,
biotechnology and medical research customers. During the year
ended December 31, 2005, Charles River Laboratories
International, Inc. and GlaxoSmithKline plc accounted for
approximately 14% and 11%, respectively of our total revenue.
During the year ended December 31, 2006, Merck &
Co., Inc. accounted for approximately 12% of our total revenue.
During each of the years ended December 31, 2007 and 2008,
Johnson & Johnson accounted for approximately 12% and
11%, respectively, of our total revenue. During the year ended
December 31, 2009, no customer accounted for more than 10%
of our total revenue. During the three months ended
March 31, 2009, Satoris, Inc. accounted for approximately
21% of our total revenues. No customer accounted for more than
10% of our total revenues during the three months ended
March 31, 2010. In addition to the pharmaceutical and
biotechnology market, we also have customers from leading
government and academic research laboratories, consumer products
companies and diagnostic companies.
We purchase materials from a variety of suppliers. Each
immunoassay uses two antibody reagents and a protein standard.
All of our biomarker assays require microspheres, buffers,
diluents, and fluorescent detection reagents. We also purchase a
variety of laboratory consumables such as microtiter plates and
pipette tips. Important suppliers include Luminex Corporation
for microspheres and R&D Systems for reagents, antibodies
and protein standards.
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Reimbursement and
Billing
We expect payment for our VeriPsych test will proceed through
the typical channels for commercial laboratory testing services
in young patients, namely private health insurance providers and
Medicaid. We have retained Laboratory Billing Solutions, Inc. an
experienced laboratory billing and collection firm and expect to
outsource this function to this firm or another comparable firm
for the foreseeable future. This external source is responsible
for submitting our claims to the appropriate payor and
interacting with the payor in an appropriate way to maximize
frequency of reimbursement approval. In addition, we intend to
pursue reimbursement from patients on a case-by-case basis and
establish procedures to ensure maximum reimbursement from
individual patients. We anticipate submitting, either on our own
or through a third-party, an application for our CLIA laboratory
to be considered an
out-of-network
provider with several private insurance providers. We intend to
pursue clinical laboratory service agreements with targeted
private insurance companies on a
case-by-case
basis to enable us to automate our submission process and
maximize reimbursement.
In the United States, the American Medical Association assigns
specific Current Procedural Terminology, or CPT, codes, which
are a classification used to report medical procedures and
services under public and private health insurance plans. Once
the CPT code is established, Centers for Medicare and Medicaid
Services, or CMS, establishes reimbursement payment levels and
coverage rules under Medicaid and Medicare. For laboratory
testing services, reimbursement fees are set forth on the CMS
Clinical Laboratory Fee Schedule. Private payors establish rates
and coverage rules independently and are typically more flexible
with greater capacity to make exceptions to reimbursement
payment levels. Both private and public insurance carriers
require that claims be submitted with an appropriate CPT code,
which is provided by the laboratory performing the services, and
an ICD-9-CM code, which is provided by the physician or
authorized healthcare provider that has ordered the procedures.
Each of the immunoassays included in our VeriPsych test are
described in the CPT. Several immunoassays in our VeriPsych test
have specific CPT codes and the remainder of CPT codes fall
under the category of not otherwise specified, or
NOS. NOS codes allow immunoassays to be coded and reported when
no specific code fits.
NOS-coded
services and procedures are priced based on the CMS Clinical
Laboratory Fee Schedule. Claims including NOS-coded services and
procedures cannot be processed using an automated claims
processing systems so our claims to third-party payors for our
VeriPsych test will need to be submitted manually. In addition,
four of the 51 immunoassays in our VeriPsych test do not
currently have associated ICD-9-CM codes demonstrating medical
necessity of the immunoassays for the diagnosis of mental
illness. The lack of these ICD-9-CM codes in connection with
these four immunoassays is another reason why we will need to
submit claims manually, since we will need to submit with each
claim clinical support documentation for the medical necessity
of these immunoassays. Submitting claims for our VeriPsych test
manually will add to our costs and will likely result in greater
payor scrutiny, initial rejections and delays in claims approval
and payment. We expect that we will need to work with payors
individually to establish the necessary documentation required
for claims processing and payment. It may be difficult for us to
achieve an automated claims processing routine.
We believe existing CPT codes adequately cover the tests
contained in our VeriPsych test and the average reimbursement
based on these codes is sufficient. Therefore, we currently do
not expect to seek a unique CPT code(s) for our VeriPsych test.
However, we may in the future apply for a unique CPT code(s) for
our VeriPsych testing line, which would likely take one or more
years to be considered and, if granted, would likely result in a
change in our reimbursement amount. At this time we cannot
predict whether the classification of our VeriPsych test under a
unique CPT code(s) would result in lower payments.
Intellectual
Property
We seek to obtain and maintain intellectual property protection
for our products, proprietary information, and technology. We
rely on a combination of patent, trademark, trade secret,
confidentiality, licenses, and other agreements and measures to
protect our proprietary rights. We, or our licensors, have filed
patent applications directed toward single biomarkers and
combinations of biomarkers, methods of their use, and kits
related to our VeriPsych test. These applications have been
filed throughout the world and are intended to preclude, upon
issuance, third parties from making, using, or selling identical
or similar products. We, or our licensors, have filed
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patent applications for other indications. As we discover novel
biomarker panels for high-value indications we will follow this
same strategy.
We own or have a license to commercialize technology covered by
one issued patent for our TruCulture product and an additional
42 current pending patent applications, filed first either with
the U.S. Patent and Trademark Office or under the Patent
Cooperation Treaty, or PCT, or a PCT convention country, and
their foreign counterparts. We file patent applications in
countries or regions that we consider to be strategic to our
business, including the United States, Europe, Canada, China,
Australia, Japan and other countries, or we file international
applications under the PCT reserving our right to file such
applications. Of these patents and pending patent applications,
at least five families of related applications are directed to
methods underlying our technology platform, five families cover
biomarker discoveries that are related to diagnostic product
opportunities and two families cover therapeutic methods. We
intend, where appropriate, to file additional patent
applications and to in-license additional patents relating to
new technologies, discoveries or products. US Patent
No. 6,410,334 owned by RBM has a maintenance fee due
June 25, 2013, and expires August 4, 2019.
We cannot predict whether any of our or our licensors
patent applications will issue, or, if they issue, whether they
will issue in a form that provides us with any competitive
advantage. Consequently, you should not assign material value to
our patent estate, at least until relevant patents issue.
We have registered trademarks and trademark applications related
to some of our services and goods. Such trademarks are used as
signifiers of our goods or services. As services and products
are developed we intend to file trademarks to cover our brands
where necessary. We own three U.S. Trademark Registrations,
four European Community Trademark (CTM) registrations, seven
pending U.S. Trademark Applications, seven pending CTM
Applications and four pending Japanese Applications. Maintenance
and incontestability affidavits for various marks are due
between October 1, 2010, and December 17, 2014. The
other marks expire in 2018, or have statements of use due by
2012. Additional marks are pending. We do not view our
trademarks as material to our business.
As security for our revolving line of credit, we have granted
Compass a security interest in all of our intellectual property,
including patents, patent applications, trademarks, and licenses
of patents, patent applications and trademarks of which we are
the licensee, including those rights licensed from Psynova and
Luminex. In the event we default on our repayment obligations to
Compass, we could lose all of our rights to our owned and
licensed intellectual property.
Our, Psynova and
Cambridge Universitys Relationship
We own 77.6% of the outstanding ownership interests in Psynova,
and we do not hold a majority position on its board of
directors. As a result we do not exercise complete control over
Psynova. We have entered into purchase agreements to acquire the
remaining 22.4% interest in Psynova. See Certain
Relationships and Related Party TransactionsAcquisition of
Shares of Psynova Neurotech Ltd. Psynova is party to a
framework agreement with Cambridge. The framework agreement
provides Psynova with access to the intellectual property
developed in the Cambridge Centre for Neuropsychiatric Research,
or the Bahn Laboratory, a research unit under the direction of
Dr. Sabine Bahn that has been established within the
Institute of Biotechnology at the University of Cambridge. All
intellectual property developed by the Bahn Laboratory during
the term of the framework agreement is available to Psynova for
license. Under the framework agreement, Cambridge provides
Psynova with notice of intellectual property developed in The
Bahn Laboratory. Psynova then may then notify Cambridge that it
is taking an option to exclusively license any patents or patent
applications and
non-exclusively
license any related
know-how.
Once an option is taken, Psynova has a period of 18 months
to exercise the option to license the intellectual property.
Each of the licenses provides Psynova with the right to grant
sublicenses to us. Cambridge retains the right to use the
licensed rights for academic purposes and to publish information
about the licensed intellectual property for academic purposes.
Cambridge is entitled to royalty payments, milestone payments
and sublicensing income under the license agreements. Each of
the licenses currently in place between Psynova and Cambridge
terminates upon the expiration of the last of the patents and
patent applications exclusively licensed therein and is subject
to diligent efforts of Psynova and its sublicensees to develop
and commercially exploit the licensed rights. The framework
agreement expires in March 2011. When the framework agreement
expires, Psynova may be unable to license any future rights from
Cambridge. Expiration of the framework agreement will
79
not affect any option that has been taken by Psynova and any
license in place prior to expiration of the framework agreement
will continue in accordance with the terms of the license.
The intellectual property that has been exclusively licensed by
Psynova under the framework agreement is intellectual property
that has been, and may in the future be, used to develop new
biomarker patterns that could have commercial application for
the diagnosis of various disorders, including psychiatric
disorders, disorders of the central nervous system, psychotic
disorders, major depressive disorder, schizophrenia, bipolar
disorders and multiple sclerosis. Psynova recently entered into
licenses under the framework agreement for two patent
applications owned by Cambridge directed to the biomarker panel
being commercialized in our VeriPsych test. These licenses
terminate upon the expiration of the last of the subject patent
applications, which currently would be in January 2031. We
exclusively sublicense the foregoing intellectual property
through a
co-development
and commercialization agreement with Psynova. Under the
co-development
and commercialization agreement, which provides for research and
development of diagnostics for schizophrenia, we have an
exclusive right to commercialize intellectual property in the
area of schizophrenia, including the two patent applications
owned by Cambridge referenced above. Under the co-development
and commercialization agreement, we also have right of first
refusal and the last right of negotiation to take licenses and
commercialize products and tests developed by Psynova in other
psychiatric indications. The co-development and
commercialization agreement has been amended to provide for the
licensing to us of Psynova intellectual property related to
schizophrenia and the sublicensing to us of all Cambridge
intellectual property related to schizophrenia that is licensed
to Psynova, including the two patent applications owned by
Cambridge referenced above.
Our Relationship
with Luminex
Access to Luminex products and technology is important for our
business. Under a development and supply agreement, Luminex
provides microsphere beads and fluorescent detection instruments
that are used in our products and services. The development and
supply agreement provides nonexclusive rights to Luminex
intellectual property for developing and commercializing our
research and diagnostic products and services in a number of
fields, including neurodegenerative disorders such as
schizophrenia. The agreement is in effect for the life of the
applicable patents and patent applications held by Luminex.
Competition
We believe, upon launch, that we will be the only company
offering a blood-based test to aid in the diagnosis of
psychiatric disorders, and that our proprietary technology and
experience represent a competitive advantage. However, the
molecular diagnostics industry is highly competitive and subject
to rapid change. Companies developing molecular diagnostic tests
for a variety of conditions include a number of large,
well-established diagnostic companies and laboratory service
providers, as well as an increasing number of new companies
entering the market. Many of these potential competitors have
financial and other resources substantially greater than our
own, and have substantially more experience in developing and
commercializing molecular diagnostic tests than we have.
Established diagnostics companies such as Abbott Laboratories,
Beckman Coulter, Inc., Roche, General Electric Company,
Johnson & Johnson, Mitsubishi Chemical Corporation,
Philips Healthcare and Siemens Healthcare Diagnostics Inc. have
expanded into the molecular diagnostics area to complement their
legacy businesses. In addition, commercial laboratories with
extensive service networks for diagnostic tests, such as
Laboratory Corporation of America Holdings and Quest Diagnostics
Inc., have expanded their testing capabilities to include
molecular diagnostics.
In addition, companies utilizing other technologies in the
fields of genetics, gene expression, protein expression,
metabolites, imaging and other brain scans and cognitive testing
may be able to develop effective diagnostic tests that could
compete with our products in the psychiatric market. We have
identified a number of early stage companies with technologies
that may compete with us in the future, including Ridge
Diagnostics, Inc., which has filed a patent application for a
protein diagnostic pattern indicative of major depression,
GeneNews Limited, Avacta Group plc, and AbaStar
MDxtm
Inc., which have each announced plans to develop diagnostic
products for neuropsychiatry using gene expression techniques.
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There are a number of companies that compete with our biomarker
testing services, including large central laboratories focused
on the preclinical and clinical testing market such as Covance
Inc., Quintiles Inc. and Charles River Laboratories, Inc., as
well as Companies marketing multiplex assay kits and services to
the research market such as Millipore Corporation, AssayGate,
Inc., Meso Scale Discovery, Aushon Biosystems Inc., RayBiotech,
Inc. and Gentel Biosciences, Inc.
Regulatory
Compliance
Our laboratory in Austin, Texas is an independent testing
laboratory certified to perform tests of high complexity on
human specimens under CLIA, and has a permit from the Centers
for Disease Control and Prevention to import or transfer
etiological agents or vectors of human disease. In addition, we
are capable of supporting studies required by the FDA, which
comply with good laboratory practices, or GLP, for laboratories
doing pre-clinical trial work. To promote and ensure the quality
and validity of services, we believe the processes and
conditions under which our laboratory activities occur comply
with relevant FDA GLP requirements. We are able to manufacture
kits under GMP conditions at our Lake Placid, NY facility, and
we maintain an International Organization for Standardization,
or ISO, certified cell culture service laboratory and
manufacturing site in Reutlingen, Germany.
Clinical
Laboratory Improvement Amendments of 1988
As a clinical laboratory, we are required to hold certain
federal, state and local licenses, certifications and permits to
conduct our business. Under CLIA, we are required to hold a
certificate applicable to the high complexity type of work we
perform and to comply with standards covering personnel,
facilities administration, quality systems and proficiency
testing.
We have a certificate of accreditation under CLIA to perform
testing and are accredited by the Commission on Office
Laboratory Accreditation. To renew our CLIA certificate, we are
subject to survey and inspection every two years to assess
compliance with program standards. The standards applicable to
the testing which we perform may change over time. We cannot
assure you that we will be able to operate profitably should
regulatory compliance requirements become substantially more
costly in the future.
If our laboratory is out of compliance with CLIA requirements,
we may be subject to sanctions such as suspension, limitation or
revocation of our CLIA certificate, as well as a directed plan
of correction, state
on-site
monitoring, civil money penalties, civil injunctive suit or
criminal penalties. We must maintain CLIA compliance and
certification to be eligible to bill for services provided to
Medicare beneficiaries. If we were to be found out of compliance
with CLIA program requirements and subjected to sanction, our
business could be harmed.
Food
and Drug Administration
The United States Food and Drug Administration, or the FDA,
regulates the sale and distribution of medical devices,
including in vitro diagnostic test kits. Devices
subject to FDA regulation must undergo premarket review and
approval or clearance prior to commercialization unless the
device is of a type exempted from such review. In addition,
manufacturers of medical devices must comply with various
regulatory requirements under the Federal Food, Drug, and
Cosmetic Act and regulations promulgated under that Act,
including the Quality System Regulation, unless exempted from
those requirements, registration, listing, restrictions on
advertising and promotion, and medical device reporting.
Entities that fail to comply with FDA requirements can be liable
for criminal or civil penalties, such as fines, warning letters,
recalls, detentions, injunctions, orders to cease manufacturing
and restrictions on labeling and promotion.
Clinical laboratory services have historically not been subject
to FDA regulation, but in vitro diagnostic test kits
and reagents and equipment used by these laboratories may be
subject to FDA regulation. Clinical laboratory tests that are
developed and validated by a laboratory for use in examinations
the laboratory performs itself are called Laboratory Developed
Tests, or LDTs. Most LDTs currently are not subject to premarket
review by FDA although reagents or software provided to
laboratories and used to perform LDTs may be subject to review
by the FDA prior to marketing. We believe that our VeriPsych
test is a type of LDT. The FDA is in the process of reassessing
the regulatory status of LDTs generally, especially ones using
multiple markers used to calculate single scores, and
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may seek to regulate such tests as medical devices, including
requiring premarket review. The FDA may also seek to actively
regulate a test offered by a laboratory and require premarket
review and clearance or approval if the FDA concludes that the
test was not developed by that laboratory. There is currently no
formal process by which FDA determines if a test offered by a
laboratory qualifies as an LDT; and FDA has not issued criteria
that it uses to determine LDT status if, as is the case here, a
laboratory collaborates with another company in the course of
developing a test.
If premarket review is required, this would adversely affect our
business until such review is completed and approval or
clearance to market is obtained. If premarket review is required
by the FDA, there can be no assurance that our VeriPsych test
will be cleared or approved on a timely basis, if at all.
Obtaining premarket clearance or approval from the FDA could be
very costly, and may involve conducting clinical studies that
comply with the FDAs requirements. Many diagnostic tests
are cleared by the FDA for marketing through the 510(k)
premarket notification process. This process requires
demonstrating that the device is substantially
equivalent to a predicate device, which is
another device already cleared by the FDA. FDA review of a
510(k) premarket notification typically takes nine to eighteen
months for a novel test but can take substantially longer. If an
applicant cannot identify a predicate device acceptable to the
FDA, the device is automatically placed into Class III. In
order to gain the FDAs approval to market a Class III
type of device, the applicant must submit a premarket approval
application, or PMA. A PMA is longer, more complex, and more
costly than a 510(k) premarket notification. FDA review of a PMA
typically take one to three years for a novel test but can take
longer. Because of the novelty of our VeriPsych test, if the FDA
required a marketing application, we may not be able to identify
a predicate device acceptable to the FDA. This would necessitate
submission of a PMA, unless the FDA agrees to de novo
classification of the device. This process, which is available
for certain low or moderate risk devices, enables clearance of
the 510(k) premarket notification despite the lack of a
predicate device. The FDA has approved only a relatively small
number of applications through the de novo classification
process, and there can be no assurance that any application we
submitted would be found eligible for this process.
If clearance or approval is obtained and we want to modify the
device, we may need to submit a new application to the FDA and
receive clearance or approval before we could commercialize the
modified product. Ongoing compliance with FDA regulations would
increase the cost of conducting our business, subject us to
inspection by the FDA, require compliance with FDA limitations
on marketing, and to the requirements of the FDA and penalties
for failure to comply with the requirements of the FDA. Should
any of the clinical laboratory device reagents obtained by us
from vendors and used in conducting our LDT be affected by
future regulatory actions, we could be adversely affected by
those actions, including increased cost of testing or delay,
limitations on the use of the reagents or prohibition on the
purchase of reagents necessary to perform testing.
Health
Insurance Portability and Accountability Act
Under the federal Health Insurance Portability and
Accountability Act of 1996, or HIPAA, the United States
Department of Health and Human Services, or HHS, has issued
regulations to protect the privacy and security of protected
health information used or disclosed by healthcare providers,
such as us. HIPAA also regulates standardization of data
content, codes and formats used in healthcare transactions and
standardization of identifiers for health plans and
providers. Penalties for violations of HIPAA regulations
include civil and criminal penalties.
The HIPAA privacy regulations protect medical records and other
personal health information by limiting its use and release,
giving patients the right to access their medical records and
limiting most disclosures of health information to the minimum
amount necessary to accomplish an intended purpose. Under our
current business model, we are not currently required to comply
with the HIPAA privacy regulations, because we are not currently
a covered entity. Once we launch our VeriPsych test and start
receiving individually identifiable health information with
respect to individual patients, we will be considered a covered
entity required to comply with the HIPAA privacy regulations. We
intend to develop policies and procedures to comply with these
regulations prior to launch of our VeriPsych test. The
requirements under the HIPAA privacy regulations may change
periodically and could have an effect on our business operations
if compliance becomes substantially more costly than under
current requirements.
In addition to federal privacy regulations, there are a number
of state laws governing confidentiality of health
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information that are applicable to our operations. New laws
governing privacy may be adopted in the future as well. We
intend to take steps to comply with health information privacy
requirements to which we are aware that we are subject. However,
we can provide no assurance that we are or will remain in
compliance with diverse privacy requirements in all of the
jurisdictions in which we do business. Failure to comply with
privacy requirements could result in civil or criminal
penalties, which could have a materially adverse impact on our
business.
HHS has transaction and code set regulations which establish
standards for eight electronic transactions and four code sets
to be used in those transactions. They also contain requirements
concerning the use of these standards by health plans,
healthcare clearinghouses and certain healthcare providers. In
addition, HHS has security regulations which establish standards
for the security of electronic protected health information to
be implemented by health plans, healthcare clearinghouses and
certain healthcare providers. Our failure to maintain compliance
with these regulations could result in civil or criminal
penalties and could have a material adverse effect on our
business.
Federal
and State Self-Referral Prohibitions
We are subject to another complicated federal statute, the
Ethics in Patient Referral Act of 1989, or Stark I, as amended
by the Omnibus Budget and Reconciliation Act of 1993, or Stark
II, and as codified as sections 1877 and 1903(s) of the
Social Security Act. Stark I and Stark II, including all final
regulations, will be referred to collectively as the Stark Law.
The Stark Law prohibits a physician from ordering certain
designated health services, including laboratory
tests from us, for Medicare patients, if the physician, or any
member of such physicians immediate family, has an
investment interest in, or compensation arrangement with, us,
unless an exception applies, regardless of the intent of the
parties. This prohibition will be referred to as a Prohibited
Referral. Similarly, we may not bill Medicare or any other party
for services furnished pursuant to a Prohibited Referral. There
are several statutory and regulatory Stark Law exceptions that
are relevant to arrangements involving clinical laboratories,
including: 1) fair market value compensation for the
provision of items or services; 2) payments by physicians
to a laboratory for clinical laboratory services;
3) certain space and equipment rental arrangements that are
set at a fair market value rate and satisfy other requirements;
4) certain professional services provided by a physician
that are set at a fair market value rate and satisfy other
requirements; 5) an exception for certain ancillary
services (including laboratory services) provided within the
referring physicians own office, if certain criteria are
satisfied; and 6) physician investment in a publicly traded
company that has stockholders equity exceeding
$75 million at the end of its most recent fiscal year or on
average during the previous three fiscal years, and which
satisfies certain other requirements. All of the requirements of
a Stark Law exception must be met in order to take advantage of
the exception.
Sanctions for a violation of the Stark Law include the following:
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denial of payment for the services provided in violation of the
Stark Law;
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refunds of amounts collected by an entity in violation of the
Stark Law;
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a civil money penalty of up to $15,000 for each service arising
out of the Prohibited Referral;
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exclusion from federal healthcare programs, including the
Medicare and Medicaid programs; and
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a civil money penalty of up to $100,000 for each scheme or
arrangement involving parties that enter into a scheme to
circumvent the Stark Laws prohibition.
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The Stark Law applies regardless of the reasons for the
financial relationship and the referral. No finding of intent to
violate the Stark Law is required for a violation. In addition,
the federal governments recent enforcement efforts
indicate that a violation of the Stark Law may also serve as the
basis for liability under the federal False Claims Act.
In addition, a number of the states have similar prohibitions on
physician referrals, or State Self-Referral Laws. For example,
California has enacted the Physician Ownership and Referral Act,
commonly known as PORA, which, like the Stark Law,
provides exceptions for certain arrangements, such as
compensation paid to a physician for personal services rendered
by the physician. However, many state prohibitions may differ
from the Stark Laws prohibitions and exceptions.
Violations of these State Self-Referral Laws may result in
prohibition of payment for services rendered, loss of licenses,
fines, and criminal penalties. State Self-Referral Laws and
regulations promulgate
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pursuant thereto also may require physicians or other healthcare
professionals to disclose to patients any financial relationship
the physicians or healthcare professionals have with a
healthcare provider that is recommended to the patients. These
laws and regulations vary significantly from state to state, are
often vague and, in many cases, have not been interpreted by
courts or regulatory agencies.
Exclusions and penalties under the either the Stark Law or the
State Self-Referral Laws, which will be referred to collectively
as the Self-Referral Laws, if applied to us, could result in
significant loss of reimbursement to us, thereby significantly
affecting our financial condition. In addition to exclusions,
penalties and other sanctions, we would be required to refund
any payments we receive pursuant to a Prohibited Referral to
Medicare, and others, as applicable.
We have attempted, and will continue to attempt, to comply with
the Self-Referral Laws. For example, we will enter into
compensation arrangements with a number of physicians for
personal services, such as speaking engagements and blood sample
preparation, and will structure these arrangements with terms
intended to comply with the requirements of the personal
services exception to the Self-Referral Laws. However, it is
possible that some of our financial arrangements with physicians
could be subject to regulatory scrutiny at some point in the
future, and we cannot provide an assurance that we will be found
to be in compliance with these laws following any such
regulatory review. In such event, we would be required to refund
any payments we receive pursuant to a Prohibited Referral to the
patient, the payor or the Medicare program, as applicable.
In addition, investors who are physicians and physicians who are
an immediate family member of an investor may not be able to
order our VeriPsych test for certain of their patients unless
another applicable exception can be met, of which there are very
few. Two of the more common Stark Law large investment
entity exceptions for ownership or investment interests
may be applicable if, at the time the physician who is an
investor or who is an immediate family member of an investor
orders our VeriPsych test for their Medicare patients, our
investment securities (including shares or bonds, debentures,
notes, or other debt instruments) can be purchased on the open
market and we (1) are either listed for trading on the New
York Stock Exchange, the American Stock Exchange, or any
regional exchange in which quotations are published on a daily
basis, or foreign securities listed on a recognized foreign,
national, or regional exchange in which quotations are published
on a daily basis, or is traded under an automated interdealer
quotation system operated by the National Association of
Securities Dealers; or (2) have stockholder equity (the
difference in value between our total assets and total
liabilities) exceeding $75 million at the end of the its
most recent fiscal year or on average during the previous
3 fiscal years.
For purposes of the Stark Law, ownership or investment interest
includes ownership or investment though equity, debt, or other
means, and includes, but is not limited to, stock, stock options
(with some exceptions), partnership shares, limited liability
company memberships, as well as loans, bonds, or other financial
instruments that are secured with an entitys property or
revenue or a portion of that property or revenue. The Stark Law
can also be implicated when a physician or the physicians
immediate family member indirectly invests in an entity (e.g.,
holds ownership in a company that invests in the entity) and the
government determines that the entity acted with reckless
disregard or ignorance of such investment. For purposes of the
Stark Law, an immediate family member is means
husband or wife; birth or adoptive parent, child, or sibling;
stepparent, stepchild, stepbrother, or stepsister;
father-in-law,
mother-in-law,
son-in-law,
daughter-in-law,
brother-in-law,
or
sister-in-law;
grandparent or grandchild; and spouse of a grandparent or
grandchild.
There is no guarantee that we will meet the Stark Law
large investment entity exceptions described above,
or that any of the other Stark Law exceptions applicable to
ownership or investment interests will be available if investors
who are physicians and physicians who are an immediate family
member of an investor want to order our VeriPsych test for their
Medicare patients. Although there may be other Stark Law
exceptions applicable to ownership or investment interests, such
as the Stark Law in-office ancillary services
exception, application of such exceptions can be
complicated to implement and may be difficult to meet. If an
exception is not met, any physician so affected will not be able
to order our VeriPsych test for their Medicare patients. The
Stark Law does not prohibit investors who are physicians and
physicians who are an immediate family member of an investor
from ordering our VeriPsych test for non-Medicare patients.
Federal
and State Anti-Kickback Laws
The federal
anti-kickback
statute, located at 42 U.S.C.
§ 1320a-7b(b),
or the Anti-Kickback Statute, provides that
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it is illegal to knowingly and willfully offer, pay, solicit, or
receive any payment, directly or indirectly, to induce an
individual or entity for services for which payment is made by
the Medicare and Medicaid programs, and certain other federal
healthcare programs. Violation of the Anti-Kickback Statute is a
felony punishable by a fine of up to $25,000, imprisonment for
up to five years, or both. In addition, entities or individuals
violating the Anti-Kickback Statute can be excluded from
participation in Medicare and Medicaid and other federal
healthcare programs, and may be liable for civil monetary
penalties of up to $50,000 per act, and treble the amount of
remuneration offered, paid, solicited or received. In addition
to statutory exceptions applicable to the Anti-Kickback Statute,
HHS has published certain safe harbor regulations which define
certain payment practices and activities which are deemed not to
violate the Anti-Kickback Statute and therefore will not subject
providers or suppliers to civil or criminal penalties or to
exclusion from the Medicare and Medicaid programs. A transaction
which does not satisfy all the elements of the pertinent
provisions of the safe harbor regulations, however, is not
necessarily illegal. If a transaction is challenged, the parties
to the transaction must demonstrate that no violation was
intended and that there are valid clinical or business
justifications for the transaction
and/or
structure.
Historically, the clinical laboratory industry has been the
focus of major governmental enforcement initiatives. The federal
governments enforcement efforts have been increasing over
the past decade, in part as a result of the enactment of HIPAA,
which included several provisions related to fraud and abuse
enforcement, including the establishment of a program to
coordinate federal, state and local law enforcement programs; a
program to conduct greater numbers of investigations, audits and
inspections relating to payment for healthcare items and
services; and a federal anti-fraud and abuse account for
enforcement efforts, funded through collection of penalties and
fines for violations of the healthcare anti-fraud and abuse
laws. Multiple federal and state law enforcement authorities,
including the U.S. Department of Justice, the Office of the
Inspector General, or the OIG, and various state agencies
scrutinize arrangements between healthcare providers and
potential referral sources to ensure that the arrangements are
not designed as a mechanism to illegally induce patient care
referrals. Enforcement authorities, the courts and Congress have
also demonstrated a willingness to look behind the formalities
of a transaction to determine the underlying purpose of payments
between healthcare providers and actual or potential referral
sources. Generally, courts have taken a broad interpretation of
the scope of the federal Anti-Kickback Statute, holding that the
statute may be violated if merely one purpose of a payment
arrangement is to induce referrals.
From time to time, the OIG issues alerts and other guidance on
certain practices in the healthcare industry. Several examples
of such guidance involve the clinical laboratory industry. For
example, a 1994 Fraud Alert, or the Special Fraud Alert, set
forth a number of practices allegedly engaged in by some
clinical laboratories and healthcare providers that raise issues
under the fraud and abuse laws, including the Anti-Kickback
Statute. These practices include: (i) providing employees
to furnish valuable services for physicians (other than
collecting patient specimens for testing) that are typically the
responsibility of the physicians staff; (ii) offering
certain laboratory services to renal dialysis centers at prices
below fair market value in return for referrals of other tests
which are billed to Medicare at higher rates;
(iii) providing free testing to physicians managed
care patients in situations where the referring physicians
benefit from such reduced laboratory utilization;
(iv) providing free
pick-up and
disposal of bio-hazardous waste for physicians for items
unrelated to a laboratorys testing services;
(v) providing general-use facsimile machines or computers
to physicians that are not exclusively used in connection with
the laboratory services; and (vi) providing free testing
for healthcare providers, their families and their employees
(professional courtesy testing). The OIG emphasized in the
Special Fraud Alert that when one purpose of an arrangement is
to induce referrals of federal healthcare program-reimbursed
laboratory testing, both the clinical laboratory and the
healthcare provider (e.g., physician) may be liable under the
Anti-Kickback Statute, and may be subject to criminal
prosecution and exclusion from participation in the Medicare and
Medicaid programs and other federal healthcare programs.
Another issue addressed by the OIG involved the provision of
discounts on laboratory services billed by a clinical laboratory
to customers in return for the referral of federal healthcare
program business. In a 1999 Advisory Opinion, the OIG concluded
that a proposed arrangement whereby a laboratory would offer
physicians significant discounts on non-federal healthcare
program laboratory tests might violate the Anti-Kickback
Statute. The OIG reasoned that the laboratory could be viewed as
providing such discounts to the physician in exchange for
referrals by the physician of business to be billed by the
laboratory to Medicare at non-discounted rates. The OIG
indicated that the arrangement would not qualify for protection
under the discount safe harbor because Medicare and Medicaid
would not get the benefit of the discount.
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The OIG has adopted a procedure whereby it will provide
guidance, or an Advisory Opinion, as to whether the partys
participation in a particular arrangement would be treated as
violating the Anti-Kickback Statute. An Advisory Opinion may be
relied upon only by the requesting party and is binding on the
OIG only with respect to that transaction; provided, in the
event the OIG later determines the requestor failed to disclose
material information, the agency will no longer be bound by the
Advisory Opinion. Investors should be aware that we do not
intend to seek an Advisory Opinion regarding whether the
investment in or distributions from us, or our operations comply
with the Anti-Kickback Statute.
Although the Anti-Kickback Statute applies only to federal
healthcare programs, a number of states, including California,
have passed laws substantially similar to the federal
Anti-Kickback Statute pursuant to which similar types of
prohibitions are made applicable to all other health plans and
third-party payors. These state laws will be referred to as
State Anti-Kickback Statutes. Californias State
Anti-Kickback Statute, commonly referred to as Section 650,
has been interpreted by the California Attorney General and
California courts in substantially the same way as the federal
enforcement agencies and the courts have interpreted the federal
Anti-Kickback Statute. A violation of Section 650 is
punishable by imprisonment and fines of up to $50,000.
We have attempted to structure our business relationships to
fully or substantively comply with any applicable Anti-Kickback
Statute and State Anti-Kickback Statute regulatory safe harbor
such as the discount safe harbor and the personal service safe
harbor. As previously noted, failure to fully meet the terms of
a safe harbor does not render an arrangement illegal; rather, an
arrangement would not have the protections of the safe harbor if
challenged by an enforcement agencies and, if necessary, the
parties might be required to demonstrate why the arrangement
does not violate the Anti-Kickback Statute or the State
Anti-Kickback Statute. While we believe that we are in
compliance with the Anti-Kickback Statute and any applicable
State Anti-Kickback Statute, there can be no assurance that our
relationships with physicians (including those involving
speaking engagements), hospitals and other customers will not be
subject to investigation or a successful challenge under such
laws. If imposed for any reason, exclusions and sanctions under
the Anti-Kickback Statute or any applicable State Anti-Kickback
Statute could result in significant loss of reimbursement to us,
thereby significantly affecting our financial condition and
having a negative effect on our business. In addition,
violations of the Anti-Kickback Statute have also been used by
government enforcement agencies as a basis for False Claims Act.
Other
Federal Fraud and Abuse Laws
In addition to the requirements that are discussed above, there
are several other healthcare fraud and abuse laws that could
have an impact on our business. For example, pursuant to certain
provisions of the Social Security Act, the Secretary of the
U.S. Department of Health and Human Services is permitted
to exclude an individual or entity that charges the federal
healthcare programs substantially in excess of its usual charges
for its services. The terms usual charge and
substantially in excess are ambiguous and subject to
varying interpretations. In 2003 the OIG proposed to define
these terms in such a way that a laboratory charging Medicare or
Medicaid for a given service more than 120 percent of its
average payment from managed care plans and other payers would
have been subject to exclusion, at the OIGs discretion,
which would require laboratories and other providers, including
us, to either lower their charges to Medicare and Medicaid or
increase charges to certain other payers to avoid the risk of
exclusion. However, the OIG withdrew the proposed regulation,
saying it preferred to continue evaluating billing patterns on a
case-by-case
basis. In its withdrawal notice, the OIG also said it
remains concerned about disparities in the amounts charged
to Medicare and Medicaid when compared to private payers,
that it continues to believe its exclusion authority for excess
charges provides useful backstop protection for the public
fisc, and that it will continue to use all tools
available . . . to address instances where Medicare or Medicaid
are charged substantially more than other payers. Thus,
although the OIG did not proceed with its rulemaking, an
enforcement action based on certain concepts set forth in the
proposed regulation is possible.
The False Claims Act also imposes civil liability on individuals
and entities that knowingly submit or cause to be submitted
false or fraudulent claims for payment to the government. The
federal government has widely used the False Claims Act to
enforce alleged Medicare and other governmental program fraud in
areas such as coding errors, billing for services not provided,
billing for services at higher reimbursement rate than is
allowed and billing for medically unnecessary care. Violations
of the federal Anti-Kickback Statute and the Stark Law have also
been used by prosecutors as a basis for False Claims Act
liability.
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In addition to actions being brought under the False Claims Act
by government officials, the False Claims Act also allows a
private individual with direct knowledge of fraud to bring a
whistleblower or qui tam lawsuit on behalf of the government for
violations of the False Claims Act. Because a False Claims Act
complaint is initially filed under seal, the action may be
pending for some time before the defendant is even aware of the
action. If the government is ultimately successful in obtaining
redress in the matter or if the private litigant succeeds in
obtaining redress without the governments involvement,
then the private litigant will receive a percentage of the
recovery. The penalty for violation of the False Claims Act can
be up to $11,000 for each false claim plus three times the
amount of damages resulting from each false claim. Because of
the severity of the penalties under the False Claims Act,
healthcare providers often find it necessary to settle
allegations of violations under the False Claims Act (regardless
of the merits of such allegations) rather than to risk an
adverse outcome in a court of law.
The Fraud Enforcement and Recovery Act of 2009, or FERA, greatly
expanded the reach of the False Claims Act by eliminating the
prior requirement that a false claim be presented to a federal
official, or that such a claim directly involve federal funds.
The new law clarifies that liability attaches whenever an
individual or entity makes a false claim to obtain money or
property, any part of which is provided by the government,
without regard to whether the individual or entity makes such
claim directly to the federal government. Consequently, under
FERA, liability attaches when such false claim is submitted to
an agent acting on the governments behalf or with a third
party contractor, grantee or other recipient of such federal
money or property. Additionally, under FERA, individuals and
entities violate the False Claims Act by knowingly retaining
historic improper payments even if the individual or entity did
not make claim for such payments. The False Claims Act and FERA
extend broad protections to whistleblowers that prohibit
entities from demoting, harassing, terminating or otherwise
retaliating against whistleblowers for making False Claims Act
allegations.
The Civil Monetary Penalties law, located at 42 U.S.C.
§ 1320a-7a(a),
or the Civil Monetary Penalties Law, allows the federal
government to pursue civil monetary penalties against anyone who
knowingly presents or causes to be presented to a state or
federal government claims for healthcare items or services,
including, among others, upcoded claims, that were not provided
as submitted; fraudulent claims; a pattern of medically
unnecessary claims. Penalties for filing a false or fraudulent
claim include a possible $50,000 fine for each act plus three
times the amount of damages resulting from the amount of
overpayment due, and exclusion from federal healthcare programs.
In addition to the False Claims Act and the Civil Monetary
Penalties Law, most states have enacted false claims laws that
allow the recovery of money that was fraudulently obtained by a
healthcare provider from the state, such as Medicaid funds
provided by the state, or, in some cases, from private payers,
and assess other fines and penalties. The Deficit Reduction Act
of 2005 also included new requirements directed at Medicaid
fraud, including increased spending on enforcement and financial
incentives for state Medicaid agencies to adopt false claims act
provisions similar to the federal False Claims Act.
We believe that we have procedures in place to provide for the
accurate completion of claim forms and requests for payment.
Nonetheless, given the complexities of the Medicare, Medicaid
and other federal healthcare program coding and billing process,
there can be no assurance that we will not code or bill in error
and that such claims for payment will not be treated as false
claims by a federal or state government enforcement agency or a
private litigant.
The federal government has other civil and criminal statutes,
including those under Title II of HIPAA entitled
Preventing Health Care Fraud and Abuse, encompassing
a package of offenses, enhanced penalties, increased
investigative funding, and inventive enforcement mechanisms,
which may be utilized if an individual or entity commits certain
acts knowingly
and/or
willfully in connection with a healthcare benefit,
including benefits derived from private payors (under
Section 204 of HIPAA). Violations of these statutes
constitute felonies and may result in fines, imprisonment,
and/or
exclusion from federal healthcare programs.
The federal government has made a policy decision to
significantly increase the financial resources allocated to
enforcing the general fraud and abuse laws including, but not
limited to, the federal Anti-Kickback Statute, the Stark Law and
the False Claims Act. In addition, private insurers and various
state enforcement agencies have increased their level of
scrutiny of healthcare claims in an effort to identify and
prosecute fraudulent and abusive practices in the healthcare
area. We are subject to these increased enforcement activities
and may be subject to specific subpoenas and requests for
information. We are unable to predict how these laws will be
applied in the future, and no assurances can be given that its
arrangements will not be subject to scrutiny under such laws.
87
Sanctions for violations of these laws may include exclusion
from participation in Medicare, Medicaid and other federal
healthcare programs, significant criminal fines and civil
monetary penalties, and loss of CLIA licensure. Any exclusion
from participation in a federal healthcare program, or any loss
of licensure, arising from any action by any federal or state
regulatory or enforcement authority, would have a material
adverse effect on our business. In addition, any significant
criminal or civil penalty resulting from such proceedings could
significantly affect our financial condition and have a material
adverse effect on our business.
State
Laboratory Licensing
California, Maryland, New Jersey, New York and Pennsylvania each
require us to be licensed in such state before we can accept
specimens from such state for our diagnostic testing services.
We are currently licensed in Maryland and Pennsylvania. We are
in the process of obtaining licenses in California and New
Jersey, which are administrative processes. We are not currently
licensed in New York, but intend to apply for a license in the
future.
Environmental
We are subject to federal, state and local regulations relating
to the handling and disposal of regulated medical waste. Our
laboratories generate medical waste. We use outside vendors to
dispose of such waste and contractually require them to comply
with applicable laws and regulations. In addition,
transportation of our clinical laboratory specimens and some
laboratory supplies are also considered hazardous materials
subject to regulation by the Department of Transportation, the
Public Health Service, the United States Postal Service and the
International Air Transport Association. We believe our shipping
and packaging practices comply with such regulations. In
addition, our present and future business has been and will
continue to be subject to various other laws and regulations,
including state and local laws relating to such matters as the
disposal of potentially hazardous substances.
Occupational
Safety
The federal Occupational Safety and Health Administration has
established extensive requirements relating specifically to
workplace safety for healthcare employers. This includes
requirements to develop and implement multi-faceted programs to
protect workers from exposure to blood-borne pathogens, such as
HIV and hepatitis B and C, including preventing or minimizing
any exposure through sharps or needle stick injuries. There are
similar state requirements with which we also must comply.
Facilities
We currently lease approximately 16,000 square feet of
space for our corporate headquarters and laboratory facility in
Austin, Texas under a lease that expires in May 2012. In March
2010, we entered into an amendment to the lease of our corporate
headquarters and laboratory facility in which we agreed to lease
approximately 20,429 square feet of additional space beginning
July 1, 2010. On March 23, 2010, we entered an amendment to
extend our corporate headquarters in Austin, Texas by 20,000
square feet and extended the lease to June 30, 2015. We will
assume the additional space on July 1, 2010 after renovations.
Our testing service laboratory in Austin, Texas currently
receives samples from pharmaceutical and biotechnology companies
and government and academic institutions. This laboratory will
also conduct our VeriPsych test and other diagnostic testing
services. Testing of samples is performed in accordance with our
standard operating procedures and methods using applicable
requirements of GLP. Our laboratory provides immunoassay
services through the use of liquid-handling laboratory robotics
to perform the assays, Luminex instruments to read the results,
and proprietary software to collect and reduce the data. We
believe our system is highly scalable, requiring only additional
robots, Luminex instruments and computers. We have been
certified as a CLIA laboratory since 2005. Our CLIA
accreditation was last renewed in 2008.
We currently lease approximately 5,500 square feet of
laboratory and office space in Lake Placid, New York under a
lease that expires in December 2010. Our Lake Placid facility is
responsible for developing new immunoassays and manufacturing
multiplexed immunoassay kits. This facility can manufacture kits
in compliance with Good Manufacturing Practices, or GMP, to meet
the requirements of the FDA for diagnostic products.
We currently lease approximately 5,000 square feet of
laboratory and office space in Reutlingen, Germany under a
88
lease that expires in December 2011. Our lab in Reutlingen,
Germany focuses on complex cell co-culture systems and produces
our TruCulture product pursuant to ISO standards the European
Union equivalent of GMP.
Employees
As of April 19, 2010, we had 141 full-time employees
and 12 part-time employees across our domestic and international
offices. None of our employees are covered by collective
bargaining agreements, and our management considers its
relationships with our employees to be good. Generally,
our employees are at-will employees. We have entered into
employment agreements with certain members of our management
team. See Compensation Discussion and
AnalysisEmployment Agreements.
Legal
Proceedings
From time to time, we may be party to lawsuits in the ordinary
course of business. We are currently not a party to any material
legal proceedings.
89
Management
Executive
Officers and Directors
The following table sets forth certain information about our
executive officers, directors and director nominee as of
April 19, 2010:
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
T. Craig Benson
|
|
48
|
|
President and Chief Executive Officer; Director
|
Patrick McClain
|
|
54
|
|
Senior Vice President and Chief Financial Officer
|
Michael Spain, M.D.
|
|
57
|
|
Senior Vice President and Chief Medical Officer
|
James P. Mapes, Ph.D.
|
|
61
|
|
Senior Vice President and Chief Scientific Officer
|
Ralph L. McDade, Ph.D.
|
|
55
|
|
Senior Vice President and Strategic Development Officer
|
Anthony Barnes, Ph.D.
|
|
54
|
|
Senior Vice President Diagnostics
|
Mark Chandler, Ph.D.
|
|
56
|
|
Director and Chairman of the Board of Directors
|
Matthew
Zell(2)(3)
|
|
44
|
|
Director
|
Mark J.
Gainor(2)(3)
|
|
54
|
|
Director
|
David L.
Schultz(1)(2)
|
|
63
|
|
Director
|
Mark C.
Capone(1)(3)
|
|
47
|
|
Director
|
William G.
Bock(4)
|
|
59
|
|
Director Nominee
|
|
|
|
|
(1)
|
|
Member of the Audit Committee.
|
|
(2)
|
|
Member of the Compensation
Committee.
|
|
(3)
|
|
Member of the Nominating and
Governance Committee.
|
|
(4)
|
|
Anticipated member of the Audit
Committee effective upon the completion of this Offering.
|
Executive
Officers
The following provides information about each of our executive
officers. The business address for these individuals is 3300
Duval Road, Austin, Texas.
T. Craig
Benson, President, Chief Executive Officer and Secretary;
Director
Mr. Benson has served as our President and Secretary and a
member of our board of directors since 2002 and our Chief
Executive Officer since 2004. He joined us to direct our
spin-off from Luminex. From 2000 to 2004, Mr. Benson served
as Chairman of the Board of Directors for Equity Resource
Partners, LLC, a private investment company. From 1987 through
September 2000, Mr. Benson was employed by Service
Corporation International, or SCI, a world leader in death
care-related services. During his tenure with SCI,
Mr. Benson held various senior executive management
positions, which included domestic and international merger and
acquisition responsibilities, Vice-President of Marketing and
Corporate Alliances, as well as President of SCI International,
Ltd., SCIs International holding company. From 1990 to
1994, Mr. Benson served as President of Investment Capital
Corporation, the private equity arm of SCI, which held over
$351 million in assets. Mr. Benson has served on the
board of directors of Psynova since June 2008.
Mr. Benson has previously served on the boards of directors
of various publicly held entities, which include Florafax
International Inc., Tanknology Environmental, Inc., Equity
Corporation International and Pinnacle Global Group, Inc.
Mr. Benson received a Bachelor of Business Administration
from Southern Methodist University in 1984. Mr. Benson was
selected to serve as a director due to his depth of knowledge of
our company, including its strategies, operations, finances and
markets, as well as his thorough knowledge of the biotechnology
industry. In addition to serving as our President and Chief
Executive Officer, Mr. Benson has served on the Board of
Directors of five publicly traded companies and has extensive
experience in the areas of private equity investments, banking,
capital markets, international operations and mergers and
acquisitions.
90
Patrick
McClain, Senior Vice President and Chief Financial
Officer
Mr. McClain has served as our Chief Financial Officer since
2002. From 2002 to 2010 Mr. McClain served as a Vice
President and since March 2010 serves as a Senior Vice
President. From 2005 to 2007, Mr. McClain also served as
Chief Financial Officer of The Biophysical Corporation, a
related party. From 1996 to 2002, Mr. McClain served as
Chief Financial Officer for Infinop Holdings Inc., a software
development company, and Guardian on Board Ltd., a
multi-national technology company. From 1996 to 2002,
Mr. McClain also operated a consulting company, providing
CFO services to over 20 technology and life sciences companies.
From 1990 to 1996, Mr. McClain directed finance, accounting
and acquisitions for Sheshunoff Information Services Inc. He
also served as Vice President and Controller/Chief Financial
Officer for two national commercial banks from 1985 to 1989.
Mr. McClain was employed by Price Waterhouse LLP from 1979
through 1985. He received a bachelor of business administration
in accounting from Ohio University, with honors, in 1979.
Michael
Spain, M.D., Senior Vice President and Chief Medical
Officer
Dr. Spain has served as our Chief Medical Officer since
January 2003 and a Senior Vice President since March 2010. Prior
to joining us, Dr. Spain served as Vice President, Clinical
Affairs and Chief Medical Officer of Luminex from 1997 to 2003.
From 1994 to 1997, Dr. Spain served as Medical Director of
Laboratory Corporation of America Holdings, an independent
clinical laboratory. From 1984 to 1994, Dr. Spain served as
Medical Director of Quest Diagnostics Inc. (formerly Damon
Clinical Laboratories), a leading provider of diagnostic
testing, information and services. He also served as a resident
in pathology at Baylor University Medical Center in Dallas from
1980 through 1984 and became board certified in 1984.
Dr. Spain has served on the board of directors of Psynova
since June 2008. Dr. Spain received his M.D. from the
University of Texas Southwestern Medical School in Dallas in
1980.
James P.
Mapes, Ph.D., Senior Vice President and Chief Scientific
Officer
Dr. Mapes has served as our Chief Scientific Officer since
September 2002. From 2002 to 2010 Dr. Mapes served as our
Research and Development Vice President and since March 2010
serves as a Senior Vice President. Prior to joining us,
Dr. Mapes served as Director of Research and Development
for Luminex from 2001 through 2002. From 1997 to 2000,
Dr. Mapes was employed by Becton, Dickinson and Company, a
medical technology company that manufactures medical supplies,
devices, laboratory equipment and diagnostic products, where he
served as Director of Clinical Affairs. He also held a faculty
position in the Biochemistry Department at Louisiana State
University Medical Center in New Orleans. Dr. Mapes
received his Ph.D. in Biochemistry at Indiana University in 1975
and served his post-doctoral training at Oxford University in
Oxford, England, and Texas A&M University.
Ralph L.
McDade, Ph.D., Senior Vice President and Strategic
Development Officer
Dr. McDade has served as our Strategic Development Officer
since 2002 and a Senior Vice President since March 2010. Prior
to joining us, he served as Chief Scientific Officer of Luminex
from 1996 to 2002. From 1988 to 1996 he served as Director of
Research and Development at Inland Laboratories, Inc. He held
faculty positions at The Rockefeller University in New York and
at Louisiana State University School of Medicine in New Orleans
from 1984 to 1988. Dr. McDade received his Ph.D. in
Microbiology from the University of Texas Southwestern Medical
School in 1980. He served his post-doctoral training at the
University of Connecticut Medical Center in Farmington.
Anthony
Barnes Ph.D., Senior Vice President
Diagnostics
Dr. Barnes has served as our Senior Vice
President Diagnostics since March 2010.
Dr. Barnes served as our Vice President of Clinical
Diagnostics from April 2009 to March 2010. Prior to joining RBM,
Dr. Barnes served as co-founder and Chief Executive Officer
of Oncimmune Ltd from 2003 to 2006 and President and Vice
Chairman of Oncimmune (USA) LLC from 2007 to 2009. Previously,
Dr. Barnes held the role of Chief Financial Officer of
Biowulf Technologies from 2000 to 2002; Vice President,
Commercial Operations at Immunicon from 1997 to 2000; Director,
Life Science Practice, PRTM from 1995 to 1997; Senior Director,
Infectious Disease and Nucleic
91
Acid Diagnostics, Ciba-Chiron Diagnostics from 1993 to 1995;
Director, Product Development, Lifespan from 1992 to 1993;
Marketing Manager, Abbott Laboratories from 1990 to 1992; and
Strategic Consultant, Booz-Allen Hamilton Inc. from 1988 to
1990. Dr. Barnes received his Ph.D. in chemistry from the
University of Illinois in 1983 and an M.B.A. from the University
of Chicago in 1988.
Board
of Directors
The following provides information about each of our directors
and director nominees other than Mr. Benson whose
information is provided above under the heading
Executive Officers. The business address
for these individuals is 3300 Duval Road, Austin, Texas. We do
not apply a formal diversity policy or set of guidelines in
selecting and appointing directors that comprise our board of
directors. However, when appointing new directors, our
Nominating and Governance Committee considers each individual
directors qualifications, skills, business experience,
personal and professional integrity, independence under
applicable standards and capacity to serve as a director, as
described below for each director, and consider the diversity
of, and the optimal enhancement of the current mix of talent and
experience on, the board of directors as a whole.
Mark
Chandler, Ph.D., Director and Chairman of the Board of
Directors
Dr. Chandler founded us in 2002. He has served as a member
of our board of directors since August 2002 and as Chairman of
the Board of Directors since December 2007. Dr. Chandler
has been Chairman of the Board of Directors of The Biophysical
Corporation since May 2004 and also served as its Chief
Executive Officer from May 2004 to September 2009.
Dr. Chandler served as our Chief Executive Officer and
Chairman of the Board of Directors until his departure in 2004.
Before founding us, Dr. Chandler founded Luminex in May
1995, serving as Chairman of the Board of Directors and Chief
Executive Officer from 1996 until 2002. He received his Ph.D. in
Immunology from the University of Texas Southwestern Medical
School in Dallas in 1981. Dr. Chandler was selected to
serve as a director due to his deep understanding of the
intellectual property, technology and processes of our company,
as well as the vision and business acumen he has demonstrated in
the course of his distinguished career as a scientist and
entrepreneur in the life sciences industry. In addition,
Dr. Chandlers leadership and management experience
has proven invaluable since his founding of our company.
Matthew
Zell, Director
Mr. Zell has served as a member of our board of directors
since October 2007. Mr. Zell is a Managing Director of
Equity Group Investments, L.L.C., or EGI. Prior to joining EGI
in 2001, he founded Prometheus Technologies, Inc., where he
served as President from 1990 to 2001. He has served on the
board of directors for Anixter International Inc., a public
electrical and electronic wire and table company, since 2001. In
addition, Mr. Zell has served on the board of directors of
Desarrolladora Homex, S.A.B. de C.V., a public Mexican
homebuilder, since 2004 and has been a member of its Audit
Committee and Compensation Committee since 2008. He has also
served on the board of directors of GP Strategies Corporation, a
public workforce trading company. Mr. Zell received his
bachelor of science in Aeronautical and Astronautical
Engineering from the University of Illinois in Champaign in
1988. Mr. Zell was selected to serve as a director due to
his broad experience, sophistication and expertise in the
capital and investment markets. Mr. Zell has a successful
track record of value creation for public and private companies
through his participation as a board member and his involvement
in the development of corporate strategies for businesses in a
wide range of business sectors, early to late stage, including
the health care and life sciences industries.
Mark J.
Gainor, Director
Mr. Gainor has served as a member of our board of directors
since May 2008. Mr. Gainor currently serves as Chairman and
Chief Executive Officer of Lucor Holdings, LLC, a private
venture capital investment company investing primarily in
healthcare technology and financial services companies.
Mr. Gainor and his father co-founded Gainor Medical, an
international diabetic and medical supply and distribution
company, which was acquired by Matria Healthcare in 1999. He
serves on the boards of Endovascular Research, an early-stage
stent technology company, and Mark One Financial, a financial
services firm. Mr. Gainor has previously served on the
board of directors of Therasense Inc., a public healthcare
technology company acquired by Abbott Laboratories in
92
2004, and Venetec International Inc., a manufacturer of catheter
securement technology subsequently acquired by C.R. Bard, Inc.
Mr. Gainor served Adams Respiratory Therapeutics, Inc., a
pharmaceutical company subsequently acquired by Reckitt
Benckiser in 2008 as interim Chief Executive Officer through
August 2003 and on the board of directors through January
2005. Mr. Gainor graduated from the University of Alberta,
Canada, with a degree in Business Administration and Commerce,
in 1981. Mr. Gainor was selected to serve as a director due
to his successful career as an entrepreneur, manager and
investor in a number of health care technology companies.
Mr. Gainor has special expertise in the development of
strategic collaboration relationships in the life science
industry and experience in global product development,
manufacturing and distribution.
David L.
Schultz, Director
Mr. Schultz has served as a member of our board of
directors since January 2010. Mr. Schultz is the President
and Director of Sonic Healthcare USA, Inc., the
U.S. division of Sonic Healthcare Limited, the worlds
third largest diagnostic services company. From 1989 to 2005
Schultz served as the founder, Chief Executive Officer, and
director of Clinical Pathology Laboratories, Inc., (CPL), an
Austin, Texas clinical diagnostic service laboratory.
Mr. Schultz currently holds advisory positions with the
board of directors of Critical Connections, Inc. and the board
of directors of Respiratory Research, Inc. Mr. Schultz was
previously on the Board of Applied Genetics, which was later
sold to Esoterix, Inc. Mr. Schultz received his Bachelor of
Science in Business and Public Administration from The
University of TexasDallas in 1991. Mr. Schultz was
selected to serve as a director due to his qualifications and
leadership skills in the clinical diagnostics industry. Through
his experience as President and Director of the worlds
third largest diagnostic services company, Mr. Schultz has
thorough knowledge of operations, logistics, processing, and
global distribution of clinical diagnostic products and
services, including expertise in physician sales, reimbursement,
laboratory instrumentation and associated technology.
Mr. Schultz also has extensive experience in regard to
mergers and acquisitions in the clinical diagnostics industry.
Mark C.
Capone, Director
Mr. Capone has served as a member of our board of directors
since January 2010. Mr. Capone currently serves as
President and Chief Operating Officer of Myriad Genetics
Laboratories, Inc., or Myriad. From 2002 to 2006, he served as
Senior Vice President of Sales of Myriad. Prior to joining
Myriad, Mr. Capone served 17 years with Eli Lilly and
Company, or Eli Lilly, where he held positions as Product
Development Manager, Manufacturing Plant Manager and Area Sales
Director. Many of these positions included responsibilities for
Eli Lillys neuro-psychiatric products. Mr. Capone
received his bachelor of science degree in Chemical Engineering
from Pennsylvania State University graduating with highest
distinction in 1984, his Master of Science degrees in Chemical
Engineering and Management from Massachusetts Institute of
Technology in 1991. Mr. Capone was selected to serve as a
director due to his knowledge and experience in the
international distribution, logistics and marketing of clinical
diagnostic products and services. Mr. Capone has been
involved in the development and management of corporate
strategies in clinical diagnostic operations, business processes
and reimbursement matters, all of which will be of benefit to
our company. In addition, he has commercial leadership and
management experience in the neuro-psychiatric market which we
believe will be valuable to the development of our molecular
diagnostic tests.
William
G. Bock, Director Nominee
Mr. Bock has been elected to serve as a member of our board
of directors effective upon the completion of this offering.
Mr. Bock currently serves as Senior Vice President of
Finance and Administration and Chief Financial Officer of
Silicon Laboratories, Inc. From 2001 to 2006, Mr. Bock
participated in the venture capital industry, principally as a
partner with CenterPoint Ventures. From 1997 to 1999,
Mr. Bock served as President and Chief Executive Officer of
DAZEL Corporation, a provider of electronic information delivery
systems. After DAZELs acquisition by Hewlett-Packard,
Mr. Bock then served as Vice President until 2001.
Mr. Bock has also served as Executive Vice President and
Chief Operating Officer of Tivoli Systems, which he helped take
public in 1995 and was later acquired by IBM. Prior to joining
Tivoli, Mr. Bock successfully completed an IPO at Convex
Computer Corporation as CFO in 1986 and then became the Senior
Vice President of Sales in 1991. Prior to Convex, Mr. Bock
spent nine years in various finance roles at Texas Instruments
including the Vice President and Controller of the Data Systems
Group. Mr. Bock holds a B.S. degree in computer science
from Iowa State
93
University and a M.S. degree in industrial administration from
Carnegie Mellon University. Mr. Bock was selected to serve
as a director due to his credentials and qualifications in the
area of public and financial accounting. Mr. Bock has
particular skills in corporate finance, corporate governance,
compliance, disclosure and compensation matters and has
extensive experience in capital market transactions.
Board
Composition
Our board of directors is currently authorized to have seven
members, and is currently composed of six members. Mr. Bock
has been elected to serve as a member of our board of directors
effective upon the completion of this offering. Our board of
directors has determined that each of Messrs. Schultz,
Capone and Bock are independent within the meaning of the
independent director standards of the SEC and the Nasdaq Global
Market. We intend to add an additional independent member to our
board of directors prior to the commencement of this offering.
Each of Messrs. Benson, Chandler, Gainor and Zell were
elected to serve as members of the board of directors pursuant
to the Investors Rights Agreements and the voting
agreement contained therein. See Certain Relationships and
Related Party TransactionsInvestors Rights
Agreement.
Board
Leadership Structure
We currently separate the roles of chief executive officer and
chairman of the board of directors in recognition of the
differences between the two roles. Our Chief Executive Officer
is responsible for setting our strategic direction and the day
to day leadership and performance of the company, while our
Chairman of the board of directors provides guidance to the
chief executive officer and sets the agenda for meetings and
presides over meetings of the full board of directors. Our
board of directors intends to hold executive sessions at least
four times a year.
Our board of directors has no policy with respect to the
separation of the offices of chairman of the board of directors
and chief executive officer. The board of directors believes
that this issue is part of the succession planning process and
that it is in our best interests for the board of directors to
make a determination regarding this issue each time it elects a
new chief executive officer.
The
Role of Our Board of Directors in Risk Oversight
The role of our board of directors in the risk oversight process
includes receiving regular reports from members of senior
management on areas of material risk to the company, including
operational, financial, legal and regulatory, and strategic and
reputational risks. The full board of directors (or the
appropriate committee in the case of risks that are under the
purview of a particular committee) receives these reports from
the appropriate risk owner within the organization
to enable it to understand our risk identification, risk
management and risk mitigation strategies. When a committee
receives the report, the chairman of the relevant committee
reports on the discussion to the full board of directors during
the committee reports portion of the next meeting of the board
of directors. This enables the board of directors and its
committees to coordinate the risk oversight role, particularly
with respect to risk interrelationships. As part of its charter,
the Audit Committee discusses our policies with respect to risk
assessment and risk management.
Board
Committees
Our board of directors has established three committees: the
Audit Committee, the Compensation Committee and the Nominating
and Governance Committee. Following the completion of this
offering, copies of the charters for each of our committees will
be available without charge, upon request in writing to
Rules-Based
Medicine, Inc., 3300 Duval Road, Austin, Texas 78759, Attn:
Corporate Secretary or on the investor relations portion of our
website, www.rulesbasedmedicine.com.
Audit
Committee
Our Audit Committee currently consists of Messrs. Capone
and Schultz. Upon completion of this offering and the admission
of Mr. Bock to our board of directors, our Audit Committee
will also include Mr. Bock. Our board of directors has
determined that each of Messrs. Bock, Capone and Shultz is
independent within the meaning of the
94
independent director standards of the SEC and the Nasdaq.
Mr. Bock will serve as the committees Chairman. We
have determined that Mr. Bock meets the requirements of
Item 407 of Regulation
S-K
promulgated under the Securities Act and will serve as the Audit
Committees financial expert. This committees main
function is to oversee our accounting and financial reporting
processes, internal systems of control, independent registered
public accounting firm relationships and the audits of our
financial statements.
Compensation
Committee
Our Compensation Committee currently consists of
Messrs. Gainor, Schultz and Zell, each of whom our board of
directors has determined is independent within the meaning of
the independent director standards of the Nasdaq.
Mr. Gainor serves as the committees Chairman. At
least two members of the committee are
(i) Non-Employee Directors for the purposes of
Rule 16-b3
under the Exchange Act and (ii) outside
directors for the purposes of Section 162(m) of the
Internal Revenue Code. This committees main function is to
assist our board of directors in determining the development
plans and compensation for our senior management and directors
and recommend these plans to our board of directors.
Nominating
and Governance Committee
Our Nominating and Governance Committee currently consists of
Messrs. Capone, Gainor and Zell, each of whom our board of
directors has determined is independent within the meaning of
the independent director standards of the Nasdaq. Mr. Zell
serves as the committees Chairman. The committees
main function is to identify and nominate candidates for
election to the board of directors taking into account each
individuals qualifications and skills and the diversity of the
board of directors as a whole, as described above, and develop
and recommend to the board of directors a set of corporate
governance principles applicable to our company.
Compensation
Committee Interlocks and Insider Participation
Upon the commencement of this offering, none of the members of
our Compensation Committee will be an officer or employee of
ours. None of our executive officers will serve on the board of
directors or compensation committee of a company that has an
executive officer that serves on our board of directors or
Compensation Committee. No member of our board of directors
serves, or has within the past fiscal year served, as a member
of the board of directors or compensation committee of any other
entity that has one or more executive officers who serve on our
board of directors or Compensation Committee.
Key
Employees
The following provides information about each of our
non-executive key employees.
Peter
Amatulli, Vice President, Sales and Marketing
Mr. Amatulli has served as our Vice President of Sales and
Marketing since December 2007. From 2006 to 2007,
Mr. Amatulli served as the Vice President of Sales for
several contract research organizations, and central labs in the
biopharmaceutical industry. From 1991 to 2006, Mr. Amatulli
served as the Vice President of Sales at Covance Inc., a leading
drug development services company, where he led the development
of their central lab sales organization. He graduated cum
laude from Ohio University with a degree in General Studies,
and an emphasis in Business Administration, in 1973.
Samuel T.
LaBrie, Ph.D., Vice President of Corporate
Development
Dr. LaBrie has served as our Vice President of Corporate
Development since 2007. Prior to joining RBM, he served as
Senior Manager of Business Development for Sigma-Aldrich
Corporation from 2004 to 2007. He also served as the Chief
Scientific Officer and co-founder of ProteoPlex Inc. from
2001 to 2004. From 1996 to 2001, he worked for Incyte Genomics,
Inc. as Senior Director of Product Development. Dr. LaBrie
received his Ph.D. in Biology from the University of California,
San Diego in 1993.
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Don
Beamish, Vice President of Commercial Development
Mr. Beamish has served as our Vice President of Commercial
Development since October 2009. From 2008 to October 2009,
Mr. Beamish was a management consultant for Cobbs Creek
Healthcare, a provider of strategies and solutions for
pharmaceutical, biotechnology and medical device companies. From
1992 to 2008, Mr. Beamish held several executive and
management positions in the sales and marketing group of the
pharmaceuticals division of AstraZeneca PLC. Mr. Beamish
received a bachelor of science degree from Carleton University
in Ottawa, Ontario in 1978 and a Master of Business
Administration degree from Queens University in Kingston,
Ontario in 1982.
Clinical Advisory
Board
We engage a Clinical Advisory Board to provide us with expert
guidance in the areas of clinical trial development, clinical
strategy, and product development strategy. The Clinical
Advisory Board is composed of nationally recognized thought
leaders in psychiatry and will meet with us semiannually to
advise us in clinical and development strategy and to provide
input and advice on emerging trends, competitive strategy and
new opportunities. The members of the Clinical Advisory Board
are:
Sabine
Bahn, M.D., Ph.D., M.R.C. Psych
Dr. Bahn is a co-founder of Psynova and a leading research
scientist. A psychiatrist by training, she established the
Cambridge Centre for Neuropsychiatric Research, which has
conducted comprehensive functional genomics studies on
psychiatric disorders. Her main research interests have been to
understand the molecular basis of neuropsychiatric disorders,
with a focus on the major psychotic disorders, schizophrenia and
bipolar disorder. Dr. Bahn has been awarded numerous grants,
including from the Stanley Medical Research Institute, and has
had numerous peer-reviewed publications. In addition, Dr. Bahn
serves on the editorial boards of Frontiers in Neuroenergetics
and Clinical Schizophrenia and related Psychoses.
Tyrone D.
Cannon, Ph.D.
Dr. Cannon is the Staglin Family Professor of Psychology,
Psychiatry & Biobehavioral Sciences, the Carol Moss
Spivak Scholar in Neuroscience, and the Director of the Staglin
Music Festival Center for Cognitive Neuroscience at UCLA.
Dr. Cannons research aims to discover the causes of
schizophrenia and bipolar disorder and to develop effective
treatment and prevention strategies based on an understanding of
the genetic and neural mechanisms that give rise to these
disorders.
Andreas
Meyer-Lindenberg, M.D., Ph.D.
Prof. Dr. Meyer-Lindenberg is the Director of the Central
Institute of Mental Health, Mannheim Germany, and the Professor
and Chairman of Psychiatry and Psychotherapy, University of
Heidelberg. He received a Masters in Mathematics from the
University of Hagen, a Ph.D. from the University of Giessen, and
an M.D. from the University of Bonn. He worked for over
ten years at the U.S. National Institute of Mental
Health, or NIMH. Dr. Meyer-Lindenberg has investigated the
interaction of the prefrontal cortex and striatum in people with
schizophrenia. His mathematical skills have helped him develop
methods to investigate complex interactions between genetic
variants and their influence on the human brain. He now combines
studies of genetic indicators of mental illness with
neuroimaging in order to uncover the elusive biological
mechanisms of mental disorders.
Wayne
Drevets, M.D.
Dr. Drevets is the President of the Laureate Institute for
Brain Research, within the William K. Warren Laureate
Psychiatric Institute and Hospital in Tulsa, Oklahoma. For
fiscal year 2008, the psychiatric center saw 3,633 inpatient
admissions and over 84,000 outpatient visits. Dr. Drevets
received his M.D. from the University of Kansas. He joined the
Department of Psychiatry at Washington University Medical School
where he rose to the rank of tenured Associate Professor. During
these years he conducted positron emission tomography, or PET,
imaging studies of mood and anxiety disorders under the
mentorship of Dr. Marcus Raichle. He moved to the
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University of Pittsburgh, where he continued to study brain
imaging and acquired additional training in the application of
PET to receptor imaging. In 2001, Dr. Drevets joined the
NIMH Mood and Anxiety Disorders Program as a Senior
Investigator. He is currently involved in research employing PET
and MRI technologies to better understand mood and anxiety
disorders.
John
Kane, M.D.
Dr. Kane is professor of psychiatry, neurology, and
neuroscience, and holds the Dr. E. Richard Feinberg Chair
in Schizophrenia Research at the Albert Einstein College of
Medicine. Dr. Kane directs the NIMH-funded Research Center
for the Study of Schizophrenia for the North Shore Long Island
Jewish Health System. He has published over 300 papers in
scientific journals and is one of the most highly cited
researchers in psychiatry. Dr. Kane has been a member of
the Board of Scientific Counselors for NIMH. He has served on
the council of the American College of Neuropsychopharmacology,
and chaired the American Psychiatric Association Committee on
Research on Psychiatric Treatments. He is president of the
American Society of Clinical Psychopharmacology and the
Schizophrenia International Research Society. Dr. Kane has
chaired the NIMH Psychopathology and Psychobiology Review
Committee as well as the Psychopharmacologic Drugs Advisory
Committee of the FDA. He has served as a consultant to the
Veterans Administration and the U.S. Department of Justice.
Dr. Kane is a recipient of the Arthur P. Noyes Award in
Schizophrenia, the NAPPH Presidential Award for Research, the
American Psychiatric Association Foundations
Fund Prize for Research, the Kempf Fund Award for
Research Development in Psychobiological Psychiatry, the Lieber
Prize for Outstanding Research in Schizophrenia, the Heinz E.
Lehmann Research Award from New York State and the Dean Award
from the American College of Psychiatrists. Dr. Kane
received his medical degree from New York University School of
Medicine.
Principal
Investigators
Several of our academic collaborators have chosen to work with
us as principal investigators, in which the collaborator
receives no direct payment from the company, but does have a
confidentiality obligation. These experts will assist in the
design of clinical trials and the interpretation of the results.
There is a potential for these relationships to change as the
different assays progress through validation, evaluation and
general usage in clinical practice.
Charles
Schulz, M.D.
Dr. Schulz is a Professor and Head of the Department of
Psychiatry at the University of Minnesota. He received his M.D.
and psychiatric residency training at the UCLA Medical School.
Dr. Schulz became a clinical associate at the National
Institute of Mental Health where he worked in the
Neuropsychopharmacology Section at the Clinical Center. In 1980,
Dr. Schulz moved to the Medical College of Virginia where
he started the Schizophrenia Program. His research interests
focused on neuropsychiatric studies of teenagers suffering from
schizophrenia, including CT research. In 1983, he became Medical
Director of the Schizophrenia Module at University of Pittsburgh
where his research focused on treatment refractory
schizophrenia. In 1986, he moved to the NIMH extramural program
where he contributed to the National Plan on Schizophrenia
Research. Along with Dr. Carol Tamminga, he started the
biennial International Congress on Schizophrenia Research.
Dr. Schulz was Professor and Chairman of the Department of
Psychiatry at Case Western Reserve University School of Medicine
and University Hospitals of Cleveland from 1989 to 1999. His
research interests are MRI imaging in adolescents with
schizophrenia and bipolar illness. He also has been active in
clinical trials with antipsychotic medications.
Sheldon
Preskorn, M.D.
Dr. Preskorn is President and Chief Executive Officer for
the Clinical Research Institute and Professor in the Department
of Psychiatry at the University of Kansas School of
Medicine-Wichita. A fellow of the American Psychiatric
Association and the American Psychopathological Association,
Dr. Preskorn has served on advisory committees of the FDA,
Veterans Administration, National Institutes of Health and
National Science Foundation, and was a consultant to the
Menninger Foundation on clinical psychopharmacology. He received
his M.D. at the University of Kansas. An international lecturer
and the author of over 400 scientific, professional articles and
books, Dr. Preskorn has received continuous grant funding
since 1978 for an estimated life-time total of
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$50 million. His clinical research has included
pharmacokinetics, drug-drug interactions and drug development
through all clinical phases from first time in man
studies through phase III trials. He has been the principal
investigator on over 250 clinical trials including drug
development studies of all antidepressants marketed in the
United States in the last 25 years. He also has extensive
experience with the drug registration process having been
involved in the registration process for eight of the 12
antidepressants marketed in the United States over the last
25 years and the only implantable device approved for the
treatment of a psychiatric illness. In addition to this research
work, his clinical and administrative experience includes six
years as supervising physician for an acute psychosis ward, six
years as chief of psychiatry for a university affiliated
Veterans Administration Medical Center, five years as director
of the KUSM-W Outpatient Psychiatric Clinic and eight years as
Chair of the KUSM-W Department of Psychiatry.
Scientific
Advisory Board
Our scientific advisory board consists of scientists with
knowledge in mathematics, statistics, clinical trial design and
applied biology. They act as strategic resources for our
management and our board of directors.
Thomas
Joos, Ph.D.
Thomas Joos is a leading expert and opinion leader within the
field of protein microarray technologies and applications.
Dr. Joos is head of the Biochemistry Department of the
Natural and Medical Sciences Institute at the University of
Tübingen. Dr. Joos is a scientific advisor of
BioChipNet, and a member of the editorial board of Drug
Discovery Today, Proteomics, Molecular Biotechnology and Expert
Review of Proteomics. Dr. Joos is an invited speaker,
advisor and chairman at major international biochip conferences.
He has published numerous papers, including recent articles in
Drug Discovery Today, Proteomics and Trends in Biotechnology.
Vladimir
Vapnik, Ph.D.
Dr. Vapnik has been working on learning
theory-related
problems for more than four decades. Together with Alexey
Chervonenkis he studied the problem of uniform convergence of
empirical means and developed the VC theory. He also developed
the Support Vector Machines algorithm. Dr. Vapnik received
his Ph.D. in statistics at the Institute of Control Sciences,
Moscow in 1964. He worked at this institute from 1961 to 1990
and became Head of the Computer Science Research Department. At
the end of 1990, he moved to the USA and joined the Adaptive
Systems Research Department at Bell Labs. Vapnik left Bell Labs
in 2002 and joined NEC Laboratories America, Inc., where he
currently works in the Machine Learning group. He is a Professor
of Computer Science and Statistics at Royal Holloway, University
of London and an Adjunct Professor position at Columbia
University. He was inducted into the U.S. National Academy
of Engineering in 2006. He received the 2008 Paris Kanellakis
Award.
Michael
Walker, Ph.D.
Dr. Walker received a Ph.D. from Stanford. He has over
20 years experience in biostatistics and bioinformatics and
is a Consulting Professor for the Department of Medicine at
Stanford University. Dr. Walker teaches courses in biology
and statistics and consults for biotechnology and pharmaceutical
companies in the field of biostatistics and clinical trial
design. His clients include Roche, Affymetrix, Inc., and Genomic
Health, Inc. He has published in The New England Journal of
Medicine, The Lancet, Genome Research and other leading
journals, and has more than forty patents issued or pending for
the discovery of disease-associated genes and statistical
analysis methods.
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Matthew
Albert, Ph.D.
Dr. Matthew Albert is an Institut national de la santé
et de la recherché medicalé INSERM director of
research working at Institut Pasteur, where he heads a mixed
INSERM / Pasteur Unit. His current positions also
include Director of The Center for Human Immunology at Institut
Pasteur; and Adjunct Faculty at Necker Hospital. He received his
M.D. at Cornell University Medical College and his Ph.D. in
Immunology at The Rockefeller University. Dr Alberts
laboratory is centered around a bedside-to-bench
approach to translational research. His basic science and
clinical research goals are to define the direct and indirect
influence of apoptotic and autophagic cell death on immunity;
identify mechanisms of tumor immunity in patients with
superficial transitional cell carcinoma of the bladder; and
characterize the complex role of type I interferons and
interferon stimulated genes in hepatitis C virus disease
pathogenesis and treatment. He has received the Burroughs
Wellcome Fund Career Award (2000), The Doris Duke Clinical
Scientist Development Award (2001), The European Young
Investigator Awards (2006) and The European Research
Council Young Investigator Starting Award (2008).
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Compensation
Discussion and Analysis
This compensation discussion and analysis, or CD&A,
provides information about our compensation objectives and
policies for our principal executive officer, our principal
financial officer and our other three most highly-compensated
executive officers, and is intended to place in perspective the
information contained in the executive compensation tables that
follow this discussion. This CD&A provides a general
description of our compensation program and specific information
about its various components.
Throughout this discussion, the following individuals are
referred to as the Named Executive Officers and are
included in the Summary Compensation Table:
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Craig Benson, President and Chief Executive Officer
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Patrick S. McClain, Senior Vice President and Chief Financial
Officer
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Michael Spain, Senior Vice President and Chief Medical Officer
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Ralph McDade, Senior Vice President and Strategic Development
Officer
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James Mapes, Senior Vice President and Chief Scientific Officer
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While this CD&A focuses primarily on the information
contained in the following tables and related footnotes, as well
as the supplemental narratives relating to the last completed
fiscal year, we also describe compensation actions taken before
or after the last completed fiscal year to the extent that such
discussion enhances the understanding of our executive
compensation disclosure. As a privately-held company, our
significant stockholders had significant input in the amount and
design of our executive compensation through their
representation on the Compensation Committee of our board of
directors. Consequently, the Compensation Committee of our board
of directors retained significant discretion in the awarding of
executive compensation, whether in the form of salary increases,
discretionary annual bonuses or discretionary equity based
awards in 2009 and preceding calendar years. In anticipation of
this offering, our Compensation Committee has made adjustments
to our compensatory practices to be utilized beginning in 2010
that the Compensation Committee believes will be more
appropriate for a company with public stockholders. The
Compensation Committee has retained a compensation consultant to
assist it in transitioning its compensation practices. This
CD&A discusses the compensatory practices in place during
2008 (which were the same practices in place during 2009) and
highlights changes the Compensation Committee will be
implementing in 2010. Decisions related to historic compensation
(prior to 2010) were made by the Compensation Committee composed
of Messrs. Chandler, Zell and Gainor. Decisions made in
2010 in anticipation of this offering were generally made by
Messrs. Chandler, Zell and Schultz.
We believe our success depends on the continued contributions of
our Named Executive Officers. Our executive compensation
programs are designed with the philosophy of attracting,
motivating and retaining experienced and qualified executive
officers with compensation that recognizes individual merit and
overall business results. Our policies are also intended to
support the attainment of our strategic objectives by tying the
interests of our executive officers to those of our stockholders
through operational and financial performance goals and
equity-based compensation.
The principal elements of our executive compensation programs
are base salary, discretionary annual cash bonuses, long-term
equity incentives and the employee benefit arrangements made
available to our full-time employees generally. The employee
benefit arrangements provided to our Named Executive Officers
consist of life, disability and health insurance benefits, a
qualified 401(k) savings plan and paid vacation and holidays.
Responsibilities
of the Compensation Committee
The Compensation Committee of our board of directors is
responsible for the approval, evaluation and oversight of all of
our compensation plans, policies and programs. The primary
purpose of the Compensation Committee is to establish and
implement our compensation policies and monitor our compliance
with such policies.
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The responsibilities of the Compensation Committee include the
following:
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reviewing and making recommendations to our board of directors
with respect to our general compensation programs;
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reviewing and approving our goals and objectives relating to the
compensation of our executive officers, evaluating such
officers performance in light of these goals and
establishing compensation levels based on these evaluations;
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reviewing market data to assess our position with respect to the
compensation of our executive officers in order to ensure we are
competitive with comparable public companies;
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administering our equity based compensation plans, including
selecting to whom grants under any such plans are made and
determining the terms and type of any such grant;
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recommending to our board of directors the adoption of
amendments to any of our compensatory plans and modifying or
canceling any existing grants under such plans;
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reviewing the sufficiency of the shares available for grant
under any of our equity plans based on our goals for hiring,
bonus and retention; and
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preparing the Compensation Committee Report to be
included in our proxy statement.
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Compensation
Program Objectives
The objectives of our executive compensation programs are as
follows:
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attracting and retaining talented and experienced executives;
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motivating and rewarding executives whose knowledge, skills and
performance are critical to our success;
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aligning the interests of our executive officers and
stockholders by motivating executive officers to increase
stockholder value and rewarding executive officers when
stockholder value increases;
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providing a compensation package that is weighted towards pay
for performance, and in which total compensation is primarily
determined by company and individual results and the creation of
stockholder value;
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ensuring fairness among the executive management team by
recognizing the contributions each executive makes to our
success;
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fostering a shared commitment among executives by coordinating
their company and individual goals; and
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compensating our executives in accordance with our
long-term
objectives and goals.
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Although not formally adopted as objectives in 2008 and 2009,
the preceding objectives are consistent with the informal
objectives employed historically by our Compensation Committee.
The Compensation Committee evaluates the objectives of our
executive compensation programs on a regular basis, no less
frequently than annually. In determining the objectives of our
executive compensation programs, the Compensation Committee
examines the appropriate matching of compensation to performance
for each individual and for the entire executive group.
The Compensation Committee is responsible for reviewing and
making recommendations to our board of directors regarding our
executive compensation programs. These programs are intended to
achieve the objectives established by the Compensation Committee
for compensating our executive officers. The Compensation
Committee reviews our executive compensation programs on an
annual basis to determine if such programs are effective in
achieving the objectives established by the Compensation
Committee. Compensation objectives are established based upon
various measurements of meeting annual business objectives in
comparison to plan, and the associated value creation associated
with such objectives, both as individuals and as a management
group.
The Compensation Committee meets outside the presence of all of
our executive officers to consider the appropriate compensation
for our President and Chief Executive Officer. For all other
Named Executive Officers, the Compensation Committee meets
outside the presence of all executive officers except our
President and Chief Executive Officer. Historically, our
President and Chief Executive Officer and Senior Vice President
and Chief
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Financial Officer have annually reviewed the performance of each
other Named Executive Officer with the Compensation Committee
and make recommendations to the Compensation Committee with
respect to the appropriate base salary, target cash bonus
potential and the grant of
long-term
equity incentive awards. Based in part on these recommendations
and the other considerations discussed below, the Compensation
Committee has approved the annual compensation package of each
of our executive officers, other than our President and Chief
Executive Officer. The Compensation Committee alone has
historically analyzed the performance of our President and Chief
Executive Officer to determine the base salary, target cash
bonus potential and the grant of
long-term
equity incentive awards appropriate for him. Input or
suggestions applicable to the group or individual compensation
from other executive officers are solicited from our President
and Chief Executive Officer and Senior Vice President and Chief
Financial Officer by the Compensation Committee, but the
Compensation Committee will typically not solicit input directly
from our other executive officers, in determining compensation
levels of our executive officers.
Historically, although the Compensation Committee has made all
final determinations with respect to the compensation of our
executive officers, the President and Chief Executive Officer
and the Senior Vice President and Chief Financial Officer have
had significant input in the compensation paid to our
executives, including the Named Executive Officers, other than
their own compensation. As is discussed in greater detail below,
our compensation setting process was refined in 2010 in
anticipation of becoming a public company.
Certain Policies
Underlying Our Executive Compensation Programs
Our executive compensation programs and practices are selected
and structured to support our short-term and
long-term
strategic goals and values and to reward and retain talented
individuals. We design our compensation programs to support our
culture and efforts to remain a growth company.
We seek a balanced approach to executive compensation, with each
primary element of compensation (base salary, cash incentives,
equity incentives and benefits) designed to play a specific role.
We have historically applied the following material, but
informal, policies relating to our executive compensation
programs:
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Allocation between
long-term
and current compensation. Current compensation consists of
base pay and discretionary cash bonuses. Long-term compensation
consists entirely of equity awards made to our Named Executive
Officers in prior years, all of which were fully vested by the
end of 2007. The allocation between
long-term
and currently paid out compensation has historically been based
upon subjective determinations made by our Compensation
Committee regarding the individual performance of our executives
and the overall performance of our company. This allocation has
been based on the nature of each executives annual
performance objectives and our retention objectives. The
Compensation Committee determined not to make any equity based
awards to the Named Executive Officers in 2009 and 2008, but
will make additional grants in connection with this offering.
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Allocation between cash and non-cash compensation. It is
our policy to provide all currently paid compensation in cash
and all
long-term
compensation in the form of awards tied to our common stock. The
allocation between cash and non-cash compensation likewise has
been based on each executives annual performance
objectives and the retention objectives of the company.
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Compensation
Consultants and Competitive Market Data
We believe it is in our stockholders best interests to
ensure that our executive compensation is competitive with that
of other companies of similar size and complexity. While a
compensation consultant has not been utilized historically by
the Compensation Committee, in anticipation of this offering the
Compensation Committee has engaged Towers Watson &
Co., or Towers Watson, as its independent advisor to provide
competitive market data and analysis regarding material elements
of compensation, including base salary, cash incentives and
equity incentives. During February 2010 the compensation
consultant developed the competitive market data through the use
of both compensation survey data and publicly-available data
from a reference peer group. The reference peer group consisted
of the following companies:
Gen-Probe,
Inc., Myriad Genetics, Inc., Cepheid, Inc., Genomic
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Health Inc., ISIS Pharmaceuticals, Inc., Abaxis Inc.,
Zymogenetics, Inc., Progenics Pharmaceutical Inc., Monogram,
Inc., Orchid Cellmark, Sequenom, Inc., Luna Innovations Inc.,
Biosphere Medical, Inc., Sangamo Biosciences Inc., and Arqule,
Inc. The consultants also provided advice directly to the
Compensation Committee regarding interpretation of the
competitive market data and how the compensation levels
established helped to promote the goals espoused in our
compensation philosophy, both as to specific compensation
elements as well as regarding total compensation.
Towers Watson was retained directly by the Compensation
Committee and has not performed any services for us other than
in connection with its analysis of executive and director
compensation in early 2010.
Our Executive
Compensation Programs
Overall, our executive compensation programs are designed to be
consistent with the objectives and principles set forth above.
The basic elements of our executive compensation programs are
summarized in the table below, followed by a more detailed
discussion of each compensation program.
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Element
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Characteristics
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Purpose
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Base Salary
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Fixed amount adjusted annually
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Attract and retain
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Annual Bonus
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Based upon individual performance and the performance of our
company
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To motivate and enhance share price, and our short-term and
long-term
financial growth and stability
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Long Term Incentive Plan Awards
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Based upon performance individually and as an executive group
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To retain and motivate our executives over a longer term
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401(k) Plan
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Voluntary annual contributions
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Enhance overall compensation package
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Medical Benefits
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Ongoing medical participation in medical, life, disability,
dental and vision policies
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Attract and retain
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All pay elements are cash-based except for
long-term
incentive awards, which have historically been equity based. We
consider individual performance, the nature of each
executives annual performance objectives and competitive
market conditions in determining the amounts to be paid, the
allocation between cash versus equity and how much of a Named
Executive Officers compensation should be short-term
versus
long-term.
We believe that a substantial portion of each Named Executive
Officers compensation should be in performance-based pay
to motivate our executives to act in our stockholders best
interests.
Historically, in determining whether to increase or decrease the
compensation of our executive officers, including our Named
Executive Officers, we have taken into account such items as the
annual changes (if any) in the contributions made by the
executive officer to the company, the performance of the
executive officer, the increases or decreases in
responsibilities and roles of the executive officer, the
business needs of the executive officer, the transferability of
managerial skills to another employer, the relevance of the
executive officers experience to other potential employers
and the readiness of the executive officer to assume a more
significant role with another organization. These factors have
not been used in a specific formula, but have instead been
weighted at the discretion of the Compensation Committee as
appropriate for each executive officer.
In general, compensation or amounts realized by executives from
prior compensation from us, such as gains from previous equity
based awards, have been taken into account in setting other
elements of compensation for a given fiscal year. In doing so,
we have been focused on providing incentives for retaining our
executive officers in a competitive marketplace as well as
providing performance incentives for our benefit and our
stockholders benefit.
2010 Compensation
Review and Process
In 2010 with the assistance of Towers Watson we reassessed our
compensation philosophy and process. In
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reassessing and determining the compensation package of our
Named Executive Officers our Compensation Committee reviewed the
primary elements of our officers compensation
(specifically base salary, annual cash incentive bonus and
long-term
equity incentives) and compared each element to benchmark data
compiled with the assistance of Towers Watson with respect to
the reference peer group described above. Such competitive
market data was a key factor used in determining compensation.
Our President and Chief Executive Officer reviewed the
competitive market data and reviewed the performance of each
executive officer. In addition to competitive market value and
individual executive performance, other factors considered when
making executive compensation decisions in 2010 included:
competitive market pressures, business conditions, the vesting
and value of current equity grants, each individuals
tenure, prior compensation, prior experience, distinctive value
to our organization, variances in job responsibilities relative
to similarly titled officers at other companies, the appropriate
mix of compensation elements (including base salary, cash
incentives and equity incentives). Furthermore, the Compensation
Committee considered our overall performance and the potential
financial impact (including dilution) associated with their
compensation. No defined formula was used to weight the various
factors. Our President and Chief Executive Officer conducted
this review with assistance from our Senior Vice President and
Chief Financial Officer. Our President and Chief Executive
Officer then made recommendations to the Compensation Committee
regarding adjustments to base salary, cash incentives or equity
incentives relative to the compensation levels set forth in the
competitive market data. Our President and Chief Executive
Officer also recommended performance metrics for achieving cash
incentives and equity grants. He discussed his recommendations
and the underlying rationale with the Compensation Committee.
The Compensation Committee has full discretion to accept or
reject the recommendations of our President and Chief Executive
Officer. The Compensation Committee conducted its own analysis
and had access to the competitive market data as well as the
proposed adjustments of our President and Chief Executive
Officer. In addition, the Compensation Committee received input
from Towers Watson and met in executive session (without our
President and Chief Executive Officer present) prior to making
its final determinations regarding 2010 compensation.
To determine the compensation of our President and Chief
Executive Officer, the Compensation Committee, through
consultation with the remaining independent members of our board
of directors, assessed President and Chief Executive
Officers performance and considered competitive market
data and other factors described herein.
The variation in compensation among the executive officers is a
function of the Compensation Committees judgment. The
following factors are considered: competitive market data,
review of our President and Chief Executive Officers
performance, review of President and Chief Executive
Officers performance evaluations for each executive
officer (including the Named Executive Officers), and
consideration of the market competitive pressures, business
conditions, the vesting and value of current equity grants,
overall RBM performance and the potential financial impact of
its compensation decisions. Key contributors to the variance in
compensation amongst the executive officers are the variance in
the competitive market data for each position and variance in
each executives individual performance.
The three primary components of our executive compensation
program are base salary, cash incentives and equity awards. The
Compensation Committee has not adopted any defined formula for
allocating compensation between
long-term
and currently paid out compensation, between cash and non-cash
compensation or among different forms of non-cash compensation.
Employment
Agreements
We entered into employment agreements with each of the Named
Executive Officers, effective October 12, 2007. We intend
to amend and restate these agreements in 2010. The amended and
restated employment agreements are expected to be substantially
similar to the agreements in effect as of December 31,
2009. The agreements provide the Named Executive Officers with
an annual base salary, which is subject to review and adjustment
by our board of directors. The Named Executive Officers are also
entitled to participate in our employee benefit programs, to the
extent eligible, and may receive bonuses and incentive
compensation in the discretion of our board of directors.
Our employment agreements are described in detail below in the
narrative following the Summary Compensation Table. See
Executive CompensationDiscussion of Summary
Compensation TableEmployment Agreements.
104
Annual Cash
Compensation
To attract and retain executives with the ability and the
experience necessary to lead us and deliver strong performance
to our stockholders, we provide a competitive total compensation
package. Prior to 2010, in order to obtain information about
competitive compensation we have relied on informal reviews of
compensation practices of similar companies. In 2010, our
Compensation Committee retained Towers Watson to provide us with
this information. Base salaries are intended to compensate our
executive officers for their services in accordance with their
levels of responsibility within our company, while total
compensation is intended to align our financial objectives with
the management team by utilizing a significant equity component.
Our cash compensation considers individual performance and
experience to ensure that each executive officer is
appropriately compensated.
Base
Salary
We review the salary ranges of our executive officers as a
group, and individual salaries for our executive officers
annually. We establish the annual base salary for each executive
officer based on consideration of many internal factors, such as
the individuals performance and experience and the pay of
others on the executive team.
At the beginning of each year, our President and Chief Executive
Officer and our Senior Vice President and Chief Financial
Officer evaluate the base salary amounts paid to our other Named
Executive Officers and make recommendations to our Compensation
Committee. The Compensation Committee has the final say on any
changes to the base salaries of our Named Executive Officers,
which generally are made retroactive to January 1. When
establishing the base salary of any executive officer, we
consider business requirements for certain skills, individual
experience and contributions, the roles and responsibilities of
the executive and other factors, such as an individuals
contribution to the overall growth of the company or a
particular department within the company. We believe competitive
base salary is necessary to attract and retain an executive
management team with the appropriate abilities and experience
required to lead us. In 2009, between 67% and 68% of each Named
Executive Officers total compensation was comprised of
base salary, depending on the executives role with us and
the executives overall contributions to the company during
the year. This fixed portion of compensation is intended to
provide security and a reliable, but not excessive, source of
income to our Named Executive Officers.
During 2009 and 2008, the base salaries of our Named Executive
Officers were based upon their overall responsibility for our
operation and growth. However, management and our Compensation
Committee have historically been concerned about parity among
our executive officers. Mr. Benson earned the largest
salary (and discretionary bonus) because of his significantly
larger responsibility for our overall strategic direction,
operation and performance.
The base salaries paid to our Named Executive Officers are set
forth below in the Summary Compensation Table. See
Executive CompensationSummary Compensation
Table.
In its 2010 review the Compensation Committee determined that to
appropriately implement its policy of paying for performance,
the base salaries of our Named Executive Officers should be set
at below the market
50th
percentile of our reference peer group with adjustments to
reflect the factors described above.
Discretionary
Cash Bonuses
We provide the opportunity for our Named Executive Officers and
other executives to earn an annual cash bonus award. We provide
this opportunity to attract and retain an appropriate caliber of
talent for each position and to motivate executives to achieve
our annual business goals. Historically annual bonuses have been
discretionary. We review annual cash bonus awards for our Named
Executive Officers and other executives annually to determine
award payments for the last completed fiscal year, as well as to
establish award opportunities for the current fiscal year. At
the beginning of each year, we meet with executives to discuss
company goals for the year and what each executive is expected
to contribute in order to help the company achieve those goals.
Our 2009 bonuses were recommended by our President and Chief
Executive Officer and our Vice President and Chief Financial
Officer at year-end following a review of the individual
performance of the executive officer in question, the past
compensation, including base salary and equity awards, paid to
the executive officer, and the
105
overall performance of our company. The 2009 bonus
recommendations were then evaluated and approved by our
Compensation Committee.
In connection with the adoption of our 2010 Long Term Incentive
Plan the Compensation Committee discussed the implementation of
a performance based annual cash incentive plan to serve as a
financial incentive to achieve goals during the fiscal year that
the Compensation Committee believes are in the short and
long-term
interests of our shareholders. Each fiscal year, the
Compensation Committee will approve the structure and incentive
plan performance metrics. The Compensation Committee will
establish key financial metrics, such as adjusted operating
income, revenue, working capital, operational and individual
performance objectives, which we refer to as MBOs, for each of
our executive officers to support our operating goals and to
reward achievement of performance goals. Our board of directors
and Compensation Committee may exercise discretion either to
award compensation absent attainment of the relevant metrics or
to reduce or increase the size of any award or payout. We have
no predetermined weightings for our various annual incentive
measures but rather the Compensation Committee will make a
balanced, comprehensive assessment of our annual performance.
Our annual incentive philosophy is to emphasize teamwork and
company financial results. In addition, we will consider an
executives achievement of specified individual MBOs.
Consistent with our policy of paying for performance we target
our cash incentive plan to be between the
50th and
75th percentiles
of our reference peer group, with adjustments to reflect the
factors described above, upon the full achievement of
established operating goals. We have designed our incentive
bonus plan to pay up to 150 percent of the target bonus for
outstanding performance. However, consistent with this pay for
performance policy, no payment under the plan is guaranteed if
an executive officer fails to meet the minimum established goals
under the arrangement.
Long
Term Equity Incentive Compensation
We use
long-term
equity compensation to retain, motivate and align the interests
of our executive officers and employees with those of our
stockholders and to provide incentives to maximize stockholder
value. Long-term equity incentive awards were granted to our
Named Executive Officers in prior years, all of which were fully
vested by the end of 2007. We did not award any
long-term
equity incentive grants to our Named Executive Officers during
2009 or 2008 although certain employees and other executive
officers did receive such grants in 2008.
In connection with its review of our compensation practices in
2010, the Compensation Committee has targeted the value of our
equity incentives to be between the
50th and
75th percentiles
of our reference peer group, with adjustments to reflect the
factors described above. Historically, we have granted stock
options as a
long-term
incentive for selected executives.
In February 2010, we considered our
long-term
incentive strategy. The Compensation Committee concluded that
the optimal form of
long-term
incentives for Named Executive Officers would be restricted
stock unit awards. As a result, the Compensation Committee
determined that it would be appropriate to grant Named Executive
Officers restricted stock units which will be granted in
connection with this offering. Restricted stock units build
executive stock ownership and provide a strong financial
retention incentive. All restricted stock units will vest
incrementally over a four-year period. In addition, certain
executives, including the Named Executive Officers, will be
entitled to defer the receipt of shares issuable under the
restricted stock units beyond the date of vesting. Restricted
stock units do not result in the issuance of shares of our
common stock at the time of grant and, therefore, holders of
restricted stock units will not be entitled to vote and will not
have the rights generally associated with the ownership of our
common stock. However, holders of restricted stock units will be
entitled to receive distributions on our common stock, if any,
to the same extent as stockholders generally. The restricted
stock unit awards approved by the Compensation Committee in 2010
will be granted pursuant to our 2010 Long Term Incentive Plan
described below.
Long
Term Incentive Plan
In March 2010 we adopted a 2010 Long Term Incentive Plan, or
LTIP, in order to attract and retain the best available
personnel for positions of substantial responsibility, to
provide additional incentives to our employees, directors and
consultants, and to promote the success of our business.
106
The LTIP will primarily provide for grants of (a) incentive
stock options qualified as such under U.S. federal income
tax laws, (b) stock options that do not qualify as
incentive stock options, (c) stock appreciation rights, or
SARs, (d) restricted stock awards, (e) restricted
stock units, (f) performance awards, (g) bonus stock,
(h) stock based awards or (i) any combination of such
awards.
The LTIP is not subject to the Employee Retirement Income
Security Act of 1974, as amended, or ERISA. The LTIP, for a
limited period of time following this offering, will qualify for
an exception to the deductibility limitations imposed by
Section 162(m) of the Internal Revenue Code. As a result,
during that limited period of time, awards will be exempt from
the limitations on the deductibility of compensation that
exceeds $1,000,000.
Shares Available. The maximum aggregate number of shares
of our common stock that may be reserved and available for
delivery in connection with awards under the LTIP is 2,200,000,
subject to adjustment in accordance with the terms of the LTIP.
If common stock subject to any award is cancelled, forfeited
settled in cash, or withheld to pay the exercise price of or to
satisfy the withholding obligations with respect to an award,
those shares of common stock will again be available for
delivery under the LTIP to the extent allowable by law.
Eligibility. Any individual who provides services to us,
including non-employee directors and consultants, is eligible to
participate in the LTIP (each, an Eligible Person).
Each Eligible Person who is designated by the Compensation
Committee to receive an award under the LTIP will be a
Participant. An Eligible Person will be eligible to
receive an award pursuant to the terms of the LTIP and subject
to any limitations imposed by appropriate action of the
Compensation Committee.
Administration. Our board of directors has appointed the
Compensation Committee to administer the LTIP pursuant to its
terms, except in the event our board of directors chooses to
take action under the LTIP. Our Compensation Committee will,
unless otherwise determined by the board of directors, be
comprised of two or more individuals each of whom constitutes an
outside director as defined in Section 162(m)
of the Internal Revenue Code and nonemployee
director as defined in
Rule 16b-3
under the Securities Exchange Act of 1934. Unless otherwise
limited, the Compensation Committee has broad discretion to
administer the LTIP, including the power to determine to whom
and when awards will be granted, to determine the amount of such
awards (measured in cash, shares of common stock or as otherwise
designated), to proscribe and interpret the terms and provisions
of each award agreement, to accelerate the exercise terms of any
award (provided that such acceleration does not cause an award
intended to qualify as performance based compensation for
purposes of Section 162(m) of the Internal Revenue Code to
fail to so qualify), to delegate duties under the LTIP and to
execute all other responsibilities permitted or required under
the LTIP.
Terms of Options. The Compensation Committee may grant
options to Eligible Persons including (a) incentive stock
options (only to our employees) that comply with
Section 422 of the Internal Revenue Code and
(b) nonstatutory options. The exercise price for an
incentive stock option must not be less than the greater of
(a) the par value per share of common stock or (b) the
fair market value per share as of the date of grant. Options may
be exercised as the Compensation Committee determines, but not
later than 10 years from the date of grant. Any incentive
stock option granted to an employee who possesses more than 10%
of the total combined voting power of all classes of our shares
within the meaning of Section 422(b)(6) of the Internal
Revenue Code must have an exercise price of at least 110% of the
fair market value of the underlying shares at the time the
option is granted and may not be exercised later than five years
from the date of grant.
Terms of SARs. SARS may be awarded in connection with or
separate from an option. A SAR is the right to receive an amount
equal to the excess of the fair market value of one share of our
common stock on the date of exercise over the grant price of the
SAR. SARs awarded in connection with an option will entitle the
holder, upon exercise, to surrender the related option or
portion thereof relating to the number of shares for which the
SAR is exercised, which option or portion thereof will then
cease to be exercisable, in exchange for an amount calculated as
described in the preceding sentence. Such SAR is exercisable or
transferable only to the extent that the related option is
exercisable or transferable. SARs granted independently of an
option will be exercisable as the Compensation Committee
determines. The term of a SAR will be for a period determined by
the Compensation Committee but will not exceed ten years. SARs
may be paid in cash, common stock or a combination of cash and
stock, as provided for by the Compensation Committee in the
award agreement.
107
Restricted Stock Awards. A restricted stock award is a
grant of shares of common stock subject to a risk of forfeiture,
restrictions on transferability, and any other restrictions
imposed by the Compensation Committee in its discretion. Except
as otherwise provided under the terms of the LTIP or an award
agreement, the holder of a restricted stock award may have
rights as a stockholder, including the right to vote or to
receive dividends (subject to any mandatory reinvestment or
other requirements imposed by the Compensation Committee). A
restricted stock award that is subject to forfeiture
restrictions may be forfeited and reacquired by us upon
termination of employment or services. Common stock distributed
in connection with a stock split or stock dividend, and other
property distributed as a dividend, may be subject to the same
restrictions and risk of forfeiture as the restricted stock with
respect to which the distribution was made.
Restricted Stock Units. Restricted stock units are rights
to receive common stock, cash or a combination of both at the
end of a specified period. Restricted stock units may be subject
to restrictions, including a risk of forfeiture, as specified in
the award agreement. Restricted stock units may be satisfied by
common stock, cash or any combination thereof, as determined by
the Compensation Committee. Except as otherwise provided by the
Compensation Committee in the award agreement or otherwise,
restricted stock units subject to forfeiture restrictions will
be forfeited upon termination of a participants employment
or services prior to the end of the specified period. The
Compensation Committee may, in its sole discretion, grant
dividend equivalents with respect to restricted stock units.
Other Awards. Eligible Persons may be granted, subject to
applicable legal limitations and the terms of the LTIP and its
purposes, other awards related to common stock. Such awards may
include, but are not limited to, common stock awarded as a
bonus, dividend equivalents, convertible or exchangeable debt
securities, other rights convertible or exchangeable into common
stock, purchase rights for common stock, awards with value and
payment contingent upon our performance or any other factors
designated by the Compensation Committee, and awards valued by
reference to the book value of common stock or the value of
securities of or the performance of specified subsidiaries. The
Compensation Committee will determine terms and conditions of
all such awards. Cash awards may granted as an element of or a
supplement to any awards permitted under the LTIP. Awards may
also be granted in lieu of obligations to pay cash or deliver
other property under the LTIP or under other plans or
compensatory arrangements, subject to any applicable provision
under Section 16 of the Securities Exchange Act of 1934.
Performance Awards. The Compensation Committee may
designate that certain awards granted under the LTIP constitute
performance awards. A performance award is any award
the grant, exercise or settlement of which is subject to one or
more performance standards. These standards may include business
criteria for us on a consolidated basis, such as total
stockholders return and earnings per share, or for
specific subsidiaries or business or geographical units.
Other
Benefits
Retirement
Savings Opportunity
All eligible employees may participate in our 401(k) Profit
Sharing Plan and Trust, or 401(k) Plan, established in 2002 and
most recently amended in 2009. Each eligible employee over
21 years of age may make pre-tax contributions of up to 60%
of his or her compensation not to exceed the current Internal
Revenue Service limits. We provide this 401(k) Plan to help our
employees save a portion of their cash compensation for
retirement in a tax efficient manner. We may provide
discretionary matching contributions of a percentage of the
eligible compensation deferred by our employees to the 401(k)
Plan each year, which is determined by us in our sole discretion
each year and is subject to applicable limits established by the
Internal Revenue Code. To date, we have not made any matching
contributions under the 401(k) Plan.
Health
and Welfare Benefits
All full-time employees, including our Named Executive Officers,
may participate in our health and welfare benefit programs,
including medical, dental and vision care coverage, disability
insurance and life insurance.
108
Severance and
Change of Control Arrangements
Our employment agreements provide for severance payments upon
certain terminations of employment intended to provide our Named
Executive Officers with the security to freely exercise their
best business judgment in the exercise of their responsibilities
and, in particular, to provide such security in connection with
a change in control of our company. We believe it is important
that our Named Executive Officers focus their attention and
energy on our business without any distractions regarding the
effects of a change in control. Further, such severance
protection assists us in maximizing stockholder value by
allowing our Named Executive Officers to participate in an
objective review of any proposed transaction and whether such
proposal is in the best interest of our stockholders. Finally,
the severance provisions are intended to compensate an executive
during the non-compete period (required under the terms of his
or her employment agreement), which limits the executives
ability to work for a similar
and/or
competing company for a period of time subsequent to his
termination.
For further discussion, see Executive
CompensationPotential Payments Upon Termination or Change
in Control.
Stock Ownership
Guidelines
The Compensation Committee believes that it is important for our
senior executives to be shareholders so that the
executives financial interests are aligned with other
shareholders. Accordingly, the Compensation Committee intends to
establish executive stock ownership guidelines to formalize the
expectation of the Compensation Committee regarding the stock
holdings of our Named Executive Officers, as follows:
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The guideline for the President and Chief Executive Officer is
set at four times annual base salary.
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The guideline for the Senior Vice President and Chief Financial
Officer is three times annual base salary.
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The guidelines for all other Named Executive Officer are set at
two times annual base salary.
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In addition, outside directors will also have a stock ownership
guideline. The target ownership for outside directors is
expected to be set at a value of $100,000. Directors and
executive officers will be expected to be in compliance with the
applicable ownership level within five years of becoming subject
to the ownership guidelines. Stock ownership will include shares
of our common stock over which a director or executive officer
has direct or indirect ownership or control. In addition, for
purposes of our stock ownership guidelines, stock ownership will
include shares of our common stock underlying certain equity
awards intended to be settled in common stock including all
shares underlying restricted stock units and all shares
underlying vested (but not unvested) stock options. In addition,
shares owned indirectly by our executives through their
ownership in non-voting membership interests of RBM Management
Group, LLC will be deemed to be common stock ownership for
purposes of our guidelines. Compliance with our stock ownership
guidelines will be considered by the Compensation Committee in
its review of and decision making with respect to the
compensation of our Named Executive Officers.
Securities
Trading Policy
Our securities trading policy states that executive officers,
including the Named Executive Officers and directors, may not
purchase or sell puts or calls to sell or buy our stock, engage
in short sales with respect to our stock or buy our securities
on margin. The purchase or sale of stock by our officers may
only be made during a window of time described in our policy and
approved by our board of directors.
Tax Deductibility
of Executive Compensation
Limitations on deductibility of compensation may occur under
Section 162(m) of the Internal Revenue Code. An exception
applies to this deductibility limitation for a limited period of
time in the case of companies that become publicly-traded. In
addition, following such limited period of time, an exception to
the $1 million limit applies with respect to certain
performance-based compensation.
Although deductibility of compensation is preferred, tax
deductibility is not a primary objective of our compensation
programs. We believe that achieving our compensation objectives
set forth above is more important than the benefit of tax
deductibility, and we reserve the right to maintain flexibility
in how we compensate our
109
executive officers that may result in limited deductibility of
amounts of compensation from time to time. However, it is not
anticipated that the compensation level will exceed the tax
deductible limitations for any of our executive officers.
Conclusion
We believe the compensation we have provided to each of our
executive officers is reasonable and appropriate to facilitate
the achievement of our operational objectives. The compensation
programs and policies that we and our Compensation Committee
have designed effectively incentivize our executive officers on
both a short-term and
long-term
basis to perform at a level necessary to achieve these
objectives. The various elements of compensation combine to
align the best interests of our executive officers with the best
interests of our stockholders and our best interests in order to
maximize stockholder value.
110
Executive
Compensation
The following table summarizes the compensation we paid during
the years ended December 31, 2009 and 2008, to our Named
Executive Officers. Additional information concerning the Named
Executive Officers compensation can be found in the
Compensation Discussion and Analysis section of this
registration statement, beginning on page 91
Summary
Compensation Table
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Name and Principal Position
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Year
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Salary
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Bonus
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Total
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(a)
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(b)
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($)(c)
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($)(d)
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($)(j)
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Craig Benson,
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2009
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$
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257,500
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$
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125,000(2
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$
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382,500
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President and Chief Executive Officer
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2008
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$
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250,000
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$
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135,000(1
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)
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$
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385,000
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Patrick S. McClain,
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2009
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$
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226,600
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$
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106,000(2
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$
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332,600
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Senior Vice President and Chief Financial Officer
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2008
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$
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220,000
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$
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100,000(1
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$
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320,000
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Michael Spain,
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2009
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$
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242,565
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$
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117,000(2
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$
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359,565
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Senior Vice President and Chief Medical Officer
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2008
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$
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235,500
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$
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132,500(1
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$
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368,000
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Ralph McDade,
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2009
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$
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242,565
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$
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117,000(2
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)
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$
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359,565
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Senior Vice President and Strategic Development Officer
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2008
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$
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235,500
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$
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132,500(1
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)
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$
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368,000
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James Mapes,
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2009
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$
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222,500
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$
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106,000(2
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$
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328,500
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Senior Vice President and Chief Scientific Officer
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2008
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$
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210,000
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$
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100,000(1
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$
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310,000
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(1)
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Reflects amounts paid in March 2009
for services provided in fiscal year 2008 from a discretionary
bonus pool awarded by our Compensation Committee.
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(2)
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Reflects amounts paid in February
2010 for services provided in fiscal year 2009 from a
discretionary bonus pool awarded by our Compensation Committee.
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Discussion of
Summary Compensation Table
Our executive compensation policies and practices, pursuant to
which the compensation set forth in the Summary Compensation
Table was paid or awarded, are described above in the section
titled Compensation Discussion and Analysis. As
indicated therein, none of our Named Executive Officers received
any equity based compensation awards in 2009 or 2008, and all
prior grants to our Named Executive Officers were fully vested
by the end of 2007. For 2009 and 2008, none of our Named
Executive Officers received reportable compensation other than
base salary and discretionary bonuses. A summary of certain
material terms of the employment agreements with our Named
Executive Officers is set forth below.
Employment
Agreements
We entered into employment agreements with each of the Named
Executive Officers, effective October 12, 2007. We intend
to amend and restate these agreements in 2010. The amended and
restated employment agreements are expected to be substantially
similar to the agreements in effect as of December 31,
2009. The agreements provide the Named Executive Officers with
an annual base salary, which is subject to review and adjustment
by our board of directors. The Named Executive Officers are also
entitled to participate in our employee benefit programs, to the
extent eligible, and may receive bonuses and incentive
compensation in the discretion of our board of directors. The
employment agreements are not intended to modify the at will
employment relationship between the parties and, as such, do not
provide for a specified term of employment; however, severance
benefits are provided in certain limited circumstances. The
severance benefits provided by these employment agreements are
described below in the section titled Potential
Payments Upon Termination or Change in ControlEmployment
Agreements. The employment agreements also contain certain
confidentiality, noncompetition, and other restrictive
covenants, which are also described in the section titled
Potential Payments Upon Termination or Change in
ControlEmployment Agreements.
111
Grants of
Plan-Based Awards
We did not grant any plan-based awards to our Named Executive
Officers during the year ended December 31, 2009.
Outstanding
Equity Awards at Fiscal Year-End
None of our Named Executive Officers held any outstanding equity
based awards as of December 31, 2009.
Option Exercises
and Stock Vested
None of our Named Executive Officers exercised any stock options
or held any other awards that vested during the year ended
December 31, 2009.
Pension
Benefits
We do not sponsor or maintain any plans that provide for
specified retirement payments or benefits, such as tax-qualified
defined benefit plans or supplemental executive retirement
plans, for our Named Executive Officers.
Nonqualified
Deferred Compensation
We do not have any nonqualified deferred compensation plans or
arrangements in which the Named Executive Officers participate.
Potential
Payments Upon Termination or Change in Control
We have entered into employment agreements with each of our
Named Executive Officers that contain provisions regarding
payments to be made to such individuals upon termination of
their employment, including in connection with a change in
control. These agreements, as they are expected to be amended
and restated prior to this offering, are described in greater
detail below and in the section above titled
Discussion of Summary Compensation
TableEmployment Agreements.
Employment
Agreements
Pursuant to his respective employment agreement, if a Named
Executive Officers employment is terminated by us without
cause or by the Named Executive Officer for
good reason (as such terms are defined in the
employment agreements), then he is entitled to receive
12 months base salary, payable in accordance with our
normal payroll practices. In the event a Named Executive
Officers employment is terminated by us without
cause or by the Named Executive Officer for
good reason within 12 months following the
occurrence of a change in control (as defined in the
employment agreement), then the Named Executive Officer is
entitled to receive 24 months base salary, payable in
accordance with our normal payroll practices. In each case, the
Named Executive Officer will not be entitled to receive in
excess of two times the annual limit under
section 401(a)(17) of the Internal Revenue Code
(i.e., $490,000 for 2009) prior to the first day of
the seventh month following the date of such Named Executive
Officers termination. In addition, in order to receive the
severance amounts, the Named Executive Officer will be required,
within 60 days of termination, to execute and not revoke a
confidentiality and release agreement in our favor and will be
required to continue to comply with the restrictive covenants
contained in the employment agreement, as described below.
In the event the Named Executive Officer is terminated for any
reason other than one of the reasons described above, then he
shall only be entitled to receive his earned but unpaid base
salary, accrued vacation and any other earned but unpaid
compensation. The employment agreements with the Named Executive
Officers generally use the following terms:
(a) cause means the Named Executive
Officers (i) failure to perform one or more of his
essential duties and obligations to us (other than a failure
resulting from a disability (within the meaning of
section 22(e)(3) of the Internal Revenue Code)) which, if
the failure is remediable, the Named Executive Officer fails to
remedy within 10 days after receipt of written notice from
us, (ii) refusal or failure to comply with the reasonable
and legal directives of our board of directors after written
notice from our board of directors describing the failure to
comply
112
and, if such failure is remediable, the Named Executive
Officers failure to remedy within 10 days of
receiving written notice, (iii) act of personal dishonesty,
fraud or misrepresentation, (iv) violation of federal or
state law or regulation applicable to our business,
(v) conviction of, or plea of nolo contendere or guilty to,
a felony under the laws of the United States or any State,
(vi) use of illegal drugs or abuse of other narcotics or
alcohol during working hours or where such abuse (whenever
occurring) impacts on the Named Executive Officers working
day, (vii) breach of any of the Named Executive
Officers obligations under any written agreement with us
(including the employment agreement and any proprietary
information and inventions assignment agreement) or
(viii) violation of one of our policies.
(b) change in control means a change in our
ownership or control other than one effected through any
bankruptcy proceeding including those effected through a merger,
consolidation or acquisition by any person or related group of
persons (other than an acquisition by us or by one of the
employee benefit plans we sponsor or by a person or persons that
directly or indirectly owns our stock as of October 12,
2007) of beneficial ownership of securities possessing more
than 50% of the total combined voting power of our outstanding
securities; except that the following events will not constitute
a change in control: (i) a consolidation or merger with one
of our wholly-owned subsidiaries, (ii) a merger effected
exclusively for the purpose of changing our domicile,
(iii) the issuance of shares in an equity financing in
which we are the surviving corporation or (iv) any other
corporate reorganization or other transaction or series of
related transactions involving us, in each case, if our
stockholders immediately prior to such event or series of
related events continue to own at least 50% of the voting
securities of the surviving corporation immediately after such
event or series of related events in proportions substantially
similar to those that existed immediately prior to such event or
series of related events.
(c) good reason means, without the Named
Executive Officers written consent, (i) a substantial
reduction in the Named Executive Officers duties,
authority or responsibilities as in effect immediately prior to
the reduction, unless the reduction occurs as a result of us
being acquired by or otherwise being made a part of a larger
entity, (ii) a 25 percent or more reduction in the
Named Executive Officers base salary as in effect
immediately prior to the reduction, (iii) the relocation of
the Named Executive Officer to a facility or location more than
100 miles from the Named Executive Officers then
present location or (iv) a substantial reduction in the
kind or level of employee benefits to which the Named Executive
Officer was entitled immediately prior to the reduction that
constitutes a material breach of the employment agreement and
that results in the Named Executive Officers overall
benefits package being materially reduced below a level
commensurate with his position, in each case, unless such action
applies generally to all of our officers and employees;
provided, that (A) the Named Executive Officer must provide
us with written notice of an alleged good reason event within
60 days of its initial occurrence and of his intent to
terminate employment as a result of the event and (B) we
will have 30 days from the date the notice is provided to
cure.
The employment agreements contain confidentiality and invention
assignment provisions, as well as covenants not to compete or
solicit during the employment term and continuing for
24 months following a Named Executive Officers
termination of employment. Termination of the employment of any
Named Executive Officer due to a breach of one of these
provisions constitutes a termination for cause. In addition, we
are not required to pay any severance amounts if a Named
Executive Officer is in breach of any of these provisions. The
employment agreements do not prohibit the waiver, in writing, of
a breach of these covenants. You should also refer to the copies
of our employment agreements that have been filed with the SEC
as exhibits to our registration statement, of which this
prospectus forms a part.
Quantification
of Payments
The table below discloses the amount of compensation
and/or other
benefits due to the Named Executive Officers in the event of
their termination of employment
and/or in
the event we undergo a change in control. The amounts disclosed
assume that such termination
and/or the
occurrence of such change in control was effective as of
December 31, 2009. The amounts below constitute estimates
of the amounts that would be paid out to the Named Executive
Officers upon their respective terminations
and/or upon
the occurrence of a change in control. The actual amounts to be
paid out are dependent on various factors, which may or may not
exist at the time a
113
Named Executive Officer is actually terminated
and/or a
change in control actually occurs. Therefore, such amounts and
disclosures should be considered forward looking
statements.
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Termination Without Cause or
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for Good Reason Within
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Termination Without Cause
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12 Months Following a
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Name
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or for Good Reason
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Change in Control
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Craig Benson,
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$
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257,500
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$
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515,000
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President and Chief Executive Officer
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Patrick S. McClain,
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$
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226,600
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$
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453,200
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Senior Vice President and Chief Financial Officer
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Michael Spain,
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$
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242,565
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$
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485,130
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Senior Vice President and Chief Medical Officer
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Ralph McDade,
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$
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242,565
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$
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485,130
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Senior Vice President and Strategic Development Officer
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James Mapes,
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$
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222,500
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$
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445,000
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Senior Vice President and Chief Scientific Officer
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114
Director
Compensation
We did not pay any compensation to our non-employee directors in
2009 and 2008. Our employee directors do not receive any
additional compensation for serving on our board of directors.
We are currently evaluating director compensation for each of
our directors and director nominees following the completion of
this offering.
Our Compensation Committee intends to grant restricted stock
units under our 2007 Long Term Incentive Plan with respect to
2,250 shares to Messrs. Schultz and Capone. The
restricted stock units will be fully vested upon the date of
grant and provide for settlement upon the earlier to occur of
the directors separation for service (as such
term is defined in regulations promulgated under
section 409A of the Internal Revenue Code), a fixed date
elected by the director, or a change in control (as defined in
our 2007 Long Term Incentive Plan, provided that such event also
constitutes a change in control for purposes of
section 409A of the Internal Revenue Code). Our 2007 Long
Term Incentive Plan generally defines a change in control as
(a) the acquisition of 50% or more of our outstanding
voting securities (excluding certain acquisitions by us or our
affiliates or acquisitions by entities described in (c) below),
(b) a change in the majority of the members of our
incumbent board of directors, (c) a business combination
unless (i) holders of our outstanding voting securities
prior to such business combination continue to hold more than
50% of the outstanding voting securities of the resulting
company, (ii) no person owns 20% or more of the outstanding
voting securities of the resulting company except to the extent
such ownership existed prior to the business combination, and
(iii) a majority of the directors of the resulting company
were members of our incumbent board of directors, or
(d) approval by our stockholders of our complete
liquidation or dissolution. These awards are intended to
compensate these new directors for services provided in
preparation of this offering.
In March 2010 our board of directors and Compensation Committee
implemented a compensation program for non-employee members of
our board of directors. Each non-employee director will be
entitled to receive the following compensation during each year
of service as a director:
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A fee of $20,000 each quarter.
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If the director is a member of a committee of our board of
directors, then for each committee the director serves on the
director will receive $2,500.
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The Chair of the Audit Committee will receive an additional
$2,500 per quarter.
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The Chair of the Compensation Committee will receive an
additional $2,500 per quarter.
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Non-employee directors will be required to receive at least 50%
of their aggregate annual compensation in restricted stock units
issued under our 2010 Long Term Incentive Plan. Prior to
January 1 of each year, each non-employee director will
complete an election form selecting what percentage of his or
her annual compensation will be payable in cash and the
percentage payable in restricted stock units. A non-employee
director may elect to receive up to 100% of his annual
compensation in restricted stock units but may not elect to
receive more than 50% of his annual compensation in cash.
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Narrative
Disclosure of Our Compensation Policies and Practices as they
Relate to our Risk Management
In accordance with the requirements of
Regulation S-K,
Item 402(s), to the extent that risks may arise from our
compensation policies and practices that are reasonably likely
to have a material adverse effect on us, we are required to
discuss those policies and practices (including policies and
practices regarding employees that are not Named Executive
Officers) as they relate to our risk management practices and
risk-taking incentives. We have determined that our compensation
policies and practices are not reasonably likely to have a
material adverse effect on us and, therefore, no such disclosure
is necessary. Our Compensation Committee and our board of
directors are aware of the need to routinely assess our
compensation policies and practices and intend to make a
determination as to the necessity of this particular disclosure
on an annual basis.
115
Certain
Relationships and Related Party Transactions
We describe below transactions and series of similar
transactions, since January 1, 2006, to which we were a
party or will be party, in which:
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the amounts involved exceeded or will exceed $120,000; and
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a director, executive officer, holder of more than 5% of our
common stock (on an as-converted basis) or any member of their
immediate family had or will have a direct or indirect material
interest.
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We also describe below certain other transactions with our
directors, executive officers and stockholders. As of the date
of completion of this offering, our written policy will require
that any transaction with a related party required to be
reported under applicable SEC rules, other than
compensation-related matters, be reviewed and approved by our
Audit Committee. We will not adopt written procedures for review
of, or standards for approval of, these transactions, but
instead we intend to review such transactions on a case by case
basis. In addition, our Compensation Committee will approve all
compensation-related policies.
The Biophysical
Corporation
HealthMAP Laboratories, Inc., subsequently renamed The
Biophysical Corporation, or Biophysical, was founded in 2004 to
commercialize biomarker testing services in the health and
wellness market. Mark Chandler, Ph.D., our Founding
Director and Chairman of the Board of Directors, is a
stockholder of Biophysical and its Chairman of the Board. Craig
Benson, our President and Chief Executive Officer and director,
is a stockholder of Biophysical and a member of its board of
directors. We have entered into a testing services agreement to
perform the relevant laboratory work for Biophysical. Any
contracts or services rendered between the two companies are
negotiated at arms length by the independent members of
our board of directors and the independent members of
Biophysicals board of directors. Biophysical has purchased
testing services from the Company totaling $0.5 million,
$0.8 million and $0.5 million for the years ended
December 31, 2007, 2008 and 2009, respectively.
Settlement
Agreement with Luminex
In connection with our spin-off from Luminex, Luminex was issued
10% of our outstanding shares of common stock and
$4.4 million of our Series A preferred stock, and we
entered into a development and supply agreement with Luminex
whereby we received a non-exclusive license to design, develop,
and distribute testing services and kit products using the
Luminex platform.
On April 26, 2005, we served Luminex with a complaint,
which was filed by us in state district court in Travis County,
Texas seeking a declaratory judgment that the formation of
HealthMAP Laboratories, Inc. (subsequently renamed The
Biophysical Corporation) did not constitute a usurpation of a
corporate opportunity of ours and that we had the necessary
contractual license rights under our existing agreement with
Luminex to perform certain testing services on behalf of
Biophysical. In connection with the complaint, Luminex made
certain counterclaims against us, as well as claims against Mark
Chandler, Ph.D., our Founding Director and Chairman of the
Board of Directors, and Craig Benson, President and Chief
Executive Officer and director. We settled this litigation with
Luminex on October 15, 2007. As part of the settlement, we
paid Luminex a cash payment of $12.5 million. We made this
cash payment in exchange for resolution of the dispute between
the companies regarding Biophysical as well as the retirement of
Luminexs stock ownership in us and the granting to us of
certain additional licensing rights from Luminex. The parties
formally dismissed the lawsuit on October 24, 2007, as
required by the settlement agreement.
Sale of Preferred
Stock
On October 12, 2007, we sold 7,485,231 shares of our
Series A-1
preferred stock at a price of approximately $3.34 per share for
aggregate consideration of $25.0 million to EGI-Fund
(08-10)
Investors, L.L.C., which we refer to as EGI Fund, two funds
affiliated with Cross Creek Capital L.P., which we refer to as
Cross Creek Capital, and RBM Investment LLC.
116
Sale of Common
Stock and Stockholders Sale of Preferred Stock
In May 6, 2008, we sold 337,838 shares of our common
stock to Mark J. Gainor at a purchase price of $2.96 per share
for aggregate consideration totaling approximately
$1.0 million. Mr. Gainors shares of common stock
vest over a three-year period, with one third vesting each year.
At the same time, our principal preferred stockholder, EGI-Fund,
sold 143,943 shares of
Series A-1
preferred stock to Mr. Gainor at a purchase price of
$3.4736 per share for aggregate consideration totaling
approximately $0.5 million. Mr. Gainor was elected to
our board of directors in May 2008 in connection with these
transactions.
Investors
Rights Agreement
We entered into an Investors Rights Agreement with certain
holders of our securities on October 12, 2007, or the
Investors Rights Agreement, in connection with the sale of
shares of our
Series A-1
preferred stock. Each holder of more than 5% of our common stock
(on an as converted basis), including RBM Holdings, LLC, RBM
Management Group, LLC, EGI-Fund, funds affiliated with Cross
Creek Capital, RBM Investment LLC and Mark J. Gainor, is a party
to this agreement. Mr. Gainor became a party to the
Investors Rights Agreement on May 6, 2008 when he
entered into a joinder agreement with us, concurrently with his
purchase of shares of our common stock from us and shares of
preferred stock from EGI-Fund. See Description of Capital
StockInvestors Rights Agreement.
Pursuant to the Investors Rights Agreement, and the voting
agreement contained therein, the following directors were each
elected to serve as members of our board of directors and
continue to serve as of the date of this prospectus:
Mr. Benson, Mr. Chandler, Mr. Gainor and
Mr. Zell. The voting agreement contained in the
investors rights agreement will terminate upon completion
of this offering, and members previously elected to our board of
directors pursuant to this agreement will continue to serve as
directors until their successors are duly elected by of our
common stockholders.
Ownership of Our
Common Stock by RBM Holdings, LLC and RBM Management Group,
LLC
RBM Holdings, LLC and RBM Management Group, LLC own
substantially all of the shares of our common stock outstanding
prior to the conversion of the outstanding shares of our
preferred stock into shares of common stock upon the completion
of this offering. Substantially all of the outstanding
membership interests of RBM Holdings, LLC are held by Mark
Chandler, our Founding Director and Chairman of the board of
directors, and Craig Benson, our President and Chief Executive
Officer and director. RBM Holdings, LLC owns all of the
outstanding voting membership interests of RBM Management Group,
LLC. Certain of our officers and employees own non-voting
Class B membership interests of RBM Management Group, LLC.
The outstanding non-voting Class B membership interests of
RBM Management Group, LLC are subject to vesting and buy-sell
restrictions. In the event that the employment of the holder of
restricted Class B membership interests of RBM Management
Group, LLC should terminate, RBM Management Group, LLC may
acquire such restricted Class B membership interests, with
the effect that the interest of RBM Holdings, LLC in RBM
Management Group, LLC would be increased. Mark Chandler and
Craig Benson serve as the sole Managers of each of RBM Holdings,
LLC and RBM Management Group, LLC. Mark Chandler owns 76% of the
outstanding membership interest of RBM Holdings, LLC, allowing
Mr. Chandler to designate the Manager and control the
actions of RBM Holdings, LLC and RBM Management Group, LLC.
Indemnification
of Directors
Our restated certificate of incorporation and our restated
bylaws provide that we will indemnify each of our directors and
officers to the fullest extent permitted under Delaware law. We
have also entered into indemnification agreements with each of
our current directors. These agreements require us to indemnify
these individuals to the fullest extent permitted under Delaware
law against liability that may arise by reason of their service
to us, and to advance expenses incurred as a result of any
proceeding against them as to which they could be indemnified.
We also intend to enter into indemnification agreements with our
future directors. See Description of Capital
StockLimitation of Liability and Indemnification
Matters.
117
Investment in
Satoris, Inc.
In June 2007, we entered into a services agreement with Satoris,
Inc., or Satoris, a development-stage company. Under this
agreement, we provided services to Satoris including assay
development and validation and biomarker pattern validation.
Payment of such services was made in cash and the issuance of
1,270,270 shares of Satoris Series B preferred stock
representing $0.5 million in value. We were also issued
warrants to purchase 254,054 shares of Satoris
Series B preferred stock. We assigned no value to the
warrants.
In March 2009, we entered into a letter of intent with Satoris
to convert a $0.4 million accounts receivable balance into
a $0.4 million promissory note. In addition, Satoris issued
us an additional 3,239,189 shares of Satoris Series B
preferred stock valued at $1.2 million in exchange for its
involvement in certain testing services to be conducted between
us and a third party. To the extent an agreement is not entered
into between us and the third party, Satoris will be reimbursed
for certain amounts reimbursed by the third party to us, up to
the issue amount of $1.2 million, either in cash or shares
of Satoris Series B preferred stock. In December 2009,
RBM amended its agreement with Satoris gaining clarity on field
of use and extending exclusive testing service provisions with
Satoris to five years.
Our total investment in Satoris is less than 12% and as such has
been accounted for using the cost method.
During the years ended December 31, 2007, 2008 and 2009, we
recognized $0.8 million, $0.2 million and
$1.3 million, respectively, of revenue related to the
services agreement with Satoris. We recognized $1.2 million
of revenue in testing services for the year ended
December 31, 2009 related to the receipt of 3,239,189
Satoris Series B preferred stock mentioned above.
Acquisition of
Shares of Psynova Neurotech Ltd.
In May 2008, pursuant to the terms of a co-development and
commercialization agreement we entered into with Psynova, we
loaned Psynova approximately $1.4 million in cash and
provided a credit towards our MAP testing services of
approximately $1.0 million. Interest on the outstanding
amount of the facility drawn by Psynova accrued at 8% per year
on a monthly basis and was added to principal. In addition,
Psynova granted to us the right to purchase 19,562,716 of its
Preferred A Ordinary Shares at $0.13 per share. We granted
Psynova the right to require us to purchase an additional
19,562,716 of its Preferred A Ordinary Shares if certain
milestones were reached on or before December 31, 2008.
In November 2008, pursuant to Psynova achieving milestones
related to our schizophrenia test, the amounts drawn under the
loan, including all accrued interest, plus the credit for
services converted into 15,558,003 Preferred A Ordinary Shares
of Psynova. In addition, as a result of Psynova exercising its
right to require us to purchase 19,562,716 of its Preferred A
Ordinary Shares from it, we paid $1.3 million in cash and
$1.2 million in credit toward future services. At
November 21, 2008, we invested a total of $4.9 million
in Psynova equity securities and owned 47.9% of the outstanding
capital stock of Psynova. The investment was accounted for using
the equity method beginning on December 1, 2008. In
September 2009, we purchased an additional 21,718,276 Preferred
A Ordinary Shares in Psynova pursuant to a share purchase
agreement by and between Porton Capital Inc., Porton Capital
Technology Funds, both third-party investors, and us for
$5.5 million, bringing our total investment in Psynova to
$9.8 million, net of our equity interest in the losses of
Psynova. This brought our ownership interest to 77.6% resulting
in Psynovas financial position and results of operations
being consolidated with our own as of and for the year ended
December 31, 2009.
Pursuant to the Articles of Association of Psynova, we may from
time to time appoint two persons to be non-executive directors
of Psynova. Psynovas board of directors currently consists
of five members. We have appointed Messrs. Benson and Spain
to serve as non-executive directors of Psynova. In connection
with our acquisition of an additional 21,718,276 shares of
Preferred A Ordinary Shares in Psynova pursuant to the share
purchase agreement between Porton Capital Inc and Porton Capital
Technology Funds, and us, we acquired the rights of Porton
Capital Inc and Porton Capital Technology Funds to also appoint
an additional two persons to be non-executive directors of
Psynova. We have elected not to exercise the right to appoint
additional non-executive directors of Psynova at this time but
may elect to do so in the future.
118
On March 5, 2010, we entered into share acquisition
agreements with the remaining shareholders of Psynova as part of
a plan of acquisition to purchase the remaining 3,515,116
Preferred A Ordinary Shares and 14,465,427 Ordinary Shares
(including shares issued in connection with options to purchase
1,562,427 Ordinary Shares) in Psynova for an aggregate of
£4.7 million (or approximately $7.0 million based
on the exchange rate of pounds sterling to US dollars on
March 5, 2010). Upon closing of these acquisitions, we will
acquire the remaining 22.4% outstanding equity interest in
Psynova resulting in Psynova becoming our wholly owned
subsidiary. Each share acquisition agreement provides that the
purchase price will be paid in two installments. The first
installment is an aggregate of £3.7 million and will
occur on the date of closing. The second installment is an
aggregate of £1.0 million and will occur on or before
the later of the closing date described below or 30 days
following our first commercial sale of a diagnostic test capable
of distinguishing among patients with schizophrenia, bipolar
disorder and major depressive disorder. The value of each
installment is converted into and denominated in US dollars at
the exchange rate in effect the business day before the date the
installment is to be made. The closing date will occur on the
earlier of 30 days following the consummation of our
initial public offering or another date designated by us upon
ten days written notice to the selling shareholder. If the
closing has not occurred by December 31, 2010, the parties
to each agreement have the right to terminate. Our obligation to
close is subject to the condition that we simultaneously acquire
all of the remaining equity interest in Psynova.
The aggregate value of each installment will be paid in
accordance with the terms of each share acquisition agreement
and may be payable in cash, shares of our common stock or a
combination thereof. Under the terms of the share acquisition
agreements, £0.3 million of the first installment must
be paid in cash and £3.4 million may be paid at our
option in cash or with shares of our common stock. Of the second
installment, £0.1 million must be paid in cash,
£0.6 million must be paid through the issuance of
shares of our common stock and £0.3 million may be
paid at our option in cash or with shares of our common stock.
The number of shares of our common stock that would be issued is
determined by converting the value of the payment to US dollars
as described above and dividing the resulting value by either
the initial public offering price of our common stock if such
shares are issued within 30 days of the consummation of our
initial public offering or the average closing price of a share
of our common stock for the 30 days ending on the third
trading day prior to payment, if such shares are issued after
30 days from the consummation of our initial public
offering.
If the closing of the share acquisition agreements and the
payment of both of the installments were to occur within
30 days of the consummation of this offering and assuming
an exchange rate of £1.5061 to $1.00 (the exchange rate of
pounds sterling to US dollars on March 5, 2010) and
that shares of our common stock will be sold at
$ per share, which is the midpoint
of the range set forth on the cover of this prospectus, we would
be required to
issue shares
of our common stock and, if we elect to issue shares of our
common stock where we have the option to do so, then we would
issue an
additional shares
in connection with the consummation of the acquisitions. If we
do not pay either or both installments within the first
30 days of the initial public offering, elect not to pay
each installment with only shares of our common stock where we
have the election to do so or the exchange rate of pounds
sterling to US dollars is different than that set forth above,
then the number of shares issuable in connection with this
acquisition could be materially different.
119
Principal
Stockholders
The following table sets forth the beneficial ownership of our
common stock as of March 31, 2010, as adjusted to reflect
the conversion of our
Series A-1
preferred stock into common stock immediately prior to the
completion of this offering and the shares of common stock to be
issued and sold in this offering at an assumed initial public
offering price of $ , which is the
midpoint of the range set forth on the cover of this prospectus,
by:
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each of our named executive officers;
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each of our directors;
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all of our directors and executive officers as a group; and
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each person or group of affiliated persons, known by us to
beneficially own more than 5% of our outstanding shares of
common stock.
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We have determined beneficial ownership in accordance with the
rules of the SEC. Except as indicated by the footnotes below, we
believe that the persons and entities named in the table below
have sole voting and investment power with respect to the shares
of common stock that they beneficially own, subject to
applicable community property laws, based on information
furnished to us by such stockholders.
Applicable percentage ownership is based
on shares
of common stock outstanding on March 31, 2010, which gives
effect to the conversion of our
Series A-1
preferred stock
into shares
of common stock immediately prior to the closing of this
offering. For purposes of the table below, we have assumed
that shares
of common stock will be outstanding upon completion of this
offering. In computing the number of shares of common stock
beneficially owned by a person and the percentage ownership of
that person, we deemed outstanding shares of common stock
subject to options or warrants held by that individual or group
that are currently exercisable or exercisable within
60 days of March 31, 2010. We did not deem these
shares outstanding, however, for the purpose of computing the
percentage ownership of any other person. The information in
this table does not include any shares that may be purchased by
our directors and executive officers in the directed share
program that we anticipate undertaking in connection with this
offering. We intend to reserve an aggregate
of shares
of common stock for this program, as described under
UnderwritingDirected Shares. Additionally, the
column in the table relating to beneficial ownership of our
shares after this offering reflects no exercise of the
underwriters option to purchase up
to
additional shares of our common stock from us to cover
over-allotments.
120
Except as otherwise indicated below, the address for persons
listed on the table is
c/o Rules-Based
Medicine, Inc., 3300 Duval Road, Austin, Texas 78759.
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Percentage of Shares
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Beneficially Owned(1)
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Number of Shares(1)
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Before the
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After the
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Beneficial Owner
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Beneficially Owned
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Offering
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Offering(2)
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5% Stockholders:
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RBM Holdings, LLC(3)
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RBM Management Group, LLC(4)
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EGI-Fund
(08-10)
Investors, L.L.C.(5)(9)
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Named Executive Officers and Directors:
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T. Craig Benson(6)
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Patrick S. McClain(7)
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Michael Spain, M.D.(7)
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James P. Mapes, Ph.D.(7)
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Ralph L. McDade, Ph.D.(7)
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Mark Chandler, Ph.D.(8)
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Mark J. Gainor(14)(16)
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Matthew Zell(9)
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David L. Schulz
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Mark C. Capone
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All directors and executive officers as a group
(9 persons)(7)(10)
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*
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Less than 1%
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(1)
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Assumes the conversion of our
outstanding Series A Preferred Shares immediately prior to
the closing of this offering.
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(2)
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Assumes no exercise of the
underwriters option to purchase additional shares.
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(3)
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Consists
of shares
directly owned by RBM Holdings, LLC
and shares
directly owned by RBM Management Group, LLC. RBM Holdings, LLC
owns 100% of the outstanding voting membership interests of RBM
Management Group, LLC.
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(4)
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Consists
of shares
directly owned by RBM Management Group, LLC.
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(5)
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Matthew Zell is neither an officer
nor a director of EGI-Fund
(08-10)
Investors, L.L.C. EGI-Fund (08-10) Investors, L.L.C. does not
share or hold any voting or dispositive power with respect to
shares held by Mr. Zell. As such, EGI-Fund (08-10)
Investors, L.L.C. disclaims beneficial ownership of all shares
owned by Mr. Zell. The address of EGI-Fund
(08-10)
Investors, L.L.C. is Two North Riverside Plaza, Suite 600,
Chicago, Illinois 60606.
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(6)
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Consists
of shares
directly held by RBM Holdings, LLC,
and shares
directly held by RBM Management Group, LLC. Mr. Benson owns
approximately 26% of the outstanding membership interests of RBM
Holdings, LLC., excluding membership interests of RBM
Holdings,LLC held in trust created for the benefit of
Dr. Chandler and members of his family of which
Mr. Benson is the trustee. RBM Holdings, LLC owns 100% of
the outstanding voting membership interests of RBM Management
Group, LLC.
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(7)
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Does not include vested non-voting
membership interests in RBM Management Group, LLC held by
certain executive officers of the Company. See, Certain
Relationships and Related Party TransactionsOwnership of
Our Common Stock by RBM Holdings, LLC and RBM Management Group,
LLC for additional information.
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(8)
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Consists
of shares
directly held by RBM Holdings, LLC,
and shares
directly held by RBM Management Group, LLC. Dr. Chandler
owns approximately 74% of the outstanding membership interests
of RBM Holdings, LLC., including membership interests of RBM
Holdings,LLC held in trust created for the benefit of
Dr. Chandler and members of his family of which
Mr. Benson is the trustee. RBM Holdings, LLC owns 100% of
the outstanding voting membership interests of RBM Management
Group, LLC.
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(9)
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EGI-Fund (08-10) Investors, L.L.C.
is primarily indirectly owned by trusts establish for the
benefit of Matthew Zell and members of his family, the trustee
of which is Chai Trust Company, LLC, or Chai. The Managing
Directors of Chai Trust Company, LLC are Kellie Zell Harper,
JoAnn Zell Gillis, Matthew Zell, Leah Zell Wanger, Donald J.
Liebentritt, Bert Cohen and Robert M. Levin. Mr. Zell
disclaims beneficial ownership of such shares owned by EGI-Fund
(08-10) Investors, L.L.C., except to the extent of his pecuniary
interest therein.
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(10)
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Does not include unvested stock
options granted to certain executive officers and directors to
purchase up to an aggregate 323,750 shares of common stock
pursuant to the 2007 Long Term Incentive Plan.
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The following chart provides a simplified overview of the
ownership of our common stock by RBM Holdings, LLC and RBM
Management Group, LLC after the completion of this offering:
122
Description of
Capital Stock
General
The following summary describes the material terms of our
capital stock. However, you should refer to the actual terms of
the capital stock contained in our amended and restated
certificate of incorporation, which will be in effect upon the
completion of this offering, and applicable law. We intend to
amend and restate our certificate of incorporation and bylaws
immediately prior to the completion of this offering. Copies of
our amended and restated certificate of incorporation and
amended and restated bylaws are filed as exhibits to the
registration statement of which this prospectus is a part. The
descriptions of the common stock and preferred stock reflect
changes to our capital structure that will occur upon the
completion of this offering.
Upon completion of this offering, our authorized capital stock
will consist
of shares
of common stock, par value $0.001 per share,
and shares
of undesignated preferred stock, par value $0.001 per share.
As of April 19, 2010, we had issued and outstanding:
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8,446,838 shares of common stock, held by three
stockholders of record; and
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7,485,231 shares of
Series A-1
preferred stock, held by five stockholders of record.
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Prior to the commencement of this offering, we intend to amend
our certificate of incorporation to amend the conversion
provisions relating to our
Series A-1
preferred stock. The amended conversion provisions will provide
that the number of shares of common stock into which the
mandatorily redeemable convertible preferred stock will be
automatically converted immediately prior to the completion of
this offering based on a set of six predetermined ranges of the
public offering price per share of common stock in this offering.
The conversion ratio of each share of
Series A-1
preferred stock shall be:
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if the initial public offering price per share is less than or
equal to $ per share, then each
share of
Series A-1
preferred stock will convert into 1.01 shares of common
stock;
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if the initial public offering price per share is between
$ per share and
$ per share, then each share of
Series A-1
preferred stock will convert into 0.94 shares of common
stock;
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if the initial public offering price per share is between
$ per share and
$ per share, then each share of
Series A-1
preferred stock will convert into 0.85 shares of common
stock;
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if the initial public offering price per share is between
$ per share and
$ per share, then each share of
Series A-1
preferred stock will convert into 0.79 shares of common
stock;
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if the initial public offering price per share is between
$ per share and
$ per share, then each share of
Series A-1
preferred stock will convert into 0.73 shares of common
stock; and
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if the initial public offering price per share is greater than
or equal to $ per share, then each
share of
Series A-1
preferred stock will convert into 0.67 shares of common
stock.
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Immediately prior to the completion of this offering and after
the conversion of the
Series A-1
Preferred Stock as described above, each share of common stock
will be split, such
that shares
of common stock will be outstanding prior to issuance of shares
in connection with this offering.
Common
Stock
Each holder of common stock is entitled to one vote for each
share of common stock held on all matters submitted to a vote of
stockholders and are not entitled to cumulative voting rights.
This means that the holders of a majority of the outstanding
shares of common stock entitled to vote in any election of
directors can elect all of the directors then standing for
election. Subject to preferences that may apply to shares of
preferred stock outstanding at the time, the holders of
outstanding shares of our common stock are entitled to receive
dividends out of assets legally available at the times and in
the amounts that our board of directors may determine from time
to time. Upon our liquidation, dissolution, or
winding-up,
the holders of outstanding shares of common stock are
123
entitled to share ratably in all assets remaining after payment
of all liabilities and the liquidation preferences of any
outstanding preferred stock. Holders of shares of our common
stock have no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund
provisions applicable to the shares of our common stock. All
outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued in
this offering, when they are paid for, will be fully paid and
nonassessable.
Preferred
Stock
Under our amended and restated certificate of incorporation that
will be in effect upon the completion of this offering, our
board of directors will have the authority, without further
action by our stockholders, to issue from time to time the
preferred stock in one or more series, to establish the number
of shares to be included in each series, and to fix the powers,
preferences, and rights of the shares of each wholly unissued
series and any of its qualifications, limitations, or
restrictions. Without any further action by the stockholders,
our board of directors will also be able to increase or decrease
the number of shares of any series, but may not decrease the
number of shares of any series below the number of shares of
that series then outstanding.
Our board of directors may authorize the issuance of preferred
stock with voting or conversion rights that could harm the
voting power or other rights of the holders of our common stock,
or that could decrease the amount of earnings and assets
available for distribution to the holders of our common stock.
The issuance of preferred stock, while providing flexibility to
the board of directors in discouraging an attempt to gain
control of us by means of a merger, tender offer, proxy contest,
or other transaction, could, among other things, have the effect
of delaying, deferring, or preventing a change in control of us
and might harm the market price of our common stock and the
voting and other rights of the holders of our common stock. We
have no current plans to issue any shares of preferred stock.
Warrants
In September 2009, in conjunction with the entry into our Loan
and Security Agreement with Heartland for our subordinated debt,
we issued warrants to purchase shares of our common stock. In
connection with the borrowing of an additional $5.0 million
of subordinated debt on December 31, 2009, we issued
warrants to purchase an additional 100,000 shares of our
common stock. All warrants outstanding are immediately
exercisable at an exercise price of $9.00 per share. As of
April 19, 2010, we had outstanding warrants to purchase up
to 200,000 shares of our common stock. These warrants to
purchase common stock expire on September 1, 2014.
Investors
Rights Agreement
Registration
Rights
Under the terms of the Investors Rights Agreement, the
holders of approximately 337,838 shares of our common stock
and the holders of our
Series A-1
preferred stock are entitled to rights with respect to the
registration of such shares under the Securities Act of 1933, or
Securities Act. These shares and any shares of our common stock
into which any shares of our Series A-1 preferred stock are
converted, are referred to as registrable securities.
Demand
Registration Rights
At any time after the earlier of (1) January 1, 2012
or (2) 180 days following the effective date of this
registration statement, subject to certain exceptions, the
holders of more than 50% of the then-outstanding shares of
Series A-1
preferred stock, which we refer to as the initiating investors,
have the right to demand that we file a registration statement
covering the offering and sale of at least 30% of the
registrable securities then outstanding (or a lesser percent if
the sale of such registrable securities would exceed
$15 million net of underwriting discounts and commissions).
If such demand right is exercised, then we will (1) within
ten days after the date of such registration request, give
notice of such demand to all investors other than the initiating
investors and (2) as soon as practicable, and in any event
within 60 days after the date of the registration request,
file a
Form S-1
registration statement with the SEC under the Securities Act to
cover the registrable securities.
124
We have the ability to delay the filing of such registration
statement under specified conditions, such as during the period
starting on the date 60 days in advance of and ending on
the date 180 days following the effective date of this
registration statement or if our board of directors deems it
advisable to delay such filing because it would materially
interfere with a significant acquisition or similar transaction,
require premature disclosure of material information or render
us unable to comply with requirements under the Securities Act
or the Exchange Act. Postponements at the discretion of our
board of directors cannot exceed 75 days and such right to
postpone may not be invoked more than once during any
twelve-month period. We are not obligated to file a registration
statement on more than two occasions upon the request of the
initiating investors. Upon the conversion of the shares of our
Series A-1
preferred stock into shares of common stock upon the completion
of this offering, no holders will be able to demand that we file
a registration statement pursuant to these provisions.
Additionally, see Underwriting for a description of
the lock-up
provisions that are applicable to our stockholders.
Form S-3
Registration Rights
If we are eligible to file a registration statement on
Form S-3,
the initiating investors have the right, on one or more
occasions, to request registration on
Form S-3
of the sale of the registrable securities held by such holders
provided such securities are anticipated to have an aggregate
sales price (net of underwriting discounts and commissions, if
any) in excess of $3.0 million.
We have the ability to delay the filing of such registration
statement under specified conditions, such as during the period
starting on the date 30 days in advance of and ending on
the date 90 days following the effective date of an
offering of our securities, or if our board of directors deems
it advisable to delay such filing as described above. We are not
obligated to effect more than two registrations of registrable
securities on
Form S-3
in any twelve-month period. Upon the conversion of the shares of
our
Series A-1
preferred stock into shares of common stock upon the completion
of this offering, no holders will be able to demand that we file
a registration statement pursuant to these provisions.
Piggyback
Registration Rights
The holders of all of the registrable securities have piggyback
registration rights. Under these provisions, if we register any
securities for public sale, these holders will have the right to
include their shares in the registration statement, subject to
customary exceptions. The underwriters of any underwritten
offering will have the right to limit the number of shares
having registration rights to be included in the registration
statement. Each of our stockholders has waived their
registration rights with respect to this offering.
Expenses
of Registration
We will pay all registration expenses, other than underwriting
discounts, commissions, and stock transfer taxes, related to any
demand,
Form S-3,
or piggyback registration, including reasonable attorneys
fees and disbursements of one counsel for the holders of
registrable securities.
Termination
of Registration Rights
These registration rights will continue following this offering
and will terminate on the earliest to occur of:
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the occurrence of a merger or consolidation to which we are
party in which the shares of our capital stock outstanding
immediately prior to such merger or consolidation are converted
into or exchanged for shares of capital stock that represent,
immediately following such merger or consolidation, at least a
majority of the voting power of the capital stock of the
surviving corporation, or if the surviving corporation is a
wholly owned subsidiary of another corporation immediately
following such merger or consolidation, the parent corporation
of such surviving or resulting corporation;
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the sale, lease, transfer, exclusive license, or other
disposition, in a single transaction or series of related
transactions, of all or substantially all of our and our
subsidiaries assets, taken as a whole;
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the sale or disposition of one or more of our subsidiaries if
substantially all of our and our subsidiaries assets,
taken as a whole, are held by the subsidiary or subsidiaries
being sold; and
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125
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for any particular stockholder with registration rights, that
stockholders registration rights will terminate if such
stockholders shares of stock can be sold in a single
market sale on a single market day in compliance with
Rule 144 of the Securities Act.
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Indemnification
The Investors Rights Agreement contains customary
cross-indemnification provisions, under which we are obligated
to indemnify the selling stockholders in the event of material
misstatements or omissions in the registration statement
attributable to us, and each selling stockholder is obligated to
indemnify us for material misstatements or omissions in the
registration statement due to information provided by such
stockholder provided that such information was not changed or
altered by us.
Anti-Takeover
Effects of Provisions of our Amended and Restated Certificate of
Incorporation, our Amended and Restated Bylaws and Delaware
Law
Section 203
of the Delaware General Corporation Law
We will be subject to the provisions of Section 203 of the
Delaware General Corporation Law, or DGCL, regulating corporate
takeovers. In general, those provisions prohibit a Delaware
corporation, including those whose securities are listed for
trading on the Nasdaq Global Market, from engaging in any
business combination with any interested stockholder for a
period of three years following the date that the stockholder
became an interested stockholder, unless:
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the transaction is approved by the board of directors before the
date the interested stockholder attained that status;
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upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction
commenced; or
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on or after such time the business combination is approved by
the board of directors and authorized at a meeting of
stockholders by at least two-thirds of the outstanding voting
stock that is not owned by the interested stockholder.
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Section 203 defines business combination to
include the following:
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any merger or consolidation involving the corporation and the
interested stockholder;
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any sale, transfer, pledge or other disposition of 10% or more
of the assets of the corporation involving the interested
stockholder;
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subject to certain exceptions, any transaction that results in
the issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
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any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
stockholder; or
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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.
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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 any of
these entities or persons.
The existence of these provisions could have anti-takeover
effects with respect to transactions not approved in advance by
our board of directors, such as discouraging takeover attempts
that might result in a premium over the market price of our
common stock.
126
Amended
and Restated Certificate of Incorporation and Amended and
Restated Bylaws
Certain provisions of our amended and restated certificate of
incorporation and amended and restated bylaws to be in effect
upon the completion of this offering summarized below may be
deemed to have an anti-takeover effect and may delay, deter or
prevent a tender offer or takeover attempt that a stockholder
might consider to be in its best interests, including attempts
that might result in a premium being paid over the market price
for the shares held by stockholders.
Our amended and restated certificate of incorporation and
amended and restated bylaws to be in effect upon the completion
of this offering contain provisions that could have the effect
of discouraging potential acquisition proposals or tender offers
or delaying or preventing a change of control of our company. In
particular, our amended and restated certificate of
incorporation and amended and restated bylaws to be in effect
upon the completion of this offering, as applicable, among other
things:
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provide that special meetings of the stockholders may be called
only by our Chairman of the Board, Chief Executive Officer, our
board of directors or by the Chief Executive Officer after at
least 90-day prior notice to shareholders upon the written
request of holders of at least a majority of the voting power of
the outstanding shares entitled to vote generally in the
election of directors;
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establish procedures with respect to stockholder proposals and
stockholder nominations, including requiring that advance
written notice of a stockholder proposal or director nomination
generally must be received at our principal executive offices
not less than 90 nor more than 120 days prior to the first
anniversary date of mailing of our proxy statement released to
stockholders in connection with the previous years annual
meeting of stockholders;
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do not include a provision for cumulative voting in the election
of directors. Under cumulative voting, a minority stockholder
holding a sufficient number of shares may be able to ensure the
election of one or more directors. The absence of cumulative
voting may have the effect of limiting the ability of minority
stockholders to effect changes in the board of directors and, as
a result, may have the effect of deterring a hostile takeover or
delaying or preventing changes in control or management of our
company;
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provide that vacancies on our board of directors may be filled
by a majority of directors in office, although less than a
quorum, and not by the stockholders;
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require that the vote of holders of at least a majority of the
voting power of the outstanding shares entitled to vote
generally in the election of directors is required to amend
various provisions of our amended and restated certificate of
incorporation and amended and restated bylaws, including
provisions relating to:
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the number of directors on our board of directors;
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the election, qualification and term of office of our directors;
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removal of members of our board of directors; and
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certain amendments to our amended and restated certificate of
incorporation and amended and restated by-laws; and
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provide that the board of directors has the power to alter,
amend or repeal the amended and restated bylaws without
stockholder approval.
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Following the completion of this offering, our amended and
restated certificate of incorporation will authorize our board
of directors, without further vote or action by the
stockholders, to issue up
to shares
of preferred stock in one or more classes or series, and to fix
or alter:
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the number of shares constituting any class or series;
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the powers, preferences, and rights of each class or series;
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the relative, participating, optional, and other special rights
of each class or series; and
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any qualifications, limitations, or restrictions on each class
or series.
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The above provisions are intended to promote continuity and
stability in the composition of our board of directors and in
the policies formulated by the board, and to discourage certain
types of transactions that may involve an
127
actual or threatened change of control. Such provisions,
however, could discourage others from making tender offers for
our shares and, as a consequence, may also inhibit fluctuations
in the market price of our common stock that could result from
actual or rumored takeover attempts. These provisions could also
operate to prevent changes in our management.
Limitation of
Liability and Indemnification Matters
Our amended and restated certificate of incorporation to be in
effect upon completion of this offering limits the liability of
our directors for monetary damages for breach of their fiduciary
duty as directors, except for liability that cannot be
eliminated under the DGCL. Delaware law provides that directors
of a company will not be personally liable for monetary damages
for breach of their fiduciary duty as directors, except for
liabilities:
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for any breach of their duty of loyalty to us or our
stockholders;
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for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
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for unlawful payment of dividend or unlawful stock repurchase or
redemption, as provided under Section 174 of the
DGCL; or
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for any transaction from which the director derived an improper
personal benefit.
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Our amended and restated certificate of incorporation and
amended and restated bylaws to be in effect upon the completion
of this offering also provide that we will indemnify our
directors and officers to the fullest extent permitted by
Delaware law. Our amended and restated certificate of
incorporation and amended and restated bylaws to be in effect
upon the completion of this offering also permit us to purchase
insurance on behalf of any officer, director, employee or other
agent for any liability arising out of that persons
actions as our officer, director, employee or agent, regardless
of whether Delaware law would permit indemnification. We have
also entered into indemnification agreements with each our
current directors. These agreements require us to indemnify
these individuals to the fullest extent permitted under Delaware
law against liability that may arise by reason of their service
to us, and to advance expenses incurred as a result of any
proceeding against them as to which they could be indemnified.
We also intend to enter into indemnification agreements with our
future directors. We believe that the limitation of liability
provision in our certificate of incorporation and the
indemnification agreements will facilitate our ability to
continue to attract and retain qualified individuals to serve as
directors and officers.
Nasdaq
Symbol
We have applied to list our common stock for quotation on the
Nasdaq Global Market under the symbol RULE.
Transfer Agent
and Registrar
The transfer agent and registrar for our common stock is
American Stock Transfer & Trust Company, LLC.
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Shares Eligible
for Future Sale
Prior to this offering, there has been no public market for our
common stock. Future sales of shares of our common stock in the
public market, or the availability of such shares of our common
stock for sale in the public market, could adversely affect
market prices prevailing from time to time. As described below,
only a limited number of shares will be available for sale
shortly after this offering due to contractual and legal
restrictions on resale. Nevertheless, sales of a substantial
number of shares of our common stock in the public market after
such restrictions lapse, or the perception that those sales may
occur, could adversely affect the prevailing market price at
such time and our ability to raise equity-related capital at a
time and price we deem appropriate.
Sales of
Restricted Shares
Upon the closing of this offering, we will have outstanding an
aggregate
of shares
of common stock. Of these shares, all of
the shares
of common stock to be sold in this offering will be freely
tradable without restriction or further registration under the
Securities Act, unless the shares are held by any of our
affiliates as such term is defined in Rule 144
of the Securities Act. All remaining shares of common stock held
by existing stockholders will be deemed restricted
securities as such term is defined under Rule 144.
The restricted securities were issued and sold by us in private
transactions and are eligible for public sale only if registered
under the Securities Act or if they qualify for an exemption
from registration under Rule 144 or Rule 701 under the
Securities Act, which rules are summarized below.
As a result of the
lock-up
agreements described below and the provisions of Rule 144
and Rule 701 under the Securities Act, the shares of our
common stock (excluding the shares to be sold in this offering)
that will be available for sale in the public market are as
follows:
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no shares will be eligible for sale on the date of this
prospectus or prior to 180 days after the date of this
prospectus;
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shares will be eligible for sale upon the expiration of the
lock-up
agreements, beginning 180 days after the date of this
prospectus (subject to extension) and when permitted under
Rule 144 or Rule 701; and
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shares will be eligible for sale, upon exercise of vested
options, upon the expiration of the
lock-up
agreements, beginning 180 days after the date of this
prospectus (subject to extension).
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In addition, any shares of our common stock issued in connection
with our acquisition of the remaining 22.4% interest in Psynova
will be restricted securities as such term is
defined under Rule 144 and will be eligible for public sale
only if registered under the Securities Act or if they qualify
for an exemption from registration under the Securities Act.
These shares will also be subject to the
lock-up
agreements described below.
Lock-up
Agreements
We, our officers and directors and all other stockholders have
agreed not to sell any common stock for a period of
180 days from the date of this prospectus, subject to
certain exceptions and extensions. See Underwriting
for a description of these
lock-up
provisions.
Rule 144
In general, under Rule 144 as currently in effect, a person
(or persons whose shares are aggregated) who is not deemed to
have been an affiliate of ours at any time during the three
months preceding a sale, and who has beneficially owned
restricted securities within the meaning of Rule 144 for a
least six months (including any period of consecutive ownership
of preceding non-affiliated holders) would be entitled to sell
those shares, subject only to the availability of current public
information about us. A non-affiliated person who has
beneficially owned restricted securities within the meaning of
Rule 144 for at least one year would be entitled to sell
those shares without regard to the provisions of Rule 144.
A person (or persons whose shares are aggregated) who is deemed
to be an affiliate of ours and who has beneficially owned
restricted securities within the meaning of Rule 144 for at
least six months would be entitled to
129
sell within any three-month period a number of shares that does
not exceed the greater of one percent of the then outstanding
shares of our common stock or the average weekly trading volume
of our common stock reported through the Nasdaq Global Market
during the four calendar weeks preceding the filing of notice of
the sale. Such sales are also subject to certain manner of sale
provisions, notice requirements and the availability of current
public information about us.
Rule 701
In general, under Rule 701, any of our employees,
directors, officers, consultants or advisors who purchases
shares from us in connection with a compensatory stock or option
plan or other written agreement before the effective date of
this offering is entitled to sell such shares 90 days after
the effective date of this offering in reliance on
Rule 144, without having to comply with the holding period
requirement of Rule 144 and, in the case of non-affiliates,
without having to comply with the public information, volume
limitation or notice filing provisions of Rule 144. The SEC
has indicated that Rule 701 will apply to typical stock
options granted by an issuer before it becomes subject to the
reporting requirements of the Exchange Act, along with the
shares acquired upon exercise of such options, including
exercises after the date of this prospectus.
Stock
Plans
We intend to file one or more registration statements on
Form S-8
under the Securities Act to register shares of our common stock
issued or reserved for issuance under each of our 2007 Long Term
Incentive Plan and our 2010 Long Term Incentive Plan. The
first such registration statement is expected to be filed soon
after the date of this prospectus and will automatically become
effective upon filing with the SEC. Accordingly, shares
registered under such registration statement will be available
for sale in the open market following the effective date, unless
such shares are subject to vesting restrictions with us,
Rule 144 restrictions applicable to our affiliates or the
lock-up
restrictions described above.
Warrants
As of April 19, 2010, we had outstanding warrants to
purchase 200,000 shares of our common stock issued in
connection with our subordinated debt. All warrants outstanding
are immediately exercisable at an exercise price of $9.00 per
share. These warrants to purchase common stock expire on
September 1, 2014. See Description of Capital
StockWarrants.
Stock
Options
As of April 19, 2010, options to purchase a total of
796,950 shares of our common stock were outstanding and
exercisable under our 2007 Long Term Incentive Plan.
Restricted Stock
Units
Our Compensation Committee intends to grant 4,500 restricted
stock units under our 2007 Long Term Incentive Plan.
Registration
Rights
Following the completion of this offering, the holders
of shares
of our common stock (including shares of our common stock issued
upon the conversion of 7,785,231 shares of our
Series A-1
preferred stock) and warrants to purchase up to
200,000 shares of common stock are entitled to rights with
respect to the registration of their shares under the Securities
Act, subject to the
lock-up
agreements described above. Registration of these shares under
the Securities Act would result in the shares becoming freely
tradable without restriction under the Securities Act, except
for shares purchased by affiliates, immediately upon the
effectiveness of the registration statement of which this
prospectus is a part. Any sales of securities by these
stockholders could have a material adverse effect on the trading
price of our shares of common stock. See Description of
Capital StockInvestors Rights Agreement for
additional information.
130
Material U.S.
Federal Tax Considerations to
Non-U.S.
Holders
The following is a general discussion of the material
U.S. federal income tax and estate consequences of the
acquisition, ownership and disposition of our common stock to a
non-U.S. holder.
For the purpose of this discussion, a
non-U.S. holder
is any beneficial owner of our common stock that is not for
U.S. federal income tax purposes any of the following:
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an individual citizen or resident of the U.S.;
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a corporation (or other entity treated as a corporation for
U.S. federal income tax purposes) created or organized in
the U.S. or under the laws of the U.S. or any
political subdivision thereof;
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a partnership (or other entity treated as a partnership for
U.S. federal income tax purposes);
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an estate whose income is subject to U.S. federal income
tax regardless of its source; or
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a trust (x) whose administration is subject to the primary
supervision of a U.S. court and which has one or more
U.S. persons who have the authority to control all
substantial decisions of the trust or (y) which has made a
valid election to be treated a U.S. person.
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If a partnership (or an entity treated as a partnership for
U.S. federal income tax purposes) holds our common stock,
the tax treatment of a partner in the partnership will generally
depend on the status of the partner and upon the activities of
the partnership. Accordingly, we urge partnerships that hold our
common stock and partners in such partnerships to consult their
tax advisors.
This discussion assumes that a
non-U.S. holder
will hold our common stock issued pursuant to the offering as a
capital asset (generally, property held for investment). This
discussion does not address all aspects of U.S. federal
income taxation or any aspects of state, local or
non-U.S. taxation,
nor does it consider any U.S. federal income tax
considerations that may be relevant to
non-U.S. holders
that may be subject to special treatment under U.S. federal
income tax laws, including, without limitation,
U.S. expatriates, life insurance companies, tax-exempt or
governmental organizations, dealers in securities or currency,
banks or other financial institutions, controlled foreign
corporations, passive foreign investment companies, corporations
that accumulate earnings to avoid U.S. federal income tax,
and investors that hold our common stock as part of a hedge,
straddle or conversion transaction. Furthermore, the following
discussion is based on current provisions of the Internal
Revenue Code of 1986, as amended, and Treasury Regulations and
administrative and judicial interpretations thereof, all as in
effect on the date hereof, and all of which are subject to
change, possibly with retroactive effect.
We urge each prospective investor to consult a tax advisor
regarding the U.S. federal, state, local and
non-U.S.
income and other tax consequences of acquiring, holding and
disposing of shares of our common stock.
Dividends
We have not paid any dividends on our common stock, and we do
not plan to pay any dividends for the foreseeable future.
However, if we do pay dividends on our common stock, those
payments will constitute dividends for U.S. tax purposes to
the extent paid from our current or accumulated earnings and
profits, as determined under U.S. federal income tax
principles. To the extent those dividends exceed our current and
accumulated earnings and profits, the dividends will constitute
a return of capital and will first reduce a holders
adjusted tax basis in the common stock, but not below zero, and
then will be treated as gain from the sale of the common stock.
Any dividend (out of earnings and profits) paid to a
non-U.S. holder
of our common stock generally will be subject to
U.S. withholding tax either at a rate of 30% of the gross
amount of the dividend or such lower rate as may be specified by
an applicable tax treaty. To receive the benefit of a reduced
treaty rate, a
non-U.S. holder
must provide us with an IRS
Form W-8BEN
or other appropriate version of IRS
Form W-8
certifying qualification for the reduced rate.
131
Dividends received by a
non-U.S. holder
that are effectively connected with a U.S. trade or
business conducted by the
non-U.S. holder,
and, where an income tax treaty applies, are attributable to a
U.S. permanent establishment of the
non-U.S. holder,
are exempt from such withholding tax. To obtain this exemption,
the
non-U.S. holder
must provide us with an IRS
Form W-8ECI
properly certifying such exemption. Such effectively connected
dividends, although not subject to withholding tax, will be
subject to U.S. federal income tax on a net income basis at
the same graduated rates generally applicable to
U.S. persons, net of certain deductions and credits,
subject to any applicable tax treaty providing otherwise. In
addition to the income tax described above, dividends received
by corporate
non-U.S. holders
that are effectively connected with a U.S. trade or
business of the corporate
non-U.S. holder
may be subject to a branch profits tax at a rate of 30% or such
lower rate as may be specified by an applicable tax treaty.
A
non-U.S. holder
of our common stock may obtain a refund of any excess amounts
withheld if an appropriate claim for refund is timely filed with
the Internal Revenue Service, or the IRS.
Gain on
Disposition of Common Stock
A
non-U.S. holder
generally will not be subject to U.S. federal income tax on
any gain realized upon the sale or other disposition of our
common stock unless:
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the gain is effectively connected with a U.S. trade or
business of the
non-U.S. holder
and, if required by an applicable tax treaty, is attributable to
a U.S. permanent establishment maintained by such
non-U.S. holder;
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the
non-U.S. holder
is an individual who is present in the U.S. for a period or
periods aggregating 183 days or more during the calendar
year in which the sale or disposition occurs and certain other
conditions are met; or
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we are or have been a U.S. real property holding
corporation for U.S. federal income tax purposes and
the
non-U.S. holder
holds or has held, directly or indirectly, at any time within
the shorter of the five-year period preceding the disposition or
the
non-U.S. holders
holding period, more than 5% of our common stock. We believe
that we are not currently, and that we will not become, a
U.S. real property holding corporation for
U.S. federal income tax purposes.
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Unless an applicable tax treaty provides otherwise, gain
described in the first bullet point above will be subject to
U.S. federal income tax on net income basis at the same
graduated rates generally applicable to U.S. persons.
Corporate
non-U.S. holders
also may be subject to a branch profits tax equal to 30% (or
such lower rate as may be specified by an applicable tax treaty)
of its earnings and profits that are effectively connected with
a U.S. trade or business.
Gain described in the second bullet point above (which may be
offset by U.S. source capital losses, provided that the
individual
non-U.S. holder
has timely filed U.S. federal income tax returns with
respect to such losses) will be subject to a flat 30%
U.S. federal income tax (or such lower rate as may be
specified by an applicable tax treaty).
Non-U.S. holders
should consult any applicable income tax treaties that may
provide for different rules.
Backup
Withholding and Information Reporting
Generally, we must report annually to the IRS the amount of
dividends paid to each
non-U.S. holder,
the name and address of the recipient, and the amount, if any,
of tax withheld with respect to those dividends. A similar
report is sent to each
non-U.S. holder.
These information reporting requirements apply even if
withholding was not required because the dividends were
effectively connected with the holders conduct of a
U.S. trade or business or withholding was eliminated by an
applicable tax treaty. Pursuant to tax treaties or other
agreements, the IRS may make its reports available to tax
authorities in the recipients country of residence.
Payments of dividends to a
non-U.S. holder
may be subject to backup withholding (currently at a rate of
28%) unless the
non-U.S. holder
establishes an exemption, for example, by properly certifying
its
non-U.S. status
on an IRS
Form W-8BEN
or another appropriate version of IRS
Form W-8.
Notwithstanding the foregoing, backup withholding may apply if
either we or our paying agent has actual knowledge, or reason to
know, that the beneficial owner is a U.S. person that is
not an exempt recipient.
132
Payments of the proceeds from sale or other disposition by a
non-U.S. holder
of our common stock effected outside the U.S. by or through
a foreign office of a broker generally will not be subject to
information reporting or backup withholding. However,
information reporting (but not backup withholding) will apply to
those payments if the broker does not have documentary evidence
that the holder is a
non-U.S. holder,
an exemption is not otherwise established, and the broker is one
of the following:
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a U.S. person or a foreign branch or office of a
U.S. person;
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a controlled foreign corporation for U.S. federal income
tax purposes;
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a foreign person 50% or more of whose gross income is
effectively connected with a U.S. trade or business for a
specified three-year period; or
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a foreign partnership if at any time during its tax year
(x) one or more of its partners are U.S. persons who
hold in the aggregate more than 50% of the income or capital
interests in such partnership or (y) it is engaged in the
conduct of a U.S. trade or business.
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Payments of the proceeds from a sale or other disposition by a
non-U.S. holder
of our common stock effected by or through a U.S. office of
a broker generally will be subject to information reporting and
backup withholding (currently at a rate of 28% of the gross
proceeds) unless the
non-U.S. holder
establishes an exemption, for example, by properly certifying
its
non-U.S. status
on an IRS
Form W-8BEN
or another appropriate version of IRS
Form W-8.
Notwithstanding the foregoing, information reporting and backup
withholding may apply if the broker has actual knowledge, or
reason to know, that the holder is a U.S. person that is
not an exempt recipient.
Backup withholding is not an additional tax. Rather, the
U.S. income tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is timely
furnished to the IRS.
Estate
Tax
Our common stock owned or treated as owned by an individual who
is not a citizen or resident of the U.S. (as specifically
defined for U.S. federal estate tax purposes) at the time
of death will be includible in the individuals gross
estate for U.S. federal estate tax purposes and may be
subject to U.S. federal estate tax unless an applicable
estate tax treaty provides otherwise.
133
Underwriting
We have entered into an underwriting agreement with the
underwriters named below. Jefferies & Company, Inc.
and Stephens Inc. are acting as representatives of the
underwriters. Jefferies & Company, Inc. is the sole
book-running manager of the offering.
The underwriting agreement provides for the purchase of a
specific number of shares of common stock by each of the
underwriters. The underwriters obligations are several,
which means that each underwriter is required to purchase a
specified number of shares, but is not responsible for the
commitment of any other underwriter to purchase shares. Subject
to the terms and conditions of the underwriting agreement, each
underwriter has severally agreed to purchase the number of
shares of common stock set forth opposite its name in the table
below.
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Underwriters
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Number of Shares
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Jefferies & Company, Inc.
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Stephens Inc.
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Robert W. Baird & Co. Incorporated
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William Blair & Company, L.L.C.
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Total
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The underwriters have agreed to purchase all of the shares
offered by this prospectus (other than those covered by the
over-allotment option described below) if any are purchased. The
shares of our common stock should be ready for delivery on or
about ,
2010 against payment in immediately available funds. The
underwriters are offering the shares subject to various
conditions and may reject all or part of any order.
Under the underwriting agreement, if an underwriter defaults in
its commitment to purchase shares, the commitments of
non-defaulting underwriters may be increased or the underwriting
agreement may be terminated, depending on the circumstances.
Directed
Shares
At our request, the underwriters have reserved up
to % of the shares of common stock
for sale at the initial public offering price to persons who are
directors, officers or employees or who have business
relationships with RBM. The number of shares of common stock
available for sale to the general public will be reduced by the
number of directed shares purchased by participants in the
program. Any directed shares not purchased will be offered by
the underwriters to the general public on the same basis as all
other shares of common stock offered. We have agreed to
indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, in connection
with the sales of the directed shares.
Over-Allotment
Option
We have granted the underwriters an over-allotment option. This
option, which is exercisable for up to 30 days after the
date of this prospectus, permits the underwriters to purchase a
maximum
of
additional shares from us. If the underwriters exercise all or
part of this option, they will purchase shares covered by the
option at the initial public offering price that appears on the
cover page of this prospectus, less the underwriting discount.
If this option is exercised in full, the total price to public
will be $ and, before expenses,
the total proceeds to us will be
$ . The underwriters have severally
agreed that, to the extent the over-allotment option is
exercised, they will each purchase a number of additional shares
proportionate to the underwriters initial amount reflected
in the foregoing table.
Commission and
Expenses
The representatives have advised us that the underwriters
propose to offer the shares directly to the public at the public
offering price that appears on the cover page of this
prospectus. In addition, the representatives may offer
134
some of the shares to other securities dealers at such price
less a concession of $ per share.
The underwriters may also allow, and such dealers may reallow, a
concession not in excess of $ per
share to other dealers. After the shares are released for sale
to the public, the representatives may change the offering price
and other selling terms at various times.
The following table provides information regarding the amount of
the discount to be paid to the underwriters:
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Total Without
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Total with Full
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Exercise of
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Exercise of
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Over-Allotment
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Over-Allotment
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Per Share
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Option
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Option
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Public offering price
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$
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$
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$
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Underwriting discount
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$
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$
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$
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Proceeds, before expenses
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$
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$
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$
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We estimate that the total expenses of the offering, excluding
the underwriting discount, will be approximately
$ million.
Indemnification
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or
to contribute to payments the underwriters may be required to
make in respect of those liabilities.
Lock-Up
Agreements
We, our officers and directors and substantially all other
stockholders have agreed to a
180-day
lock-up with
respect to shares of our common stock and other of our
securities that they beneficially own, including securities that
are convertible into shares of common stock and securities that
are exchangeable or exercisable for shares of common stock. This
means that, without the prior written consent of the
representative, for a period of 180 days following the date
of this prospectus, we and such persons may not, subject to
certain exceptions, directly or indirectly (1) sell, offer,
contract or grant any option to sell (including without
limitation any short sale), pledge, transfer, establish an open
put equivalent position within the meaning of
Rule 16a-1(h)
under the Exchange Act or otherwise dispose of any shares of
common stock, options or warrants to acquire shares of common
stock, or securities exchangeable or exercisable for or
convertible into shares of common stock currently or hereafter
owned either of record or beneficially or (2) publicly
announce an intention to do any of the foregoing. In addition,
the lock-up
period may be extended in the event that we issue a release
earnings or announce certain material news or a material event
with respect to us occurs during the last 17 days of the
lock-up
period, or prior to the expiration of the
lock-up
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the
lock-up
period.
The restrictions in these
lock-up
agreements will not apply, subject to certain conditions, to
transactions relating to (1) any shares of common stock
acquired from the representatives as part of this offering in
connection with the directed share program or (2) the
transfer of any or all of the shares of common stock owned by a
stockholder, either during such stockholders lifetime or
on death, by gift, will or interstate succession to the
immediate family of the stockholder or to a trust the
beneficiaries of which are exclusively the stockholder
and/or a
member or members of the stockholders immediate family,
provided, however, that the recipient in each of (1) and
(2) agrees to be bound by such restrictions.
Discretionary
Sales
The representatives have informed us that they do not expect
discretionary sales by the underwriters to exceed five percent
of the shares offered by this prospectus.
135
No Public
Market
We have applied to list our common stock on the Nasdaq Global
Market under the symbol RULE. If our common stock is
approved for listing, subject to official notice of issuance,
there has been no public market for the shares prior to this
offering. The offering price for the shares has been determined
by us and the representatives, based on the following factors:
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the history and prospects for the industry in which we compete;
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our past and present operations;
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our historical results of operations;
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our prospects for future business and earning potential;
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our management;
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the general condition of the securities markets at the time of
this offering;
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the recent market prices of securities of generally comparable
companies;
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the market capitalization and stages of development of other
companies which we and the representatives believe to be
comparable to us; and
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other factors deemed to be relevant.
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We cannot assure you that the initial public offering price will
correspond to the price of which the common stock will trade in
the public market after the offering or that an active trading
market for the common stock will develop and continue after the
offering.
Price
Stabilization, Short Positions and Penalty Bids
SEC rules may limit the ability of the underwriters to bid for
or purchase shares of our common stock before distribution of
the shares is completed. However, the underwriters may engage in
the following activities in accordance with the rules:
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Stabilizing Transactions. The representatives may make
bids or purchases for the purpose of pegging, fixing or
maintaining the market price of our common stock, so long as
stabilizing bids do not exceed a specified maximum.
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Over-allotments and Syndicate Covering Transactions. The
underwriters may sell more shares of our common stock in
connection with this offering than the number of shares that
they have committed to purchase. This over-allotment creates a
short position for the underwriters. A bid for or purchase of
shares of common stock on behalf of the underwriters to reduce a
short position incurred by the underwriters is a syndicate
covering transaction. Establishing short sales positions
may involve either covered short sales or
naked short sales. Covered short sales are short
sales made in an amount not greater than the underwriters
over-allotment option described above. The underwriters may
close out any covered short position either by exercising their
over-allotment option or by purchasing shares in the open
market. To determine how they will close the covered short
position, the underwriters will consider, among other things,
the price of shares available for purchase in the open market,
as compared to the price at which they may purchase shares
through the over-allotment option. Naked short sales are short
sales in excess of the over-allotment option. The underwriters
must close out any naked short position by purchasing shares in
the open market. A naked short position is more likely to be
created if the underwriters are concerned that, in the open
market after the pricing of this offering, there may be downward
pressure on the price of the shares that could adversely affect
investors who purchase shares in this offering.
|
|
|
|
Penalty Bids. If the representatives purchase shares in
the open market in a stabilizing transaction or syndicate
covering transaction, it may reclaim a selling concession from
the underwriters and selling group members who sold those shares
as part of this offering.
|
|
|
|
Passive Market Making. Market makers in the shares who
are underwriters or prospective underwriters may make bids for
or purchases of shares, subject to limitations, until the time,
if ever, at which a stabilizing bid is made.
|
136
Similar to other purchase transactions, the underwriters
purchases to cover the syndicate short sales or to stabilize the
market price of our common stock may have the effect of raising
or maintaining the market price of our common stock or
preventing or mitigating a decline in the market price of our
common stock. As a result, the price of the shares of our common
stock may be higher than the price that might otherwise exist in
the open market if such purchases by the underwriters were not
occurring. The imposition of a penalty bid might also have an
effect on the price of our common stock if it discourages
resales of the shares.
Neither we nor the underwriters make any representation or
prediction as to the effect that the transactions described
above may have on the price of our common stock. These
transactions may occur on the Nasdaq Global Market or otherwise.
If such transactions are commenced, they may be discontinued
without notice at any time.
Electronic
Distribution
A prospectus in electronic format may be made available on the
Internet sites or through other online services maintained by
one or more of the underwriters or by their affiliates. In those
cases, prospective investors may view offering terms online and,
depending upon the particular underwriter, prospective investors
may be allowed to place orders online. The underwriters may
agree with us to allocate a specific number of shares for sale
to online brokerage account holders. Any such allocation for
online distributions will be made by the representatives on the
same basis as other allocations.
Other than the prospectus in electronic format, the information
on any underwriters website and any information contained
in any other website maintained by an underwriter is not part of
the prospectus or the registration statement of which this
prospectus forms a part, has not been approved
and/or
endorsed by us or any underwriter in its capacity as underwriter
and should not be relied upon by investors.
Upon receipt of a request by an investor or its representative
who has received an electronic prospectus from an underwriter
within the period during which there is an obligation to deliver
a prospectus, we will promptly transmit, or cause to be
transmitted, without charge, a paper copy of the prospectus.
Affiliations
RBM Investments LLC, a holder of our
Series A-1
Preferred Stock, is affiliated with Stephens Inc., one of the
underwriters for this offering. In the future, the underwriters
and their affiliates may provide various investment banking,
commercial banking, financial advisory and other services to us
and our affiliates for which services they may receive customary
fees.
Selling
Restrictions
European Economic Area. In relation to each Member State
of the European Economic Area which has implemented the
Prospectus Directive (each such Member State referred to as
Relevant Member State) an offer to the public of any shares
which are the subject of the offering contemplated by this
prospectus may not be made in that Relevant Member State except
that an offer to the public in that Relevant Member State of any
shares may be made at any time under the following exemptions
under the Prospectus Directive, if they have been implemented in
that Relevant Member State:
1. to legal entities which are authorized or regulated to
operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities;
2. to any legal entity which has two or more of (1) an
average of at least 250 employees during the last financial
year; (2) a total balance sheet of more than
43,000,000 and (3) an annual net turnover of more
than 50,000,000, as shown in its last annual or
consolidated accounts;
3. to fewer than 100 natural or legal persons (other than
qualified investors as defined in the Prospectus Directive)
subject to obtaining the prior consent of the representatives
for any such offer; or
137
4. in any other circumstances falling within
Article 3(2) of the Prospectus Directive, provided that no
such offer of the shares shall result in a requirement for the
publication by us or any underwriter of a prospectus pursuant to
Article 3 of the Prospectus Directive.
Each person in a Relevant Member State who receives any
communication in respect of, or who acquires any shares under,
the offers contemplated in this prospectus will be deemed to
have represented, warranted and agreed to and with each
underwriter and us that:
1. it is a qualified investor within the meaning of the law
in that Relevant Member State implementing Article 2(1)(e)
of the Prospectus Directive; and
2. in the case of any shares acquired by it as a financial
intermediary, as that term is used in Article 3(2) of the
Prospectus Directive, (i) the shares acquired by it in the
offer have not been acquired on behalf of, nor have they been
acquired with a view to their offer or resale to, persons in any
Relevant Member State, other than qualified investors, as that
term is defined in the Prospectus Directive, or in circumstances
in which the prior consent of the representatives has been given
to the offer or resale; or (ii) where shares have been
acquired by it on behalf of persons in any Relevant Member State
other than qualified investors, the offer of those shares to it
is not treated under the Prospectus Directive as having been
made to such persons.
For the purposes of this provision, the expression an
offer to the public in relation to any shares in any
Relevant Member State means the communication in any form and by
any means of sufficient information on the terms of the offer
and any shares to be offered so as to enable an investor to
decide to purchase any shares, as the same may be varied in that
Member State by any measure implementing the Prospectus
Directive in that Member State and the expression
Prospectus Directive means Directive 2003/71/EC and
includes any relevant implementing measure in each Relevant
Member State.
Switzerland. The shares offered pursuant to this document
will not be offered, directly or indirectly, to the public in
Switzerland and this document does not constitute a public
offering prospectus as that term is understood pursuant to art.
652a or art. 1156 of the Swiss Federal Code of Obligations. We
have not applied for a listing of the shares being offered
pursuant to this prospectus on the SWX Swiss Exchange or on any
other regulated securities market, and consequently, the
information presented in this document does not necessarily
comply with the information standards set out in the relevant
listing rules. The shares being offered pursuant to this
prospectus have not been registered with the Swiss Federal
Banking Commission as foreign investment funds, and the investor
protection afforded to acquirers of investment fund certificates
does not extend to acquirers of shares.
Investors are advised to contact their legal, financial or tax
advisers to obtain an independent assessment of the financial
and tax consequences of an investment in shares.
138
Legal
Matters
The validity of our common stock offered by this prospectus will
be passed upon for Rules-Based Medicine, Inc., by
Vinson & Elkins L.L.P., Dallas, Texas. Certain legal
matters in connection with this offering will be passed upon for
the underwriters by Dewey & LeBoeuf LLP, New York, New
York.
Experts
The consolidated financial statements of Rules-Based Medicine,
Inc. included in this prospectus and in the registration
statement have been audited by PMB Helin Donovan, LLP, an
independent registered public accounting firm, to the extent and
for the period set forth in their report appearing elsewhere in
this prospectus and in the registration statement. The financial
statements are included in reliance upon their report given upon
the authority of PMB Helin Donovan, LLP as experts in auditing
and accounting.
The financial statements of Psynova Neurotech Ltd. included in
this prospectus and in the registration statement have been
audited by PMB Helin Donovan, LLP, an independent registered
public accounting firm, to the extent and for the period set
forth in their report appearing elsewhere in this prospectus and
in the registration statement. The financial statements are
included in reliance upon their report given upon the authority
of PMB Helin Donovan, LLP as experts in auditing and accounting.
Where You Can
Find More Information
We have filed with the SEC a registration statement on
Form S-1
(including the exhibits, schedules and amendments thereto) under
the Securities Act, with respect to the shares of our common
stock offered hereby. This prospectus does not contain all of
the information set forth in the registration statement and the
exhibits and schedules thereto. Some items are omitted in
accordance with the rules and regulations of the SEC. For
further information with respect to us and the common stock
offered hereby, we refer you to the registration statement and
the exhibits and schedules filed therewith. Statements contained
in this prospectus as to the contents of any contract, agreement
or any other document are summaries of the material terms of
this contract, agreement or other document. With respect to each
of these contracts, agreements or other documents filed as an
exhibit to the registration statement, reference is made to the
exhibits for a more complete description of the matter involved.
A copy of the registration statement, and the exhibits and
schedules thereto, may be inspected without charge at the public
reference facilities maintained by the SEC at
100 F Street NE, Washington, D.C. 20549. Copies
of these materials may be obtained, upon payment of a
duplicating fee, from the Public Reference Room of the SEC at
100 F Street NE, Washington, D.C. 20549. Please
call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
facility. The SEC maintains a website that contains reports,
proxy and information statements and other information regarding
registrants that file electronically with the SEC. The address
of the SECs website is
http://www.sec.gov.
139
Index to
Financial Statements
|
|
|
|
|
|
|
Page
|
|
Condensed Consolidated Financial Statements (Unaudited) of
Rules-Based Medicine, Inc. for the Three Months Ended
March 31, 2010:
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
|
|
Audited Financial Statements of Rules-Based Medicine,
Inc.:
|
|
|
|
|
|
|
|
F-15
|
|
|
|
|
F-16
|
|
|
|
|
F-17
|
|
|
|
|
F-18
|
|
|
|
|
F-19
|
|
|
|
|
F-20
|
|
|
|
|
|
|
Audited Financial Statements of Psynova Neurotech Limited:
|
|
|
|
|
|
|
|
F-45
|
|
|
|
|
F-46
|
|
|
|
|
F-47
|
|
|
|
|
F-48
|
|
|
|
|
F-49
|
|
|
|
|
F-50
|
|
|
F-1
Rules-Based
Medicine, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
(unaudited)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,049
|
|
|
$
|
5,045
|
|
Restricted cash
|
|
|
965
|
|
|
|
832
|
|
Accounts receivable and related party receivable
|
|
|
4,935
|
|
|
|
4,195
|
|
Inventory, net
|
|
|
5,897
|
|
|
|
7,226
|
|
Deferred equity financing costs
|
|
|
1,232
|
|
|
|
2,167
|
|
Prepaid expenses and other assets
|
|
|
959
|
|
|
|
1,157
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
21,037
|
|
|
|
20,622
|
|
Property and equipment, net
|
|
|
2,766
|
|
|
|
3,204
|
|
Goodwill
|
|
|
4,884
|
|
|
|
4,884
|
|
Intangibles, net
|
|
|
19,674
|
|
|
|
19,693
|
|
Investments in unconsolidated affiliates
|
|
|
1,669
|
|
|
|
1,669
|
|
Other long-term assets
|
|
|
1,400
|
|
|
|
1,273
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
51,430
|
|
|
$
|
51,345
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders deficit
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,697
|
|
|
$
|
4,559
|
|
Accrued expenses and other current liabilities
|
|
|
5,055
|
|
|
|
4,129
|
|
Deferred revenue
|
|
|
1,373
|
|
|
|
1,172
|
|
Current portion of long-term debt and capital leases
|
|
|
227
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
8,352
|
|
|
|
10,089
|
|
Long-term debt and capital leaseslong-term portion
|
|
|
13,727
|
|
|
|
13,691
|
|
Deferred income tax payable
|
|
|
4,073
|
|
|
|
3,902
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
26,152
|
|
|
|
27,682
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (see Note 6)
|
|
|
|
|
|
|
|
|
Series A-1
preferred stock, $0.001 par value; 8,475,231 shares
authorized; 7,485,231 shares issued and outstanding,
liquidation preference of $25.0 million at
December 31, 2009 and March 31, 2010
|
|
|
26,267
|
|
|
|
26,167
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock; $0.001 par value; 17,315,980 shares
authorized; 8,446,838 shares issued and outstanding at
December 31, 2009 and March 31, 2010
|
|
|
8
|
|
|
|
8
|
|
Additional paid-in capital
|
|
|
2,088
|
|
|
|
2,147
|
|
Accumulated other comprehensive income
|
|
|
5
|
|
|
|
(95
|
)
|
Accumulated deficit
|
|
|
(5,383
|
)
|
|
|
(6,689
|
)
|
|
|
|
|
|
|
|
|
|
Total RBM stockholders deficit
|
|
|
(3,282
|
)
|
|
|
(4,629
|
)
|
Noncontrolling interest
|
|
|
2,293
|
|
|
|
2,125
|
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(989
|
)
|
|
|
(2,504
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
51,430
|
|
|
$
|
51,345
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
F-2
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
|
(unaudited)
|
|
|
Pharmaceutical testing products and services revenues
|
|
$
|
5,830
|
|
|
$
|
5,616
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
2,457
|
|
|
|
2,383
|
|
Research and development
|
|
|
896
|
|
|
|
1,372
|
|
Sales and marketing
|
|
|
1,228
|
|
|
|
1,727
|
|
General and administrative
|
|
|
770
|
|
|
|
1,212
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,351
|
|
|
|
6,694
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
479
|
|
|
|
(1,078
|
)
|
Equity in loss of Psynova
|
|
|
(263
|
)
|
|
|
|
|
Interest and other income (expense)
|
|
|
(51
|
)
|
|
|
(354
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
165
|
|
|
|
(1,432
|
)
|
Provision (benefit) for income taxes
|
|
|
45
|
|
|
|
(357
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
120
|
|
|
$
|
(1,075
|
)
|
|
|
|
|
|
|
|
|
|
Less net loss attributable to noncontrolling interest
|
|
|
|
|
|
|
(168
|
)
|
Net income (loss) attributable to RBM
|
|
$
|
120
|
|
|
$
|
(907
|
)
|
|
|
|
|
|
|
|
|
|
Net income attributable to preferred stockholders
|
|
|
376
|
|
|
|
399
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to RBM common stockholders
|
|
$
|
(256
|
)
|
|
$
|
(1,306
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
$
|
62
|
|
|
$
|
(95
|
)
|
Comprehensive loss attributable to RBM
|
|
$
|
(194
|
)
|
|
$
|
(1,401
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to RBM common stockholders:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
Shares used to compute net loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
8,446,838
|
|
|
|
8,446,838
|
|
|
See accompanying notes
F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Number of
|
|
|
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Noncontrolling
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Interest
|
|
|
(Deficit)
|
|
|
|
(In thousands, except share data)
|
|
|
|
(unaudited)
|
|
|
Balance at December 31, 2009
|
|
|
8,446,838
|
|
|
$
|
8
|
|
|
$
|
2,088
|
|
|
$
|
(5,383
|
)
|
|
$
|
5
|
|
|
|
2,293
|
|
|
$
|
(989
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
Preferred stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(399
|
)
|
|
|
|
|
|
|
|
|
|
|
(399
|
)
|
Net loss from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(907
|
)
|
|
|
|
|
|
|
(168
|
)
|
|
|
(1,075
|
)
|
Change in translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010
|
|
|
8,446,838
|
|
|
$
|
8
|
|
|
$
|
2,147
|
|
|
$
|
(6,689
|
)
|
|
$
|
(95
|
)
|
|
$
|
2,125
|
|
|
$
|
(2,504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
|
(unaudited)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
120
|
|
|
$
|
(1,075
|
)
|
Adjustments to reconcile net income to cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
222
|
|
|
|
311
|
|
Loss on disposal of property and equipment
|
|
|
|
|
|
|
13
|
|
Stock-based compensation expense
|
|
|
48
|
|
|
|
59
|
|
Equity in loss of Psynova
|
|
|
263
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable and related party receivable
|
|
|
1,795
|
|
|
|
790
|
|
Prepaid expenses and other current assets
|
|
|
(358
|
)
|
|
|
(205
|
)
|
Inventory
|
|
|
(173
|
)
|
|
|
(1,370
|
)
|
Investment funded through services
|
|
|
(1,272
|
)
|
|
|
|
|
Accounts payable
|
|
|
366
|
|
|
|
2,812
|
|
Accrued expenses and other liabilities
|
|
|
(378
|
)
|
|
|
(1,740
|
)
|
Deferred tax liability
|
|
|
(8
|
)
|
|
|
(171
|
)
|
Deferred revenue
|
|
|
(381
|
)
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
244
|
|
|
$
|
(416
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Internally developed intangibles
|
|
|
(221
|
)
|
|
|
(140
|
)
|
Purchase of property and equipment
|
|
|
(206
|
)
|
|
|
(652
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
$
|
(427
|
)
|
|
$
|
(792
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Payment of principal on long-term debt and capital leases
|
|
|
(37
|
)
|
|
|
(62
|
)
|
Deferred equity financing costs
|
|
|
|
|
|
|
(935
|
)
|
Subordinated debt interest payments
|
|
|
|
|
|
|
134
|
|
Amortization of debt issuance costs
|
|
|
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
$
|
(37
|
)
|
|
$
|
(740
|
)
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rates on cash and cash equivalents
|
|
|
(61
|
)
|
|
$
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
$
|
(281
|
)
|
|
$
|
(2,004
|
)
|
Cash and cash equivalents at the beginning of period
|
|
|
2,536
|
|
|
|
7,049
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of period
|
|
$
|
2,255
|
|
|
$
|
5,045
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
10
|
|
|
$
|
184
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
|
|
|
$
|
401
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing transactions:
|
|
|
|
|
|
|
|
|
Imputed
Series A-1
preferred stock dividend
|
|
$
|
376
|
|
|
$
|
399
|
|
|
See accompanying notes
F-5
Rules-Based
Medicine, Inc.
(Unaudited)
|
|
1.
|
Significant
Accounting Policies
|
Organization
Rules-Based Medicine, Inc., or RBM or the Company, is a life
sciences company focused on the development and
commercialization of molecular diagnostic tests on novel
biomarker patterns, initially for the psychiatric market. RBM
also provides testing products and services to the
pharmaceutical, biotechnology and medical research industries.
Principles
of Consolidation
The accompanying unaudited condensed consolidated financial
statements include the accounts of the Company and the accounts
of its wholly-owned and majority-owned subsidiaries. The Company
has eliminated all intercompany balances and transactions.
Basis
of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission and do not
include all the information and notes required by accounting
principles generally accepted in the United States, or GAAP, for
complete financial statements. In the opinion of management, the
accompanying condensed consolidated financial statements contain
all adjustments necessary to present fairly the financial
position and the results of operations for the periods
presented. Interim operating results are not necessarily
indicative of results that may be expected for the full year
ending December 31, 2010 or for any subsequent period. It
is suggested that these condensed consolidated financial
statements be read in conjunction with the annual financial
statements and notes thereto found elsewhere in this
registration statement. The accompanying condensed consolidated
balance sheet as of December 31, 2009 has been derived from
the audited financial statements included elsewhere in this
registration statement.
Use of
Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts and disclosure of assets and
liabilities at the date of the financial statements as well as
the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those
estimates.
Cash
and Cash Equivalents and Restricted Cash
All highly liquid investments with original maturities of three
months or less at the time of purchase are considered cash
equivalents. Restricted cash currently represents proceeds from
long-term debt which is restricted for payment of interest on
the debt. Restricted cash is excluded from cash and cash
equivalents.
Foreign
Currency Translation
The functional currency of the Companys foreign
subsidiaries in Germany and the United Kingdom is the local
currency (Euro and Great British Pound). The revenue and
expenses of such subsidiaries have been translated into
U.S. dollars at average exchange rates prevailing during
the period. Assets and liabilities have been translated at the
rates of exchange on the balance-sheet date. The resulting
cumulative translation adjustments are reported in accumulated
other comprehensive income (loss), a separate component of
stockholders equity in the accompanying condensed
consolidated balance sheets. Transactional gains and losses from
currency transactions denominated in currencies other than the
functional currency are recorded as other income or expense on
the condensed consolidated statements of operations.
F-6
Debt
Issuance Costs
The Company capitalizes all costs related to its issuance of
debt and amortizes those costs using the effective interest
method over the life of the related debt instruments.
Unamortized debt issuance costs were $1.0 million at
December 31, 2009 and $0.8 million at March 31,
2010 and are included in prepaid expenses and other assets in
the condensed consolidated balance sheet. During the year ended
December 31, 2009 and the three months ended March 31,
2010, the Company amortized $50,000 and $0.1 million,
respectively, of debt issuance costs, which were included in
interest expense in the condensed consolidated statement of
operations.
Revenue
Recognition
Revenue is recognized when persuasive evidence of an agreement
exists, delivery has occurred, the fee is fixed and
determinable, and collection is probable. Such revenue
recognition generally occurs as the related service is
performed. Customer advances and amounts billed to customers in
excess of revenue recognized are recorded as deferred revenue.
Testing revenues and kit sales are recognized at the time the
testing service has been completed and the tests are delivered
and accepted by the customer. Kit product and TruCulture tube
sales are recognized when the kit and tube, respectively, are
shipped to customers.
Stock-Based
Compensation
The Company follows the authoritative guidance on share-based
payments that requires recognition of compensation costs for all
share-based payment awards made to employees based upon each
awards estimated grant date fair value. The Company
utilizes the Black-Scholes option-pricing model to determine the
fair value of stock option awards. Compensation cost is
recognized on a straight-line basis over the respective vesting
period of the award. Compensation expense is recognized only for
those awards that are expected to vest.
Earnings
Per Share
The Company computes basic earnings per share available to
common stockholders using the weighted-average number of common
shares outstanding during the reporting period. The Company
adjusted diluted earnings per share for the after-tax impact of
incremental shares that would be available for issuance upon the
assumed exercise of stock options and for the shares that would
be issued upon the conversion of the convertible preferred stock.
A reconciliation of the number of the numerator and denominator
used in the calculation of basic and diluted earnings per share
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss attributable to RBM common stockholders
|
|
$
|
(256
|
)
|
|
$
|
(1,306
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
8,446,838
|
|
|
|
8,446,838
|
|
Basic and diluted net loss per share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
F-7
The following shares were excluded from the calculation of
dilutive earnings per share because their inclusion would have
been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
Series A-1
preferred stock
|
|
|
7,485,231
|
|
|
|
7,485,231
|
|
Options to purchase common stock
|
|
|
311,500
|
|
|
|
796,950
|
|
Warrants
|
|
|
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,796,731
|
|
|
|
8,482,181
|
|
|
|
|
|
|
|
|
|
|
|
Recently
Issued Accounting Pronouncements
With the exception of those stated below, there have been no
recent accounting pronouncements or changes in accounting
pronouncements during the three months ended March 31,
2010, as compared to the recent accounting pronouncements
described in the Consolidated Financial Statement for the years
ended December 31, 2009 and 2008 that are of material
significance, or have potential material significance, to the
Company.
Effective April 1, 2009, the Company adopted the Financial
Accounting Standards Boards, or FASB, updated guidance
related to subsequent events, which establishes general
standards of accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are
issued or are available to be issued. The updated guidance
initially required the disclosure of the date through which an
entity has evaluated subsequent events and the basis for that
datethat is, whether that date represents the date the
financial statements were issued or were available to be issued.
However, in February 2010, the FASB amended the guidance to
remove the requirement to disclose the date through which
subsequent events were evaluated. Adoption of the updated
guidance did not have a material impact on the Companys
consolidated results of operations or financial condition.
Effective January 1, 2010, the Company adopted the
FASBs updated guidance related to fair value measurements
and disclosures, which requires a reporting entity to disclose
separately the amounts of significant transfers in and out of
Level 1 and Level 2 fair value measurements and to
describe the reasons for the transfers. In addition, in the
reconciliation for fair value measurements using significant
unobservable inputs, or Level 3, a reporting entity should
disclose separately information about purchases, sales,
issuances and settlements (that is, on a gross basis rather than
one net number). The updated guidance also requires that an
entity should provide fair value measurement disclosures for
each class of assets and liabilities and disclosures about the
valuation techniques and inputs used to measure fair value for
both recurring and non-recurring fair value measurements for
Level 2 and Level 3 fair value measurements. The
guidance is effective for interim or annual financial reporting
periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances and settlements in
the roll forward activity in Level 3 fair value
measurements, which are effective for fiscal years beginning
after December 15, 2010 and for interim periods within
those fiscal years. Therefore, the Company has not yet adopted
the guidance with respect to the roll forward activity in
Level 3 fair value measurements. The adoption of this
guidance had no impact on the Companys disclosures,
consolidated results of operations or financial condition.
F-8
|
|
2.
|
Balance Sheet
Account Details
|
Intangible
Assets
Intangible assets consisted of the following at
December 31, 2009 and March 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
March 31, 2010
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Developed technologies
|
|
$
|
1,646
|
|
|
$
|
250
|
|
|
$
|
1,396
|
|
|
$
|
1,780
|
|
|
$
|
298
|
|
|
$
|
1,482
|
|
Purchased assay licenses
|
|
|
1,660
|
|
|
|
364
|
|
|
|
1,296
|
|
|
|
1,660
|
|
|
|
405
|
|
|
|
1,255
|
|
Patents and trademarks
|
|
|
1,060
|
|
|
|
202
|
|
|
|
858
|
|
|
|
1,060
|
|
|
|
226
|
|
|
|
834
|
|
VeriPsych
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189
|
|
|
|
8
|
|
|
|
181
|
|
In-process research and development
|
|
|
16,124
|
|
|
|
|
|
|
|
16,124
|
|
|
|
15,941
|
|
|
|
|
|
|
|
15,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,490
|
|
|
$
|
816
|
|
|
$
|
19,674
|
|
|
$
|
20,630
|
|
|
$
|
937
|
|
|
$
|
19,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The VeriPsych diagnostic test launched in March 2010 and
$0.2 million of in-process research and development was
allocated to this product and will be amortized over a period of
two years based on the estimated life of the test.
The aggregate intangible asset amortization expense as of
March 31, 2010 is as follows (in thousands):
|
|
|
|
|
|
|
2010
|
|
|
417
|
|
2011
|
|
|
555
|
|
2012
|
|
|
477
|
|
2013
|
|
|
461
|
|
2014
|
|
|
403
|
|
Thereafter
|
|
|
916
|
|
|
|
|
|
|
Total
|
|
$
|
3,229
|
|
|
|
|
|
|
|
Accrued
Expenses and Other Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
Accrued IPO costs
|
|
$
|
650
|
|
|
$
|
417
|
|
Accrued dividends
|
|
|
417
|
|
|
|
917
|
|
Accrued income taxes
|
|
|
683
|
|
|
|
282
|
|
Accrued bonus
|
|
|
726
|
|
|
|
325
|
|
Accrued salaries
|
|
|
445
|
|
|
|
117
|
|
Accrued royalties
|
|
|
287
|
|
|
|
283
|
|
Put liability
|
|
|
1,250
|
|
|
|
1,250
|
|
Other
|
|
|
597
|
|
|
|
538
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,055
|
|
|
$
|
4,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
Investments in
Unconsolidated Subsidiaries
|
Satoris,
Inc.
The Company owns a 12% investment interest in Satoris, Inc. The
Company follows FASB guidance for cost method investments for
valuing this investment. It is not practicable to estimate the
fair value of this investment
F-9
and no significant event has occurred to lead this investment to
be impaired, therefore the value of the investment at
March 31, 2010 has not changed. The carrying value of the
investment at December 31, 2009 and March 31, 2010 was
$1.7 million.
In March 2009, RBM entered into a letter of intent with Satoris
to convert a $0.4 million accounts receivable balance into
a $0.4 million promissory note. In addition, Satoris issued
to the Company an additional 3,239,189 shares of
Series B preferred stock valued at $1.2 million in
exchange for its involvement in certain testing services to be
conducted between RBM and a third party.
During the three months ended March 31, 2009 and 2010, the
Company recognized $1.2 million and zero, respectively, of
revenue related to a services agreement with Satoris.
Psynova
Neurotech Ltd.
Prior to September 18, 2009, the date the Company obtained
controlling interest, Psynova Neurotech Ltd., or Pysnova, the
Companys 47.9% ownership interest in Psynova was accounted
for as an equity investment. The Company recorded its 47.9% of
the losses of Psynova for the three months ended March 31,
2009 of $0.3 million in the condensed consolidated
statement of operations.
During the three months ended March 31, 2009, the Company
recognized $26,000 of revenue related to services performed for
Psynova.
On September 18, 2009, the Company purchased an additional
stake in Psynova pursuant to a share purchase agreement among
third-party investors in Psynova and RBM bringing RBMs
total investment in Psynova 77.6%.
On March 5, 2010, the Company entered into agreements with
the remaining shareholders of Psynova to purchase all of the
noncontrolling interest of Pysnova. The payments will be made in
cash and restricted stock for a total of £4.7 million.
The payments will be made in two tranches with the first tranche
in the amount of £3.7 million due on the Closing date,
which is no later than 30 days following the consummation
of the initial public offering or another date designated by the
Company. The second tranche in the amount of
£1.0 million is payable on or before the later of the
initial public offering date or 30 days following the first
commercial sale of a diagnostic test capable of distinguishing
among patients with schizophrenia, bipolar disorder and major
depression disorder. On the Closing date, the Company will
record the purchase of the additional interest ownership in
Psynova as an equity investment in accordance with FASB guidance
for purchases of additional ownership interests subsequent to
obtaining controlling interest.
|
|
4.
|
Line of Credit
and Long-Term Debt
|
The Company has a revolving line of credit with BBVA Compass
Bank, or Compass, for up to $9.0 million. Although monthly
principal payments are not required, any unpaid principal
balance is due and payable on the maturity date, which is
August 10, 2011. Substantially all of the Companys
assets have been pledged to secure the line of credit. The
balance drawn on the line was $3.5 million at
December 31, 2009 and March 31, 2010. The amount
available to borrow at March 31, 2010 was $2.3 million.
The terms of the agreement require the Company to provide
certain customary covenants for a credit agreement, including
certain financial covenants. The financial covenants require a
minimum tangible net worth of $6.5 million on a quarterly
basis, pro-forma debt service coverage not less than 1.35 to 1
on a rolling quarterly basis and not less than 1.5 to 1 on a
quarterly basis and a fixed charge coverage ratio of at least
1.5 to 1 on a rolling quarterly basis. The Company was in
compliance with all covenants as of March 31, 2010.
The Company has subordinated debt with Heartland Community Bank,
or Heartland, for $10.0 million. The subordinated debt is
secured by the equity ownership interest of RBM Holdings, LLC
and RBM Management Group, LLC in the Company. The total amount
of quarterly interest payments are held in an escrow account
with the bank. The outstanding balance in the escrow account of
$0.8 million at March 31, 2010 was included in
restricted cash on the condensed consolidated balance sheet.
Full payment of the accrued interest and unpaid principal
balance will be due on the termination date of
September 17, 2011.
F-10
The following table outlines the principal balance of the
long-term debt by agreement (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
Heartland subordinated debt
|
|
$
|
9,813
|
|
|
$
|
9,840
|
|
Revolving line of credit
|
|
|
3,482
|
|
|
|
3,484
|
|
August 13, 2008 promissory note
|
|
|
260
|
|
|
|
246
|
|
March 6, 2008 promissory note
|
|
|
185
|
|
|
|
172
|
|
Note payable assumed in Multiplex Biosciences acquisition
|
|
|
56
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
13,796
|
|
|
|
13,790
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
|
145
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
Total debt less current portion
|
|
$
|
13,651
|
|
|
$
|
13,642
|
|
|
|
|
|
|
|
|
|
|
|
Future minimum principal payments under the long-term debt as of
March 31, 2010 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Annual
|
|
|
|
Payment
|
|
|
|
Amounts
|
|
|
2010
|
|
|
542
|
|
2011
|
|
|
10,417
|
|
2012
|
|
|
3,623
|
|
2013
|
|
|
82
|
|
|
|
|
|
|
Total minimum payments
|
|
$
|
14,664
|
|
Less: interest portion
|
|
|
874
|
|
|
|
|
|
|
Present value of net minimum payments
|
|
|
13,790
|
|
Less: current portion of obligations
|
|
|
148
|
|
|
|
|
|
|
Long-term obligations
|
|
$
|
13,642
|
|
|
|
|
|
|
|
This table does not include the capital leases of
$0.1 million.
|
|
5.
|
Stock-Based
Compensation
|
The Companys 2007 Long-term Incentive Plan is described in
the annual financial statements contained elsewhere in this
registration statement.
The Company recorded stock-based compensation expense of $48,000
and $0.1 million for the three months ended March 31,
2009 and 2010, respectively.
F-11
The following table summarizes the stock option activity under
the 2007 Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Weighted Average
|
|
|
Contractual Life
|
|
|
Intrinsic Value
|
|
|
|
Number of Shares
|
|
|
Exercise Price
|
|
|
(in years)
|
|
|
(in thousands)
|
|
|
Outstanding at December 31, 2009
|
|
|
673,500
|
|
|
$
|
3.60
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
131,000
|
|
|
|
7.04
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(7,550
|
)
|
|
|
2.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2010
|
|
|
796,950
|
|
|
$
|
4.17
|
|
|
|
8.95
|
|
|
$
|
2,288
|
|
Vested and expected to vest at March 31, 2010
|
|
|
701,175
|
|
|
$
|
4.35
|
|
|
|
9.08
|
|
|
$
|
1,886
|
|
Exercisable at March 31, 2010
|
|
|
796,950
|
|
|
$
|
4.17
|
|
|
|
8.95
|
|
|
$
|
2,288
|
|
|
Total unrecognized stock-based compensation expense subject to
recognition in future periods $1.4 million at
March 31, 2010. This expense is expected to be recognized
over the weighted-average periods of 4.08 years at
March 31, 2010.
The assumptions used to estimate the fair value of the stock
options using the Black-Scholes option pricing model were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
Weighted-average fair value of stock options granted
|
|
$
|
2.85
|
|
|
$
|
4.37
|
|
Volatility factor
|
|
|
64.6
|
%
|
|
|
64.6
|
%
|
Risk-free interest rate
|
|
|
1.90
|
%
|
|
|
2.95
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life of options
|
|
|
6
|
|
|
|
6
|
|
|
Fair value of stock options grantedDue to the
absence of an active market for the Companys common stock,
the board of directors was required to determine the fair value
of the common stock for consideration in setting exercise prices
for the options granted and in valuing the options granted. In
determining fair value, Company management considered both
quantitative and qualitative factors including the rights,
preferences and liquidity of the Companys preferred and
common stock, current and projected operating and financial
performance, the status of new product development and financial
market conditions.
As the Companys common stock is not actively traded, the
determination of fair value involves assumptions, judgments and
estimates. If different assumptions were made, stock-based
compensation expense, net income and net income per share could
have been significantly different.
VolatilityAs the Company is not publicly traded and
therefore has no trading history, stock price volatility was
estimated by taking a blend of historical volatility of industry
peers of a similar size whose shares are publicly traded.
Risk-free interest rateThe risk-free interest rate
assumption was based on zero coupon U.S. Treasury
instruments whose term was consistent with the expected term of
the Companys stock option grants.
Dividend YieldThe assumed dividend yield was based
on the Companys expectation that no dividends will be paid
in the foreseeable future.
Expected life of options The expected life was
calculated using the simplified method allowed under
current accounting guidance. This method calculates the midpoint
between the vesting date and contractual termination date since
the Company does not have sufficient historical exercise data to
provide a reasonable basis upon which to estimate expected term.
F-12
|
|
6.
|
Commitments and
Contingencies
|
In March 2010, the Company amended its lease for its corporate
headquarters and laboratory in Austin, Texas to, among other
things, acquire additional space to accommodate its growth. The
lease amendment was effective March 1, 2010.
At March 31, 2010, future minimum lease payments for
non-cancelable operating leases were as follows (in thousands):
|
|
|
|
|
|
|
2010
|
|
$
|
278
|
|
2011
|
|
|
481
|
|
2012
|
|
|
549
|
|
2013
|
|
|
581
|
|
2014
|
|
|
617
|
|
2015
|
|
|
318
|
|
|
|
|
|
|
Total minimum payments
|
|
$
|
2,824
|
|
|
|
|
|
|
|
|
|
7.
|
Geographic
Information
|
The Company operates in one segment, using one measure of
profitability to manage its business. Sales for geographic
regions were based upon the customers location.
Distribution of revenues by country is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
Revenue by country:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
4,179
|
|
|
$
|
3,725
|
|
Germany
|
|
|
404
|
|
|
|
858
|
|
Japan
|
|
|
417
|
|
|
|
282
|
|
All other countries
|
|
|
830
|
|
|
|
751
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,830
|
|
|
$
|
5,616
|
|
|
|
|
|
|
|
|
|
|
|
The Companys effective tax rate was (29%) and 27% for the
first three months ended March 31, 2010 and 2009,
respectively. The effective tax rates for both periods are
different than the statutory rate due to tax benefits or expense
between U.S. and foreign taxes. The effective tax rate for the
first three months of 2010 reflects a benefit related to net
operating losses in the US and Germany and adjustments made to
properly reflect deferred tax liabilities.
The Company records liabilities related to uncertain tax
positions. The Company does not believe any uncertain tax
positions are pending that may have a material adverse effect on
our condensed consolidated financial statements as of
March 31, 2010.
|
|
9.
|
Related Party
Transactions
|
The Companys chairman of the board of directors is an
owner and director of The Biophysical Corporation, or
Biophysical. Biophysical has purchased testing services from the
Company totaling $0.1 million for the three months ended
March 31, 2009 and 2010. Accounts receivable due from
Biophysical were $0.2 million and $0.1 million as of
December 31, 2009 and March 31, 2010, respectively.
F-13
The Companys investment in Satoris is accounted for as a
cost method investment. The Company has recorded
$1.2 million and zero in revenue from Satoris for the three
months ended March 31, 2009 and 2010, respectively. Notes
receivable due from Satoris were $0.4 million
December 31, 2009 and March 31, 2010.
Psynova is a consolidated subsidiary of the Company. Prior to
September 18, 2009, Psynova was accounted for as an equity
method investment. The Company recorded revenues of $26,000 from
Psynova for the three months ended March 31, 2009.
On April 13, 2010, the Company paid $1.0 million in
accrued dividends to the
Series A-1
preferred stockholders. At March 31, 2010,
$0.9 million was in accrued expenses and other current
liabilities in the condensed consolidated balance sheet.
The Company has evaluated and disclosed subsequent events
through April 22, 2010, the date of issuance of the
financial statements, and is not aware of any other subsequent
event that would have a material impact on the accompanying
financial statements.
F-14
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Rules-Based
Medicine, Inc.:
We have audited the accompanying consolidated balance sheets of
Rules-Based Medicine, Inc. (the Company) and its
subsidiaries as of December 31, 2009 and 2008 as well as
the related consolidated statements of operations,
stockholders (deficit) equity and cash flows for the years
ended December 31, 2009, 2008 and 2007. These consolidated
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits
included consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we
express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
consolidated 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, the consolidated financial statements
present fairly, in all material respects, the financial position
of Rules-Based Medicine, Inc. and its subsidiaries as of
December 31, 2009 and 2008, including the results of its
operations and its cash flows for the years ended
December 31, 2009, 2008, and 2007 and are in conformity
with accounting principles generally accepted in the United
States of America.
As discussed in Note 5 to the accompanying consolidated
financial statements, the Company acquired a controlling
interest (77.6%) in Psynova Neurotech Ltd. during 2009.
/s/ PMB Helin Donovan, LLP
Austin, TX
March 12, 2010
F-15
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,536
|
|
|
$
|
7,049
|
|
Restricted cash
|
|
|
|
|
|
|
965
|
|
Accounts receivable
|
|
|
4,343
|
|
|
|
4,908
|
|
Related party receivable
|
|
|
84
|
|
|
|
27
|
|
Inventory, net
|
|
|
5,500
|
|
|
|
5,897
|
|
Deferred equity financing costs
|
|
|
|
|
|
|
1,232
|
|
Prepaid expenses and other assets
|
|
|
356
|
|
|
|
959
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
12,819
|
|
|
|
21,037
|
|
Property and equipment, net
|
|
|
2,099
|
|
|
|
2,766
|
|
Goodwill
|
|
|
4,884
|
|
|
|
4,884
|
|
Intangibles, net
|
|
|
2,703
|
|
|
|
19,674
|
|
Investments in unconsolidated affiliates
|
|
|
5,746
|
|
|
|
1,669
|
|
Income tax receivable
|
|
|
457
|
|
|
|
|
|
Related party note receivable
|
|
|
|
|
|
|
423
|
|
Other
long-term
assets
|
|
|
|
|
|
|
977
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
28,708
|
|
|
$
|
51,430
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders deficit
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
796
|
|
|
$
|
1,697
|
|
Accrued expenses and other current liabilities
|
|
|
1,545
|
|
|
|
3,955
|
|
Deferred revenue
|
|
|
2,183
|
|
|
|
1,373
|
|
Income tax payable
|
|
|
180
|
|
|
|
683
|
|
Accrued dividends
|
|
|
|
|
|
|
417
|
|
Capital leasescurrent portion
|
|
|
|
|
|
|
82
|
|
Current portion of
long-term
debt
|
|
|
160
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,864
|
|
|
|
8,352
|
|
Long-term
debtlong-term
portion
|
|
|
506
|
|
|
|
13,651
|
|
Capital
leaseslong-term
portion
|
|
|
|
|
|
|
76
|
|
Deferred income tax payable
|
|
|
1,087
|
|
|
|
4,073
|
|
Other
long-term
liabilities
|
|
|
1,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
7,707
|
|
|
|
26,152
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (see Note 12)
|
|
|
|
|
|
|
|
|
Series A-1
preferred stock, $0.001 par value; 8,475,231 shares
authorized; 7,485,231 shares issued and outstanding,
liquidation preference of $25.0 million at
December 31, 2008 and 2009
|
|
|
25,156
|
|
|
|
26,267
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock; $0.001 par value; 17,315,980 shares
authorized; 8,446,838 shares issued and outstanding at
December 31, 2008 and 2009
|
|
|
8
|
|
|
|
8
|
|
Additional paid-in capital
|
|
|
1,380
|
|
|
|
2,088
|
|
Accumulated other comprehensive income
|
|
|
13
|
|
|
|
5
|
|
Accumulated deficit
|
|
|
(5,556
|
)
|
|
|
(5,383
|
)
|
|
|
|
|
|
|
|
|
|
Total RBM stockholders deficit
|
|
|
(4,155
|
)
|
|
|
(3,282
|
)
|
Noncontrolling interest
|
|
|
|
|
|
|
2,293
|
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(4,155
|
)
|
|
|
(989
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
28,708
|
|
|
$
|
51,430
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
F-16
Rules-Based
Medicine, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
Pharmaceutical testing products and services revenues
|
|
$
|
13,037
|
|
|
$
|
21,669
|
|
|
$
|
24,641
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
4,868
|
|
|
|
8,590
|
|
|
|
9,985
|
|
Research and development
|
|
|
1,544
|
|
|
|
3,235
|
|
|
|
4,803
|
|
Sales and marketing
|
|
|
2,575
|
|
|
|
4,368
|
|
|
|
5,252
|
|
General and administrative
|
|
|
1,676
|
|
|
|
2,520
|
|
|
|
2,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
10,663
|
|
|
|
18,713
|
|
|
|
22,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
2,374
|
|
|
|
2,956
|
|
|
|
1,734
|
|
Equity in loss of Psynova
|
|
|
|
|
|
|
|
|
|
|
(997
|
)
|
Gain on re-measurement of Psynova
|
|
|
|
|
|
|
|
|
|
|
1,947
|
|
Interest income
|
|
|
115
|
|
|
|
245
|
|
|
|
42
|
|
Foreign currency gain (loss)
|
|
|
16
|
|
|
|
(43
|
)
|
|
|
(49
|
)
|
Interest expense
|
|
|
(80
|
)
|
|
|
(64
|
)
|
|
|
(289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
2,425
|
|
|
|
3,094
|
|
|
|
2,388
|
|
Provision for income taxes
|
|
|
433
|
|
|
|
1,218
|
|
|
|
708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,992
|
|
|
$
|
1,876
|
|
|
$
|
1,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less net loss attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
Net income attributable to RBM
|
|
$
|
1,992
|
|
|
$
|
1,876
|
|
|
$
|
1,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to preferred stockholders
|
|
|
598
|
|
|
|
1,441
|
|
|
|
1,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to RBM common stockholders
|
|
$
|
1,394
|
|
|
$
|
435
|
|
|
$
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
$
|
11
|
|
|
$
|
2
|
|
|
$
|
(8
|
)
|
Comprehensive income attributable to RBM
|
|
$
|
1,405
|
|
|
$
|
437
|
|
|
$
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to RBM common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.16
|
|
|
$
|
0.05
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
8,814,989
|
|
|
|
8,326,512
|
|
|
|
8,446,838
|
|
|
See accompanying notes
F-17
Rules-Based
Medicine, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Stockholders
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Noncontrolling
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Interest
|
|
|
(Deficit)
|
|
|
|
(In thousands, except share data)
|
|
|
Balance at December 31, 2006
|
|
|
990,000
|
|
|
$
|
1
|
|
|
|
9,010,000
|
|
|
$
|
9
|
|
|
$
|
4,442
|
|
|
$
|
(867
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,585
|
|
Repurchase and cancellation of Series A preferred stock
|
|
|
(990,000
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,430
|
)
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(901,000
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
(5,144
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,145
|
)
|
Preferred stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,972
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,972
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182
|
|
Net income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,992
|
|
|
|
|
|
|
|
|
|
|
|
1,992
|
|
Change in translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
8,109,000
|
|
|
$
|
8
|
|
|
$
|
195
|
|
|
$
|
(5,991
|
)
|
|
$
|
11
|
|
|
$
|
|
|
|
$
|
(5,777
|
)
|
Issuance of common stock, net of issuance costs
|
|
|
|
|
|
|
|
|
|
|
337,838
|
|
|
|
|
|
|
|
993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
993
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192
|
|
Preferred stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,441
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,441
|
)
|
Net income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,876
|
|
|
|
|
|
|
|
|
|
|
|
1,876
|
|
Change in translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
|
|
|
$
|
|
|
|
|
8,446,838
|
|
|
$
|
8
|
|
|
$
|
1,380
|
|
|
$
|
(5,556
|
)
|
|
$
|
13
|
|
|
|
|
|
|
$
|
(4,155
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251
|
|
Issuance of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
457
|
|
Preferred stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,528
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,528
|
)
|
Net income (loss) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,701
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
1,680
|
|
Change in translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
(8
|
)
|
Noncontrolling interest from Psynova
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,314
|
|
|
|
2,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
|
|
|
$
|
|
|
|
|
8,446,838
|
|
|
$
|
8
|
|
|
$
|
2,088
|
|
|
$
|
(5,383
|
)
|
|
$
|
5
|
|
|
$
|
2,293
|
|
|
$
|
(989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
F-18
Rules-Based
Medicine, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,992
|
|
|
$
|
1,876
|
|
|
$
|
1,680
|
|
Adjustments to reconcile net income to cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
465
|
|
|
|
737
|
|
|
|
1,103
|
|
Stock-based compensation expense
|
|
|
182
|
|
|
|
192
|
|
|
|
251
|
|
Equity in loss of Psynova
|
|
|
|
|
|
|
|
|
|
|
997
|
|
Gain on re-measurement of Psynova
|
|
|
|
|
|
|
|
|
|
|
(1,947
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,898
|
)
|
|
|
(668
|
)
|
|
|
(411
|
)
|
Prepaid expenses and other current assets
|
|
|
18
|
|
|
|
(72
|
)
|
|
|
(1,146
|
)
|
Related party receivable
|
|
|
(84
|
)
|
|
|
(60
|
)
|
|
|
57
|
|
Income tax receivable
|
|
|
|
|
|
|
(457
|
)
|
|
|
457
|
|
Note receivable
|
|
|
|
|
|
|
|
|
|
|
(26
|
)
|
Inventory
|
|
|
(2,046
|
)
|
|
|
(2,909
|
)
|
|
|
(399
|
)
|
Investment funded through services
|
|
|
(470
|
)
|
|
|
(868
|
)
|
|
|
(1,199
|
)
|
Accounts payable
|
|
|
274
|
|
|
|
(4
|
)
|
|
|
840
|
|
Income tax payable
|
|
|
180
|
|
|
|
|
|
|
|
503
|
|
Accrued expenses and other liabilities
|
|
|
290
|
|
|
|
(582
|
)
|
|
|
590
|
|
Deferred tax asset (liability)
|
|
|
239
|
|
|
|
461
|
|
|
|
(44
|
)
|
Deferred revenue
|
|
|
1,091
|
|
|
|
35
|
|
|
|
(798
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
233
|
|
|
$
|
(2,319
|
)
|
|
$
|
508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of assay licenses
|
|
$
|
(1,500
|
)
|
|
$
|
(160
|
)
|
|
$
|
|
|
Net cash paid for acquisition of Psynova
|
|
|
|
|
|
|
(4,409
|
)
|
|
|
(4,480
|
)
|
Net cash paid for acquisition of EDI
|
|
|
(300
|
)
|
|
|
|
|
|
|
|
|
Internally developed intangibles
|
|
|
|
|
|
|
|
|
|
|
(1,181
|
)
|
Purchase of property and equipment
|
|
|
(690
|
)
|
|
|
(1,454
|
)
|
|
|
(1,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
$
|
(2,490
|
)
|
|
$
|
(6,023
|
)
|
|
$
|
(6,857
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
$
|
|
|
|
$
|
993
|
|
|
$
|
|
|
Proceeds from issuance of preferred stock
|
|
|
23,360
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(5,145
|
)
|
|
|
|
|
|
|
|
|
Redemption of Series A preferred stock
|
|
|
(4,430
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuance of
long-term
debt
|
|
|
|
|
|
|
586
|
|
|
|
|
|
Proceeds from subordinated debt, net
|
|
|
|
|
|
|
|
|
|
|
9,813
|
|
Advance on line of credit, net
|
|
|
|
|
|
|
|
|
|
|
3,482
|
|
Payment for capital lease
|
|
|
|
|
|
|
|
|
|
|
(61
|
)
|
Payment of principal on
long-term
debt
|
|
|
(1,518
|
)
|
|
|
(83
|
)
|
|
|
(162
|
)
|
Deferred equity financing costs
|
|
|
|
|
|
|
|
|
|
|
(1,232
|
)
|
Creation of escrow for subordinated debt interest payments
|
|
|
|
|
|
|
|
|
|
|
(965
|
)
|
Payment of preferred stock dividends
|
|
|
(1,617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
$
|
10,650
|
|
|
$
|
1,496
|
|
|
$
|
10,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rates on cash and cash equivalents
|
|
|
11
|
|
|
|
2
|
|
|
$
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
$
|
8,404
|
|
|
$
|
(6,844
|
)
|
|
$
|
4,513
|
|
Cash and cash equivalents at the beginning of period
|
|
|
976
|
|
|
|
9,380
|
|
|
|
2,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of period
|
|
$
|
9,380
|
|
|
$
|
2,536
|
|
|
$
|
7,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
80
|
|
|
$
|
42
|
|
|
$
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
19
|
|
|
$
|
1,180
|
|
|
$
|
(216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Imputed
Series A-1
preferred stock dividend
|
|
$
|
354
|
|
|
$
|
1,441
|
|
|
$
|
1,528
|
|
Fixed assets acquired under capital leases
|
|
|
|
|
|
|
|
|
|
|
225
|
|
Fair value of assets acquired in acquisition
|
|
|
1,630
|
|
|
|
|
|
|
|
17,771
|
|
Liabilities assumed in acquisition
|
|
|
995
|
|
|
|
|
|
|
|
3,754
|
|
Warrants issued with debt
|
|
|
|
|
|
|
|
|
|
|
457
|
|
|
See accompanying notes
F-19
Rules-Based
Medicine, Inc.
|
|
1.
|
Organization and
Business Description
|
Rules-Based Medicine, Inc., or RBM or the Company, is a life
sciences company focused on the development and
commercialization of molecular diagnostic tests on novel
biomarker patterns, initially for the psychiatric market. RBM
also provides testing products and services to the
pharmaceutical, biotechnology and medical research industries.
Rules-Based Medicine was formed in 1998 as a wholly owned
subsidiary of the Luminex Corporation, or Luminex. From
inception through July 31, 2002, Rules-Based Medicine
operated as a research and development project. On
August 1, 2002, RBM was incorporated in Delaware and on
September 5, 2002, the Company purchased the Rules-Based
Medicine subsidiary from Luminex pursuant to an asset purchase
agreement.
In November 2006, RBM acquired Multiplex Biosciences, Inc., a
Delaware corporation, a provider of contract multiplex
immunoassay development and manufacturing services located in
Lake Placid, New York, to augment its assay development and kit
manufacturing capabilities.
In October 2007, RBM acquired the capital stock of
Experimentelle und diagnostische Immunologie GmbH, a German
company with limited liability, or EDI, a developer of human
organotypic cell culture test systems, including RBMs
TruCulture product.
In May 2008, RBM entered into an agreement with Psynova
Neurotech Ltd., or Psynova, to co-develop and commercialize a
blood-based test for the diagnosis of recent-onset
schizophrenia. In November 2008, as a result of Psynova
achieving certain clinical accuracy milestones with respect to
the recent-onset schizophrenia blood-based test, Psynova
exercised its rights to convert outstanding loans and interest
into Preferred A Ordinary shares and to require RBM to purchase
additional shares resulting in RBM owning a 47.9% equity
interest in Psynova. In September 2009, RBM purchased an
additional stake in Psynova pursuant to a share purchase and
sale agreement, or the Purchase Agreement, by and between Porton
Capital Inc., Porton Capital Technology funds, both third-party
investors in Psynova, and RBM for $5.5 million, bringing
RBMs total investment in Psynova to $9.8 million, or
77.6%, net of RBMs equity interest in the losses of
Psynova, resulting in Psynovas financial position and
results of operations being consolidated with RBMs as of
and for the year ended December 31, 2009.
|
|
2.
|
Liquidity and
Capital Resources
|
On September 18, 2009, pursuant to the Purchase Agreement
RBM purchased an additional stake of 21,718,126 shares of
Preferred A Ordinary Shares in Psynova. To acquire this
controlling interest, the Company issued subordinated debt in
the face amount of $5.0 million. The Company also has a
$9.0 million revolving line of credit with a
$3.5 million outstanding balance and cash and cash
equivalents of $7.0 million at December 31, 2009. In
addition, the Company amended its subordinated debt agreement on
December 31, 2009 and issued additional subordinated debt
of $5.0 million. The Companys acquisition of Psynova
has increased its debt and the Company has committed to fund a
diagnostic product commercialization plan. The Company believes
it has enough cash to operate for the coming year with its cash
on hand, cash to be generated from operations and from the
borrowing availability under its revolving line of credit. The
Company does intend, however, to raise additional equity funds
either through an initial public offering or private placement
during 2010 to fund its current and future diagnostic
initiatives.
|
|
3.
|
Significant
Accounting Policies
|
Principles
of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and the accounts of its wholly-owned and
majority-owned subsidiaries. The financial statements include
the accounts of the Company
F-20
and its subsidiaries, including Multiplex Biosciences, Inc., EDI
and Psynova, as of their respective dates of acquisition. The
Company has eliminated all intercompany balances and
transactions.
Segment
Reporting
In accordance with FASB guidance for disclosures by segment, the
Company has determined that it operates in one segment as it
only reports operating results on an aggregate basis to the
chief operating decision maker of the Company.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States,
or GAAP, requires management to make estimates and assumptions
that affect the reported amounts and disclosure of assets and
liabilities at the date of the financial statements as well as
the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those
estimates.
Foreign
Currency Translation
The functional currency of our foreign subsidiaries is
determined in accordance with authoritative guidance issued by
the Financial Accounting Standards Board, or FASB. Assets and
liabilities for those subsidiaries are translated at exchange
rates in effect at the balance sheet date. Income and expense
amounts are translated at the average monthly exchange rates for
those periods. The resulting translation adjustments are
recorded as a component of accumulated other comprehensive
income within stockholders equity. Foreign currency
translation gains were $11,000 and $2,000 for the years ended
December 31, 2007 and 2008, respectively. Foreign currency
translation losses were $8,000 for the year ended
December 31, 2009. Gains and losses from currency
transactions denominated in currencies other than the functional
currency are recorded as other income or expense on the
consolidated statements of operations. Foreign currency
transaction gains were $16,000 for the year ended
December 31, 2007. Foreign currency transaction losses were
$43,000 and $49,000 for the years ended December 31, 2008
and 2009, respectively.
Fair
Value of Financial Instruments
The carrying amounts of the financial instruments, including
cash equivalents, accounts receivable, accounts payable and
accrued liabilities, approximate their respective fair values,
due to the short-term nature of these instruments.
The fair values of the revolving line of credit, capital leases,
and
long-term
debt approximate their carrying amounts at December 31,
2008 and 2009.
Cash
and Cash Equivalents and Restricted Cash
All highly liquid investments with original maturities of three
months or less at the time of purchase are considered cash
equivalents. Restricted cash currently represents proceeds from
long-term
debt which is restricted for payment of interest on the debt.
Restricted cash is excluded from cash and cash equivalents and
is classified as current or non-current based on the period of
its intended utilization.
Financial
Instruments and Credit Risks
Financial instruments that potentially subject the Company to
credit risk include cash and cash equivalents, accounts
receivable and unbilled receivables from customers. Cash is
deposited in demand accounts in federally insured domestic
institutions to minimize risk. Although the balances in these
accounts exceed the federally insured limit from time to time,
the Company has not incurred losses related to these deposits.
Accounts receivable and unbilled receivables are generally
unsecured. The Company performs ongoing credit evaluations of
customers and generally does not require collateral. The Company
maintains reserves for potential credit losses on customer
accounts when deemed necessary. There were no allowances for
credit losses at December 31, 2008 or 2009.
F-21
The following is a summary of the Companys customers that
accounted for 10% or more of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
2009
|
|
|
|
Johnson & Johnson
|
|
|
11.2
|
%
|
|
|
4.8
|
%
|
|
|
|
|
|
The following is a summary of the Companys customers that
accounted for 10% or more of accounts receivable.
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2008
|
|
2009
|
|
Merck
|
|
|
8
|
%
|
|
|
16
|
%
|
Johnson & Johnson
|
|
|
15
|
%
|
|
|
5
|
%
|
Biophysical Corporation
|
|
|
15
|
%
|
|
|
4
|
%
|
Eli Lilly Company
|
|
|
5
|
%
|
|
|
12
|
%
|
|
Derivatives
A derivative is an instrument whose value is derived
from an underlying instrument or index such as a future,
forward, swap, option contract, or other financial instrument
with similar characteristics, including certain derivative
instruments embedded in other contracts, or embedded
derivatives, and for hedging activities. The Company has entered
into foreign currency futures contracts which are intended to
reduce the Companys exposure to currency price
fluctuations. These transactions do not meet the requirements to
be accounted for as hedges. The Company may engage in other
similar complex equity or debt transactions in the future, but
not with the intention to enter into derivative instruments.
Derivatives and embedded derivatives, if applicable, are
measured at fair value and marked to market through earnings, as
required by FASB. However, such new
and/or
complex instruments may have immature or limited markets. As a
result, the pricing models used for valuation often incorporate
significant estimates and assumptions, which may impact the
level of precision in the financial statements.
Property
and Equipment
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the related assets.
The estimated useful life is three to seven years for lab
equipment, two to seven years for furniture, fixtures and
leasehold improvements, five years for automobiles and three to
five years for computer and office equipment. Repairs and
maintenance and minor replacements are charged to expense as
incurred.
Inventory
Inventories consist of raw reagents and testing kits.
Inventories are stated at the lower of cost or market on a
first-in, first-out basis through the use of an inventory
valuation allowance. In order to assess the ultimate realization
of inventories, the Company is required to make judgments as to
future demand requirements compared to current or committed
inventory levels. Allowance requirements generally increase as
the projected demand requirement decreases due to market
conditions, technological and product life cycle changes.
Inventory
Reserves
The Company evaluates its inventories for excess quantities and
obsolescence. Inventories that are considered obsolete are
written off. Remaining inventory balances are adjusted to
approximate the lower of cost or market value. The valuation of
inventories at the lower of cost or market requires the use of
estimates as to the amounts of current inventories that will be
sold. These estimates are dependent on managements
assessment of current and expected orders from the
Companys customers.
F-22
Allowance
for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do
not bear interest. The Company records specific provisions for
individual accounts when management becomes aware of a
customers inability to meet its financial obligations to
the Company, such as in the case of bankruptcy filings or
deterioration in the customers operating results or
financial position. If circumstances related to a customer
change, the Companys estimates of the recoverability of
the receivables would be further adjusted. As of
December 31, 2008 and 2009, there was no allowance for
doubtful accounts. The Company has not provided a general
allowance as it has historically had immaterial amounts of
write-offs.
Intangible
Assets and Other Long-Lived Assets
Intangible assets consist of acquired patents, internally
developed technologies and in-process research and development.
For internally developed software, costs are capitalized once
technological feasibility has been established. Internally
developed software is amortized over the estimated beneficial
life of the asset. Acquired intangible assets are recorded at
fair value and amortized over the shorter of the contractual
life or the estimated useful life. The Company made one
acquisition in each of the years ending December 31, 2007
and 2009. See Note 5 for further discussion.
Intangible assets are continually monitored and are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of any such asset may not be
recoverable. The determination of recoverability is based on an
estimate of undiscounted cash flows expected to result from the
use of an asset and its eventual disposition. The estimate of
undiscounted cash flows is based upon, among other things,
certain assumptions about expected future operating performance,
growth rates and other factors. The Companys estimates of
undiscounted cash flows may differ from actual cash flows due
to, among other things, technological changes, economic
conditions, changes to our business model or changes in our
operating performance. If the sum of the undiscounted cash flows
is less than the carrying value of the asset, we recognize an
impairment charge, measured as the amount by which the carrying
value exceeds the fair value of the asset. The Company estimates
fair value by discounting the projected cash flows expected to
be generated by the applicable asset over their remaining useful
life.
Goodwill
Goodwill is tested for impairment on an annual basis in
accordance with the authoritative guidance for goodwill.
Additionally, goodwill is tested in the interim if events and
circumstances indicate that goodwill may be impaired. The events
and circumstances that are considered include business climate,
legal factors, operating performance indicators and competition.
Impairment of goodwill is evaluated using a two-step process.
The first step involves a comparison of the fair value of the
reporting unit with its carrying amount. If the carrying amount
of the reporting unit exceeds its fair value, the second step of
the process involves a comparison of the fair value and the
carrying amount of the goodwill of that reporting unit. If the
carrying amount of the goodwill of a reporting unit exceeds the
fair value of that goodwill, an impairment loss would be
recognized in an amount equal to the excess of carrying value
over fair value. If an event occurs that would cause a revision
to the estimates and assumptions used in analyzing the value of
the goodwill, the revision could result in a non-cash impairment
charge that could have a material impact on the financial
results.
Debt
Issuance Costs
The Company capitalizes all costs related to its issuance of
debt and amortizes those costs using the effective interest
method over the life of the related debt instruments.
Unamortized debt issuance costs were $1.0 million at
December 31, 2009 and are included in prepaid expenses and
other assets in the consolidated balance sheet. During the year
ended December 31, 2009, the Company amortized
$0.1 million of debt issuance costs, which were included in
interest expense in the consolidated statement of operations.
Comprehensive
Income
Comprehensive income consists of net income (loss) and other
comprehensive income, which includes certain changes in equity
during a period from transactions or other events and
circumstances from non-owner sources.
F-23
Cumulative foreign currency translation adjustments and
unrealized gains and losses from investments, net of taxes, are
reported in accumulated other comprehensive income in
stockholders equity.
Revenue
Recognition
Revenue is recognized when persuasive evidence of an agreement
exists, delivery has occurred, the fee is fixed and
determinable, and collection is probable. Such revenue
recognition generally occurs as the related service is
performed. Customer advances and amounts billed to customers in
excess of revenue recognized are recorded as deferred revenue.
Testing revenues and kit sales are recognized at the time the
testing service has been completed and the tests are delivered
and accepted by the customer. Kit product and TruCulture tube
sales are recognized when the kit and tube, respectively, are
shipped to customers.
Research
and Development
Research and development costs consist of amounts to expand our
existing product offerings and to develop, test and validate
molecular diagnostic tests. Such costs include research and
development performed by the Company and costs for research and
development services performed by consultants. Research and
development costs are expensed as incurred.
Advertising
Costs
The Company expenses advertising costs as incurred. Advertising
expenses were not significant for the years ended
December 31, 2007, 2008 and 2009.
Royalties
The Company pays royalties on certain testing services. Royalty
costs are included in cost of revenues and were
$0.3 million, $0.5 million and $0.6 million for
the years ended December 31, 2007, 2008 and 2009,
respectively.
Stock-Based
Compensation
The Company follows the authoritative guidance on share-based
payments that requires recognition of compensation costs for all
share-based payment awards made to employees based upon each
awards estimated grant date fair value. The Company
utilizes the Black-Scholes option-pricing model to determine the
fair value of stock option awards. Compensation cost is
recognized on a straight-line basis over the respective vesting
period of the award.
Prior to the establishment of the 2007 Long Term Incentive Plan,
or the 2007 Plan, the Company distributed to its employees
limited liability company interests in one of its stockholders,
RBM Management Group, as a means of incentivization. The Company
computes the grant date fair value of these limited liability
company interests and recognizes the related costs ratably over
the vesting period, which is typically five years. The
Companys board of directors determined the fair value of
these limited liability company interests on the grant date.
The Company recorded stock-based compensation expense of
$0.2 million, $0.2 million and $0.3 million for
the years ended December 31, 2007, 2008 and 2009,
respectively.
Income
Taxes
In the ordinary course of business, there are many transactions
for which the ultimate tax outcome is uncertain. The Company
accounts for income taxes in accordance with the FASB guidance
for accounting for income taxes. This statement prescribes the
use of the liability method whereby deferred tax asset and
liability account balances are determined based on differences
between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to
reverse. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be
realized.
In June 2006, FASB issued guidance which supplements the
guidance for accounting for income taxes. This guidance defines
the confidence level that a tax position must meet in order to
be recognized in the financial
F-24
statements. The Company regularly assesses uncertain tax
positions in each of the tax jurisdictions in which it has
operations and accounts for the related financial statement
implications. Unrecognized tax benefits are reported using the
two-step approach under which tax effects of a position are
recognized only if it is more-likely-than-not to be
sustained and the amount of the tax benefit recognized is equal
to the largest tax benefit that is greater than fifty percent
likely of being realized upon ultimate settlement of the tax
position. Determining the appropriate level of unrecognized tax
benefits requires the Company to exercise judgment regarding the
uncertain application of tax law. The amount of unrecognized tax
benefits is adjusted when information becomes available or when
an event occurs indicating a change is appropriate. Future
changes in unrecognized tax benefits requirements could have a
material impact on the results of operations.
As a result of the implementation of the FASB guidance, the
Company has not changed any of its tax accrual estimates. The
Company files U.S. federal and U.S. state tax returns.
The Company is generally no longer subject to tax examinations
relating to state tax returns for years prior to 1996.
On January 1, 2007, the Company adopted FASB issued
guidance that clarifies the accounting for uncertainty in income
taxes recognized in financial statements and requires the impact
of a tax position to be recognized in the financial statements
if that position is more likely than not of being sustained by
the taxing authority. The total amount of unrecognized tax
benefits as of December 31, 2008 was $43,000.
The recognition of unrecognized tax benefits is as follows (in
thousands):
|
|
|
|
|
|
|
December 31, 2008
|
|
$
|
43
|
|
Additions based on tax positions related to the current year
|
|
|
7
|
|
Decreases based on tax positions related to prior years
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
$
|
50
|
|
|
|
|
|
|
|
The Companys practice is to recognize interest
and/or
penalties related to income tax matters in income tax expense.
During the year ended December 31, 2009, the Company did
not recognize any interest or penalties.
A Texas tax law change relating to taxable margin became
effective for the Companys fiscal year ended
December 31, 2007. This tax, as defined under the law, is
computed on total gross revenues reduced by the greatest of
three defined amounts, rather than being based on federal
taxable income. The Texas margin tax is accounted for as an
income tax. For the years ended December 31, 2007, 2008 and
2009, the Company recorded state tax expense of
$0.1 million, $0.2 million and $0.1 million,
respectively.
Earnings
Per Share
The Company computes basic earnings per share available to
common stockholders using the weighted-average number of common
shares outstanding during the reporting period. The Company
adjusted diluted earnings per share for the after-tax impact of
incremental shares that would be available for issuance upon the
assumed exercise of stock options and for the shares that would
be issued upon the conversion of the convertible preferred stock.
A reconciliation of the number of the numerator and denominator
used in the calculation of basic and diluted earnings per share
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to RBM common stockholders
|
|
$
|
1,394
|
|
|
$
|
435
|
|
|
$
|
173
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
8,814,989
|
|
|
|
8,326,512
|
|
|
|
8,446,838
|
|
Basic and diluted net income (loss) per share
|
|
$
|
0.16
|
|
|
$
|
0.05
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
The following shares were excluded from the calculation of
dilutive earnings per share because their inclusion would have
been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Series A-1
preferred stock
|
|
|
7,485,231
|
|
|
|
7,485,231
|
|
|
|
7,485,231
|
|
Options to purchase common stock
|
|
|
|
|
|
|
276,000
|
|
|
|
673,500
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,485,231
|
|
|
|
7,761,231
|
|
|
|
8,358,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recently
Issued Accounting Pronouncements
In February 2008, the FASB issued guidance which delays the
effective date of adopting guidance for measuring the fair value
under GAAP for all non-financial assets and non-financial
liabilities, excluding those assets that are recognized or
disclosed at fair value on a recurring basis for fiscal years
beginning after November 15, 2008, and interim periods
within those fiscal years. The Company elected a partial
deferral of the fair value guidance under the provisions
associated with the measurement of fair value used when
evaluating goodwill, other intangible assets and other
long-lived assets for impairment. The Company is currently
evaluating the impact of this standard on its financial
statements.
In October 2009 FASB issued guidance for fair value measurements
and improving disclosures about fair value measurements. This
new guidance requires some new disclosures and clarifies some
existing disclosure requirements about fair value measurement.
The objective of the guidance is to improve these disclosures
and improve transparency in financial reporting. The guidance
now requires a reporting entity to (1) separately disclose
the amounts of significant transfers in and out of Level 1
and Level 2 fair value measurements and describe the
reasons for the transfers and (2) present separately information
about purchases, sales, issuances and settlements in the
reconciliation of fair value measurements. In addition, a
reporting entity needs to use judgment in determining the
appropriate classes of assets and liabilities for purposes of
reporting fair value measurement and the entity should provide
disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair
value measurements. This guidance is effective for interim and
annual reporting periods beginning after December 15, 2009,
except for disclosures about purchases, sales, issuances and
settlements in the
roll-forward
activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after
December 15, 2010 and for interim periods within those
fiscal years. The Company is currently evaluating the impact of
this standard on its financial statements.
In October 2009, the FASB issued guidance for
multiple-deliverable
revenue arrangements. This guidance requires an entity to use an
estimated selling price when
vendor-specific
objective evidence or acceptable third party evidence does not
exist for any products or services included in a
multiple-element
arrangement. The arrangement consideration should be allocated
among the products and services based upon their relative
selling prices, thus eliminating the use of the residual method
of allocation. This guidance also requires expanded qualitative
and quantitative disclosures regarding significant judgments
made and changes in applying this guidance. This guidance is
effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after
June 15, 2010. Early adoption and retrospective application
are also permitted. The Company is currently evaluating the
impact of adopting this new provision.
|
|
4.
|
Recently Adopted
Accounting Principles
|
In December 2007, the FASB issued guidance for noncontrolling
interests in consolidated financial statements. This guidance
establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary, and for the
deconsolidation of a subsidiary. Specifically, this guidance
clarifies that noncontrolling interests in a subsidiary should
be reported as equity in the consolidated financial statements.
The Company has adopted this guidance in the first quarter of
2009 and it did not have a material effect on the Companys
results of operations and financial position.
F-26
In December 2007, the FASB issued guidance which impacts the
accounting for business combinations. This guidance requires
changes in the measurement of the assets and liabilities to a
fair value method consistent with the guidance for fair value
measurements. The guidance also requires a change in accounting
for certain acquisition-related expenses and business
adjustments which no longer are considered part of the purchase
price. This guidance is effective for fiscal years beginning on
or after December 15, 2008 and was adopted by us on
January 1, 2009. The adoption of this statement had a
material impact on the Companys consolidated financial
statements primarily related to the acquisition of Psynova where
$0.1 million of acquisition costs were expensed and a gain
on re-measurement of $1.9 million was recognized.
In April 2008, the FASB issued guidance clarifying the
determination of the useful life of intangible assets. This
guidance amends the factors to be considered in developing
renewal or extension assumptions used to determine the useful
life of intangible assets. The intent of this guidance is to
improve the consistency between the useful life of an intangible
asset and the period of expected cash flows used to measure its
fair value. This guidance was effective for financial statements
in the first quarter of 2009. This guidance did not to have a
material impact on the Companys consolidated financial
statements, but the potential impact is dependent upon the
acquisitions of intangible assets in the future.
In March 2009, the FASB issued guidance clarifying accounting
for research and development assets acquired in an asset
acquisition. The guidance clarifies that all tangible and
intangible research and development assets acquired in an asset
acquisition shall be capitalized regardless if the assets have
future use and they will be considered indefinite-lived until
completion or abandonment of the associated research and
development activities. This guidance was adopted
January 1, 2009 and had a material impact on the
Companys consolidated financial statements related to the
acquisition of Psynova where $16.1 million was capitalized
as in-process research and development.
In April 2009, the FASB and the Accounting Principles Board
issued guidance about interim disclosures about value of
financial instruments that requires an entity to provide
disclosures about fair value of financial instruments in interim
financial information. The new guidance is to be applied
prospectively and is effective for interim and annual periods
ending after June 15, 2009 with early adoption permitted
for periods ending after March 15, 2009. The Company
adopted the new guidance in the quarter ended June 30,
2009. There was no impact on the condensed consolidated
financial statements as it relates only to additional
disclosures.
In May 2009, the FASB issued a standard that sets forth the
period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial
statements; the circumstances under which an entity should
recognize events or transactions occurring after the balance
sheet date in its financial statements; and the disclosures that
an entity should make about events or transactions that occurred
after the balance sheet date. This standard is effective for
interim and annual periods ending after June 15, 2009. The
Company adopted this standard in the quarter ended June 30,
2009 and it did not impact the consolidated financial results.
Management has evaluated subsequent events up to the date of its
issued financial statements.
In June 2009, FASB issued The FASB Accounting Standards
Codification, or the Codification, authorizing the Codification
as the sole source for authoritative guidance in accordance with
U.S. GAAP. The Codification is effective for financial
statements issued for reporting periods that end after
September 15, 2009. The position supersedes all accounting
standards in U.S. GAAP, aside from guidance issued by the
SEC.
In August 2009, the FASB issued guidance on measuring
liabilities at fair value, which provides clarification that in
circumstances where a quoted market price in an active market
for an identical liability is not available, a reporting entity
must measure fair value of the liability using one of the
following techniques: the quoted price of the identical
liability when traded as an asset; quoted prices for similar
liabilities or similar liabilities when traded as assets; or
another valuation technique, such as a present value technique
or the amount that the reporting entity would pay to transfer
the identical liability or would receive to enter into the
identical liability that is consistent with the provisions of
authoritative guidance. This statement becomes effective for the
first reporting period, including interim periods, beginning
after issuance. The Company adopted this statement in the year
ended December 31, 2009 and it did not have a material
impact on the results of operations.
F-27
The FASB issued a standard that established a framework for
measuring fair value in GAAP and clarified the definition of
fair value within that framework. This standard does not require
assets and liabilities that were previously recorded at cost to
be recorded at fair value or for assets and liabilities that are
already required to be disclosed at fair value. This standard
introduced, or reiterated, a number of key concepts which form
the foundation of the fair value measurement approach to be used
for financial reporting purposes. The fair value of the
Companys financial instruments reflects the amounts that
the Company estimates to receive in connection with the sale of
an asset or paid in connection with the transfer of a liability
in an orderly transaction between market participants at the
measurement date (exit price). This standard also established a
fair value hierarchy that prioritizes the use of inputs used in
valuation techniques into the following three levels:
Level 1quoted prices in active markets for identical
assets and liabilities.
Level 2observable inputs other than quoted prices in
active markets for identical assets and liabilities.
Level 3unobservable inputs.
The adoption of this standard did not have an effect on the
Companys financial condition or results of operations, but
it introduced new disclosures about how the Company values
certain assets and liabilities. Much of the disclosure is
focused on the inputs used to measure fair value, particularly
in instances where the measurement uses significant unobservable
(Level 3) inputs. As of December 31, 2008 and
2009, the Company did not have financial assets or liabilities
that would require measurement on a recurring basis. At
December 31, 2008 and 2009 all financial assets consisted
of cash and cash equivalents at financial institutions in the
United States.
5. Business
Combinations
Psynova
Neurotech Ltd.
In 2008, the Company made an initial investment of 47.9% in
Psynova for $4.9 million. On September 18, 2009, the
Company obtained a controlling interest, 77.6%, in Psynova by
purchasing 21,718,276 Preferred A Ordinary shares from
third-party investors in Psynova for $5.5 million in cash.
The total investment in Psynova by RBM was $9.8 million,
net of the equity in loss of Psynova at the acquisition date.
The purchase price was allocated to the assets acquired based on
the fair values at the acquisition date. The intangible assets
acquired were valued at $16.1 million. Management estimated
the fair values in accordance with accounting guidance for
business combinations that became effective January 1, 2009
and utilized the services of third-party valuation consultants.
An income-based approach was utilized in determining the
$16.1 million value of the intangible assets. The
multi-period excess earning methodology was utilized
incorporating managements forecasted results to calculate
expected cash flows attributable to the in-process research and
development. The discount rate applied to the expected cash
flows was derived using the internal rate of return analysis of
Psynova, plus a premium to account for the increased riskiness
of the in-process research and development above Psynova as an
entity.
In connection with the acquisition, the carrying amount of the
investment in Psynova prior to obtaining controlling interest
was revalued to fair value in the year ended December 31, 2009,
resulting in the Company recording a gain on re-measurement of
$1.9 million in its consolidated statement of operations.
The gain on re-measurement was a result of re-measuring the
Companys original equity investment in Psynova of 47.9% to
fair value at the date the Company acquired an additional 29.7%,
resulting in a controlling interest of 77.6%. The fair value of
the initial investment on the date of obtaining controlling
interest was calculated using the option-pricing model.
The financial results of Psynova are included in these financial
statements beginning on September 18, 2009, the date on
which control was acquired. The Company recognized
$0.3 million in revenue and $0.1 million in net loss
from Psynova for the year ended December 31, 2009.
An option pricing methodology was used to measure the fair value
of the noncontrolling interest of Psynova. The purchase price
paid to acquire shares from the third party investors, Porton
Capital, Inc. and Porton Capital Technology Funds, was used as
the fair value, which represented Level 1 inputs in accordance
with FASB guidance
F-28
for fair value measurements. The option pricing model was used
to value 100% of Psynova due to the existence of different
equity classes. The noncontrolling interest was calculated by
subtracting RBMs ownership of preferred shares from the
100% fair value of Psynova.
The following are the key inputs that were utilized in the
option pricing methodology:
a) The estimated fair value of Series A preferred shares of
£0.1550 was derived from RBMs acquisition of Porton
Capital, Inc. and Porton Capital Technology Funds shares.
b) The estimated volatility was determined to be 85% based
on historical volatilities of 24 publicly traded companies
within the medical diagnostics industry for a period of six
months, which is the estimated time to liquidity.
c) The estimated continuously compounded interest rate was
calculated to be 0.21% based on calculating the continuously
compounded equivalent of the six-month Treasury bill as of
September 2009.
d) The estimated time to liquidity of six months was based
on managements estimate regarding the duration until a
liquidity event for a hypothetical market participant.
The acquisition of Psynova resulted in a
step-up to
$16.1 million in the cost basis of the intangible assets as
compared to their fair value at the date of acquisition. The
difference between the $16.1 million balance of the
intangible assets acquired and the deductible tax basis and net
operating loss carryforwards available at Psynova based on
United Kingdom taxes was approximately $10.8 million. As a
result of the differences in the financial reporting and tax
basis at Psynova, the Company has established a deferred tax
liability of $3.0 million based on the 28% corporate tax
rate payable in the United Kingdom.
The purchase price was allocated as follows (in thousands):
|
|
|
|
|
|
|
Current assets
|
|
$
|
1,638
|
|
Property and equipment
|
|
|
9
|
|
Intangible assets
|
|
|
16,124
|
|
|
|
|
|
|
Total assets
|
|
|
17,771
|
|
|
|
|
|
|
Current liabilities
|
|
|
723
|
|
Deferred tax liability
|
|
|
3,031
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
3,754
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
14,017
|
|
|
|
|
|
|
Less: Fair value of non-controlling interest
|
|
|
2,314
|
|
Fair value of controlling interest
|
|
$
|
11,703
|
|
|
|
|
|
|
Less: Carrying amount of investment in Psynova
|
|
|
9,756
|
|
|
|
|
|
|
Gain on re-measurement
|
|
$
|
1,947
|
|
|
|
|
|
|
|
Experimentelle
und Diagnostiche Immunologic GmbH
On September 30, 2007, the Company acquired the capital
stock of Experimentelle und Diagnostiche Immunologic GmbH, or
EDI, for a purchase price of 0.7 million or
approximately $1.0 million. The purchase price was
comprised of three components: (a) a payment of
0.3 million upon the closing;
(b) 0.3 million payable on the one-year
anniversary of the closing of the transaction; and
(c) 250,000 shares of Class B limited liability
company interests of RBM Management Group, LLC upon closing in
lieu of 0.2 million in cash. The overall purchase
price was $2.4 million which included the put option
obligation, taxes paid on behalf of the seller and acquisition
costs. The purchase price was allocated to the assets acquired
based on estimated fair value at the date of acquisition. The
value of the intangible asset acquired was derived from the
present value of estimated royalties saved. The goodwill
represents the excess of the purchase price over the aggregate
fair value of the net
F-29
identifiable assets acquired. The Company acquired EDI due to
the immediate availability of product offerings that
complemented the Companys existing products.
The purchase price was allocated as follows (in thousands):
|
|
|
|
|
|
|
Current assets
|
|
$
|
454
|
|
Property and equipment
|
|
|
48
|
|
Intangible assets
|
|
|
1,045
|
|
Other assets
|
|
|
83
|
|
|
|
|
|
|
Total assets
|
|
|
1,630
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
458
|
|
Deferred income
|
|
|
108
|
|
Deferred tax liability
|
|
|
387
|
|
Notes payable
|
|
|
42
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
995
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
635
|
|
|
|
|
|
|
Cash paid
|
|
|
356
|
|
Purchase price payable
|
|
|
356
|
|
Acquisition costs
|
|
|
187
|
|
Put obligation issued
|
|
|
1,250
|
|
Taxes paid on behalf of the seller
|
|
|
282
|
|
|
|
|
|
|
Cost of acquisition
|
|
$
|
2,431
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,796
|
|
|
|
|
|
|
|
The operations of EDI have been included in the operations of
the Company since October 1, 2007. In 2007, pursuant to the
EDI purchase agreement, the Company provided the selling
shareholder of EDI an option to put its 250,000 Class B
limited liability company interests of RBM Management Group, LLC
back to the Company at $5.00 per share on the third anniversary
of the transaction. As a result, the Company credited
$1.25 million as a put obligation payable since the Company
guaranteed the payment of this contingent obligation.
Unaudited
Pro Forma Results of Operations for Business
Combinations
The following table presents the unaudited pro forma results of
operations for the years ended December 31, 2007, 2008 and
2009 as if the acquisitions had occurred at the beginning of
each period presented. The pro forma financial information is
for comparative purposes only and it is not indicative of what
actual results would have been if the acquisitions had taken
place at the beginning of each period presented or of future
results.
The following results are in thousands, except per share data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
EDI Pro Forma
|
|
|
December 31,
|
|
|
|
2007 as Reported
|
|
|
Adjustments
|
|
|
2007 Pro Forma
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Pro forma revenues
|
|
$
|
13,037
|
|
|
$
|
329
|
|
|
$
|
13,366
|
|
Pro forma net income (loss) attributable to RBM common
stockholders
|
|
$
|
1,394
|
|
|
$
|
(126
|
)
|
|
$
|
1,268
|
|
Pro Forma net income per share attributable to RBM common
stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.16
|
|
|
|
|
|
|
$
|
0.14
|
|
|
F-30
In the year ended December 31, 2007, the pro forma
adjustments for the EDI transaction included the addition of
revenues and costs for the EDI operations from January 1,
2007 through September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
Psynova Pro Forma
|
|
|
December 31, 2008
|
|
|
|
as Reported
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Pro forma revenues
|
|
$
|
21,669
|
|
|
$
|
(868
|
)
|
|
$
|
20,801
|
|
Pro forma net income (loss) attributable to RBM common
stockholders
|
|
$
|
435
|
|
|
$
|
(1,941
|
)
|
|
$
|
(1,506
|
)
|
Pro Forma net income (loss) per share attributable to RBM common
stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.05
|
|
|
|
|
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
Psynova Pro Forma
|
|
|
December 31, 2009
|
|
|
|
as Reported
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Pro forma revenues
|
|
$
|
24,641
|
|
|
$
|
(1,168
|
)
|
|
$
|
23,473
|
|
Pro forma net income (loss) attributable to RBM common
stockholders
|
|
$
|
173
|
|
|
$
|
(1,428
|
)
|
|
$
|
(1,255
|
)
|
Pro Forma net income (loss) per share attributable to RBM common
stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.02
|
|
|
|
|
|
|
$
|
(0.15
|
)
|
|
In the year ended December 31, 2008, the pro forma
adjustments for Psynova included the elimination of intercompany
revenues and costs, the elimination of interest earned on
amounts loaned to Psynova, interest expense assuming
$5.0 million of subordinated debt was acquired on
January 1, 2008, a 28% tax benefit on the loss from
RBMs equity interest in Psynova and a 34% tax benefit on
the interest expense. In the year ended December 31, 2009,
the pro forma adjustments for Psynova included the elimination
of intercompany revenues and costs, interest expense assuming
$5.0 million of subordinated debt was acquired on
January 1, 2008, a 28% tax benefit on the loss from
RBMs equity interest in Psynova and a 34% tax benefit on
the interest expense.
|
|
6.
|
Goodwill and
Other Intangible Assets
|
Goodwill
At December 31, 2008 and 2009, the Company had goodwill in
the amount of $4.9 million. Goodwill is comprised of
$3.0 million from the acquisition of Rules-Based Medicine
from Luminex in September 2002, $0.1 million from the
acquisition of Multiplex Biosciences, Inc. in October 2006 and
$1.8 million from the acquisition of EDI in September 2007.
F-31
Other
Intangible Assets
Intangible assets consisted of the following at
December 31, 2008 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2009
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Developed technologies
|
|
$
|
465
|
|
|
$
|
152
|
|
|
$
|
313
|
|
|
$
|
1,646
|
|
|
$
|
250
|
|
|
$
|
1,396
|
|
Purchased assay licenses
|
|
|
1,660
|
|
|
|
199
|
|
|
|
1,461
|
|
|
|
1,660
|
|
|
|
364
|
|
|
|
1,296
|
|
Patents and trademarks
|
|
|
1,045
|
|
|
|
116
|
|
|
|
929
|
|
|
|
1,060
|
|
|
|
202
|
|
|
|
858
|
|
In-process research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,124
|
|
|
|
|
|
|
|
16,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,170
|
|
|
$
|
467
|
|
|
$
|
2,703
|
|
|
$
|
20,490
|
|
|
$
|
816
|
|
|
$
|
19,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technologies in the amount of $0.5 million were
placed in service in 2004 and 2006 and will be amortized over a
life of 15 years. Purchased assay licenses in the amount of
$1.7 million were acquired from Luminex in 2007 and 2008
and are being amortized over a life of 10 years. Patents in
the amount of $1.0 million were acquired in the acquisition
of EDI in 2007 and are being amortized over a life of
12 years.
The Company capitalized $1.2 million of costs associated
with developed technologies in the year ended December 31,
2009, of which $0.6 million was placed in service during
the year ended December 31, 2009. The remaining
$0.6 million will be placed in service in the three months
ending March 31, 2010 for a life of five years.
In-process research and development of $16.1 million was
acquired in the business combination of Psynova and is an
indefinite-lived asset, which is not amortized. It will remain
an indefinite-lived asset until the completion or abandonment of
the research and development efforts.
The aggregate intangible asset amortization expense is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
528
|
|
2011
|
|
|
|
|
|
|
539
|
|
2012
|
|
|
|
|
|
|
539
|
|
2013
|
|
|
|
|
|
|
539
|
|
2014
|
|
|
|
|
|
|
481
|
|
Thereafter
|
|
|
|
|
|
|
924
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
3,550
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was $0.1 million, $0.3 million
and $0.3 million for the years ended December 31,
2007, 2008 and 2009, respectively.
F-32
|
|
7.
|
Property and
Equipment
|
Property and equipment consisted of the following at
December 31, 2008 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
Lab equipment
|
|
$
|
2,053
|
|
|
$
|
2,780
|
|
Office and computer equipment
|
|
|
825
|
|
|
|
1,447
|
|
Automobile
|
|
|
41
|
|
|
|
41
|
|
Leasehold improvements
|
|
|
532
|
|
|
|
579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,451
|
|
|
|
4,847
|
|
Less: accumulated depreciation
|
|
|
(1,352
|
)
|
|
|
(2,081
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
2,099
|
|
|
$
|
2,766
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $0.4 million, $0.4 million
and $0.7 million for the years ended December 31,
2007, 2008 and 2009, respectively. Equipment recorded under
capital leases was $0.2 million, with accumulated
amortization of $0.1 million, for the year ended
December 31, 2009. There were no capital leases prior to
January 1, 2009.
|
|
8.
|
Investments in
Unconsolidated Subsidiaries
|
Investments as of December 31, 2008 and 2009 consisted of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Satoris Series B preferred stock
|
|
$
|
470
|
|
|
$
|
1,669
|
|
Psynova Preferred A Ordinary Shares
|
|
|
5,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,746
|
|
|
$
|
1,669
|
|
|
|
|
|
|
|
|
|
|
|
Satoris,
Inc.
In June 2007, the Company entered into a services agreement with
Satoris, Inc., or Satoris, a development-stage company. Under
this agreement, the Company provided services to Satoris
including assay development and validation and biomarker pattern
validation. Payment of such services was made in cash and the
issuance of 1,270,270 shares of Satoris Series B
preferred stock representing $0.5 million in value. The
Company was also issued warrants to purchase 254,054 shares
of Series A preferred stock. The Company assigned no value
to the warrants.
In March 2009, RBM entered into a letter of intent with Satoris
to convert a $0.4 million accounts receivable balance into
a $0.4 million promissory note. In addition, Satoris issued
to the Company an additional 3,239,189 shares of
Series B preferred stock valued at $1.2 million in
exchange for its involvement in certain testing services to be
conducted between RBM and a third party. To the extent an
agreement is not entered into between RBM and the third-party,
Satoris will be reimbursed for certain amounts reimbursed by the
third-party to RBM, up to the issue amount of $1.2 million,
either in cash or shares of Series B preferred stock.
Pursuant to the letter of intent, in December 2009, RBM amended
its 2007 agreement with Satoris gaining clarity on field of use
and extending exclusive testing service provisions with Satoris
to five years.
The total investment in Satoris is less than 12% and as such has
been accounted for using the cost method.
During the years ended December 31, 2007, 2008 and 2009,
the Company recognized $0.8 million, $0.2 million and
$1.3 million, respectively, of revenue related to the
services agreement with Satoris. The Company recognized
$1.2 million in testing services for the year ended
December 31, 2009 related to the receipt of 3,239,189
Series B preferred stock mentioned above.
F-33
Psynova
Neurotech Ltd.
In May 2008, the Company entered into a co-development and
commercialization agreement with Psynova. Under the agreement,
Psynova agreed to provide material to the Company for the
purposes of conducting a research and development project. The
parties will collaborate in the development, validation,
obtaining of regulatory approval, manufacturing and marketing of
diagnostic immunoassays for schizophrenia arising from the
research and development project.
Pursuant to the initial terms, the Company may make an
investment of up to £2.7 million in Psynova by
providing loans or subscribing for shares in the capital of
Psynova.
In 2008, the Company loaned Psynova £0.7 million, or
$1.4 million, in cash and provided a credit toward its MAP
testing services of £0.5 million, or
$1.0 million. Interest on the outstanding amount of the
loan drawn by Psynova accrued at 8% per annum on a monthly basis
and was added to principal. In addition, Psynova granted the
Company the right to purchase 19,562,716 Preferred A Ordinary
Shares at £0.0869, or $0.13, per share. The Company also
granted Psynova the right to require the Company to purchase an
additional 19,562,716 Preferred A Ordinary Shares if the
milestones specified in the agreement occurred on or before
December 31, 2008.
On November 21, 2008, Psynova achieved certain clinical
accuracy milestones triggering the conversion of the outstanding
loan, accrued interest, and credit for testing services with the
Company into 15,558,003 Preferred A Ordinary Shares for
$2.4 million. In addition, Psynova exercised its right to
require the Company to purchase an additional
19,562,716 shares, which the Company paid for with
£0.9 million, or $1.3 million, in cash in
November 2008 and £0.9 million, or $1.2 million,
in credit toward future services in December 2008. At
November 21, 2008, the Company had invested a total of
£3.0 million, or $4.9 million, in Psynova equity
interests and owned 47.9% of the outstanding stock of Psynova.
The investment was accounted for using the equity method
beginning on December 1, 2008.
On September 18, 2009, the Company purchased an additional
stake of 21,718,276 shares of Preferred A Ordinary Shares
in Psynova pursuant to a share purchase agreement among
third-party investors in Psynova and RBM for $5.5 million,
bringing RBMs total investment in Psynova to
$9.8 million, or 77.6%, net of its equity in the loss of
Psynova. To acquire this controlling interest in Psynova, the
Company issued subordinated debt in the face amount of
$5.0 million. See Note 5 for further discussion.
During the years ended December 31, 2007, 2008 and 2009,
the Company recognized $47,000, $0.9 million and
$1.5 million, respectively, of revenue related to the
services agreement with Psynova.
|
|
9.
|
Line of Credit
and Long-Term Debt
|
On August 10, 2009, the Company entered into a revolving
line of credit with BBVA Compass Bank, or Compass, for up to
$9.0 million. The monthly interest is calculated at the
lesser of (i) the Compass Bank prime rate plus 0.375% and
(ii) the maximum rate which is the greater of the highest
rate allowed per law and the highest rate allowed in the Texas
Finance Code; the interest rate can never be less than 4% per
year. The line of credit also bears a 0.25% quarterly fee for
any unused portion of the line of credit. Interest is due and
payable monthly beginning one month after the loan date.
Although monthly principal payments are not required, any unpaid
principal balance is due and payable on the maturity date, which
is August 10, 2011. Substantially all of the Companys
assets have been pledged to secure the line of credit.
The balance drawn on the line was $3.5 million at
December 31, 2009. The amount available to borrow at
December 31, 2009 was $2.8 million. The maximum amount
available to borrow on the line of credit is determined to be
the sum of 85% of the Companys eligible accounts
receivable from domestic and Canadian accounts receivable, 90%
of the Companys eligible accounts receivable from
international and foreign accounts receivable covered by
receivable insurance, 70% of the Companys eligible
accounts receivable from international and foreign accounts
receivable of a domestic public company not covered by
receivable insurance not to exceed $0.5 million and 50% of
the Companys eligible accounts receivable from
international and foreign accounts receivable not covered by
receivable insurance not to exceed $0.5 million and 60% of
the value of eligible inventory provided that the outstanding
principal balance of all advances against eligible inventory
shall not at any time exceed the lesser of 150% of the
Companys eligible accounts receivable or $4.5 million.
F-34
The terms of the agreement require the Company to provide
certain customary covenants for a credit agreement, including
certain financial covenants. The financial covenants require a
minimum tangible net worth of $6.5 million on a quarterly
basis, pro-forma debt service coverage not less than 1.35 to 1
on a rolling quarterly basis and not less than 1.5 to 1 on a
quarterly basis during the quarter ended March 31, 2010 and
a fixed charge coverage ratio of at least 1.5 to 1 on a rolling
quarterly basis. The Company was in compliance with all
covenants as of December 31, 2009.
On September 17, 2009, the Company entered into a Loan and
Security Agreement for subordinated debt with Heartland
Community Bank, or Heartland, for $5.0 million in
connection with our acquisition of an additional stake of
21,718,276 Preferred A Ordinary Shares in Psynova. The
subordinated debt is secured by the equity ownership interest of
RBM Holdings, LLC and RBM Management Group, LLC in the Company.
The debt bears interest at a fixed rate of 8% per annum.
Quarterly interest payments of $0.1 million are due
beginning on December 17, 2009. The first draw on the debt
included $0.6 million that was deposited into an escrow
account with the bank from which the quarterly interest payments
will be made.
On December 31, 2009, the Company amended its Loan and
Security Agreement with Heartland to increase the subordinated
debt to $10.0 million to fund the launch of our VeriPsych
test and to support general working capital needs. The
additional $5.0 million of subordinated debt bears interest
at a fixed rate of 8.00% per annum and matures on
September 17, 2011. The additional subordinated debt is
secured by the equity ownership interest of RBM Holdings, LLC
and RBM Management Group, LLC in the Company. Quarterly interest
payments of $0.1 million are due beginning on
March 17, 2010. The first draw on the debt included
$0.5 million that was deposited into an escrow account with
the bank from which the quarterly interest payments will be made.
The outstanding balance in the escrow account of
$1.0 million at December 31, 2009 was included in
restricted cash on the consolidated balance sheet. Full payment
of the accrued interest and unpaid principal balance will be due
on the termination date of September 17, 2011.
Under the line of credit agreement with Compass, the Company
will be deemed in default of the agreement if the Company
defaults on its subordinated debt agreement with Heartland or if
there is a foreclosure on the pledge of the equity ownership
interest of RBM Holdings, LLC and RBM Management Group, LLC.
Under the Heartland subordinated debt agreement, the Company may
be deemed in default of the agreement if the Company defaults on
its line of credit agreement with Compass. Heartland has agreed
not to assert, collect, or enforce all, or any part of, the
amounts due from the Company under the subordinated loan
agreement without prior written consent of Compass.
On August 13, 2008, the Company entered into a promissory
note for $0.3 million with Stillwater National Bank and
Trust Company. The promissory note is secured by specific
lab and office equipment. Monthly principal and interest
payments are payable over a 60-month term beginning on
December 18, 2008. Advances under the note incur interest
at 6% per annum.
On March 6, 2008, the Company entered into a promissory
note for $0.3 million with Stillwater National Bank and
Trust Company. The promissory note is secured by specific
lab and office equipment. Monthly principal and interest
payments are payable over a 60-month term through March 6,
2013 and bears interest at 7% per annum.
In September 2007, the Company assumed notes payable upon its
acquisition of EDI. The note is unsecured and is due on demand.
This note, in the amount of $53,000, was paid in full during the
year ended December 31, 2009.
In October 2006, the Company assumed the $0.2 million note
payable upon its acquisition of Multiplex Biosciences, Inc. The
note is unsecured, is payable in monthly installments through
August 14, 2011 and bears interest at 4% per annum.
F-35
The following table outlines the principal balance of the
long-term
debt by agreement (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Heartland subordinated debt
|
|
$
|
|
|
|
$
|
9,813
|
|
Revolving line of credit
|
|
|
|
|
|
|
3,482
|
|
August 13, 2008 promissory note
|
|
|
317
|
|
|
|
260
|
|
March 6, 2008 promissory note
|
|
|
234
|
|
|
|
185
|
|
Note payable assumed in EDI acquisition
|
|
|
24
|
|
|
|
|
|
Note payable assumed in Multiplex Biosciences acquisition
|
|
|
91
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
666
|
|
|
|
13,796
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
|
160
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
Total debt less current portion
|
|
$
|
506
|
|
|
$
|
13,651
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the subordinated debt financing, the Company
issued debt at a discount. As a result of these contract
provisions, the subordinated debt balance at issuance was
adjusted as follows (in thousands):
|
|
|
|
|
|
|
Notional balance of subordinated note at issuance
|
|
$
|
10,000
|
|
Adjustments:
|
|
|
|
|
Discount for loan fees paid on subordinated note
|
|
|
(202
|
)
|
|
|
|
|
|
Subordinated note balance, net of unamortized discount
|
|
$
|
9,798
|
|
|
|
|
|
|
|
The subordinated debt balance on the consolidated balance sheet
as of December 31, 2009 is comprised of the following (in
thousands):
|
|
|
|
|
|
|
Notional balance of subordinated debt at December 31, 2009
|
|
$
|
10,000
|
|
Adjustments:
|
|
|
|
|
Unamortized discount
|
|
|
(187
|
)
|
|
|
|
|
|
Subordinated debt balance, net of unamortized discount at
December 31, 2009
|
|
$
|
9,813
|
|
|
|
|
|
|
|
Future minimum principal payments under the
long-term
debt are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Annual
|
|
|
|
Payment
|
|
|
|
Amounts
|
|
|
Years Ending December 31,
|
|
|
|
|
2010
|
|
|
722
|
|
2011
|
|
|
10,390
|
|
2012
|
|
|
3,621
|
|
2013
|
|
|
82
|
|
|
|
|
|
|
Total minimum payments
|
|
$
|
14,815
|
|
Less: interest portion
|
|
|
1,019
|
|
|
|
|
|
|
Present value of net minimum payments
|
|
|
13,796
|
|
Less: current portion of obligations
|
|
|
145
|
|
|
|
|
|
|
Long-term obligations
|
|
$
|
13,651
|
|
|
|
|
|
|
|
F-36
|
|
10.
|
Stockholders
Equity and Stock-Based Compensation
|
Common
Stock and Preferred Stock
As of December 31, 2008 and 2009, there were
8,446,838 shares of common stock outstanding.
On May 6, 2008, the Company sold 337,838 shares of
restricted common stock to a board member for $1.0 million
in cash. The terms of this common stock transaction allow the
Company to repurchase the unvested portion of the stock at the
price paid plus an 8% per annum yield. These shares of common
stock vest over a three-year period, with one-third vesting each
year, and there is no right to require the Company to repurchase
the shares. At the same time, our principal preferred
stockholder sold 143,943 shares of
Series A-1
preferred stock to the board member at a purchase price of
$3.4736 per share for aggregate consideration totaling
$0.5 million.
In connection with its initial capitalization, the Company
authorized and issued 990,000 shares of Series A
preferred stock with a par value of $0.001 on August 1,
2002. During the year ended December 31, 2007, the Company
paid $1.6 million in Series A preferred stock
dividends. In 2007, the Company redeemed all of the outstanding
Series A preferred stock for $4.4 million or $4.475
per share.
On October 12, 2007, the Company raised $25.0 million
through an issuance of 7,485,231 shares of
Series A-1
preferred stock. The net proceeds were $23.4 million after
issuance costs. The
Series A-1
preferred stockholders have voting rights equal to the number of
common shares the
Series A-1
preferred stock are convertible into. The
Series A-1
are convertible at a future date which is the earlier of a
qualified financing or October 12, 2012 at a conversion
rate based upon certain performance targets, subject to certain
anti-dilution adjustments. Dividends are payable to the
Series A-1
stockholders at an annual rate of 8% beginning two years after
issuance. At December 31, 2009, there were
$0.4 million of accrued and unpaid dividends. As required
by SEC guidance, the Company has imputed preferred stock
dividends and amortization of stock issuance costs of
$0.4 million, $1.4 million, and $1.5 million for
the years ended December 31, 2007, 2008 and 2009,
respectively.
In the event of any voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company,
Series A-1
preferred stock has liquidation preferences whereas the first
$25.0 million in liquidation proceeds will go to the
Series A-1
preferred stockholders. Any liquidation proceeds between
$25.0 million and $50.0 million will go to the common
stockholders. All liquidation proceeds in excess of
$50.0 million will be split approximately 35% to 45% to the
Series A-1
preferred stockholders and the remainder to the common
stockholders.
The
Series A-1
preferred stock has a contingent conversion ratio which is based
on the determined liquidation value of the Company on the date
of conversion. The
Series A-1
preferred stock is convertible into shares of common stock
between a range of 5,450,000 and 7,485,231 shares. There is
no beneficial conversion feature based on the contingent
conversion ratio.
The
Series A-1
preferred stock provides for a payment of $0.4 million in
the event the Company pays the $1.25 million put option
granted in the EDI purchase (see below for more details).
Preferred
Stock Classification
FASB establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of
both liabilities and equity. A mandatorily redeemable financial
instrument shall be classified as a liability unless the
redemption is required to occur only upon the liquidation or
termination of the reporting entity.
A financial instrument issued in the form of shares is
mandatorily redeemable if it embodies an unconditional
obligation requiring the issuer to redeem the instrument by
transferring its assets at a specified or determinable date (or
dates) or upon an event certain to occur. A financial instrument
that embodies a conditional obligation to redeem the instrument
by transferring assets upon an event not certain to occur
becomes mandatorily redeemableand, therefore, becomes a
liabilityif that event occurs, the condition is resolved,
or the event becomes certain to occur.
A holder of the
Series A-1
preferred stock has the right to require the Company to redeem
the preferred stock if the Company defaults on the payment of
dividends. Under FASB standards, the Companys
Series A-1
preferred
F-37
stock is not considered mandatorily redeemable. However, SEC
reporting requirements provide that any possible redemption
outside of the control of the Company requires the preferred
stock to be classified outside of permanent equity. Pursuant to
the Investors Rights Agreement dated October 12, 2007
by and among the Company and certain investors, or the
Investors Rights Agreement, upon a change of control in
connection with the sale of shares of the Companys
Series A-1
preferred stock, the
Series A-1
preferred stockholders can participate in a pro rata share of
any cash or non cash proceeds obtained.
The following shares of common stock are reserved for future
issuance at December 31, 2008:
|
|
|
|
|
|
|
Conversion of
Series A-1
preferred stock
|
|
|
7,485,231
|
|
Warrants outstanding
|
|
|
|
|
Stock option plan:
|
|
|
|
|
Issued and outstanding
|
|
|
276,000
|
|
Available for grant
|
|
|
544,749
|
|
|
|
|
|
|
|
|
|
8,305,980
|
|
|
|
|
|
|
|
The following shares of common stock are reserved for future
issuance at December 31, 2009:
|
|
|
|
|
|
|
Conversion of
Series A-1
preferred stock
|
|
|
7,485,231
|
|
Warrants outstanding
|
|
|
200,000
|
|
Stock option plan:
|
|
|
|
|
Issued and outstanding
|
|
|
673,500
|
|
Available for grant
|
|
|
147,249
|
|
|
|
|
|
|
|
|
|
8,505,980
|
|
|
|
|
|
|
|
Put
Option
On September 24, 2007, the Company entered into a put
option as part of its acquisition of EDI. The Company provided
the selling shareholder an option to put his 250,000 limited
liability company interests in RBM Management Group, LLC at
$5.00 per share at a date three years from the acquisition date
of EDI. The Company has guaranteed the payment of this
contingent obligation. As such, the full value of the put option
of $1.25 million has been recorded as a liability and
included in the acquisition costs of EDI. The full value of the
put option has been classified in current liabilities at
December 31, 2009.
Stock
Options
The 2007 Plan was adopted by RBMs board of directors.
Options granted under the 2007 Plan are not generally
transferable by the optionee and each option is exercisable
during the lifetime of the option only by such optionee. The
exercise price of incentive stock options granted under the 2007
Plan must be at least equal to the fair market value of the
shares on the date of the grant. With respect to any participant
who owns stock possessing more than 10% of the voting power of
all classes of the Companys outstanding capital stock, the
exercise price of any incentive stock option granted must equal
at least 110% of the fair market value on the grant date.
Prior to the adoption of the 2007 Plan, the Company provided
limited liability company interests in RBM Management Group, LLC
to its employees in lieu of stock options. RBM Management Group,
LLC holds 4,514,010 shares of common stock in the Company.
A majority of the limited issued liability company interests
vest 20% on the first anniversary of the vesting commencement
date with the remainder vesting ratably over the next
48 months, subject to continued service through each
applicable date. The expense related to these interests is
treated as a capital contribution and recorded as such in the
consolidated statements of stockholders equity. The
Company adopted the FASB accounting guidance for share-based
compensation expense beginning on January 1, 2006 using the
modified prospective approach for these awards.
F-38
The standard form of option agreement under the 2007 Plan
provides that 20% of the options pursuant to a grant will vest
on the first anniversary of the vesting commencement date with
the remainder vesting ratably over the next 48 months,
subject to continued service through each applicable date.
The total stock-based compensation expense was $0.2 million
$0.2 million and $0.3 million for the years ended
December 31, 2007, 2008 and 2009, respectively.
Total unrecognized stock-based compensation expense related to
unvested stock options and limited liability company interests
in RBM Management Group, LLC. subject to recognition in future
periods, was $0.8 million and $1.0 million at
December 31, 2008 and 2009, respectively. This expense is
expected to be recognized over the weighted-average periods of
4.57 and 5.13 years at December 31, 2008 and 2009,
respectively.
The assumptions used to estimate the fair value of the stock
options using the Black-Scholes option pricing model were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Weighted-average fair value of stock options granted
|
|
$
|
1.36
|
|
|
$
|
3.41
|
|
Volatility factor
|
|
|
60
|
%
|
|
|
65-73
|
%
|
Risk-free interest rate
|
|
|
2.71-4.47
|
%
|
|
|
1.68-3.33
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life of options
|
|
|
6
|
|
|
|
6
|
|
|
Fair value of stock options grantedDue to the
absence of an active market for the Companys common stock,
the board of directors was required to determine the fair value
of the common stock for consideration in setting exercise prices
for the options granted and in valuing the options granted. In
determining fair value, Company management considered both
quantitative and qualitative factors including the rights,
preferences and liquidity of the Companys preferred and
common stock, current and projected operating and financial
performance, the status of new product development and financial
market conditions.
As the Companys common stock is not actively traded, the
determination of fair value involves assumptions, judgments and
estimates. If different assumptions were made, stock-based
compensation expense, net income and net income per share could
have been significantly different.
VolatilityAs the Company is not publicly traded and
therefore has no trading history, stock price volatility was
estimated by taking a blend of historical volatility of industry
peers of a similar size whose shares are publicly traded.
Risk-free interest rateThe risk-free interest rate
assumption was based on zero coupon U.S. Treasury
instruments whose term was consistent with the expected term of
the Companys stock option grants.
Dividend YieldThe assumed dividend yield was based
on the Companys expectation that no dividends will be paid
in the foreseeable future.
Expected life of options The expected life was
calculated using the simplified method allowed under
current accounting guidance. This method calculates the midpoint
between the vesting date and contractual termination date since
the Company does not have sufficient historical exercise data to
provide a reasonable basis upon which to estimate expected term.
The fair value of the RBM Management Group, LLC limited
liability company interests granted was determined to be $0.85
per share in 2006 and 2007. There were no shares issued after
December 31, 2007.
F-39
The following table summarizes the stock option activity under
the 2007 Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Weighted Average
|
|
|
|
Available for Grant
|
|
|
Number of Shares
|
|
|
Exercise Price
|
|
|
Balance at December 31, 2007
|
|
|
820,749
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(301,000
|
)
|
|
|
301,000
|
|
|
$
|
2.85
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
25,000
|
|
|
|
(25,000
|
)
|
|
|
2.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
544,749
|
|
|
|
276,000
|
|
|
$
|
2.85
|
|
Options granted
|
|
|
(453,500
|
)
|
|
|
453,500
|
|
|
|
3.96
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
56,000
|
|
|
|
(56,000
|
)
|
|
|
2.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
147,249
|
|
|
|
673,500
|
|
|
$
|
3.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following summarizes information concerning outstanding and
exercisable options as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
Number
|
|
Remaining Contractual
|
|
Weighted Average
|
|
Number
|
|
Weighted Average
|
Exercise Price
|
|
Outstanding
|
|
Life in Years
|
|
Exercise Price
|
|
Exercisable
|
|
Exercise Price
|
|
$2.85
|
|
|
276,000
|
|
|
|
9.24
|
|
|
$
|
2.85
|
|
|
|
276,000
|
|
|
|
2.85
|
|
|
The following table summarizes information concerning
outstanding and exercisable options as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Remaining Contractual
|
|
|
Weighted Average
|
|
|
Number
|
|
|
Weighted Average
|
|
Exercise Price
|
|
Outstanding
|
|
|
Life in Years
|
|
|
Exercise Price
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
$2.85
|
|
|
553,500
|
|
|
|
8.76
|
|
|
$
|
2.85
|
|
|
|
553,500
|
|
|
$
|
2.85
|
|
$7.04
|
|
|
120,000
|
|
|
|
9.84
|
|
|
|
7.04
|
|
|
|
120,000
|
|
|
|
7.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
673,500
|
|
|
|
8.95
|
|
|
$
|
3.60
|
|
|
|
673,500
|
|
|
$
|
3.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2007 Plan contains a provision for early exercise of option
grants. At December 31, 2008 and 2009 the total options
vested were 2,875 and 93,075, respectively. The aggregate
intrinsic value of options vested and expected to vest was zero
at December 31, 2008 and $2.3 million at
December 31, 2009.
Warrants
In September 2009, a warrant to purchase 100,000 shares of
common stock at an exercise price of $9.00 per share was issued
in conjunction with the Companys subordinated debt
financing. The warrant was issued to the broker who arranged the
financing in September 2009. The warrant expires on
September 1, 2014.
In December 2009, warrants to purchase 100,000 shares of
common stock at an exercise price of $9.00 per share were
issued to affiliates of the broker in conjunction with the
Companys amendment to the subordinated debt financing. The
warrants expire on September 1, 2014.
The Company calculated the fair value of the warrants issued
with the subordinated debt financing using the Black-Scholes
valuation method. The amount assigned to the warrants is
allocated to this financial instrument based on its relative
fair value. The fair value of the warrants is included in debt
issuance costs and is being amortized as interest expense from
the date of issuance to the date of maturity.
F-40
|
|
11.
|
Defined
Contribution Plan
|
The Company maintains a defined contribution savings plan under
Section 401(k) of the Internal Revenue Code. This Plan
covers substantially all employees who meet minimum age and
service requirements and allows participants to defer a
percentage of their annual compensation as defined in the 2007
Plan. The 2007 Plan is funded through employee contributions.
The Companys only expenses relating to the 2007 Plan are
administrative costs, which are not significant.
|
|
12.
|
Commitments and
Contingencies
|
Leases
The Company has non-cancelable operating leases for office
space, testing equipment and office equipment. At
December 31, 2009, future minimum lease payments for
non-cancelable operating leases were as follows (in thousands):
|
|
|
|
|
|
|
2010
|
|
$
|
313
|
|
2011
|
|
|
260
|
|
2012
|
|
|
110
|
|
|
|
|
|
|
Total minimum payments
|
|
$
|
683
|
|
|
|
|
|
|
|
Rent expense for the years ended December 31, 2007, 2008
and 2009 was $0.3 million, $0.5 million and
$0.6 million, respectively.
Luminex
Settlement
The Company and Luminex entered into a Settlement, Release, and
Confidentiality Agreement on March 30, 2007 to settle
claims and litigation between the Company and Luminex. In
consideration for the release of all claims, the Company and
Luminex agreed to the following:
1. Payment to Luminex of $12.5 million, which
represents redemption of the preferred stock and accumulated
dividends owned by Luminex, purchase of additional Luminex
licenses, and repurchase of the common stock owned by Luminex.
2. Execution of an amendment to the Development and Supply
Agreement between the Company and Luminex.
The payment of the $12.5 million was made in October 2007.
The Amended Development and Supply Agreement added sixteen
diagnostic fields to allow RBMs commercialization of new
products and services.
The payment of the $12.5 million was recorded as follows
(in thousands):
|
|
|
|
|
|
|
Item
|
|
Amount
|
|
|
Redemption of Series A preferred stock
|
|
$
|
4,430
|
|
Dividend paid on Series A preferred stock
|
|
|
1,425
|
|
Repurchase of common stock
|
|
|
5,145
|
|
Purchase of Luminex assay licenses
|
|
|
1,500
|
|
|
|
|
|
|
|
|
$
|
12,500
|
|
|
|
|
|
|
|
In accordance with FASB accounting guidance for treasury stock,
the Company made an allocation of the repurchase price to the
stated and unstated consideration in addition to the common
stock. The excess of the repurchase price over the fair value
assigned to other components has been assigned to the repurchase
of the common stock.
F-41
Psynova
Commercialization Agreement
The Company and Psynova entered into a Co-Development and
Commercialization Agreement in which the Company has agreed to
undertake the commercialization of a diagnostic test. The
commercialization of this diagnostic test will require a future
financial commitment.
|
|
13.
|
Accrued Expenses
and Other Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Accrued IPO costs
|
|
$
|
|
|
|
$
|
650
|
|
Accrued bonus
|
|
|
610
|
|
|
|
726
|
|
Accrued salaries
|
|
|
313
|
|
|
|
445
|
|
Put liability
|
|
|
|
|
|
|
1,250
|
|
Other
|
|
|
622
|
|
|
|
1,229
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,545
|
|
|
$
|
4,300
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations and before provision
for income taxes for the years ended December 31, 2007,
2008 and 2009 is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Domestic
|
|
$
|
2,365
|
|
|
$
|
3,202
|
|
|
$
|
2,375
|
|
Foreign
|
|
|
60
|
|
|
|
(108
|
)
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,425
|
|
|
$
|
3,094
|
|
|
$
|
2,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of income tax expense and the amount computed
by applying the statutory federal income tax rate (34%) to
income before income taxes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Taxes computed at federal statutory rate
|
|
$
|
825
|
|
|
$
|
1,052
|
|
|
$
|
812
|
|
Increases in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes, net of federal benefit
|
|
|
73
|
|
|
|
120
|
|
|
|
66
|
|
Stock Based compensation
|
|
|
60
|
|
|
|
60
|
|
|
|
86
|
|
Investment in Psynova
|
|
|
|
|
|
|
|
|
|
|
(323
|
)
|
Other non-deductible expenses
|
|
|
10
|
|
|
|
9
|
|
|
|
61
|
|
Change in valuation allowance
|
|
|
(250
|
)
|
|
|
|
|
|
|
|
|
Research and development credit
|
|
|
(270
|
)
|
|
|
(151
|
)
|
|
|
(105
|
)
|
Other
|
|
|
(15
|
)
|
|
|
128
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
433
|
|
|
$
|
1,218
|
|
|
$
|
708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 and 2009, the Company had federal
research and development credit carryforwards of zero and
$0.1 million, respectively. Deferred income taxes reflect
the net tax effect of temporary differences
F-42
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Companys deferred
taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Inventory reserve
|
|
$
|
102
|
|
|
$
|
102
|
|
Deferred compensation
|
|
|
52
|
|
|
|
247
|
|
Tax credit carryforwards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
154
|
|
|
|
349
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities;
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
(452
|
)
|
|
|
(517
|
)
|
Intangibles
|
|
|
(169
|
)
|
|
|
(25
|
)
|
Depreciation
|
|
|
(276
|
)
|
|
|
(426
|
)
|
EDI Intangible
|
|
|
(318
|
)
|
|
|
(294
|
)
|
Other
|
|
|
(26
|
)
|
|
|
(129
|
)
|
Psynova intangibles
|
|
|
|
|
|
|
(3,031
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(1,241
|
)
|
|
|
(4,422
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(1,087
|
)
|
|
$
|
(4,073
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
15.
|
Geographic
Information
|
Distribution of revenues by country is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Revenue by country:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
9,237
|
|
|
$
|
14,608
|
|
|
$
|
16,767
|
|
United Kingdom
|
|
|
661
|
|
|
|
1,532
|
|
|
|
2,009
|
|
Switzerland
|
|
|
966
|
|
|
|
412
|
|
|
|
511
|
|
Japan
|
|
|
317
|
|
|
|
385
|
|
|
|
1,041
|
|
All other countries
|
|
|
1,856
|
|
|
|
4,732
|
|
|
|
4,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,037
|
|
|
$
|
21,669
|
|
|
$
|
24,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.
|
Related Party
Transactions
|
The Companys chairman of the board of directors is an
owner and director of The Biophysical Corporation, or
Biophysical. Biophysical has purchased testing services from the
Company totaling $0.5 million, $0.8 million, and
$0.5 million for the years ended December 31, 2007,
2008 and 2009, respectively. Accounts receivable due from
Biophysical were $0.6 million and $0.2 million as of
December 31, 2008 and 2009, respectively.
RBM Management Group, LLC is owned by officers and employees of
the Company and owns 4,514,010 shares of the Companys
common stock.
RBM Holdings, LLC is owned by officers of the Company and owns
3,594,990 shares of the Companys common stock.
The Companys investment in Satoris is accounted for as a
cost method investment. The Company has recorded
F-43
$0.8 million, $0.2 million and $1.3 million in
revenue from Satoris for the years ended December 31, 2007,
2008 and 2009, respectively. Accounts receivable due from
Satoris were $0.4 million and $0.4 million as of
December 31, 2008 and 2009, respectively.
Psynova is a consolidated subsidiary of the Company. Prior to
September 18, 2009, Psynova was accounted for as an equity
method investment. The Company recorded revenues of $47,000,
$0.9 million and $1.4 million from Psynova for the
years ended December 31, 2007, 2008 and 2009, respectively,
prior to the date of consolidation.
On March 5, 2010, the Company entered into agreements with
the remaining shareholders of Psynova to purchase all of the
noncontrolling interest of Pysnova. The payments will be made in
cash and restricted stock for a total of £4.7 million.
The payments will be made in two tranches with the first tranche
in the amount of £3.7 million due on the Closing date,
which is no later than 30 days following the consummation
of the initial public offering or another date designated by the
Company. The second tranche in the amount of
£1.0 million is payable on or before the later of the
initial public offering date or 30 days following the first
commercial sale of a diagnostic test capable of distinguishing
among patients with schizophrenia, bipolar disorder and major
depression disorder.
The Company has evaluated and disclosed subsequent events
through March 12, 2010, the date of issuance of the
financial statements, and is not aware of any other subsequent
event that would have a material impact on the accompanying
financial statements.
|
|
18.
|
Subsequent Events
(unaudited)
|
On March 23, 2010, the Company entered into a Fourth Amendment
to Lease Agreement with CFO2 Austin, LLC to expand its office
space. Beginning on March 1, 2010, the Company will assume 1,282
square feet of office space and on July 1, 2010, the Company
will assume an additional 19,147 square feet of office space. In
addition, the lease term has been extended to June 30, 2015. The
total lease payments over the term of the lease are $2.8 million.
F-44
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Psynova Neurotech
Limited:
We have audited the accompanying balance sheet of Psynova
Neurotech Limited (the Company) as of
August 31, 2009 and the related statements of operations,
stockholders equity, and cash flows for the year then
ended. The Companys management is responsible for these
financial statements. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our
opinion. In our opinion, the financial statements referred to
above presents fairly, in all material respects, the financial
position of Psynova Neurotech Limited as of August 31, 2009
and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles
generally accepted in the United States of America.
The statement of operations, stockholders equity and cash
flows for the period from Inception (August 1,
2005) to August 31, 2009 are unaudited. This
information has been included because the Company is a
development-stage company as of August 31, 2009. The
accumulated deficit during the development stage for the period
from date of inception to August 31, 2009 is
£4,053,000.
As discussed in note 1, on September 18, 2009,
Rules Based Medicine, Inc. became the controlling
shareholder of the Company.
/s/ PMB
Helin Donovan, LLP
Austin, TX
December 18, 2009
F-45
Psynova Neurotech
Limited
(A Development-Stage Company)
Balance Sheet
As of August 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In US Dollars
|
|
|
|
|
|
|
(Converted at End
|
|
|
|
|
|
|
of Period
|
|
|
|
In GB Pounds
|
|
|
Exchange Rate)
|
|
|
|
(In thousands, except share
|
|
|
|
and per share amounts)
|
|
|
|
|
|
|
(1 £ = $1.6275)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
£
|
631
|
|
|
$
|
1,027
|
|
Accounts receivable
|
|
|
265
|
|
|
|
431
|
|
Prepaid expenses and other assets
|
|
|
142
|
|
|
|
230
|
|
Total current assets
|
|
|
1,038
|
|
|
|
1,688
|
|
Intangible assets, net
|
|
|
9
|
|
|
|
15
|
|
Property and equipment, net
|
|
|
5
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
£
|
1,052
|
|
|
$
|
1,712
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
£
|
123
|
|
|
$
|
201
|
|
Accrued expenses and other current liabilities
|
|
|
97
|
|
|
|
158
|
|
Deferred revenue
|
|
|
237
|
|
|
|
386
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
457
|
|
|
|
745
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred A Ordinary shares: £0.0001 par values:
61,500,000 shares authorized; 60,354,111 shares issued
and outstanding
|
|
|
6
|
|
|
|
9
|
|
Ordinary shares; £0.0001 par value;
17,000,000 shares authorized; 12,903,000 shares issued
and outstanding
|
|
|
1
|
|
|
|
2
|
|
Additional paid-in capital
|
|
|
4,641
|
|
|
|
7,553
|
|
Accumulated deficit
|
|
|
(4,053
|
)
|
|
|
(6,597
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
595
|
|
|
|
967
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
£
|
1,052
|
|
|
$
|
1,712
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-46
Psynova Neurotech
Limited
(A Development-Stage Company)
Statements of
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
|
|
|
|
|
August 31, 2009
|
|
|
From Inception
|
|
|
|
|
|
|
In US Dollars
|
|
|
(August 1, 2005)
|
|
|
|
For the Year Ended
|
|
|
(Converted at End
|
|
|
to
|
|
|
|
August 31, 2009
|
|
|
of Period
|
|
|
August 31, 2009
|
|
|
|
In GB Pounds
|
|
|
Exchange Rate)
|
|
|
(In GB Pounds)
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
(1 £ =$1.6275)
|
|
|
(unaudited)
|
|
|
Revenues
|
|
£
|
120
|
|
|
$
|
196
|
|
|
$
|
120
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,834
|
|
|
|
2,985
|
|
|
|
3,877
|
|
General and administrative
|
|
|
145
|
|
|
|
236
|
|
|
|
561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,979
|
|
|
|
3,221
|
|
|
|
4,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,859
|
)
|
|
|
(3,025
|
)
|
|
|
(4,318
|
)
|
Interest and other income
|
|
|
7
|
|
|
|
11
|
|
|
|
35
|
|
Interest and other expense
|
|
|
(43
|
)
|
|
|
(71
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(1,895
|
)
|
|
|
(3,085
|
)
|
|
|
(4,326
|
)
|
Benefit for taxes
|
|
|
114
|
|
|
|
186
|
|
|
|
273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
£
|
(1,781
|
)
|
|
$
|
(2,899
|
)
|
|
|
£ (4,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-47
Psynova Neurotech
Limited
(A Development-Stage Company)
Statements of Stockholders Equity
For the Year Ended August 31, 2009 and for the Period
from Inception (August 1, 2005) through
August 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred A
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Ordinary Shares
|
|
|
|
|
|
Ordinary Shares
|
|
|
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Number of Shares
|
|
|
Amount
|
|
|
Number of Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
(unaudited)
|
|
|
|
(In thousands in GB Pounds, except share and share
amounts)
|
|
|
Beginning Balance (Inception)
|
|
|
|
|
|
£
|
|
|
|
|
|
|
|
£
|
|
|
|
£
|
|
|
|
£
|
|
|
|
£
|
|
|
Issuance of Preferred A Ordinary Shares at £0.056 per share
|
|
|
6,455,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
362
|
|
|
|
|
|
|
|
362
|
|
Issuance of Ordinary Shares
|
|
|
|
|
|
|
|
|
|
|
12,903,000
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Net loss from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(291
|
)
|
|
|
(291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2006
|
|
|
6,455,000
|
|
|
£
|
|
|
|
|
12,903,000
|
|
|
£
|
1
|
|
|
£
|
362
|
|
|
£
|
(291
|
)
|
|
£
|
72
|
|
Issuance of Preferred A Ordinary Shares at £0.067 per share
|
|
|
14,949,486
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
997
|
|
|
|
|
|
|
|
999
|
|
Net loss from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(706
|
)
|
|
|
(706
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2007
|
|
|
21,404,486
|
|
|
£
|
2
|
|
|
|
12,903,000
|
|
|
£
|
1
|
|
|
£
|
1,359
|
|
|
£
|
(997
|
)
|
|
£
|
365
|
|
Issuance of Preferred A Ordinary Shares at £0.079 per share
|
|
|
3,828,906
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
300
|
|
|
|
|
|
|
|
301
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
10
|
|
Net loss from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,275
|
)
|
|
|
(1,275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2008
|
|
|
25,233,392
|
|
|
£
|
3
|
|
|
|
12,903,000
|
|
|
£
|
1
|
|
|
£
|
1,669
|
|
|
£
|
(2,272
|
)
|
|
£
|
(599
|
)
|
Issuance of Preferred A Ordinary Shares at £0.087 per share
|
|
|
35,120,719
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
2,955
|
|
|
|
|
|
|
|
2,958
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
17
|
|
Net loss from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,781
|
)
|
|
|
(1,781
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2009
|
|
|
60,354,111
|
|
|
£
|
6
|
|
|
|
12,903,000
|
|
|
£
|
1
|
|
|
£
|
4,641
|
|
|
£
|
(4,053
|
)
|
|
£
|
595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-48
Psynova Neurotech
Limited
(A Development-Stage Company)
Statements of
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
|
|
|
|
|
August 31, 2009
|
|
|
|
|
|
|
|
|
|
In US Dollars
|
|
|
From Inception
|
|
|
|
For the Year Ended
|
|
|
(Converted at
|
|
|
(August 1, 2005)
|
|
|
|
August 31, 2008
|
|
|
End of Period
|
|
|
to August 31, 2009
|
|
|
|
in GB Pounds
|
|
|
Exchange Rate)
|
|
|
in GB Pounds
|
|
|
|
(In thousands in US dollars)
|
|
|
|
|
|
|
(1 £ =$1.6275)
|
|
|
(unaudited)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
£
|
(1,781
|
)
|
|
$
|
(2,899
|
)
|
|
£
|
(4,053
|
)
|
Adjustments to reconcile net loss to cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2
|
|
|
|
3
|
|
|
|
106
|
|
Stock-based compensation expense
|
|
|
17
|
|
|
|
27
|
|
|
|
27
|
|
Accrued interest on note payable
|
|
|
33
|
|
|
|
54
|
|
|
|
33
|
|
Stock or debt issued for services
|
|
|
850
|
|
|
|
1,383
|
|
|
|
1,350
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(265
|
)
|
|
|
(425
|
)
|
|
|
(265
|
)
|
Prepaid expenses and other current assets
|
|
|
(8
|
)
|
|
|
(15
|
)
|
|
|
(142
|
)
|
Accounts payable
|
|
|
55
|
|
|
|
89
|
|
|
|
123
|
|
Accrued expenses and other liabilities
|
|
|
(169
|
)
|
|
|
(275
|
)
|
|
|
97
|
|
Deferred revenue
|
|
|
237
|
|
|
|
386
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
£
|
(1,029
|
)
|
|
$
|
(1,672
|
)
|
|
£
|
(2,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of intellectual property
|
|
£
|
|
|
|
$
|
|
|
|
£
|
(112
|
)
|
Purchase of property and equipment
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
£
|
(2
|
)
|
|
$
|
(3
|
)
|
|
£
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of ordinary shares, net
|
|
£
|
|
|
|
$
|
|
|
|
£
|
1
|
|
Proceeds from issuance of debt
|
|
|
725
|
|
|
|
1,180
|
|
|
|
725
|
|
Proceeds from issuance of preferred stock, net
|
|
|
850
|
|
|
|
1,383
|
|
|
|
2,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
£
|
1,575
|
|
|
$
|
2,563
|
|
|
£
|
3,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
£
|
544
|
|
|
$
|
888
|
|
|
£
|
631
|
|
Cash and cash equivalents at the beginning of period
|
|
£
|
87
|
|
|
$
|
139
|
|
|
£
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of period
|
|
£
|
631
|
|
|
$
|
1,027
|
|
|
£
|
631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
£
|
43
|
|
|
$
|
70
|
|
|
£
|
43
|
|
Noncash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of debt to Preferred Ordinary A shares
|
|
£
|
1,258
|
|
|
$
|
2,044
|
|
|
£
|
1,258
|
|
|
F-49
|
|
1.
|
Business
Description and Significant Accounting Policies
|
Psynova Neurotech Limited, Psynova or the Company, is a
development-stage company in the business of performing
scientific research and development activities. The Company is a
leading neurological disorder diagnostic development company.
Psynova was founded in 2005 as a spin-off from the Cambridge
University Centre for Neuropsychiatric Research, or CCNR. On
September 18, 2009, Rules-Based Medicine, Inc., or RBM,
became the controlling shareholder of the Company and owns 77.6%
of the Companys outstanding shares.
Basis
of presentation
The accompanying financial statements were prepared using the
accounting principles generally accepted in the United States,
or US GAAP. These financial statements are presented on the
accrual basis of accounting in accordance with generally
accepted accounting principles in the United States of America
whereby revenues are recognized in the period earned and
expenses when incurred.
Development-Stage
Company
The Company is a development-stage company, as defined by the
Financial Accounting Standards Board, or FASB. The Company is
devoting substantially all of its present efforts in securing
and establishing a new business, and although operations have
commenced, an immaterial amount of revenue has been realized.
Nature
of Operations
The Company is a development-stage company and has not
experienced significant revenue since its formation. The
principal activities of the Company, from the beginning of the
development-stage, have been organizational matters, issuance of
stock, and product research and development.
The Company is subject to many risks associated with early-stage
businesses in the technology industry, including its ability to
raise capital, reliance on key persons, and uncertainties
surrounding market acceptance of the Companys products.
To date, the Company has experienced losses from its operations.
The Company anticipates that it will require additional capital
resources, including the net proceeds from additional equity or
debt financing transactions, to generate revenue and achieve
positive cash flows from operations. The Companys ability
to generate positive cash flows depends upon a variety of
factors, including the acceptance in the market for the
Companys products and various other factors, some of which
may be beyond the Companys control. There can be no
assurance that such financing transactions will be consummated
or that such revenue will be generated.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally acceptable in the United States,
or US GAAP, requires management to make estimates and
assumptions that affect the reported amounts and disclosure of
assets and liabilities at the date of the financial statements
as well as the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those
estimates.
Fair
Value of Financial Instruments
The carrying amounts of the financial instruments, including
cash equivalents, accounts receivable, accounts payable and
accrued liabilities, approximate their respective fair values,
due to the short-term nature of these instruments.
F-50
Cash
and Cash Equivalents and Restricted Cash
All highly liquid investments with original maturities of three
months or less at the time of purchase are considered cash
equivalents.
Financial
Instruments and Credit Risks
The Company operates outside the U.S. and maintains its
deposit accounts with financial institutions within the United
Kingdom. These deposit accounts are generally uninsured;
however, the Company has not experienced any losses in such
account and believes it is not exposed to any significant risks
on foreign deposit accounts. The total amount of potentially
uninsured foreign deposit accounts at August 31, 2009 is
£0.6 million.
Foreign
Currency Translation
The functional currency of the Company is the Great British
pound, or GBP (£). In accordance with SEC
Rule 3-20(a),
the Company has provided a convenience translation in
U.S. dollars ($) at the exchange rate as the most recent
balance sheet date (August 31, 2009). Therefore, all asset
and liability accounts and items in the statement of operations
and statement of cash flow were translated at the exchange rate
on the balance sheet date.
Property
and Equipment
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the related assets.
The estimated useful life is two to seven years for furniture
and fixtures and three to five years for computer and office
equipment. Repairs and maintenance and minor replacements are
charged to expense as incurred.
Intangible
Assets and Other Long-Lived Assets
Intangible assets are continually monitored and are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of any such asset may not be
recoverable. The determination of recoverability is based on an
estimate of undiscounted cash flows expected to result from the
use of an asset and its eventual disposition. The estimate of
cash flows is based upon, among other things, certain
assumptions about expected future operating performance, growth
rates and other factors. The Companys estimates of
undiscounted cash flows may differ from actual cash flows due
to, among other things, technological changes, economic
conditions, changes to our business model or changes in our
operating performance. If the sum of the undiscounted cash flows
is less than the carrying value of the asset, we recognize an
impairment charge, measured as the amount by which the carrying
value exceeds the fair value of the asset. The Company estimates
fair value by discounting the projected cash flows expected to
be generated by the applicable asset over their remaining useful
life.
Revenue
Recognition
Revenue is recognized when persuasive evidence of an agreement
exists, delivery has occurred, the fee is fixed and
determinable, and collection is probable. Such revenue
recognition generally occurs as the related service is
performed. Customer advances and billed amounts due from
customers in excess of revenue recognized are recorded as
deferred revenue.
The Company derives its revenues primarily from grants and is
recognized using the time and material method. Revenue is
recognized in the period in which the costs are incurred.
Deferred revenue represents amounts received from grants in
excess of revenues recognized.
Research
and Development
Research and development costs consist of amounts to develop,
test and validate diagnostic tests. Such costs include research
and development performed by the Company and costs for research
and development services performed by consultants. Research and
development costs are expensed as incurred.
F-51
Advertising
Costs
The Company expenses advertising costs as incurred. Advertising
expenses were not significant for the year ended August 31,
2009.
Stock-Based
Compensation
The Company follows the authoritative guidance on share-based
payments that requires recognition of compensation costs for all
share-based payment awards made to employees based upon each
awards estimated grant date fair value. The Company
utilizes the Black-Scholes option-pricing model to determine the
fair value of stock option awards. Compensation cost is
recognized on a straight-line basis over the respective vesting
period of the award.
Stock-based compensation expense was £17,000 for the year
ended August 31, 2009.
Income
Taxes
Significant judgment is required in determining our provision
for income taxes. In the ordinary course of business, there are
many transactions for which the ultimate tax outcome is
uncertain. The Company accounts for income taxes in accordance
with the FASB guidance for accounting for income taxes. This
guidance prescribes the use of the liability method whereby
deferred tax asset and liability account balances are determined
based on differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are
expected to reverse. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected
to be realized.
In June 2006, FASB issued guidance which supplements the
guidance for accounting for income taxes. This guidance defines
the confidence level that a tax position must meet in order to
be recognized in the financial statements. The Company regularly
assesses uncertain tax positions in each of the tax
jurisdictions in which it has operations and accounts for the
related financial statement implications. Unrecognized tax
benefits are reported using the two-step approach under which
tax effects of a position is recognized only if it is
more-likely-than-not to be sustained and the amount
of the tax benefit recognized is equal to the largest tax
benefit that is greater than fifty percent likely of being
realized upon ultimate settlement of the tax position.
Determining the appropriate level of unrecognized tax benefits
requires the Company to exercise judgment regarding the
uncertain application of tax law. The amount of unrecognized tax
benefits is adjusted when information becomes available or when
an event occurs indicating a change is appropriate. Future
changes in unrecognized tax benefits requirements could have a
material impact on the results of operations.
As a result of the implementation of the FASB guidance, the
Company has not changed any of its tax accrual estimates.
The Companys practice is to recognize interest
and/or
penalties related to income tax matters in income tax expense.
During the year ended August 31, 2009, the Company did not
recognize any interest or penalties.
Recently
Issued Accounting Pronouncements
In August 2009, the FASB issued guidance on measuring
liabilities at fair value, which provides clarification that in
circumstances where a quoted market price in an active market
for an identical liability is not available, a reporting entity
must measure fair value of the liability using one of the
following techniques: the quoted price of the identical
liability when traded as an asset; quoted prices for similar
liabilities or similar liabilities when traded as assets; or
another valuation technique, such as a present value technique
or the amount that the reporting entity would pay to transfer
the identical liability or would receive to enter into the
identical liability that is consistent with the provisions of
authoritative guidance. This statement becomes effective for the
first reporting period, including interim periods, beginning
after issuance. We will adopt this statement beginning in the
year ended August 31, 2010.
In February 2008, the FASB issued guidance which delays the
effective date of adopting guidance for measuring the fair value
under GAAP for all non-financial assets and non-financial
liabilities, excluding those assets that are
F-52
recognized or disclosed at fair value on a recurring basis for
fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years. The Company elected a partial
deferral of the fair value guidance under the provisions
associated with the measurement of fair value used when
evaluating goodwill, other intangible assets and other
long-lived assets for impairment. The Company is currently
evaluating the impact of this standard on its financial
statements.
|
|
2.
|
Recently Adopted
Accounting Principles
|
In April 2009, the FASB and the Accounting Principles Board
issued guidance about interim disclosures about value of
financial instruments that requires an entity to provide
disclosures about fair value of financial instruments in interim
financial information. The new guidance is to be applied
prospectively and is effective for interim and annual periods
ending after June 15, 2009 with early adoption permitted
for periods ending after March 15, 2009. We adopted the new
guidance in the quarter ended June 30, 2009. There was no
impact on the financial statements as it relates only to
additional disclosures.
In May 2009, the FASB issued a standard that sets forth the
period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial
statements; the circumstances under which an entity should
recognize events or transactions occurring after the balance
sheet date in its financial statements; and the disclosures that
an entity should make about events or transactions that occurred
after the balance sheet date. This standard is effective for
interim and annual periods ending after June 15, 2009. We
adopted this standard in the quarter ended June 30, 2009
and it did not impact the financial results. Management has
evaluated subsequent events up to the date of its issued
financial statements.
In June 2009, the FASB issued The FASB Accounting Standards
Codification, or the Codification, authorizing the Codification
as the sole source for authoritative guidance in accordance with
U.S. GAAP. The Codification is effective for financial
statements issued for reporting periods that end after
September 15, 2009. The position supersedes all accounting
standards in U.S. GAAP, aside from those issued by the SEC.
The FASB issued a standard that established a framework for
measuring fair value in GAAP and clarified the definition of
fair value within that framework. This standard does not require
assets and liabilities that were previously recorded at cost to
be recorded at fair value or for assets and liabilities that are
already required to be disclosed at fair value. This standard
introduced, or reiterated, a number of key concepts which form
the foundation of the fair value measurement approach to be used
for financial reporting purposes. The fair value of the
Companys financial instruments reflects the amounts that
the Company estimates to receive in connection with the sale of
an asset or paid in connection with the transfer of a liability
in an orderly transaction between market participants at the
measurement date (exit price). This standard also established a
fair value hierarchy that prioritizes the use of inputs used in
valuation techniques into the following three levels:
Level 1quoted prices in active markets for identical
assets and liabilities.
Level 2observable inputs other than quoted prices in
active markets for identical assets and liabilities.
Level 3unobservable inputs.
The adoption of this standard did not have an effect on the
Companys financial condition or results of operations, but
it introduced new disclosures about how the Company values
certain assets and liabilities. Much of the disclosure is
focused on the inputs used to measure fair value, particularly
in instances where the measurement uses significant unobservable
(Level 3) inputs. As of August 31, 2009, the
Company did not have financial assets or liabilities that would
require measurement on a recurring basis. At August 31,
2009 all financial assets consisted of cash and cash equivalents
at financial institutions in the United Kingdom.
F-53
|
|
3.
|
Other Intangible
Assets
|
Intangible assets consisted of the following at August 31,
2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Intellectual property
|
|
£
|
112
|
|
|
£
|
103
|
|
|
£
|
9
|
|
|
The aggregate intangible asset amortization expense is as
follows (in thousands):
|
|
|
|
|
|
|
2010
|
|
|
1
|
|
2011
|
|
|
1
|
|
2012
|
|
|
1
|
|
2013
|
|
|
1
|
|
2014
|
|
|
1
|
|
Thereafter
|
|
|
4
|
|
|
|
|
|
|
Total
|
|
£
|
9
|
|
|
|
|
|
|
|
|
Amortization expense was £1,000 for the year ended
August 31, 2009.
|
|
4.
|
Property and
Equipment
|
Property and equipment consisted of the following at
August 31, 2009 (in thousands):
|
|
|
|
|
|
|
Office and computer equipment
|
|
£
|
9
|
|
Less accumulated depreciation
|
|
|
(4
|
)
|
|
|
|
|
|
Property and equipment, net
|
|
£
|
5
|
|
|
|
|
|
|
|
|
Depreciation expense was £1,000 for the year ended
August 31, 2009.
|
|
5.
|
Stockholders
Equity and Stock-Based Compensation
|
Ordinary
and Preferred Ordinary Shares
As of August 31, 2009, 17,000,000 Ordinary shares were
authorized, of which 12,903,000 were issued and outstanding.
As of August 31, 2009, 61,500,000 Preferred Ordinary A
shares were authorized, of which 60,354,111 were issued and
outstanding.
In the event of a disposition, the Preferred Ordinary
shareholders will receive a sum equal to 4% per annum of the
subscription price paid for the shares accruing day to day from
the date of issuance of those shares plus the amount equal to
the subscription price paid for the shares.
The Preferred Ordinary shareholders have the same voting rights
as the Ordinary shareholders.
The Company received approximately £1.2 million in
loans and credit for services from RBM in 2008 convertible into
Preferred A Ordinary shares at £0.0869 per share, of which
£0.7 million was funded in cash and
£0.5 million as a credit toward future services from
RBM. Interest on the outstanding amount of the facility accrued
at 8% per annum on a monthly basis and was added to principal.
At the same time, the Company granted RBM the right to purchase
19,562,716 Preferred A Ordinary Shares at
F-54
£0.0869 per share, while RBM granted the Company the right
to require RBM to purchase the above shares if certain
milestones are met on or prior to December 31, 2008.
In November 2008, the Company achieved the milestones required
in connection with triggering the conversion of the then
outstanding loan facility and accrued interest into 15,558,003
Preferred A Ordinary shares. At the same time, the Company
exercised the right to require RBM to purchase an additional
19,562,716 Preferred A Ordinary Shares at £0.0869 per
share, which was paid with £0.9 million in cash and
£0.9 million in a credit toward future services.
Stock
Options
The stock option plan was adopted by the board of directors.
Options granted under the plan are not generally transferable by
the optionee and each option is exercisable during the lifetime
of the optionee only by such optionee.
The Company adopted the FASB accounting guidance for share-based
compensation expense beginning on January 1, 2006 using the
modified prospective approach for these awards.
The standard form of option agreement under the plan provides
that options will vest immediately as the options granted
to-date have been for services previously performed.
The total unrecognized stock-based compensation expense related
to unvested stock options and restricted stock and subject to
recognition in future periods was zero at August 31, 2009.
The assumptions used to estimate the fair value of the stock
options using the Black-Scholes option pricing model were as
follows:
|
|
|
|
|
|
|
Weighted-average fair value of stock options granted
|
|
£
|
0.07
|
|
Volatility factor
|
|
|
60
|
%
|
Risk-free interest rate
|
|
|
4
|
%
|
Dividend yield
|
|
|
0
|
%
|
Expected life of options
|
|
|
6
|
|
|
|
Fair value of stock options grantedDue to the
absence of an active market for the Companys ordinary
shares, the board of directors was required to determine the
fair value of the ordinary shares for consideration in setting
exercise prices for the options granted and in valuing the
options granted. In determining fair value, Company management
considered both quantitative and qualitative factors including
the rights, preferences and liquidity of the Companys
preferred and ordinary shares, current and projected operating
and financial performance, the status of new product development
and financial market conditions.
As the Companys ordinary shares are not actively traded,
the determination of fair value involves assumptions, judgments
and estimates. If different assumptions were made, stock-based
compensation expense, net loss and net loss per share could have
been significantly different.
VolatilityAs the Company is not publicly traded and
therefore has no trading history, stock price volatility was
estimated by taking a blend of historical volatility of industry
peers of a similar size whose shares are publicly traded.
Risk-free interest rateThe risk-free interest rate
assumption was based on zero coupon U.S. Treasury
instruments whose term was consistent with the expected term of
the Companys stock option grants.
Dividend YieldThe assumed dividend yield was based
on the Companys expectation that no dividends will be paid
in the foreseeable future.
Expected life of options The expected life was
calculated using the simplified method allowed under
current accounting guidance. This method calculates the midpoint
between the vesting date and contractual termination
F-55
date since the Company does not have sufficient historical
exercise data to provide a reasonable basis upon which to
estimate expected term.
The following table summarizes the stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Weighted Average
|
|
|
|
Available for Grant
|
|
|
Number of Shares
|
|
|
Exercise Price
|
|
|
Balance at August 31, 2008
|
|
|
2,565,087
|
|
|
|
1,248,552
|
|
|
£
|
0.07
|
|
Options granted
|
|
|
(561,105
|
)
|
|
|
561,105
|
|
|
|
0.09
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
597,230
|
|
|
|
(597,230
|
)
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2009
|
|
|
2,601,212
|
|
|
|
1,212,427
|
|
|
£
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following summarizes information concerning outstanding and
exercisable options as of August 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Weighted Average
|
|
|
Number
|
|
|
Weighted Average
|
|
Exercise Price
|
|
Outstanding
|
|
|
Contractual Life in Years
|
|
|
Exercise Price
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
£0.070.09
|
|
|
1,212,427
|
|
|
|
8.60
|
|
|
|
£0.07
|
|
|
|
1,212,427
|
|
|
|
£0.07
|
|
|
The Company operates a defined contribution pension scheme. The
Company funded £6,000 into the defined pension plan in the
year ended August 31, 2009.
A reconciliation of income tax expense and the amount computed
by applying the statutory federal income tax rate (28%) to
income before income taxes is as follows (in thousands):
|
|
|
|
|
|
|
Taxes (benefit) computed at federal statutory rate
|
|
£
|
(530
|
)
|
Increases in taxes resulting from:
|
|
|
|
|
Stock Based compensation
|
|
|
5
|
|
Change in valuation allowance
|
|
|
525
|
|
Research and development credit
|
|
|
(114
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
Total
|
|
£
|
(114
|
)
|
|
|
|
|
|
|
|
F-56
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys deferred taxes are as follows:
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
Capital allowance in advance of depreciation
|
|
£
|
(1
|
)
|
Lossesasset
|
|
|
977
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
976
|
|
Valuation allowance
|
|
|
(976
|
)
|
|
|
|
|
|
Net deferred tax asset
|
|
£
|
|
|
|
|
|
|
|
|
|
The Company has an operating loss carryforward of
£3.5 million.
|
|
8.
|
Related Party
Transactions
|
One of the Companys directors, Dr. P. B. Rodgers is a
director and shareholder in Ithaka Life Sciences Limited. Ithaka
Life Sciences Limited provided services to the Company in the
amount of £36,000 for the year ended August 31, 2009.
During 2008, RBM and the Company entered into a Co-Development
and Commercialization Agreement. The parties have agreed that
the Company will provide the material to RBM for the purposes of
conducting a research and development project.
RBM will undertake the research and development project
specifically utilizing the material to be supplied by the
Company, and the parties will collaborate in relation to the
development, validation, obtaining of regulatory approval,
manufacturing and marketing of diagnostic immunoassays for
schizophrenia arising from the research and development project.
The Company received £1.2 million in loans and credit
for services from RBM in 2008 convertible into Preferred A
Ordinary shares at £0.0869 per share, of which
£0.7 million was funded in cash and
£0.5 million as a credit toward future services from
RBM. Interest on the outstanding amount of the facility accrued
at 8% per annum on a monthly basis and was added to principal.
At the same time, the Company granted RBM the right to purchase
19,562,716 Preferred A Ordinary Shares at £0.0869 per
share, while RBM granted the Company the right to require RBM to
purchase the above shares if certain milestones are met on or
prior to December 31, 2008.
In November 2008, the Company achieved the milestones required
in connection with triggering the conversion of the then
outstanding loan facility and accrued interest into 15,558,003
Preferred A Ordinary shares. At the same time, the Company
exercised the right to require RBM to purchase an additional
19,562,716 Preferred A Ordinary Shares at £0.0869 per
share, which was paid with £0.9 million in cash and
£0.9 million in a credit toward future services.
Rules-Based Medicine, Inc. is a shareholder of the Company and
the Company received services from Rules-Based Medicine, Inc. in
the amount of £1.1 million in the year ended
August 31, 2009.
|
|
9.
|
UK and US
GAAP Presentation (Unaudited)
|
United Kingdom generally accepted accounting principles, or UK
GAAP, varies in some respects from US GAAP. There were no
significant differences between UK GAAP and US GAAP on the
financial statements of Psynova as of and for the year ended
August 31, 2009, except for share-based compensation
expense and research and
F-57
development costs. UK GAAP does have a different presentation
than US GAAP. Condensed financial information of Psynova which
presents the financial statements in UK GAAP and US GAAP
presentation are as follows:
Balance
Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UK GAAP
|
|
|
|
|
|
US GAAP
|
|
|
|
At August 31,
|
|
|
US GAAP
|
|
|
At August 31,
|
|
|
|
2009
|
|
|
Adjustment
|
|
|
2009
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
£
|
631
|
|
|
|
|
|
|
£
|
631
|
|
Accounts receivable
|
|
|
265
|
|
|
|
|
|
|
|
265
|
|
Prepaid expenses and other assets
|
|
|
142
|
|
|
|
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,038
|
|
|
|
|
|
|
|
1,038
|
|
Intangibles
|
|
|
1,375
|
|
|
|
(1,366
|
)(B)
|
|
|
9
|
|
Property and equipment
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
£
|
2,418
|
|
|
|
|
|
|
£
|
1,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
£
|
123
|
|
|
|
|
|
|
£
|
123
|
|
Accrued liabilities
|
|
|
97
|
|
|
|
|
|
|
|
97
|
|
Deferred income
|
|
|
237
|
|
|
|
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
457
|
|
|
|
|
|
|
|
457
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
Common stock
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Additional paid in capital
|
|
|
4,613
|
|
|
|
28
|
(A)
|
|
|
4,641
|
|
Accumulated deficit
|
|
|
(2,659
|
)
|
|
|
(1,394
|
)(A)(B)
|
|
|
(4,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,959
|
|
|
|
|
|
|
|
595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
£
|
2,416
|
|
|
|
|
|
|
£
|
1,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UK GAAP
|
|
|
|
|
|
US Gaap
|
|
|
|
For the Year Ended
|
|
|
|
|
|
For the Year Ended
|
|
|
|
August 31,
|
|
|
|
|
|
August 31,
|
|
|
|
2009
|
|
|
|
|
|
2009
|
|
|
Revenues
|
|
£
|
120
|
|
|
|
|
|
|
£
|
120
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
(123
|
)
|
|
|
(1,711
|
)(B)(C)
|
|
|
(1,834
|
)
|
General and administrative
|
|
|
(662
|
)
|
|
|
517
|
(A)(C)
|
|
|
(145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(665
|
)
|
|
|
|
|
|
|
(1,859
|
)
|
Interest and other income
|
|
|
7
|
|
|
|
|
|
|
|
7
|
|
Interest and other expense
|
|
|
(43
|
)
|
|
|
|
|
|
|
(43
|
)
|
Benefit for taxes
|
|
|
114
|
|
|
|
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
£
|
(587
|
)
|
|
|
|
|
|
£
|
(1,781
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
Amount is stock compensation
expense calculated in accordance with US GAAP. This amount
includes £10,000 from prior years and £17,000 for the
year ended August 31, 2009.
|
|
(B)
|
|
Research and development costs are
expensed in accordance with US GAAP. This amount includes
£0.2 million from prior years and
£1.2 million for the year ended August 31, 2009.
|
|
|
|
(C)
|
|
Allocation of research and
development costs from general and administrative expenses.
|
F-58
Following are some of the differences between the UK and US GAAP
that could materially affect the presentation of the financial
statements of Psynova which were prepared in the United Kingdom
using UK GAAP.
Stock
Compensation Expense
US GAAP requires that share-based compensation expense be
recorded when share options are issued to employees. The
share-based compensation expense is based on the grant date fair
value of the options and is expensed over the vesting period. UK
GAAP does not require such treatment. Under UK GAAP an expense
is recorded for the cost of shares acquired to settle awards
under certain incentive schemes. The expense is based on an
apportionment of the cost of the shares over the period of the
scheme.
Psynova has issued a total of 1,212,427 options at exercise
prices ranging from £0.038 to £0.086. Under US GAAP it
is estimated that the stock-based compensation expense would
have been £16,584 or $27,000 more for the year ended
August 31, 2009 than under UK GAAP.
Research
and Development Costs
Under UK GAAP, research and development costs may be capitalized
and amortized over their estimated useful life. US GAAP
prescribes that such costs be expensed as incurred.
Psynova began capitalizing commercialization costs for its
Schizophrenia diagnostic product beginning on January 1,
2009. US GAAP requires all research and development costs to be
expensed as incurred. As such, the net loss for the year ended
August 31, 2009 would have been £1.2 million or
$1.9 million more. In addition, £0.2 million of
costs had been capitalized prior to 2009.
Income
Taxes and Deferred Income Taxes:
UK GAAP provides for deferred taxation in respect of timing
differences, subject to certain exceptions, between the
recognition of gains and losses in the financial statements and
for tax purposes. Under US GAAP, deferred taxation would be
computed on all differences between the tax basis and book
values of assets and liabilities which will result in taxable or
tax deductible amounts arising in future years.
UK GAAP allows for the use of the new tax rates as soon as they
are proposed in the government budget. US GAAP allows for the
use of the new tax rates upon the enactment of proposed rates
into law.
UK GAAP accounts for deferred income taxes only to the extent of
managements judgment of probable liabilities or benefits
that may materialize in the foreseeable future. US GAAP requires
a detailed accounting for deferred income taxes and provides for
all net deferred tax liabilities be recognized.
Deferred tax assets under UK GAAP and US GAAP are recognized
only to the extent that it is more likely than not that they
will be realized.
At August 31, 2009, Psynova had a net operating loss
carryforward for UK tax purposes and no deferred tax asset has
been recognized as its realization is not considered more likely
than not. This treatment is consistent between US and UK GAAP.
The Company has evaluated and disclosed subsequent events
through December 18, 2009 and is not aware of any other
subsequent event that would have a material impact on the
accompanying financial statements.
On September 18, 2009, RBM obtained controlling interest in
the Company by purchasing outstanding shares from an investor
for £3.3 million, in cash. Including a
£3.0 million investment in the Company in 2008, RBM
increased its ownership interest from 47.9% to 77.6% of the
outstanding shares of the Company.
F-59
Shares
Common
Stock
Preliminary
Prospectus
Jefferies &
Company
Stephens
Inc.
Baird
William
Blair & Company
, 2010
Part II
Information not Required in Prospectus
|
|
Item 13.
|
Other Expenses of
Issuance and Distribution
|
The following is an itemized statement of the amounts of all
expenses payable by the Registrant in connection with the
registration of the common stock offered hereby (estimated
except for the Registration Fee, FINRA Filing Fee and Nasdaq
Global Market listing fee), other than underwriting discounts
and commissions:
|
|
|
|
|
|
|
Registration FeeSecurities and Exchange Commission
|
|
$
|
6,417
|
|
FINRA Filing Fee
|
|
|
9,500
|
|
Nasdaq Global Market listing fee
|
|
|
*
|
|
Blue Sky fees and expenses
|
|
|
*
|
|
Accountants fees and expenses
|
|
|
*
|
|
Legal fees and expenses
|
|
|
*
|
|
Printing and engraving expenses
|
|
|
*
|
|
Transfer agent and registrar fees
|
|
|
*
|
|
Miscellaneous
|
|
|
*
|
|
|
|
|
|
|
Total
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
|
* |
|
To be completed by
amendment. |
|
|
Item 14.
|
Indemnification
of Directors and Officers
|
The Registrant is a Delaware corporation. Reference is made to
Section 102(b)(7) of the General Corporation Law of the
State of Delaware (the DGCL), which enables a
corporation in its original certificate of incorporation or an
amendment thereto to eliminate or limit the personal liability
of a director for violations of the directors fiduciary
duty, except (i) for any breach of the directors duty
of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) pursuant to
Section 174 of the DGCL (providing for liability of
directors for unlawful payments of dividends of unlawful stock
purchase or redemptions), or (iv) for any transaction from
which a director derived an improper personal benefit.
Reference is also made to Section 145 of the DGCL, which
provides that a corporation may indemnify any person, including
an officer or director, who is, or is threatened to be made,
party to any threatened, pending or completed legal action, suit
or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person was an
officer, director, employee or agent of such corporation or is
or was serving at the request of such corporation as a director,
officer, employee or agent of another corporation or enterprise.
The indemnity may include expenses (including attorneys
fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by such person in connection with such
action, suit or proceeding, provided such officer, director,
employee or agent acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the
corporations best interest and, for criminal proceedings,
had no reasonable cause to believe that his conduct was
unlawful. A Delaware corporation may indemnify any officer or
director in an action by or in the right of the corporation
under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director
is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense
of any action referred to above, the corporation must indemnify
him against the expenses that such officer or director actually
and reasonably incurred.
The Registrants amended and restated certificate of
incorporation and amended and restated bylaws generally
eliminate the personal liability of our directors for breaches
of fiduciary duty as a director and indemnify directors and
officers to the fullest extent permitted by the DGCL.
The Registrant intends to enter into indemnification agreements
with each of its officers and directors. Each indemnification
agreement will require the Registrant to indemnify each
indemnitee to the fullest extent permitted
II-1
by Delaware law. This means, among other things, that the
Registrant must indemnify the officer or director against
expenses (including attorneys fees), judgments, fines and
amounts paid in settlement that are actually and reasonably
incurred in an action, suit or proceeding by reason of the fact
that the person is or was an officer or director of the
Registrant or is or was serving at the Registrants request
as a director, officer, employee or agent of another corporation
or other entity if the indemnitee meets the standard of conduct
provided in Delaware law. Also as permitted under Delaware law,
the indemnification agreements require the Registrant to advance
expenses in defending such an action provided that the director
undertakes to repay the amounts if the person ultimately is
determined not to be entitled to indemnification from the
Registrant. The Registrant will also make the indemnitee whole
for taxes imposed on the indemnification payments and for costs
in any action to establish indemnitees right to
indemnification, whether or not wholly successful.
The Registrant maintains an insurance policy providing for
indemnification of the Registrants officers, directors and
certain other persons against liabilities and expenses incurred
by any of them in certain stated proceedings and under certain
stated conditions.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons pursuant to our amended and restated
certificate of incorporation, amended and restated bylaws and
the DGCL, the Registrant has been advised that in the opinion of
the SEC such indemnification is against public policy and is,
therefore, unenforceable.
The foregoing summaries are necessarily subject to the complete
text of the statute, Amended and Restated Bylaws, Amended and
Restated Certificate of Incorporation and Indemnification
Agreements referred to above and are qualified in their entirety
by reference thereto.
|
|
Item 15.
|
Recent Sales of
Unregistered Securities
|
During the last three years, we have issued securities in the
following transactions, each of which was exempt from the
registration requirements of the Securities Act. No underwriters
were involved in any of the below-referenced sales of securities:
1. From October 1, 2007 through March 31, 2010,
we granted stock options to purchase 796,950 shares of our
common stock at an average exercise price of $4.17 per share to
our employees, directors and consultants under our 2007 Long
Term Incentive Plan.
2. On September 17, 2009, we issued a warrant to
purchase 100,000 shares of common stock at an exercise
price of $9.00 per share to Rock Bancshares, Inc. and Rock
Acceptance Corporation.
3. On December 31, 2009, we issued the following
warrants to purchase shares of common stock at an exercise price
of $9.00 per share:
|
|
|
|
|
40,000 shares to L. Walter Quinn
|
|
|
|
10,000 shares to Albert B. Braunfisch
|
|
|
|
20,000 shares to W. Scott Davis
|
|
|
|
20,000 shares to James Hunter East
|
|
|
|
10,000 shares to OBLR, LLC
|
4. On May 9, 2008, we issued 337,838 shares of
common stock at a purchase price of $2.96 per share to Mark
Gainor.
5. From November 1, 2006 through November 1,
2009, we issued the following shares of
Series A-1
preferred stock:
|
|
|
|
|
143,943 shares to Mark Gainor at a purchase price of
$3.4736 per share;
|
|
|
|
6,293,356 shares to EGI-Fund
(08-10)
Investors, L.L.C. at a purchase price of $3.339910285 per share;
|
|
|
|
545,235 shares to Cross Creek Capital L.P. at a purchase
price of $3.339910285 per share;
|
II-2
|
|
|
|
|
53,583 shares to Cross Creek Capital Employees Fund, L.P.
at a purchase price of $3.339910285 per share; and
|
|
|
|
449,114 shares to RBM Investment LLC at a purchase price of
$3.339910285 per share.
|
The sales and issuances of securities in the transactions
described in paragraph (1) above were deemed to be exempt
from registration under the Securities Act of 1933, in reliance
upon Rule 701 of the Securities Act of 1933, as
transactions pursuant to compensatory benefit plans and
contracts relating to compensation as provided under
Rule 701. All recipients had adequate access, through
employment or other relationships, to information about us. All
certificates representing the issued shares of common stock
included the appropriate legends setting forth that the
securities had not been registered and the applicable
restrictions on transfer.
The offer of the common stock in the transactions described in
paragraphs (2)(4) above was deemed to be exempt from
registration under the Securities Act of 1933, in reliance upon
Section 4(2)
and/or
Regulation D promulgated thereunder as transactions not
involving any public offering.
|
|
Item 16.
|
Exhibits and
Financial Statement Schedules
|
(a) Exhibits
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1**
|
|
Form of Underwriting Agreement.
|
|
2
|
.1*
|
|
Plan of acquisition of 22.4% equity interest in Psynova
Neurotech Ltd.
|
|
3
|
.1*
|
|
Amended and Restated Certificate of Incorporation of the
Registrant.
|
|
3
|
.2*
|
|
Amendment No. 1 to Amended and Restated Certificate of
Incorporation of the Registrant.
|
|
3
|
.3*
|
|
Form of Amendment No. 2 to Amended and Restated Certificate
of Incorporation of the Registrant.
|
|
3
|
.4**
|
|
Form of Second Amended and Restated Certificate of Incorporation
of the Registrant, to be in effect upon the completion of this
offering.
|
|
3
|
.5*
|
|
Bylaws of the Registrant.
|
|
3
|
.6**
|
|
Form of Amended and Restated Bylaws of the Registrant, to be in
effect upon the completion of this offering.
|
|
4
|
.1**
|
|
Form of Common Stock Certificate.
|
|
4
|
.2*
|
|
Investors Rights Agreement dated October 12, 2007 by
and among Rules-Based Medicine, Inc., EGI-Fund
(08-10)
Investors, L.L.C., Cross Creek Capital, L.P., Cross Creek
Capital Employees Fund, L.P. and RBM Investment LLC.
|
|
4
|
.3*
|
|
Joinder Agreement to Investors Rights Agreement dated
May 6, 2008.
|
|
5
|
.1**
|
|
Opinion of Vinson & Elkins L.L.P. as to the legality
of the securities being registered.
|
|
8
|
.1**
|
|
Opinion of Vinson & Elkins L.L.P. relating to tax
matters.
|
|
10
|
.1*
|
|
Development and Supply Agreement dated September 5, 2002
between Luminex Corporation and Rules-Based Medicine, Inc. f/k/a
RBM Acquisition, Inc.
|
|
10
|
.2*
|
|
Amendment No. 1 dated October 12, 2007 to Development
and Supply Agreement dated September 5, 2002 between
Luminex Corporation and Rules-Based Medicine, Inc. f/k/a RBM
Acquisition, Inc.
|
|
10
|
.3*
|
|
Amendment No. 2 dated January 1, 2008 to Development
and Supply Agreement dated September 5, 2002 between
Luminex Corporation and Rules-Based Medicine, Inc. f/k/a RBM
Acquisition, Inc.
|
|
10
|
.4
|
|
Intentionally omitted.
|
|
10
|
.4.1*
|
|
Exclusive Patent and Non-Exclusive Know-How License Agreement
(Case No: Bah-2338-09/PSY026) dated March 22, 2010
between Cambridge Enterprise Limited and Psynova Neurotech
Limited.
|
|
10
|
.4.2*
|
|
Exclusive Patent and Non-Exclusive Know-How License Agreement
(Case No: Bah-2351-09/PSY027) dated March 22, 2010
between Cambridge Enterprise Limited and Psynova Neurotech
Limited.
|
|
10
|
.5*
|
|
Framework Agreement dated as of March 3, 2006, between the
Chancellor, Masters and Scholars of the University of Cambridge,
Cambridge University Technical Services Limited and Psynova
Limited.
|
|
10
|
.5.1*
|
|
Extension to Framework Agreement dated March 3, 2006
between the University of Cambridge, Cambridge Enterprise and
Psynova Neurotech Ltd.
|
|
10
|
.6*
|
|
Co-Development and Commercialization Agreement dated
September 5, 2008 between Psynova Neurotech Limited and
Rules-Based Medicine, Inc.
|
II-3
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.6.1*
|
|
Variation Agreement dated December 19, 2009 to the
Co-Development and Commercialization Agreement dated
September 5, 2008 between Psynova Neurotech Limited and
Rules-Based
Medicine, Inc.
|
|
10
|
.7**
|
|
Form of Director and Executive Officer Indemnification Agreement.
|
|
10
|
.7.1**
|
|
Indemnification Agreement between Rules-Based Medicine, Inc. and
Mark Chandler.
|
|
10
|
.7.2**
|
|
Indemnification Agreement between Rules-Based Medicine, Inc. and
Mark J. Gainor.
|
|
10
|
.7.3**
|
|
Indemnification Agreement between Rules-Based Medicine, Inc. and
Matthew Zell.
|
|
10
|
.7.4**
|
|
Indemnification Agreement between Rules-Based Medicine, Inc. and
David L. Schultz.
|
|
10
|
.7.5**
|
|
Indemnification Agreement between Rules-Based Medicine, Inc. and
Mark C. Capone.
|
|
10
|
.8.1**
|
|
Amended and Restated Employment Agreement between Rules-Based
Medicine, Inc. and T. Craig Benson.
|
|
10
|
.8.2**
|
|
Amended and Restated Employment Agreement between Rules-Based
Medicine, Inc. and Patrick McClain.
|
|
10
|
.8.3**
|
|
Amended and Restated Employment Agreement between Rules-Based
Medicine, Inc. and Michael Spain, M.D.
|
|
10
|
.8.4**
|
|
Amended and Restated Employment Agreement between Rules-Based
Medicine, Inc. and James P. Mapes, Ph.D.
|
|
10
|
.8.5**
|
|
Amended and Restated Employment Agreement between Rules-Based
Medicine, Inc. and Ralph L. McDade, Ph.D.
|
|
10
|
.8.6**
|
|
Amended and Restated Employment Agreement between Rules-Based
Medicine, Inc. and Anthony Barnes, Ph.D.
|
|
10
|
.9*
|
|
Rules-Based Medicine, Inc. 2007 Long Term Incentive Plan.
|
|
10
|
.9.1*
|
|
Rules-Based
Medicine, Inc. 2010 Long Term Incentive Plan.
|
|
10
|
.10*
|
|
Supply and Distribution Agreement dated October 26, 2007
between Rules-Based Medicine, Inc. and EMD Chemicals Inc.
|
|
10
|
.11*
|
|
Collaboration and License Agreement dated November 25, 2009
by and between F. Hoffman-La Roche Ltd.,
Hoffmann-La Roche Inc. and Psynova Neurotech Ltd.
|
|
10
|
.12*
|
|
Commercial Loan Agreement, dated August 10, 2009 by and
between Rules-Based Medicine, Inc. and Compass Bank.
|
|
10
|
.13*
|
|
Loan and Security Agreement, dated September 15, 2009 by
and between Rules-Based Medicine, Inc., RBM Holdings, LLC, RBM
Management Group, LLC and Heartland Community Bank.
|
|
10
|
.14*
|
|
Second Amended and Restated Subordination and Standby Agreement,
dated December 18, 2009 by and among Compass Bank,
Rules-Based Medicine, Inc. and Heartland Community Bank
|
|
10
|
.15*
|
|
Warrant to Purchase Shares of Common Stock of Rules-Based
Medicine, Inc., dated September 17, 2009 by and between
Rock Bancshares, Inc. and Rules-Based Medicine, Inc.
|
|
10
|
.15.1*
|
|
Warrant to Purchase Shares of Common Stock of Rules-Based
Medicine, Inc., dated December 31, 2009 by and between
L. Walter Quinn and Rules-Based Medicine, Inc.
|
|
10
|
.15.2*
|
|
Warrant to Purchase Shares of Common Stock of Rules-Based
Medicine, Inc., dated December 31, 2009 by and between
James Hunter East and Rules-Based Medicine, Inc.
|
|
10
|
.15.3*
|
|
Warrant to Purchase Shares of Common Stock of Rules-Based
Medicine, Inc., dated December 31, 2009 by and between
W. Scott Davis and Rules-Based Medicine, Inc.
|
|
10
|
.15.4*
|
|
Warrant to Purchase Shares of Common Stock of Rules-Based
Medicine, Inc., dated December 31, 2009 by and between
Albert B. Braunfisch and Rules-Based Medicine, Inc.
|
|
10
|
.15.5*
|
|
Warrant to Purchase Shares of Common Stock of Rules-Based
Medicine, Inc., dated December 31, 2009 by and between
OBLR, LLC and Rules-Based Medicine, Inc.
|
|
10
|
.16*
|
|
Lease Agreement dated March 19, 2003 between Rules-Based
Medicine, Inc. and STAG Investors 2000, Ltd.
|
|
10
|
.17*
|
|
First Amendment to Lease Agreement dated April 30, 2007
between Rules-Based Medicine, Inc. and STAG Investors 2000, Ltd.
|
|
10
|
.18*
|
|
Second Amendment to Lease Agreement dated September 2, 2008
between Rules-Based Medicine, Inc. and CFO2 Austin, LLC.
|
|
10
|
.19*
|
|
Third Amendment to Lease Agreement dated September 1, 2009
between Rules-Based Medicine, Inc. and CFO2 Austin, LLC.
|
|
10
|
.20*
|
|
Fourth Amendment to Lease Agreement dated March 23, 2010
between Rules-Based Medicine, Inc. and CFO2 Austin, LLC.
|
|
10
|
.21**
|
|
Form of Notice of Grant and Restricted Stock Unit Agreement
|
|
23
|
.1
|
|
Consent of PMB Helin Donovan, LLP.
|
II-4
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
23
|
.2**
|
|
Consent of Vinson & Elkins L.L.P. (included as part of
Exhibit 5.1 hereto).
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|
23
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.3**
|
|
Consent of Vinson & Elkins L.L.P. (included as part of
Exhibit 8.1 hereto).
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23
|
.4*
|
|
Consent of Director Nominee.
|
|
24
|
.1*
|
|
Power of Attorney (included on signature page of the
Registration Statement filed on December 23, 2009).
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|
24
|
.2*
|
|
Power of Attorney (included on signature page of the
Registration Statement filed on March 16, 2010).
|
|
|
|
|
*
|
|
Previously filed.
|
|
**
|
|
To be filed by amendment.
|
|
|
|
Confidential treatment has been
requested for portions of this exhibit. These portions have been
omitted from the Registration Statement and submitted separately
to the Securities and Exchange Commission.
|
(b) Financial
Statement Schedules
No financial statement schedules are provided.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the Registrant pursuant to
the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of
1933, and will be governed by the final adjudication of such
issue.
We hereby undertake that:
(a) We will provide to the underwriters at the closing
specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
(b) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from a form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(c) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Austin, State of Texas, on
April 27, 2010.
RULES-BASED MEDICINE, INC.
T. Craig Benson
President, Chief Executive Officer and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons
on April 27, 2010 in the capacities indicated.
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|
|
|
|
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Signature
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|
Title
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|
Date
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|
|
|
|
|
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*
Mark
Chandler
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|
Chairman of the Board of Directors
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|
April 27, 2010
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/s/ T.
Craig Benson
T.
Craig Benson
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President, Chief Executive Officer and Secretary; Director
(Principal Executive Officer)
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April 27, 2010
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/s/ Patrick
S. McClain
Patrick
S. McClain
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|
Chief Financial Officer and Vice President (Principal Financial
and Accounting Officer)
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|
April 27, 2010
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|
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*
Mark
J. Gainor
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Director
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|
April 27, 2010
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|
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*
Matthew
Zell
|
|
Director
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|
April 27, 2010
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|
|
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|
|
*
David
L. Schultz
|
|
Director
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|
April 27, 2010
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|
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|
*
Mark
C. Capone
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Director
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|
April 27, 2010
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*By: /s/ Patrick
S. McClain
Patrick
S. McClain
Attorney-in-fact
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II-6
Index to
Exhibits
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|
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|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1**
|
|
Form of Underwriting Agreement.
|
|
2
|
.1*
|
|
Plan of acquisition of 22.4% equity interest Psynova Neurotech
Limited.
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3
|
.1*
|
|
Amended and Restated Certificate of Incorporation of the
Registrant.
|
|
3
|
.2*
|
|
Amendment No. 1 to Amended and Restated Certificate of
Incorporation of the Registrant.
|
|
3
|
.3*
|
|
Form of Amendment No. 2 to Amended and Restated Certificate
of Incorporation of the Registrant.
|
|
3
|
.4**
|
|
Form of Second Amended and Restated Certificate of Incorporation
of the Registrant, to be in effect upon the completion of this
offering.
|
|
3
|
.5*
|
|
Bylaws of the Registrant.
|
|
3
|
.6**
|
|
Form of Amended and Restated Bylaws of the Registrant, to be in
effect upon the completion of this offering.
|
|
4
|
.1**
|
|
Form of Common Stock Certificate.
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4
|
.2*
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Investors Rights Agreement dated October 12, 2007 by
and among Rules-Based Medicine, Inc., EGI-Fund
(08-10)
Investors, L.L.C., Cross Creek Capital, L.P., Cross Creek
Capital Employees Fund, L.P. and RBM Investment LLC.
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|
4
|
.3*
|
|
Joinder Agreement to Investors Rights Agreement dated
May 6, 2008.
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|
5
|
.1**
|
|
Opinion of Vinson & Elkins L.L.P. as to the legality
of the securities being registered.
|
|
8
|
.1**
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|
Opinion of Vinson & Elkins L.L.P. relating to tax
matters.
|
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10
|
.1*
|
|
Development and Supply Agreement dated September 5, 2002
between Luminex Corporation and Rules-Based Medicine, Inc. f/k/a
RBM Acquisition, Inc.
|
|
10
|
.2*
|
|
Amendment No. 1 dated October 12, 2007 to Development
and Supply Agreement dated September 5, 2002 between
Luminex Corporation and Rules-Based Medicine, Inc. f/k/a RBM
Acquisition, Inc.
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|
10
|
.3*
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|
Amendment No. 2 dated January 1, 2008 to Development
and Supply Agreement dated September 5, 2002 between
Luminex Corporation and Rules-Based Medicine, Inc. f/k/a RBM
Acquisition, Inc.
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10
|
.4
|
|
Intentionally omitted.
|
|
10
|
.4.1*
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|
Exclusive Patent and Non-Exclusive Know-How License Agreement
(Case No: Bah-2338-09/PSY026) dated March 22, 2010
between Cambridge Enterprise Limited and Psynova Neurotech
Limited.
|
|
10
|
.4.2*
|
|
Exclusive Patent and Non-Exclusive Know-How License Agreement
(Case No: Bah-2351-09/PSY027) dated March 22, 2010
between Cambridge Enterprise Limited and Psynova Neurotech
Limited.
|
|
10
|
.5*
|
|
Framework Agreement, dated as of March 3, 2006, between the
Chancellor, Masters and Scholars of the University of Cambridge,
Cambridge University Technical Services Limited and Psynova
Limited.
|
|
10
|
.5.1*
|
|
Extension to Framework Agreement dated March 3, 2006
between the University of Cambridge, Cambridge Enterprise and
Psynova Neurotech Ltd.
|
|
10
|
.6*
|
|
Co-Development and Commercialization Agreement dated
September 5, 2008 between Psynova Neurotech Limited and
Rules-Based Medicine, Inc.
|
|
10
|
.6.1*
|
|
Variation Agreement dated December 19, 2009 to the
Co-Development and Commercialization Agreement dated
September 5, 2008 between Psynova Neurotech Limited and
Rules-Based
Medicine, Inc.
|
|
10
|
.7**
|
|
Form of Director and Executive Officer Indemnification Agreement.
|
|
10
|
.7.1**
|
|
Indemnification Agreement between Rules-Based Medicine, Inc. and
Mark Chandler.
|
|
10
|
.7.2**
|
|
Indemnification Agreement between Rules-Based Medicine, Inc. and
Mark J. Gainor.
|
|
10
|
.7.3**
|
|
Indemnification Agreement between Rules-Based Medicine, Inc. and
Matthew Zell.
|
|
10
|
.7.4**
|
|
Indemnification Agreement between Rules-Based Medicine, Inc. and
David L. Schultz.
|
|
10
|
.7.5**
|
|
Indemnification Agreement between Rules-Based Medicine, Inc. and
Mark C. Capone.
|
|
10
|
.8.1**
|
|
Amended and Restated Employment Agreement between Rules-Based
Medicine, Inc. and T. Craig Benson.
|
|
10
|
.8.2**
|
|
Amended and Restated Employment Agreement between Rules-Based
Medicine, Inc. and Patrick McClain.
|
|
10
|
.8.3**
|
|
Amended and Restated Employment Agreement between Rules-Based
Medicine, Inc. and Michael Spain, M.D.
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|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.8.4**
|
|
Amended and Restated Employment Agreement between Rules-Based
Medicine, Inc. and James P. Mapes, Ph.D.
|
|
10
|
.8.5**
|
|
Amended and Restated Employment Agreement between Rules-Based
Medicine, Inc. and Ralph L. McDade, Ph.D.
|
|
10
|
.8.6**
|
|
Amended and Restated Employment Agreement between Rules-Based
Medicine, Inc. and Anthony Barnes, Ph.D.
|
|
10
|
.9*
|
|
Rules-Based Medicine, Inc. 2007 Long Term Incentive Plan.
|
|
10
|
.9.1*
|
|
Rules-Based
Medicine, Inc. 2010 Long Term Incentive Plan.
|
|
10
|
.10*
|
|
Supply and Distribution Agreement dated October 26, 2007
between Rules-Based Medicine, Inc. and EMD Chemicals Inc.
|
|
10
|
.11*
|
|
Collaboration and License Agreement dated November 25, 2009
by and between F. Hoffman-La Roche Ltd.,
Hoffmann-La Roche Inc. and Psynova Neurotech Ltd.
|
|
10
|
.12*
|
|
Commercial Loan Agreement, dated August 10, 2009 by and
between Rules-Based Medicine, Inc. and Compass Bank.
|
|
10
|
.13*
|
|
Loan and Security Agreement, dated September 15, 2009 by
and between Rules-Based Medicine, Inc., RBM Holdings, LLC, RBM
Management Group, LLC and Heartland Community Bank.
|
|
10
|
.14*
|
|
Second Amended and Restated Subordination and Standby Agreement,
dated December 18, 2009 by and among Compass Bank,
Rules-Based Medicine, Inc. and Heartland Community Bank.
|
|
10
|
.15*
|
|
Warrant to Purchase Shares of Common Stock of Rules-Based
Medicine, Inc., dated September 17, 2009 by and between
Rock Bancshares, Inc. and Rules-Based Medicine, Inc.
|
|
10
|
.15.1*
|
|
Warrant to Purchase Shares of Common Stock of Rules-Based
Medicine, Inc., dated December 31, 2009 by and between
L. Walter Quinn and Rules-Based Medicine, Inc.
|
|
10
|
.15.2*
|
|
Warrant to Purchase Shares of Common Stock of Rules-Based
Medicine, Inc., dated December 31, 2009 by and between
James Hunter East and Rules-Based Medicine, Inc.
|
|
10
|
.15.3*
|
|
Warrant to Purchase Shares of Common Stock of Rules-Based
Medicine, Inc., dated December 31, 2009 by and between
W. Scott Davis and Rules-Based Medicine, Inc.
|
|
10
|
.15.4*
|
|
Warrant to Purchase Shares of Common Stock of Rules-Based
Medicine, Inc., dated December 31, 2009 by and between
Albert B. Braunfisch and Rules-Based Medicine, Inc.
|
|
10
|
.15.5*
|
|
Warrant to Purchase Shares of Common Stock of Rules-Based
Medicine, Inc., dated December 31, 2009 by and between
OBLR, LLC and Rules-Based Medicine, Inc.
|
|
10
|
.16*
|
|
Lease Agreement dated March 19, 2003 between Rules-Based
Medicine, Inc. and STAG Investors 2000, Ltd.
|
|
10
|
.17*
|
|
First Amendment to Lease Agreement dated April 30, 2007
between Rules-Based Medicine, Inc. and STAG Investors 2000, Ltd.
|
|
10
|
.18*
|
|
Second Amendment to Lease Agreement dated September 2, 2008
between Rules-Based Medicine, Inc. and CFO2 Austin, LLC.
|
|
10
|
.19*
|
|
Third Amendment to Lease Agreement dated September 1, 2009
between Rules-Based Medicine, Inc. and CFO2 Austin, LLC.
|
|
10
|
.20*
|
|
Fourth Amendment to Lease Agreement dated March 23, 2010
between Rules-Based Medicine, Inc. and CFO2 Austin, LLC.
|
|
10
|
.21**
|
|
Form of Notice of Grant and Restricted Stock Unit Agreement
|
|
23
|
.1
|
|
Consent of PMB Helin Donovan, LLP.
|
|
23
|
.2**
|
|
Consent of Vinson & Elkins L.L.P. (included as part of
Exhibit 5.1 hereto).
|
|
23
|
.3**
|
|
Consent of Vinson & Elkins L.L.P. (included as part of
Exhibit 8.1 hereto).
|
|
23
|
.4*
|
|
Consent of Director Nominee.
|
|
24
|
.1*
|
|
Power of Attorney (included on signature page of the
Registration Statement filed on December 23, 2009).
|
|
24
|
.2*
|
|
Power of Attorney (included on signature page of the
Registration Statement filed on March 16, 2010).
|
|
|
|
|
*
|
|
Previously filed.
|
|
**
|
|
To be filed by amendment.
|
|
|
|
|
|
Confidential treatment has been
requested for portions of this exhibit. These portions have been
omitted from the Registration Statement and submitted separately
to the Securities and Exchange Commission.
|