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Table of Contents

As filed with the Securities and Exchange Commission on January 24, 2013

Registration No. 333-175102

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 8

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

LIPOSCIENCE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   8071   56-1879288

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

2500 Sumner Boulevard

Raleigh, NC 27616

(919) 212-1999

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Richard O. Brajer

President and Chief Executive Officer

LipoScience, Inc.

2500 Sumner Boulevard

Raleigh, NC 27616

(919) 212-1999

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Brent B. Siler, Esq.

Darren K. DeStefano, Esq.

Brian F. Leaf, Esq.

Cooley LLP

11951 Freedom Drive

Reston, VA 20190-5656

(703) 456-8000

 

Glenn R. Pollner, Esq.

Gibson, Dunn & Crutcher LLP

200 Park Avenue

New York, NY 10166-0193

(212) 351-4000

 

 

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.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  ¨

 

 

 

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 under the Securities Exchange Act of 1934. (Check one):

 

Large Accelerated Filer  ¨

   Accelerated Filer  ¨    Non-accelerated Filer  x    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 that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this 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 prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

 

Subject to completion, dated January 24, 2013

PROSPECTUS

 

5,000,000 Shares

 

LOGO

Common stock

 

 

This is the initial public offering of the common stock of LipoScience, Inc. We are offering 5,000,000 shares of our common stock. No public market currently exists for our common stock.

Our common stock has been approved for listing on The NASDAQ Global Market under the symbol “LPDX.”

We anticipate that the initial public offering price will be between $13.00 and $15.00 per share.

We are an “emerging growth company” as defined under the federal securities laws and, as such, we may elect to comply with certain reduced public company reporting requirements.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 12 of this prospectus.

 

     Per
share
     Total  

Price to the public

   $                    $                

Underwriting discounts and commissions

   $         $     

Proceeds to us (before expenses)

   $         $     

We have granted the underwriters the option to purchase 750,000 additional shares of common stock on the same terms and conditions set forth above if the underwriters sell more than 5,000,000 shares of common stock in this offering.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares on or about                     , 2013.

 

 

 

Barclays   UBS Investment Bank   Piper Jaffray

 

 

Prospectus dated                     , 2013


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     12   

Special Note Regarding Forward-Looking Statements

     37   

Use of Proceeds

     39   

Dividend Policy

     39   

Capitalization

     40   

Dilution

     42   

Selected Financial Data

     44   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     47   

Business

     90   

Management

     113   

Executive Compensation

     125   

Certain Relationships and Related Party Transactions

     143   

Principal Stockholders

     145   

Description of Capital Stock

     148   

Shares Eligible for Future Sale

     154   

Certain Material U.S. Federal Tax Considerations

     157   

Underwriting

     161   

Legal Matters

     168   

Experts

     168   

Where You Can Find Additional Information

     168   

Index to Financial Statements

     F-1   

 

 

You should rely only on the information contained in this prospectus and any related free writing prospectus we may authorize to be delivered to you. We have not, and the underwriters have not, authorized any person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. Neither this prospectus nor any related free writing prospectus is an offer to sell, nor are they seeking an offer to buy, these securities in any state where the offer or solicitation is not permitted. The information contained in this prospectus is complete and accurate as of the date on the front cover of this prospectus, but information may have changed since that date.


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PROSPECTUS SUMMARY

The items in the following summary are described in more detail later in this prospectus. This summary does not contain all of the information you should consider. Before investing in our common stock, you should read the entire prospectus carefully, including the “Risk Factors” beginning on page 12 and the financial statements and related notes beginning on page F-1. Unless the context indicates otherwise, as used in this prospectus, the terms “LipoScience,” “our company,” “we,” “us” and “our” refer to LipoScience, Inc.

Overview

We are an in vitro diagnostic company pioneering a new field of personalized diagnostics based on nuclear magnetic resonance, or NMR, technology. Our first diagnostic test, the NMR LipoProfile test, directly measures the number of low density lipoprotein, or LDL, particles in a blood sample and provides physicians and their patients with actionable information to personalize management of risk for heart disease. To date, over 8 million NMR LipoProfile tests have been ordered. Our automated clinical analyzer, the Vantera system, has recently been cleared by the FDA. The Vantera system requires no previous knowledge of NMR technology to operate and has been designed to significantly simplify complex technology through ease of use and walk-away automation. We plan to selectively place the Vantera system on-site with national and regional clinical laboratories as well as leading medical centers and hospital outreach laboratories. We are driving toward becoming a clinical standard of care by decentralizing our technology and expanding our menu of personalized diagnostic tests to address a broad range of cardiovascular, metabolic and other diseases.

Approximately 50% of people who suffer a heart attack have normal cholesterol levels. We believe that direct quantification of the number of LDL and other lipoprotein particles using our NMR-based technology platform addresses the deficiencies of traditional cholesterol testing and allows clinicians to more effectively manage their patients’ risk of developing cardiovascular disease. We believe that the inherent analytical and clinical advantages of NMR-based technology, which can simultaneously analyze lipoproteins as well as hundreds of small molecule metabolites from blood serum, plasma and several other bodily fluids without time-consuming sample preparation, will also allow us to expand our diagnostic test menu. The scientific community is actively investigating our NMR-based technology for use in the prediction of diabetes, insulin resistance and other metabolic disorders, and we believe that our technology provides an attractive platform for potential expansion of the diagnostic tests we plan to offer into these areas.

Our strategy is to continue to advance patient care by converting clinicians, and the clinical diagnostic laboratories they use, from traditional cholesterol testing to our NMR LipoProfile test for the management of patients at risk for cardiovascular disease, with the goal of ultimately becoming a clinical standard of care. An increasing number of large clinical outcome studies, including the Multi-Ethnic Study of Atherosclerosis, or MESA, and the Framingham Offspring Study, indicate that a patient’s number of LDL particles is more strongly associated with the risk of developing cardiovascular disease than is his or her level of LDL cholesterol when one of the measures suggests a higher risk and the other suggests a lower risk. LDL cholesterol, or LDL-C, is a measure of the amount of cholesterol contained in LDL particles and is used to estimate the patient’s LDL level. In the MESA and Framingham studies, participants’ blood samples were evaluated to measure LDL particles using our NMR LipoProfile test, while their LDL-C levels were measured using a traditional cholesterol test.

Because the NMR LipoProfile test provides direct quantification of the number of LDL particles, as well as additional measurements related to a patient’s risk for developing cardiovascular disease, we believe that it has the potential to become a new paradigm by which clinicians evaluate key cardiovascular risk factors to provide better treatment recommendations and improve outcomes, even for patients considered to have normal levels of cholesterol. A 2008 joint consensus statement by the American Diabetes Association, or ADA, and the American College of Cardiology, or ACC, recognized that direct LDL particle measurement by NMR may be a more accurate way to capture the risk posed by LDL than is traditional LDL-C measurement. Additionally, in October 2011, the National Lipid Association, or NLA, convened an expert panel to evaluate the use of a number of

 

 

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biomarkers other than LDL-C, including LDL particle number, for initial clinical risk assessment of cardiovascular disease and ongoing management of cardiovascular disease risk in patients. The recommendations of this panel included:

 

   

for initial clinical risk assessment, the use of LDL particle number, as well as a number of the other non-LDL-C biomarkers, is reasonable for many patients considered to be at intermediate risk of coronary heart disease, patients with a family history of coronary heart disease and patients with recurrent cardiac events, and it should be considered for selected patients known to have coronary heart disease; and

 

   

for ongoing management of risk, the use of LDL particle number, as well as some of the other biomarkers, is reasonable for many patients at intermediate risk, patients with known coronary heart disease and patients with recurrent cardiac events, and it should be considered for selected patients with a family history of coronary heart disease.

During 2011, the NMR LipoProfile test was ordered more than 1.5 million times. The number of NMR LipoProfile tests ordered increased at a compound annual growth rate of approximately 30% from 2006 to 2011. We generated revenues of $45.8 million for the year ended December 31, 2011 and $41.2 million for the nine months ended September 30, 2012. Our NMR LipoProfile test has its own dedicated current procedural terminology, or CPT, code, and is reimbursed by a number of governmental and private payors, which we believe collectively represent approximately 150 million covered lives. These payors include Medicare, TRICARE, WellPoint, United Healthcare and several Blue Cross Blue Shield affiliates.

We estimate that more than 75 million traditional cholesterol tests, or lipid panels, are performed by independent clinical laboratories and hospital outreach laboratories for patient management purposes each year in the United States. Accordingly, we estimate that the 1.5 million NMR LipoProfile tests we performed in the year ended December 31, 2011 represented 2% of our potential market. In a number of states where we have targeted our sales and marketing efforts, we estimate that we have achieved market penetration rates of up to 11%. For example, in North Carolina, Alabama and West Virginia, we estimate that the number of NMR LipoProfile tests performed represented approximately 11%, 7% and 7%, respectively, of the total cholesterol tests performed in those states for patient management purposes, and 6% in Georgia. We plan to significantly increase our geographic presence across the United States to expand market awareness and penetration of the NMR LipoProfile test, with the goal of ultimately becoming a clinical standard of care.

Our clinical laboratory, which is certified under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, allows us to fulfill current demand for our test and we believe serves as a strategic asset that will facilitate our ability to launch new personalized diagnostic tests we plan to develop. To accelerate clinician and clinical diagnostic laboratory adoption of the NMR LipoProfile test and future clinical diagnostic tests, we plan to decentralize access to our technology platform through the launch of our new Vantera system, our highly automated next-generation version of our NMR-based clinical analyzer technology platform that is designed to be placed directly in clinical diagnostic laboratories. In August 2012, we received FDA clearance to market our Vantera system. The Vantera system became commercially available in December 2012, and we expect to begin placing the Vantera system in third-party clinical diagnostic laboratory facilities in the first quarter of 2013, which we believe will facilitate their ability to offer our NMR LipoProfile test and other diagnostic tests that we may develop.

Our Market

Coronary Heart Disease and Atherosclerosis

Coronary heart disease, or CHD, is the second most prevalent form of cardiovascular disease in the United States after hypertension. According to the American Heart Association, CHD accounted for over one-half of all cardiovascular disease deaths in 2006, and the direct medical costs of CHD in the United States are expected to increase from $36 billion in 2010 to $106 billion in 2030. CHD usually results from atherosclerosis, a hardening

 

 

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and narrowing of the arteries caused by a buildup of fatty plaque composed of cholesterol and other lipids, such as triglycerides, in the arterial wall. Atherosclerosis is a leading cause of heart attacks and strokes.

Since the 1960s, the scientific community has recognized that LDL particles are a key causal factor for atherosclerosis. However, for many years the only practical way to estimate the amount of LDL and high density lipoproteins, or HDL, was to measure the level of cholesterol contained in these LDL and HDL particles.

Limitations of Traditional Cholesterol Testing

While LDL and HDL testing is a generally well-accepted means to determine a patient’s need for LDL-lowering or HDL-raising therapy and monitoring treatment response, there is increasing awareness that traditional cholesterol measures of these key lipoprotein risk factors are deficient because they can overestimate or underestimate the actual levels of these lipoproteins in many patients and the CHD risk they confer. This is because many patients have disparities between their level of cholesterol and the number of lipoprotein particles in their blood, a state known as discordance. Research data have shown that the number of LDL particles, or LDL-P, is more strongly correlated with CHD risk than is the level of LDL-C in discordant patients, and that the number of HDL particles, or HDL-P, and LDL-P are more predictive of future CHD events than HDL-C and LDL-C levels. As a result, we believe that reliance on the traditional cholesterol measures of LDL and HDL contributes to the under-treatment or over-treatment of millions of patients.

The following graphic illustrates that two patients with the same level of LDL-C can have different numbers of LDL-P, leading to different CHD risk profiles.

 

LOGO

Our Solution

Our NMR LipoProfile test has been cleared by the FDA for use in our clinical laboratory and directly measures LDL-P for use in managing cardiovascular disease risk. We believe that our test provides clinicians with more clinically relevant information about LDL and other classes and subclasses of lipoproteins than does the traditional cholesterol test for managing their patients’ CHD risk.

The current NMR LipoProfile test report consists of two pages. The first page includes test results for the following measurements, which have received FDA clearance:

 

   

LDL-P, along with reference ranges to guide patient management decisions;

 

   

HDL-C; and

 

   

triglycerides.

 

 

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The second page of the NMR LipoProfile report includes test results for a number of additional lipoprotein measures that have been validated by us but which have not been cleared by the FDA. These include:

 

   

measures related to cardiovascular risk, including HDL-P, the total number of small LDL particles, and LDL particle size; and

 

   

measures associated with insulin resistance and diabetes risk, including numbers of large HDL particles, small LDL particles and very large LDL, or VLDL, particles, as well as HDL, LDL and VLDL particle size.

When the Vantera system is placed in third-party laboratories, they will process the blood sample and produce the FDA-cleared results on the first page of the test report. At the option of the third-party laboratories, we will generate these second-page test results in our clinical laboratory, and make the second-page test results available to them at no additional charge for dissemination along with the first-page results.

Clinical Validation of Lipoprotein Particle Quantification Using NMR

The clinical utility of lipoprotein particle quantification has been supported by a number of scientific papers published in peer-reviewed journals, including Journal of the American Medical Association, New England Journal of Medicine, Circulation, American Journal of Cardiology, Atherosclerosis and Journal of Clinical Lipidology. To date, eleven cardiovascular disease outcome studies have specifically evaluated the link between LDL-P and CHD risk. In each case, LDL-P was associated significantly with atherosclerotic outcomes and, in ten of the studies, the strength of association was greater than for LDL-C. In addition, studies have shown greater clinical relevance of HDL-P as compared to HDL-C. In these scientific studies, LDL-P was measured using our test, while LDL-C was measured using traditional cholesterol testing. In each of these studies, our Chief Scientific Officer, Dr. James Otvos, participated as a scientific collaborator with the studies’ academic investigators, none of whom are affiliated with our company. We did not provide any funding for any of these studies.

Our Strategy

Our strategy is to convert clinicians, and the clinical diagnostic laboratories they use, from traditional cholesterol testing to our NMR LipoProfile test for the management of patients at risk for CHD, with the goal of ultimately becoming a clinical standard of care. The key elements of our strategy to achieve this goal include:

 

   

Expand our sales force nationally;

 

   

Increase market awareness and educate clinicians about the clinical benefits of our test;

 

   

Expand relationships with clinical diagnostic laboratories;

 

   

Decentralize access to our technology platform with the Vantera system;

 

   

Broaden medical policy coverage;

 

   

Pursue inclusion in treatment guidelines;

 

   

Develop and expand relationships with leading academic medical centers; and

 

   

Develop new personalized diagnostic tests using our NMR-based technology platform.

Our Technology Platform

Our technology platform combines proprietary signal processing algorithms and NMR spectroscopic detection into a clinical analyzer to identify and quantify concentrations of lipoproteins and, potentially, small molecule metabolites. NMR detectors, or spectrometers, analyze a blood plasma or serum sample by subjecting it to a short pulse of radio frequency energy within a strong magnetic field. Each lipoprotein particle within a given diameter range simultaneously emits a distinctive radio frequency signal, similar to distinctive ringing sounds for

 

 

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bells of different sizes. The amplitude, or “volume,” of the NMR signal is directly proportional to the concentration of the particular subclass of lipoprotein particles emitting the signal. Our proprietary software then collects, records and analyzes the composite signals emitted by all of the particles in the sample in real time and separates the signals into distinct subclasses. Within minutes, we are able to quantify multiple subclasses of lipoprotein particles.

Our technology platform based on NMR offers the following advantages over conventional methods of quantifying lipoproteins and small molecule metabolites:

 

   

Information-rich detection. NMR can analyze lipoproteins as well as potentially hundreds of small molecule metabolites;

 

   

Processing efficiency. Our technology does not require physical separation of the lipoprotein particles and does not require chemical reagents in order to evaluate a sample;

 

   

Sample indifference. Our technology may be used to analyze multiple sample types, including plasma, serum, urine, cerebrospinal fluid and other biological fluids; and

 

   

Throughput. Simultaneous lipoprotein and metabolite quantification from a rapid NMR measurement makes the platform extremely efficient with high throughput.

The Vantera System

The Vantera system is our next-generation automated clinical analyzer. In August 2012, we received FDA clearance to market the Vantera system commercially to laboratories. We intend to decentralize access to our technology through the Vantera system in order to drive both geographic expansion and the technology adoption necessary for successful execution of our market conversion strategy. We intend to place the Vantera system in select high-volume national and regional clinical diagnostic laboratories, as well as at leading medical centers and hospital outreach laboratories.

We have entered into agreements with some of our current clinical diagnostic laboratory customers to place the Vantera system in their laboratories. We are also in discussions with additional laboratory customers who have indicated a similar interest in the placement of the Vantera system. We currently expect these placements to begin in the first quarter of 2013.

As with our existing clinical analyzers, the Vantera system uses NMR spectroscopy and proprietary signal processing algorithms to identify and quantify lipoproteins and metabolites from a single spectrum, or scan. We believe that the Vantera system provides the following strategic and technological benefits:

 

   

direct access to our technology on site, rather than relying on a “send-out” test;

 

   

processing of samples at a rate that is approximately twice as fast as our current-generation analyzers;

 

   

a reagent-less platform requiring no sample preparation for analysis;

 

   

multiple NMR-test processing capabilities; and

 

   

limited operator intervention, with no specialized NMR training required for operation.

Risks Related to Our Business

Our business is subject to a number of risks of which you should be aware before making an investment decision. These risks are discussed more fully in the “Risk Factors” section of this prospectus immediately following this prospectus summary. These risks include, among others:

 

   

Our ability to successfully execute our business strategy is dependent on our achieving greater market acceptance of the NMR LipoProfile test.

 

   

A small number of clinical diagnostic laboratory customers account for most of our revenues from sales of our NMR LipoProfile test.

 

 

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We had an accumulated deficit of $48.2 million as of September 30, 2012, we incurred a net loss of $0.5 million for the year ended December 31, 2011 and, while we generated net income of $1.1 million during the nine months ended September 30, 2012, we expect to incur losses for the next several years as we increase our expenses in an effort to increase market share for our NMR LipoProfile test and to develop new diagnostic tests. In addition, we have $16.0 million in term loans with two banks that require us to make monthly installment payments through July 2016 and a revolving line of credit with one of these banks that matures in December 2013.

 

   

Even though our next-generation Vantera clinical analyzer has received FDA clearance, if clinical diagnostic laboratories are not receptive to placement of the Vantera system in their facilities, or are not satisfied with such system after placement in their facilities, a key element of our business strategy may not be successful.

 

   

Health insurers, accountable care organizations and other third-party payors may decide not to cover, or may discontinue reimbursing, our NMR LipoProfile test or any other diagnostic tests we may develop in the future, or may provide inadequate reimbursement.

 

   

We rely on a limited number of key suppliers for the components used in the Vantera system and other necessary supplies to perform our NMR LipoProfile test.

 

   

Our ability to meet increased demand for our NMR LipoProfile test will be harmed if we are unable to place the Vantera system in third-party diagnostic laboratories.

 

   

If we do not successfully develop or acquire and introduce new personalized diagnostic tests or other applications of our NMR-based technology, we may not be able to generate additional revenue opportunities.

 

   

We have limited patent protection for the NMR LipoProfile test and may have limited patent protection for future tests that we may develop. As a result, our intellectual property position may not adequately protect us from competitors for sales of our NMR LipoProfile test or any future diagnostic tests we may develop.

 

   

The NMR LipoProfile test is, and any other test for which we obtain marketing approval will be, subject to extensive ongoing regulatory requirements, and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our products.

Corporate Information

We were incorporated under the laws of North Carolina in June 1994 under the name LipoMed, Inc. and reincorporated under the laws of Delaware in June 2000. In January 2002, we changed our corporate name to LipoScience, Inc. Our principal executive office is located at 2500 Sumner Boulevard, Raleigh, North Carolina. Our telephone number is (919) 212-1999. Our website address is www.liposcience.com. Information contained in, or accessible through, our website does not constitute a part of, and is not incorporated into, this prospectus.

LIPOSCIENCE®, NMR LIPOPROFILE® and VANTERA® are our registered United States trademarks. All other trademarks, trade names or service marks referred to in this prospectus are the property of their respective owners.

 

 

This prospectus includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that these industry publications and third-party research, surveys and studies are reliable, we have not independently verified such data.

 

 

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The Offering

 

Common stock offered by us

  5,000,000 shares

Common stock to be outstanding after

this offering

13,888,795 shares

 

Over-allotment option

     750,000 shares

 

Use of proceeds

We estimate that the net proceeds from our sale of shares of our common stock in this offering will be approximately $61.6 million, or approximately $71.4 million if the underwriters exercise their over-allotment option in full, based upon an assumed initial public offering price of $14.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We currently expect to use the net proceeds from this offering as follows:

 

   

$5.2 million upon the closing of this offering to pay dividends on the outstanding shares of Series F redeemable convertible preferred stock that will convert into common stock;

 

   

approximately $22.6 million to hire additional sales and marketing personnel and to support costs associated with increased sales and marketing activities;

 

   

approximately $18.0 million for capital expenditures, including components of the Vantera system and other improvements to our laboratory infrastructure;

 

   

approximately $4.8 million to fund our research and development programs, including the expansion of our diagnostic test menu based on the Vantera system; and

 

   

the balance for other general corporate purposes, including general and administrative expenses, working capital and the potential repayment of indebtedness.

 

  These estimates are subject to change. See “Use of Proceeds.”

 

Risk factors

See the section titled “Risk Factors” beginning on page 12 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

Proposed NASDAQ Global Market symbol

LPDX

Some of our existing stockholders and their affiliated entities, including holders of more than 5% of our common stock, have indicated an interest in purchasing up to an aggregate of $3.4 million in shares of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters could determine to sell more, less or no shares to any of these existing stockholders and any of these existing stockholders could determine to purchase more, less or no shares in this offering. Any shares purchased by these stockholders will be subject to the lock-up agreements described in the “Underwriting” section of this prospectus.

 

 

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The number of shares of our common stock that will be outstanding immediately after this offering is based on 8,888,795 shares of common stock outstanding as of December 31, 2012, and excludes:

 

   

2,056,848 shares of our common stock issuable upon the exercise of stock options outstanding under our 1997 stock option plan and 2007 stock incentive plan as of December 31, 2012, at a weighted average exercise price of $5.56 per share;

 

   

85,430 shares of our common stock issuable upon the exercise of outstanding warrants as of December 31, 2012, at an exercise price of $8.97 per share; and

 

   

1,212,500 shares of our common stock to be reserved for future issuance under our equity incentive plans following this offering.

Except as otherwise indicated herein, all information in this prospectus, including the number of shares that will be outstanding after this offering, assumes or gives effect to:

 

   

a 0.485- for -1 reverse stock split of our common stock effected on January 10, 2013;

 

   

the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 6,994,518 shares of our common stock, which will occur automatically upon the closing of this offering; and

 

   

no exercise of the underwriters’ over-allotment option.

 

 

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Summary Financial Data

The following tables summarize our financial data. We have derived the following summary of our statement of operations data for the years ended December 31, 2009, 2010 and 2011 from our audited financial statements appearing later in this prospectus. We have derived the following summary of our statement of operations data for the nine months ended September 30, 2011 and 2012 and balance sheet data as of September 30, 2012 from our unaudited financial statements appearing later in this prospectus.

The unaudited financial data include, in the opinion of our management, all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair presentation of our financial position and results of operations for these periods. Our historical results are not necessarily indicative of the results that may be expected in the future and our results for any interim period are not necessarily indicative of the results that may be expected for a full fiscal year. You should read the summary of our financial data set forth below together with our financial statements and the related notes to those statements, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing later in this prospectus.

Pro forma basic and diluted net (loss) income per common share have been calculated assuming the conversion of all outstanding shares of convertible preferred stock into shares of common stock. See Note 1 to our financial statements for an explanation of the method used to determine the number of shares used in computing historical and pro forma basic and diluted net (loss) income per common share.

We have presented the summary balance sheet data:

 

   

on an actual basis as of September 30, 2012;

 

   

on a pro forma basis to give effect to:

 

   

the conversion of all then outstanding shares of our convertible preferred stock into an aggregate of 6,985,817 shares of our common stock, which will occur automatically upon the closing of this offering;

 

   

the payment of $5.2 million of accrued dividends on the outstanding shares of Series F redeemable convertible preferred stock that will convert into common stock upon the closing of this offering; and

 

   

the reclassification of the preferred stock warrant liability to additional paid-in-capital upon conversion of the convertible preferred stock issuable upon exercise of such warrants into common stock; and

 

   

on a pro forma as adjusted basis to give further effect to our sale of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $14.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us after September 30, 2012.

The pro forma as adjusted information presented in the summary balance sheet data is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $14.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease each of cash and cash equivalents, total assets and total stockholders’ equity on a pro forma as adjusted basis by approximately $4.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. An increase or decrease of 1,000,000 in the number of shares we are offering would increase or decrease each of cash and cash equivalents, total assets and total stockholders’ equity on a pro forma as adjusted basis by approximately $13.0 million, assuming the assumed initial public offering price per share, which is the midpoint of the range set forth on the cover page of this prospectus, remains the same.

 

 

 

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    Year Ended December 31,     Nine Months Ended September 30,  
              2009                          2010                          2011                        2011                     2012          
   

(in thousands, except share and per share data)

 

Statement of Operations Data:

         

Revenues

  $ 34,713      $ 39,368      $ 45,807      $ 33,328      $ 41,241   

Cost of revenues

    7,792        8,139        8,529        6,367        7,622   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    26,921        31,229        37,278        26,961        33,619   

Operating expenses:

         

Research and development

    6,156        7,276        7,808        5,698        7,418   

Sales and marketing

    12,990        15,246        21,305        15,453        16,746   

General and administrative

    7,020        7,331        8,550        6,248        7,764   

Gain on extinguishment of other long-term liabilities

    —          (2,700     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    26,166        27,153        37,663        27,399        31,928   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    755        4,076        (385     (438     1,691   

Total other (expense) income

    (495     220        (163     (130     (634
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

    260        4,296        (548     (568     1,057   

Income tax expense (benefit)

    2        (16     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    258        4,312        (548     (568     1,057   

Accrual of dividends on redeemable convertible preferred stock

    (1,040     (1,040     (613     (612     —     

Undistributed earnings allocated to preferred stockholders

    —          (2,655     —          —          (850
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to common stockholders – basic

    (782     617        (1,161     (1,180     207   

Undistributed earnings re-allocated to common stockholders

    —          303        —          —          109   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to common stockholders – diluted

  $ (782   $ 920      $ (1,161   $ (1,180   $ 316   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to common stockholders per share – basic

  $ (0.49   $ 0.38      $ (0.69   $ (0.71   $ 0.12   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to common stockholders per share – diluted

  $ (0.49   $ 0.34      $ (0.69   $ (0.71   $ 0.11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock outstanding used in computing net (loss) income per share – basic

    1,596,920        1,611,843        1,674,018        1,666,820        1,704,736   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares income of common stock outstanding used in computing net (loss) income per share – diluted

    1,596,920        2,713,770        1,674,018        1,666,820        2,984,817   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net (loss) income per share of common stock – basic

      $ (0.09     $ 0.07   
     

 

 

     

 

 

 

Pro forma net (loss) income per share of common stock – diluted

      $ (0.09     $ 0.06   
     

 

 

     

 

 

 

Weighted average shares of common stock outstanding used in computing pro forma net (loss) income per share – basic

        9,031,264          8,986,474   
     

 

 

     

 

 

 

Weighted average shares of common stock outstanding used in computing pro forma net (loss) income per share – diluted

        9,031,264          10,266,555   
     

 

 

     

 

 

 

 

 

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     As of September 30, 2012  
     Actual     Pro forma     Pro forma
as adjusted(1)
 
     (in thousands)  

Balance Sheet Data:

      

Cash and cash equivalents

   $ 10,279      $ 5,079      $ 69,335   

Accounts receivable, net

     8,057        8,057        8,057   

Total assets

     33,549        28,349        89,803   

Revolving line of credit(2)

     3,500        3,500        3,500   

Current maturities of long-term debt(2)

     2,400        2,400        2,400   

Long-term debt, less current maturities(2)

     1,800        1,800        1,800   

Preferred stock warrant liability

     462        —          —     

Total liabilities

     15,480        15,018        14,872   

Redeemable convertible preferred stock and convertible preferred stock

     57,165        —          —     

Additional paid-in capital

     9,089        61,508        123,103   

Accumulated deficit

     (48,186     (48,186     (48,186

Total stockholders’ (deficit) equity

     (39,094     13,331        74,931   

 

(1) 

As of September 30, 2012, we had paid approximately $2.7 million of expenses incurred in connection with this offering.

(2) 

Subsequent to September 30, 2012, we refinanced our indebtedness. As of December 31, 2012, our indebtedness consisted of $16.0 million in term loans, all of which was classified as long-term on our balance sheet, and $5.0 million borrowed under our revolving line of credit, all of which was classified as current liabilities on our balance sheet.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information included in this prospectus, before you decide to purchase shares of our common stock. If any of the following risks actually occurs, they may harm our business, prospects, financial condition and operating results. As a result, the trading price of our common stock could decline and you could lose part or all of your investment.

Risks Related to Our Business and Strategy

Our ability to successfully execute our strategy is dependent on our achieving greater market acceptance of the NMR LipoProfile test.

Our ability to generate revenue depends on our successful marketing of the NMR LipoProfile test. The NMR LipoProfile test accounted for 85% of our revenues for the year ended December 31, 2009, 87% of our revenues for the year ended December 31, 2010, 93% of our revenues for the year ended December 31, 2011 and 94% of our revenues for the nine months ended September 30, 2012. We expect that our revenues and profitability will depend on sales of the NMR LipoProfile test for the foreseeable future.

There is not currently widespread awareness of the NMR LipoProfile test among clinicians, even though the test has been available since 1999. In order to achieve greater market acceptance of the NMR LipoProfile test, we must continue to demonstrate to clinicians, other healthcare professionals, clinical diagnostic laboratories, healthcare thought leaders and third-party payors that the test is a clinically useful and cost-effective diagnostic test and disease management tool for cardiovascular disease risk providing improved or additional benefits over traditional cholesterol testing, which has been widely accepted as effective for managing cardiovascular risk for many years.

When seeking testing and management recommendations for coronary heart disease, many physicians and other clinicians look to clinical guidelines published by influential organizations. Such organizations include the National Cholesterol Education Program, or NCEP, an authority on cholesterol management overseen by the National Heart, Lung and Blood Institute, or NHLBI, part of the National Institutes of Health, and the American Heart Association. The NMR LipoProfile test is not currently included in guidelines published by NCEP or the American Heart Association. If we are not successful in our strategy of gaining inclusion in the guidelines published by these or other organizations, it could ultimately limit market adoption of the NMR LipoProfile test.

A study published in May 2012 in Circulation, a peer-reviewed scientific journal published by the American Heart Association, evaluated frozen archived blood samples collected between 1994 and 1997 from approximately 20,000 United Kingdom subjects, and concluded that LDL-P and traditional cholesterol testing have similar predictive value for the incidence of CHD. Although this paper did not include data analyses addressing the utility of these measurements for patient management in discordant subjects, and therefore in our view does not diminish the weight of scientific evidence supporting the utility of LDL-P testing in discordant patients, it is possible that readers may misunderstand this paper, which could make it more difficult to persuade clinicians and publishers of clinical guidelines of the benefits of our NMR LipoProfile test over traditional cholesterol testing.

A small number of clinical diagnostic laboratory customers account for most of the sales of our NMR LipoProfile test. If any of these laboratories orders fewer tests from us for any reason, our revenues could decline.

For the year ended December 31, 2011 and the nine months ended September 30, 2012, we generated 76% and 88% of our revenues, respectively, from clinical diagnostic laboratory customers. Sales to one of these laboratories, Laboratory Corporation of America Holdings, or LabCorp, accounted for 33% of our revenues for the year ended December 31, 2010, 33% of our revenues for the year ended December 31, 2011 and 29% of our

 

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revenues for the nine months ended September 30, 2012. Sales to a second laboratory customer, Health Diagnostics Laboratory, Inc., accounted for 21% of our revenues for the year ended December 31, 2011 and 32% of our revenues for the nine months ended September 30, 2012.

Our current agreements with our laboratory customers do not require them to purchase any minimum quantities of the NMR LipoProfile test. In addition, these customers generally have the right to terminate their respective agreements with us at any time. If any major customer were to terminate its relationship with us, or to substantially diminish its purchases of the NMR LipoProfile test, our revenues could significantly decline or it could adversely impact our revenue growth.

We expect to incur losses for the next several years as we increase expenses in our effort to increase market share for the NMR LipoProfile test, place the Vantera system in third-party clinical diagnostic laboratories, and develop new personalized diagnostic tests.

Although we generated net income for the nine months ended September 30, 2012, we incurred a net loss of $0.5 million for the year ended December 31, 2011 and have incurred significant losses since our inception. As of September 30, 2012, we had an accumulated deficit of $48.2 million. We anticipate experiencing losses for the next several years as we increase expenses in pursuit of our growth strategy and our efforts to increase market share for the NMR LipoProfile test, place the Vantera system in third-party clinical diagnostic laboratories, and develop new personalized diagnostic tests.

Historically, our losses have resulted principally from research and development programs, our sales and marketing efforts, and our general and administrative expenses. We expect to continue to incur significant operating expenses and anticipate that our expenses and losses will increase due to costs relating to, among other things:

 

   

expansion of our direct sales force and increasing our marketing capabilities to promote market awareness and acceptance of our NMR LipoProfile test;

 

   

placement of the Vantera system in third-party clinical diagnostic laboratories;

 

   

development of and, as necessary, pursuit of regulatory approvals for, new diagnostic tests;

 

   

expansion of our operating capabilities;

 

   

maintenance, expansion and protection of our intellectual property portfolio and trade secrets;

 

   

employment of additional clinical, quality control, scientific and management personnel; and

 

   

employment of operational, financial, accounting and information systems personnel, consistent with expanding our operations and our status as a newly public company.

To become and remain profitable, we must succeed in increasing sales of our NMR LipoProfile test or develop and commercialize new tests with significant market potential, and place the Vantera system in third-party clinical diagnostic laboratories. We may never succeed in these activities and may never generate revenues that are sufficient to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain consistently profitable would likely depress the market price of our common stock and could significantly impair our ability to raise capital, expand our business or continue to pursue our growth strategy.

If we do not establish relationships with additional clinical diagnostic laboratories, we may not be able to increase the number of NMR LipoProfile tests we sell.

A significant element of our strategy is to leverage relationships with clinical diagnostic laboratories to increase market acceptance of the NMR LipoProfile test and gain market share. Most clinicians who request traditional cholesterol tests, our NMR LipoProfile test and other diagnostic tests to evaluate cardiovascular disease risk order these tests through clinical diagnostic laboratories.

 

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If we are unable to establish relationships with additional clinical diagnostic laboratories, clinicians who order tests through these laboratories may be unwilling or unable to order our NMR LipoProfile test. In addition, we would not have the benefit of leveraging the sales, marketing and distribution capabilities of these laboratories, which we believe is important to our ability to increase awareness of and expand utilization of the NMR LipoProfile test. As a result, if we are unable to establish additional clinical laboratory relationships, our ability to increase sales of our NMR LipoProfile test and to successfully execute our strategy could be compromised.

We will need to expand our marketing and sales capabilities in order to increase demand for our NMR LipoProfile test, to expand geographically and to successfully commercialize any other personalized diagnostic tests we may develop.

We believe our current sales and marketing operations are not sufficient to achieve the level of market awareness and sales required for us to attain significant commercial success for our NMR LipoProfile test, to expand our geographic presence and to successfully commercialize any other diagnostic tests we may develop. In order to increase sales of our NMR LipoProfile test, we will need to:

 

   

expand our direct sales force in the United States by recruiting additional sales representatives in selected markets;

 

   

educate clinicians, other healthcare professionals, clinical diagnostic laboratories, healthcare thought leaders and third-party payors regarding the clinical benefits and cost-effectiveness of our NMR LipoProfile test;

 

   

expand our number of clinical diagnostic laboratory and hospital outreach laboratory customers; and

 

   

establish, expand and manage sales and reimbursement arrangements with third parties, such as clinical diagnostic laboratories and insurance companies.

We have limited experience in selling and marketing the NMR LipoProfile test nationally, and we have no experience in placing and servicing the Vantera system in third-party clinical diagnostic laboratories for commercial purposes. We intend to hire a significant number of additional sales and marketing personnel with experience in the diagnostic, medical device or pharmaceutical industries. We may face competition from other companies in these industries, some of whom are much larger than us and who can pay significantly greater compensation and benefits than we can, in seeking to attract and retain qualified sales and marketing employees. If we are unable to hire and retain qualified sales and marketing personnel, our business will suffer.

Furthermore, in order to successfully commercialize diagnostic tests that we may develop in the future, we may need to conduct lengthy, expensive clinical trials and develop dedicated sales and marketing operations to achieve market awareness and demand. If we are not able to successfully implement our marketing, sales and commercialization strategies, we may not be able to expand geographically, increase sales of our NMR LipoProfile test or successfully commercialize any future diagnostic tests that we may develop.

The diagnostic industry is subject to rapidly changing technology which could make our current test and the tests we are developing obsolete unless we continue to develop and manufacture new and improved tests and pursue new market opportunities.

Our industry is characterized by rapid technological changes, frequent new product introductions and enhancements and evolving industry standards. Our future success will depend on our ability to keep pace with the evolving needs of our customers on a timely and cost-effective basis and to pursue new market opportunities that develop as a result of technological and scientific advances. These new market opportunities may be outside the scope of our expertise or in areas which have unproven market demand, and the utility and value of new tests that we develop may not be accepted in the market. Our inability to gain market acceptance of new tests could harm our future operating results. Further, if new research or clinical evidence or economic comparative evidence arises that supports a different marker for coronary heart disease risk, demand for our test could decline.

 

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Our NMR LipoProfile test competes with other diagnostic testing methods that may be more widely accepted than our test.

The clinical diagnostics market is highly competitive, and we must be able to compete effectively against existing and future competitors in order to be successful. In selling our NMR LipoProfile test, we compete primarily with existing diagnostic, detection and monitoring technologies, particularly the conventional lipid panel test, which is relatively inexpensive, widely reimbursed and broadly accepted as an effective test for managing the risk of developing cardiovascular disease. We also compete against companies that offer other methods for directly or indirectly measuring cholesterol concentrations, lipoproteins or lipoprotein particles. For example, measuring apolipoprotein B, or apoB, is an indirect way to approximate LDL-P. ApoB tests are offered by many clinical diagnostic laboratories and are generally less expensive than our tests. It is possible that apoB, or other competing tests, could be perceived by clinicians as more cost-effective than our test in providing information useful in managing CHD risk. In addition, some competitors offering these competing technologies may have longer operating histories, better name recognition and greater financial, technical, sales, marketing, distribution and public relations resources than we have. They may also have more experience in research and development, regulatory matters, manufacturing and marketing than we do, and may have established broad third-party reimbursement for their tests. If we do not compete successfully, we will not be able to increase our market share and our business will be seriously harmed.

Even though the Vantera system has received regulatory clearance in the United States, if laboratories are not receptive to placement of the Vantera system at their facilities, or if we do not receive regulatory clearance of the Vantera system in other jurisdictions, our growth strategy may not be successful.

A key element of our strategy is to place the Vantera system, our next-generation automated clinical NMR analyzer, on site with selected clinical diagnostic laboratory customers to broaden access to our technology and increase demand for our NMR LipoProfile test and any future diagnostic tests that we may develop. Although we received clearance from the FDA to perform the FDA-cleared measurements of the NMR LipoProfile test using the Vantera system in August 2012, we have not applied for clearance from comparable regulatory agencies in other countries for the Vantera system, and we may not receive regulatory clearance for the commercial use of the Vantera system in other countries on a timely basis, or at all. Even though the Vantera system is cleared by the FDA, it may not gain significant acceptance by clinical diagnostic laboratories, or these laboratories may not be satisfied with the Vantera system after it is placed in their facilities. If clinical diagnostic laboratories do not accept the placement of the Vantera system in their facilities, our ability to grow our business by deploying the Vantera system could be compromised.

We currently do not generate significant revenue from sales of the NMR LipoProfile test to laboratory customers in the State of California. Among other things, California law restricts a clinical diagnostic laboratory from charging its customers a mark-up on the price of diagnostic tests performed by a third-party laboratory. We believe that the FDA clearance for the Vantera system will facilitate our ability to drive conversion in the California market by allowing our clinical diagnostic laboratory customers to perform the NMR LipoProfile test themselves using the Vantera system. If clinical laboratories do not accept the placement of the Vantera system in their facilities, we may need to pursue other strategies in order to increase the amount of our business from clinical laboratory customers who serve the California market.

We rely on two key suppliers for the components used in the Vantera system. If we were to lose either of these suppliers, our ability to broadly place the Vantera system could be compromised.

We currently rely on a single supplier, Agilent Technologies, Inc., for the magnet, probe and console incorporated in the Vantera system. These are the key components of the analyzers necessary to perform our NMR LipoProfile test. We are party to a supply agreement with Agilent pursuant to which we have agreed to exclusively purchase all of our NMR-related components from them. We are also party to a production agreement with KMC Systems, Inc. under which KMC is our exclusive manufacturer of the sample handler and shell for the Vantera system.

 

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We are currently aware of one other primary supplier of NMR spectrometers, Bruker BioSpin, part of Bruker Corporation. We have in the past acquired NMR spectrometers from Bruker BioSpin, and we use them in our current generation of NMR clinical analyzers, but we do not currently have an agreement or relationship with Bruker BioSpin. In the event it is necessary or desirable to acquire NMR spectrometers from Bruker BioSpin, we might not be able to obtain them on commercially reasonable terms, if at all. It could also require significant time and expense to redesign our current analyzers or the Vantera system to work with the spectrometers provided by another company.

If we are unable to obtain the NMR components we need at a reasonable price or on a timely basis, we may be unable to maintain the analyzers we use in our facility to perform our NMR LipoProfile test, which could compromise our ability to meet our customers’ orders for the test. Likewise, if the components or any other part of the Vantera system are not available when needed, we may not be able to place the Vantera system broadly, which could impair our ability to pursue our growth strategy.

Our ability to meet increased demand for our NMR LipoProfile test will be harmed if we are unable to place the Vantera system in third-party diagnostic laboratories.

We have recently experienced rapid growth in orders of our NMR LipoProfile test. We perform our NMR LipoProfile test using our current generation NMR analyzers, as well as our Vantera system analyzers, located in our laboratory facility in Raleigh, North Carolina. If demand for our test grows to the point at which it exceeds our existing capacity, we will be required to add capacity in order to meet this demand. We do not expect to be able to expand capacity through the addition of more of our existing NMR clinical analyzers, because those analyzers use NMR spectrometers from Bruker BioSpin, a supplier with whom we no longer have an agreement or relationship. Instead, we intend to meet additional demand for our test by using a decentralization strategy of placing our Vantera system in the facilities of clinical diagnostic laboratories, as well as utilizing additional Vantera system analyzers at our laboratory facility in Raleigh, North Carolina.

If we are unsuccessful in broadly placing the Vantera system in third-party diagnostic laboratories for any reason, we may be unable to meet demand that exceeds our current capacity. In that case, we would need to meet increased demand by performing our NMR LipoProfile test on Vantera system analyzers located in our own laboratory and we might not be successful in doing so.

We rely on a single supplier for our branded blood collection tubes, called LipoTubes, which are used to collect a majority of our blood samples for testing.

We use an exclusive supplier for LipoTubes, which are produced according to our specifications. An alternate supplier might not be easily located, and if we are unable to obtain these tubes from this vendor for any reason, our ability to perform our test and maintain effective relationships with our current clinical customers would be impaired.

If we do not successfully develop or acquire and introduce new personalized diagnostic tests or other applications of our technology, we may not generate new sources of revenue and may not be able to successfully implement our growth strategy.

Our business strategy includes the acquisition, development and introduction of new clinical diagnostic applications of our NMR-based technology in addition to our NMR LipoProfile test. Additionally, we believe that for our Vantera system to be attractive to laboratories to place in their facilities, it may be necessary for us to offer additional tests for use on the Vantera system. All of our diagnostic tests under development will require significant additional research and development, a commitment of significant additional resources and possibly costly and time-consuming clinical testing prior to their commercialization. Our technology is complex, and we cannot be sure that any tests under development will be developed successfully, be proven to be effective, offer diagnostic or other improvements over currently available tests, meet applicable regulatory standards, be produced in commercial quantities at acceptable costs or be successfully marketed.

 

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We may also in the future seek to acquire complementary products or technologies from third parties. Integrating any product or technology we acquire could be expensive and time-consuming, disrupt our ongoing business and distract our management. If we are unable to integrate any tests or technologies effectively, we may not be able to implement our business model. If we do not successfully develop new clinical diagnostic applications of our NMR-based technology or acquire complementary diagnostic products, we could lose interest from academic medical centers and could also lose revenue opportunities with existing or future clinical laboratory customers.

If we are not able to retain and recruit qualified management, sales and marketing, regulatory and research and development personnel, we may be unable to successfully execute our business strategy.

Our future success depends to a significant extent on the skills, experience and efforts of our senior management team, including Richard O. Brajer, our President and Chief Executive Officer; Lucy G. Martindale, our Chief Financial Officer; James D. Otvos, our Chief Scientific Officer and founder; Timothy J. Fischer, our Chief Operating Officer; and Thomas S. Clement, our Vice President of Regulatory and Quality Affairs. The loss of any or all of these individuals, or other management personnel, could harm our business and might significantly delay or prevent the achievement of our business objectives. We have entered into an employment agreement or offer letters with each of these individuals and with our other executives. The existence of an employment agreement or offer letter does not, however, guarantee retention of these employees, and we may not be able to retain those individuals for the duration of or beyond the end of their respective terms. We do not maintain key person life insurance on any of our management personnel.

Recruiting and retaining qualified sales and marketing, regulatory, scientific and laboratory personnel will also be critical to our success. We may not be able to attract and retain these personnel on acceptable terms, given the competition among numerous diagnostic, medical device, pharmaceutical and biotechnology companies for similarly skilled personnel.

If we are unable to successfully manage our growth, our business will be harmed.

During the past several years, we have significantly expanded our operations. We expect this expansion to continue to an even greater degree following completion of this offering as we seek to expand nationally and explore potential expansion into international markets. Our growth has placed and will continue to place a significant strain on our management, operating and financial systems and our sales, marketing and administrative resources. As a result of our growth, our operating costs may escalate even faster than planned, and some of our internal systems may need to be enhanced or replaced. If we cannot effectively manage our expanding operations and our costs, we may not be able to continue to grow or we may grow at a slower pace and our business could be adversely affected.

We currently perform our tests exclusively in one laboratory facility. If this or any future facility or our equipment were damaged or destroyed, or if we experience a significant disruption in our operations for any reason, our ability to continue to operate our business could be materially harmed.

We currently perform our NMR LipoProfile tests exclusively in a single laboratory facility in Raleigh, North Carolina. If this or any future facility were to be damaged, destroyed or otherwise unable to operate, whether due to fire, floods, hurricanes, storms, tornadoes, other natural disasters, employee malfeasance, terrorist acts, power outages, or otherwise, or if performance of our analyzers is disrupted for any other reason, we may not be able to perform our tests or generate test reports as promptly as our customers expect, or possibly not at all. If we are unable to perform our tests or generate test reports within a timeframe that meets our customers’ expectations, our business, financial results and reputation could be materially harmed.

Currently, we maintain insurance coverage totaling $12 million against damage to our property and equipment and an additional $10 million to cover business interruption and research and development restoration expenses, subject to deductibles and other limitations. If we have underestimated our insurance needs with respect to an interruption, or if an interruption is not subject to coverage under our insurance policies, we may not be able to cover our losses.

 

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Failure in our information technology, storage systems or our analyzers could significantly disrupt our operations and our research and development efforts, which could adversely impact our revenues, as well as our research, development and commercialization efforts.

Our ability to execute our business strategy depends, in part, on the continued and uninterrupted performance of our information technology, or IT, systems, which support our operations and our research and development efforts, as well as our storage systems and our clinical analyzers, including the Vantera system analyzers. Due to the sophisticated nature of the NMR technology we use in our testing, we are substantially dependent on our IT systems. IT systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our IT systems, sustained or repeated system failures that interrupt our ability to generate and maintain data, and in particular to operate our NMR analyzers, including any Vantera system analyzers placed in third-party clinical diagnostic laboratories, could adversely affect our ability to operate our business. Any interruption in the operation of our NMR analyzers, due to IT system failures, part failures or potential disruptions in the event we are required to relocate our analyzers within our facility or to another facility, or failures of the Vantera system analyzers within the facilities of third-party clinical diagnostic laboratories, could have an adverse effect on our operations.

We rely on courier delivery services to transport samples to our facility for analysis. If these delivery services are disrupted, our business and customer satisfaction could be negatively impacted.

Clinicians and clinical laboratories ship samples to us by air and ground express courier delivery service for analysis in our Raleigh, North Carolina facility. Disruptions in delivery service, whether due to bad weather, natural disaster, terrorist acts or threats, or for other reasons, can adversely affect specimen quality and our ability to provide our services on a timely basis to customers.

Our business involves the use of hazardous materials that could expose us to environmental and other liabilities.

Our laboratory facility is subject to various local, state and federal laws and regulations relating to safe working conditions, laboratory and manufacturing practices and the use and disposal of hazardous or potentially hazardous substances, including chemicals, biological materials and various compounds used in connection with our research and development activities. In the United States, these laws include the Occupational Safety and Health Act, the Toxic Test Substances Control Act and the Resource Conservation and Recovery Act. We cannot assure you that accidental contamination or injury to our employees and third parties from hazardous materials will not occur. We do not have insurance to cover claims arising from our use and disposal of these hazardous substances other than limited clean-up expense coverage for environmental contamination due to an otherwise insured peril, such as fire.

If product liability lawsuits are successfully brought against us, we may incur substantial liabilities that could have a significant negative effect on our financial condition or reputation.

Diagnostic testing entails the risk of product liability, and we may be exposed to liability claims arising from the use of our tests. We maintain product liability insurance that is subject to deductibles and coverage limitations and is in an amount that we believe to be reasonable. We cannot be certain, however, that our product liability insurance will be sufficient to protect us against losses due to liability. As a result, we may be required to pay all or a portion of any successfully asserted product liability claim out of our cash reserves. Furthermore, we cannot be certain that product liability insurance will continue to be available to us on commercially reasonable terms or in sufficient amounts. We can provide no assurance that we will be able to avoid significant product liability claims, which could hurt our reputation and our financial condition.

 

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If we expand sales of our products or place the Vantera system outside of the United States, our business will be susceptible to costs and risks associated with international operations.

As part of our longer-term growth strategy, we may decide to target select international markets to grow our presence outside of the United States. Conducting international operations would subject us to new risks that, generally, we have not faced in the United States, including:

 

   

fluctuations in currency exchange rates;

 

   

longer accounts receivable payment cycles and difficulties in collecting accounts receivable;

 

   

uncertain regulatory registration and approval processes for seeking clearance of the Vantera system and our diagnostic tests;

 

   

competition from companies located in the countries in which we offer our products, which may be a competitive disadvantage;

 

   

difficulties in managing and staffing international operations and assuring compliance with foreign corrupt practices laws;

 

   

the possibility of management distraction;

 

   

potentially adverse tax consequences, including the complexities of foreign value added tax systems, tax inefficiencies related to our corporate structure and restrictions on the repatriation of earnings;

 

   

increased financial accounting and reporting burdens and complexities;

 

   

political, social and economic instability abroad, terrorist attacks and security concerns in general; and

 

   

reduced or varied protection for intellectual property rights in some countries.

The occurrence of any one of these risks could harm our business or results of operations. Additionally, operating internationally requires significant management attention and financial resources. We cannot be certain that the investment and additional resources required in establishing operations in other countries will produce desired levels of revenues or profitability.

We may use third-party collaborators to help us develop, validate or commercialize any new diagnostic tests, and our ability to commercialize such tests could be impaired or delayed if these collaborations are unsuccessful.

We may license or selectively pursue strategic collaborations for the development, validation and commercialization of any new diagnostic tests we may develop. In any third-party collaboration, we would be dependent upon the success of the collaborators in performing their responsibilities and their continued cooperation. Our collaborators may not cooperate with us or perform their obligations under our agreements with them. We cannot control the amount and timing of our collaborators’ resources that will be devoted to performing their responsibilities under our agreements with them. Our collaborators may choose to pursue alternative technologies in preference to those being developed in collaboration with us. The development, validation and commercialization of our potential tests will be delayed if collaborators fail to conduct their responsibilities in a timely manner or in accordance with applicable regulatory requirements or if they breach or terminate their collaboration agreements with us. Disputes with our collaborators could also impair our reputation or result in development delays, decreased revenues and litigation expenses.

Failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could cause investors to lose confidence in our operating results and in the accuracy of our financial reports and could have a material adverse effect on our business and on the price of our common stock.

As a public company in the United States, we will be required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. We expect that our first report on compliance with Section 404 will be in connection with our financial statements for the year ending December 31, 2013.

 

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The controls and other procedures are designed to ensure that information required to be disclosed by us in the reports that we file with the Securities and Exchange Commission, or SEC, is disclosed accurately and is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. We are in the early stages of conforming our internal control procedures to the requirements of Section 404 and we may not be able to complete our evaluation, testing and any required remediation needed to comply with Section 404 in a timely fashion. Our independent registered public accounting firm was not engaged to perform an audit of our internal control over financial reporting for the year ended December 31, 2011 or for any other period. Our independent registered public accounting firm’s 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 our internal control over financial reporting. Accordingly, no such opinion was expressed. Even if we develop effective controls, these new controls may become inadequate because of changes in conditions or the degree of compliance with these policies or procedures may deteriorate.

Even after we develop these new procedures, material weaknesses in our internal control over financial reporting may be discovered. In order to fully comply with Section 404, we will need to retain additional employees to supplement our current finance staff, and we may not be able to so in a timely manner, or at all. In addition, in the process of evaluating our internal control over financial reporting we expect that certain of our internal control practices will need to be updated to comply with the requirements of Section 404 and the regulations promulgated thereunder, and we may not be able to do so on a timely basis, or at all. In the event that we are not able to demonstrate compliance with Section 404 in a timely manner, or are unable to produce timely or accurate financial statements, we may be subject to sanctions or investigations by regulatory authorities such as the SEC or the stock exchange on which our stock is listed, and investors may lose confidence in our operating results and the price of our common stock could decline. Furthermore, if we are unable to certify that our internal control over financial reporting is effective and in compliance with Section 404, we may be subject to sanctions or investigations by regulatory authorities such as the SEC or stock exchanges and we could lose investor confidence in the accuracy and completeness of our financial reports, which could hurt our business, the price of our common stock and our ability to access the capital markets.

If we fail to comply with the covenants and other obligations under our credit facility, the lenders may be able to accelerate amounts owed under the facility and may foreclose upon the assets securing our obligations.

In December 2012, we entered into a credit facility with Oxford Finance, or Oxford, and Square 1 Bank, or Square 1. The facility consists of $10 million in term loans from Oxford, a $6 million term loan from Square 1 and a $6 million revolving line of credit from Square 1. The term loans are payable in monthly installments of interest only through January 2014 and then principal and interest thereafter in monthly installments through July 2016. The line of credit matures in December 2013. Borrowings under our credit facility are secured by substantially all of our tangible assets. The covenants set forth in the loan and security agreement require, among other things, that we maintain a specified liquidity ratio, measured monthly, that begins at 1.25 and is reduced to 1.0 over the term of the agreement, and that we achieve minimum three-month trailing revenue levels during the term of the agreement, which are based on 80% of our projected revenue levels. In addition, the loan and security agreement requires that our projections provided to the lenders include annual projected revenues of at least $55 million. If we fail to comply with the covenants and our other obligations under the credit facility, the lenders would be able to accelerate the required repayment of amounts due under the loan agreement and, if they are not repaid, could foreclose upon our assets securing our obligations under the credit facility.

Our ability to use net operating losses to offset future taxable income may be subject to substantial limitations.

As of September 30, 2012, our available federal net operating losses, or NOLs, and federal research and development tax credits totaled $33.8 million. In general, under Section 382 of the Internal Revenue Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs and tax credits to offset future taxable income. We believe that we have had one or more ownership

 

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changes, as a result of which our existing NOLs are currently subject to limitation. In addition, if we undergo an ownership change in connection with or after this public offering, our ability to utilize our NOLs could be further limited by Section 382. Future changes in our stock ownership, some of which are outside of our control, could result in additional ownership changes under Section 382. We are unable to predict the future ownership and other variables considered by, and elections available pursuant to, Section 382 for determining the usability of our net operating losses. We may not be able to utilize a material portion of our NOLs, even if we attain profitability.

Risks Related to Billing, Coverage and Reimbursement for Our Tests

Health insurers and other third-party payors may decide not to cover, or may discontinue reimbursing, our NMR LipoProfile test or any other diagnostic tests we may develop in the future, or may provide inadequate reimbursement, which could jeopardize our ability to expand our business and achieve profitability.

Our business is impacted by the level of reimbursement for our NMR LipoProfile test from third-party payors. In the United States, the regulatory process allows diagnostic tests to be marketed regardless of any coverage determinations made by payors. For new diagnostic tests, each third-party payor makes its own decision about which tests it will cover, how much it will pay and whether it will continue reimbursing the test. Clinicians may order diagnostic tests that are not reimbursed by third-party payors if the patient is willing to pay for the test without reimbursement, but coverage determinations and reimbursement levels and conditions are critical to the commercial success of a diagnostic product.

The Centers for Medicare and Medicaid Services, or CMS, under the U.S. Department of Health and Human Services, or HHS, establishes reimbursement payment levels and coverage rules for Medicare. CMS currently covers our NMR LipoProfile test. State Medicaid plans and private payors establish rates and coverage rules independently. As a result, the coverage determination process is often a time-consuming and costly process that requires us to provide scientific and clinical support for the use of our tests to each payor separately, with no assurance that coverage or adequate reimbursement will be obtained. While our test is reimbursed by a number of governmental and private payors, which we believe collectively represent approximately 150 million covered lives, there are significant large private payors who do not currently cover our test. If CMS or other third-party payors decide not to cover our diagnostic tests, place significant restrictions on the use of our tests, or offer inadequate payment amounts, our ability to generate revenue from our diagnostic tests could be limited. It is possible that the study published in the scientific journal Circulation in May 2012, which concluded that LDL-P and traditional cholesterol testing have similar predictive value for the incidence of CHD, although it did not address the utility of these measurements for patient management in discordant subjects, could nonetheless indirectly make it more difficult to persuade third-party payors of the benefits of our NMR LipoProfile over traditional cholesterol testing for patient management.

Even if one or more third-party payors decides to reimburse for our tests, that payor may reduce utilization or stop or lower payment at any time, which could reduce our revenues. For example, payment for diagnostic tests furnished to Medicare beneficiaries is made based on a fee schedule set by CMS. In recent years, payments under these fee schedules have decreased and may decrease more. We cannot predict whether or when third-party payors will cover our tests or offer adequate reimbursement to make them commercially attractive. Clinicians or patients may decide not to order our tests if third-party payments are inadequate, especially if ordering the test could result in financial liability for the patient.

Billing complexities associated with obtaining payment or reimbursement for our tests may negatively affect our revenues, cash flow and profitability.

Billing for clinical laboratory testing services is complex. In cases where we do not receive a fixed fee per test performed from a laboratory customer, we perform tests in advance of payment and without certainty as to the outcome of the billing process. In cases where we do receive a fixed fee per test from a laboratory customer, we may still have disputes over pricing and billing. We or our laboratory customers receive payment from individual

 

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patients and from a variety of payors, such as commercial insurance carriers, including managed care organizations and governmental programs, primarily Medicare. Each payor typically has different billing requirements, and the billing requirements of many payors have become increasingly stringent.

Among the factors complicating our billing of third-party payors are:

 

   

disputes among payors as to which party is responsible for payment;

 

   

disparity in coverage among various payors;

 

   

disparity in information and billing requirements among payors; and

 

   

incorrect or missing billing information, which is required to be provided by the prescribing physician.

These billing complexities, and the related uncertainty in obtaining payment for our tests, could negatively affect our revenues, cash flow and profitability.

Healthcare reform measures could hinder or prevent commercial success of our NMR LipoProfile test.

In March 2010, President Obama signed into law a legislative overhaul of the U.S. healthcare system, known as the Patient Protection and Affordable Care Act of 2010, as amended by the Healthcare and Education Affordability Reconciliation Act of 2010, or the PPACA, which may have far-reaching consequences for most healthcare companies, including diagnostic companies like us. As a result of this new legislation, substantial changes could be made to the current system for paying for healthcare in the United States, including changes made in order to extend medical benefits to those who currently lack insurance coverage. The mandatory purchase of insurance is strenuously opposed by a number of state governors, resulting in lawsuits challenging the constitutionality of these provisions. On June 28, 2012, the United States Supreme Court upheld the constitutionality of these provisions of the PPACA. Congress has also proposed a number of legislative initiatives, including possible repeal of the PPACA. At this time, it remains unclear whether there will be any changes made to the PPACA, whether in part or in its entirety.

Extending coverage to a large population could substantially change the structure of the health insurance system and the methodology for reimbursing medical services, drugs and devices. These structural changes could entail modifications to the existing system of private payors and government programs, such as Medicare and Medicaid, the creation of a government-sponsored healthcare insurance source, or some combination of both, as well as other changes.

Restructuring the coverage of medical care in the United States could impact the reimbursement for diagnostic tests like ours. If reimbursement for our diagnostic tests is substantially less than we or our clinical laboratory customers expect, or rebate obligations associated with them are substantially increased, our business could be materially and adversely impacted. In addition, certain members of Congress have declared their intentions to repeal some or all of the PPACA, adding further uncertainty to the law’s future impact on us.

Regardless of the impact of the PPACA on us, the U.S. government and other governments have shown significant interest in pursuing healthcare reform and reducing healthcare costs. Any government-adopted reform measures could cause significant pressure on the pricing of healthcare products and services, including our NMR LipoProfile test, in the United States and internationally, as well as the amount of reimbursement available from governmental agencies or other third-party payors. The continuing efforts of the U.S. and foreign governments, insurance companies, managed care organizations and other payors to contain or reduce healthcare costs may compromise our ability to set prices at commercially attractive levels for the NMR LipoProfile test and other diagnostic tests that we may develop. Changes in healthcare policy, such as the creation of broad limits for diagnostic products, could substantially diminish the sale of or inhibit the utilization of future diagnostic tests, increase costs, divert management’s attention and adversely affect our ability to generate revenues and achieve consistent profitability.

 

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New laws, regulations and judicial decisions, or new interpretations of existing laws, regulations and decisions, relating to healthcare availability, methods of delivery or payment for diagnostic products and services, or sales, marketing or pricing, may also limit our potential revenues, and we may need to revise our research and development or commercialization programs. The pricing and reimbursement environment may change in the future and become more challenging for a number of reasons, including policies advanced by the U.S. government, new healthcare legislation or fiscal challenges faced by government health administration authorities. Specifically, in both the U.S. and some foreign jurisdictions, there have been a number of legislative and regulatory proposals and initiatives to change the healthcare system in ways that could affect our ability to sell our diagnostic tests profitably. Some of these proposed and implemented reforms could result in reduced utilization or reimbursement rates for our diagnostic products.

Risks Related to Our Proprietary Technology

We have limited patent protection for the NMR LipoProfile test and the Vantera system and may have limited patent protection for future personalized diagnostic tests that we may develop. As a result, our intellectual property position may not adequately protect us from competitors for sales of our NMR LipoProfile test, the Vantera system or any future diagnostic tests we may develop.

A significant amount of our technology, especially regarding algorithmic processes used in the NMR LipoProfile test, is unpatented. Additionally, the majority of the technology used in our Vantera system is unpatented. As a result, we are dependent to a significant degree upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain our competitive position. We also rely on copyrights and trademarks and confidentiality, licenses and invention assignment agreements to protect our intellectual property rights, as well as, to a more limited extent, patents.

In an effort to protect our trade secrets, we require our employees, consultants, collaborators and advisors to execute confidentiality agreements upon the commencement of their relationships with us. These agreements require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. These agreements, however, may not provide us with adequate protection against improper use or disclosure of confidential information, and these agreements may be breached. Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information. A breach of confidentiality could significantly affect our competitive position. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants, collaborators or advisors have previous employment or consulting relationships. Also, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets.

The patent covering elements of our NMR LipoProfile test that we previously licensed from North Carolina State University, or NCSU, expired in August 2011. The U.S. patent we previously licensed from Siemens Medical Systems expired in 2008. We also own or co-own a number of U.S. patents and patent applications. The claims of the issued U.S. patents owned by or licensed to us, and the claims of any patents which may issue in the future and be owned by or licensed to us, may not confer on us significant commercial protection against competing diagnostic products. Third parties may challenge, narrow, invalidate or circumvent any patents we own or license currently or in the future. Also, our pending patent applications may not issue, and we may not receive any additional patents. Our patents might not contain claims that are sufficiently broad to prevent others from utilizing our technologies. Further, because of the extensive time required for development, testing and regulatory review of a potential diagnostic product, it is possible that any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantages of the patent. Similar considerations apply in any other country where we file for patent protection relating to our technology. The laws of foreign countries may preclude issuance of patents or may not protect our patent rights to the same extent as do laws of the United States.

 

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We also hold copyrights, including copyright registrations, on documentation and software for our NMR LipoProfile test and have a number of registered and unregistered trademarks, including a trademark for Vantera. However, these copyrights and trademarks may not provide competitive advantages for us, and our competitors may challenge or circumvent these copyrights and trademarks. Furthermore, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our proprietary information. In addition, the laws of some foreign countries do not protect these types of proprietary rights to the same extent as the laws of the United States.

NMR spectroscopy technology, which we use in performing our NMR analyses, is not proprietary and is known in the scientific community generally, and it is possible to duplicate the methods we use to perform our diagnostic tests. Consequently, our competitors may independently develop competing diagnostic products that do not infringe our intellectual property.

If we infringe or are alleged to infringe intellectual property rights of third parties, our business could be harmed.

Our research, development and commercialization activities, including our current NMR LipoProfile test and our NMR-based technology platform, as well as any other diagnostic test resulting from these activities, may infringe or be claimed to infringe patents owned by other parties. There may also be patent applications that have been filed but not published that, when issued, could be asserted against us. These third parties could bring claims against us that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay research, development, manufacturing or sales of the diagnostic product or product candidate that is the subject of the suit.

As a result of patent infringement claims, or in order to avoid potential claims, we may choose or be required to seek licenses from third parties. These licenses may not be available on acceptable terms, or at all. Even if we are able to obtain a license, the license would likely obligate us to pay license fees or royalties or both, and the rights granted to us might be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms.

There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the medical diagnostics industry. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference, derivation or post-grant proceedings declared or granted by the U.S. Patent and Trademark Office and similar proceedings in foreign countries, regarding intellectual property rights with respect to our current or future diagnostic tests or devices. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Patent litigation and other proceedings may also absorb significant management time. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could impair our ability to compete in the marketplace.

We may become involved in lawsuits to protect or enforce our patents or other intellectual property or the patents of our licensors, which could be expensive and time-consuming.

Competitors may infringe our intellectual property, including our patents or the patents of our licensors. As a result, we may be required to file infringement claims to stop third-party infringement or unauthorized use. This can be expensive, particularly for a company of our size, and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patent claims do not cover its technology.

 

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An adverse determination of any litigation or other proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

Interference, derivation or other proceedings brought at the U.S. Patent and Trademark Office may be necessary to determine the priority of inventions with respect to our patent applications or those of our licensors or collaborators. Litigation or USPTO proceedings brought by us may fail or may be invoked against us by third parties. Even if we are successful, domestic or foreign litigation or USPTO or foreign patent office proceedings may result in substantial costs and distraction to our management. We may not be able, alone or with our licensors or collaborators, to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the United States.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation or other proceedings, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation or proceedings. In addition, during the course of this kind of litigation or proceedings, there could be public announcements of the results of hearings, motions or other interim proceedings or developments or public access to related documents. If investors perceive these results to be negative, the market price for our common stock could be significantly harmed.

Risks Related to Government Regulation of Our Diagnostic Tests

If we are unable to comply with the requirements of the Clinical Laboratories Improvement Amendments of 1988 and state laws governing clinical laboratories or if we are required to expend significant additional resources to comply with these requirements, the success of our business could be threatened.

HHS has classified our NMR LipoProfile test as a high-complexity test under the Clinical Laboratories Improvement Amendments of 1988, commonly referred to as CLIA. Under CLIA, personnel requirements for laboratories conducting high-complexity tests are more stringent than those applicable to laboratories performing less complex tests. These personnel requirements require us to employ more experienced or more highly educated personnel and additional categories of employees, which increases our operating costs. If we fail to meet CLIA requirements, HHS or state agencies could require us to cease our NMR LipoProfile testing or other testing subject to CLIA that we may develop in the future. Even if it were possible for us to bring our laboratory back into compliance, we could incur significant expenses and potentially lose revenues in doing so. Moreover, new interpretations of current regulations or future changes in regulations under CLIA may make it difficult or impossible for us to comply with our CLIA classification, which would significantly harm our business.

Many states in which our physician and laboratory clients are located, such as New York, have laws and regulations governing clinical laboratories that are more stringent than federal law and may apply to us even if we are not located, and do not perform our NMR LipoProfile test, in that state. We may also be subject to additional licensing requirements as we expand our sales and operations into new geographic areas, which could impair our ability to pursue our growth strategy.

Portions of our NMR LipoProfile test are subject to the FDA’s exercise of enforcement discretion, and any changes to the FDA’s policies with respect to this exercise of enforcement discretion could hurt our business.

Clinical laboratory tests that are developed and validated by a laboratory for its own use are called laboratory-developed tests, or LDTs. The laws and regulations governing the marketing of diagnostic products for use as LDTs are extremely complex and in many instances there are no significant regulatory or judicial interpretations of these laws. For instance, while the FDA maintains that LDTs are subject to the FDA’s authority as diagnostic medical devices under the Federal Food, Drug, and Cosmetic Act, or FDCA, the FDA has generally exercised enforcement discretion and not enforced applicable regulations with respect to most tests performed by CLIA-certified laboratories.

 

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We have obtained, FDA clearance for several of the measurements we report as part of the NMR LipoProfile test, specifically LDL-P, HDL-C and triglycerides, in order to support our strategy of decentralizing access to the test, which will be helpful in order to make our test commercially available for other laboratories to perform and to report patient results. The remainder of the results reported as part of our NMR LipoProfile test, including HDL-P, small LDL-P and LDL size, as well as a number of lipoprotein markers associated with insulin resistance and diabetes risk, are LDTs and we include them in our report on this basis. When the Vantera system is placed in third-party laboratories, if they elect to report these non-FDA cleared test results to their customers, we will generate the test results in our clinical laboratory using either NMR spectrum data digitally sent to us by the third-party laboratory or a portion of the original blood sample that they send to us. This division of LDT data collection and reporting of test results has not been endorsed or approved by the FDA or other regulatory agencies, and there can be no assurance that the FDA will continue to regard these as LDTs.

In the third quarter of 2011, we submitted a 510(k) premarket notification to the FDA for HDL-P. In March 2012, we voluntarily withdrew that submission and have since worked with the FDA outside of the formal review process to resolve issues identified by the FDA with respect to our submission. Specifically, the FDA raised concerns relating to two clinical studies from which we acquired specimens that we tested to produce data in support of our application. Both studies were conducted by other sponsors and involved large populations. In one case, the FDA expressed concern that the subjects of the study were initially evaluated in the early 1990s and, more specifically, that the specimens were too old and the criteria used to determine a cardiovascular event during that time period were no longer representative of current medical practice. In the second case, the FDA expressed the concern that, because we could only use specimens from the group of subjects who had previously given permission to use their results for commercial purposes, it was possible that this portion of the study population was not representative of the entire population and the results may therefore have been biased.

We resubmitted the 510(k) premarket notification to the FDA, seeking clearance of the HDL-P test, in December 2012. This submission was based on data derived from specimens both from a more recent large, third-party clinical study, as well as the complete data set from the study for which FDA had been concerned with bias. We believe these revisions will address the concerns previously expressed by the FDA. However, there can be no assurance that we will obtain clearance for this LDT. We have not yet sought FDA clearance for any other LDTs but currently intend to do so for some of these non-cleared portions of our test. In the event we were to not receive clearance for HDL-P or these other tests, we would plan to continue to offer them as LDTs.

The regulation of diagnostic tests classified as LDTs may become more stringent in the future. The FDA held a meeting in July 2010 during which it indicated that it intends to reconsider its current policy of enforcement discretion and to begin drafting an oversight framework for LDTs. We cannot predict the extent of the FDA’s future regulation and policies with respect to LDTs and there can be no assurance that the FDA will not require us to obtain premarket clearance or approval for some or all of the non-FDA cleared portions of our NMR LipoProfile test report. If the FDA imposes significant changes to the regulation of LDTs, or if Congress were to pass legislation that more actively regulates LDTs and in vitro diagnostic tests, it could restrict our ability to provide the portions of our test that are not cleared by the FDA or potentially delay the launch of future tests.

While we believe that we are currently in material compliance with applicable laws and regulations relating to LDTs and we believe that our provision of these second-page results to the third-party laboratories utilizing the Vantera system will continue to be regarded as LDTs, we cannot assure you that the FDA or other regulatory agencies would agree with our determination, and a determination that we have violated these laws, or a public announcement that we are being investigated for possible violation of these laws, could hurt our business and our reputation. A significant change in any of these laws, or the FDA’s interpretation of the scope of its enforcement discretion, may also require us to change our business model in order to maintain compliance with these laws.

 

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If we are unable to obtain the required clearance of the currently non-cleared portions of our test from the FDA, third-party clinical diagnostic laboratories may be less willing to accept the Vantera system in their facilities.

In December 2011, we submitted a new 510(k) premarket notification for the Vantera system without a site restriction, and in August 2012 we received FDA clearance to market our Vantera system commercially to laboratories. We currently expect to begin placing the Vantera system in third-party clinical diagnostic laboratory facilities in the first quarter of 2013, which we believe will faciliate their ability to offer our NMR LipoProfile test and other personalized diagnostic tests that we may develop.

In the third quarter of 2011, we submitted a 510(k) premarket notification to the FDA seeking clearance of the HDL-P test, as performed on our current NMR-based clinical analyzer platform. In March 2012, the FDA notified us that there were issues with our 510(k) submission that will need to be resolved prior to FDA clearance. We voluntarily withdrew our submission and have since worked with the FDA outside of the formal review process to resolve those issues. We resubmitted our 510(k) premarket notification to the FDA in December 2012, seeking clearance of the HDL-P test as performed on our current generation clinical analyzers or using the Vantera system, with a goal of having the HDL-P test cleared by the FDA in 2013. We also intend to submit some of the other currently non-cleared test measurements to the FDA for 510(k) clearance in the first half of 2013.

If FDA clearance or approval of the non-cleared portions of our test is delayed or does not occur, clinical diagnostic laboratories may be less willing to accept the Vantera system in their facilities. Historically, many of our customers have valued the results from the non-FDA cleared portions of our test. Once the Vantera system is placed in third-party laboratories, at the option of the third-party laboratories, we will still make the second-page test results available to them at no additional charge for dissemination along with the first-page results. We will generate these second-page results in our clinical laboratory using either NMR spectrum data digitally sent to us by the third-party laboratory or a portion of the original blood sample that they send to us. We will then send the second-page results back to the third-party laboratories, which will report them to their customer along with the first-page results. Third-party laboratories utilizing the Vantera system may find the options for receiving the non-cleared portions of our test report unacceptable, which may result in less use or adoption of the Vantera system by third-party laboratories, or less willingness to accept the placement of the Vantera system in their facilities in the first place.

In addition, our NMR LipoProfile test report would continue to include a disclaimer that any non-cleared portions of tests had not been cleared by the FDA and that the clinical utility of such results had not been fully established. Furthermore, even if we do obtain FDA clearance for the currently non-cleared portions of our test, new premarket submissions for any modifications or enhancements we later make to such test, or to the Vantera system, that could significantly affect safety or effectiveness, or constitute a major change in the intended use of the test or the Vantera system, would be required. We cannot be sure that clearance of a new 510(k) notification would be granted on a timely basis, or at all, or that FDA clearance processes will not involve costs and delays that could adversely affect our ability to pursue our growth strategy.

The NMR LipoProfile test is, and any other test for which we obtain marketing clearance or approval will be, subject to extensive ongoing regulatory requirements, and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our products.

Any test or medical device for which we obtain marketing clearance or approval, including the Vantera system that received FDA clearance in August 2012, along with the manufacturing processes, labeling, advertising and promotional activities for such test or device, will be subject to continual requirements of, and review by, the FDA and comparable regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, requirements relating to product

 

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labeling, advertising and promotion, and recordkeeping. Even if regulatory approval of a test or device is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to other conditions of approval. In addition, approval may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the test or device. Discovery after approval of previously unknown problems with our tests, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in actions such as:

 

   

restrictions on manufacturing processes;

 

   

restrictions on marketing of a test;

 

   

restrictions on distribution;

 

   

warning letters;

 

   

withdrawal of the test from the market;

 

   

refusal to approve pending applications or supplements to approved applications that we submit;

 

   

recall of tests;

 

   

fines, restitution or disgorgement of profits or revenue;

 

   

suspension or withdrawal of regulatory approvals;

 

   

refusal to permit the import or export of our products;

 

   

product seizure;

 

   

injunctions; or

 

   

imposition of civil or criminal penalties.

Our business is subject to other complex and sometimes unpredictable government regulations. If we or any of our clinical diagnostic laboratory customers fail to comply with these regulations, we could incur significant fines and penalties.

As a provider of clinical diagnostic testing products and services, we are subject to extensive and frequently changing federal, state and local laws and regulations governing various aspects of our business. In particular, the clinical laboratory industry is subject to significant governmental certification and licensing regulations, as well as federal and state laws regarding:

 

   

test ordering and billing practices;

 

   

marketing, sales and pricing practices;

 

   

health information privacy and security, including the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and comparable state laws;

 

   

insurance;

 

   

anti-markup legislation; and

 

   

consumer protection.

We are also required to comply with FDA regulation of our manufacturing practices and adverse event reporting activities, and regulation by the FDA of our labeling and promotion activities. In addition, advertising of our tests is subject to regulation by the Federal Trade Commission, or FTC, under the Federal Trade Commission Act, or FTC Act. Violation of any FDA requirement could result in enforcement actions, such as seizures, injunctions, civil penalties and criminal prosecutions, and violation of the FTC Act could result in injunctions and other associated remedies, all of which could have a material adverse effect on our business. Most states also have similar postmarket regulatory and enforcement authority for devices. Additionally, most foreign countries have

 

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authorities comparable to the FDA and processes for obtaining marketing approvals. Obtaining and maintaining these approvals, and complying with all laws and regulations, may subject us to similar risks and delays as those we could experience under FDA and FTC regulation. We incur various costs in complying and overseeing compliance with these laws and regulations.

We are unable to predict what additional federal or state legislation or regulatory initiatives may be enacted in the future regarding our business or the healthcare industry in general, or what effect such legislation or regulations may have on us. Federal or state governments may impose additional restrictions or adopt interpretations of existing laws that could have a material adverse effect on us. If we fail to comply with any existing or future regulations, restrictions or interpretations, we could incur significant fines and penalties.

If we or any of our clinical diagnostic laboratory customers are subject to an enforcement action involving false claims, kickbacks, physician self-referral or other federal or state fraud and abuse laws, we could incur significant civil and criminal sanctions and loss of reimbursement, which would hurt our business.

The government has made enforcement of the false claims, anti-kickback, physician self-referral and various other fraud and abuse laws a major priority. In many instances, private whistleblowers also are authorized to enforce these laws even if government authorities choose not to do so. Several clinical diagnostic laboratories and members of their management have been the subject of this enforcement scrutiny, which has resulted in very significant civil and criminal settlement payments. In most of these cases, private whistleblowers brought the allegations to the attention of federal enforcement agencies. The risk of our being found in violation of these laws and regulations is increased by the fact that some of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. These laws include:

 

   

the federal Anti-Kickback Statute, which constrains our marketing practices, educational programs, pricing policies, and relationships with health care providers or other entities, by prohibiting, among other things, soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce, or in return for, the purchase or recommendation of an item or service reimbursable under a federal health care program, such as the Medicare and Medicaid programs;

 

   

federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers that are false or fraudulent;

 

   

federal physician self-referral laws, such as the Stark law, which prohibit a physician from making a referral to a provider of certain health services with which the physician or the physician’s family member has a financial interest, and prohibit submission of a claim for reimbursement pursuant to a prohibited referral; and

 

   

state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws, which may apply to items or services reimbursed by any third-party payer, including commercial insurers, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

If we or our operations are found to be in violation of any of these laws and regulations, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from participation in U.S. federal or state health care programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. We monitor our own compliance with federal and state fraud and abuse laws on an ongoing basis. However, we do not monitor the compliance of our clinical diagnostic laboratory customers with federal and state fraud and abuse laws. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from the operation of our business and hurt our reputation. If we were excluded from participation in U.S. federal health care programs, we would not be able to receive, or to sell our tests to other parties who receive, reimbursement

 

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from Medicare, Medicaid and other federal programs. Any similar penalties imposed upon our laboratory customers could also materially harm our revenues and our reputation.

Our compliance program has not eliminated all risks related to these laws. In 2011, our general counsel became aware of a practice engaged in by our sales force that potentially implicated the fraud and abuse laws. The practice involved giving gift cards in small denominations, typically $25, to staff in doctors’ offices or to employees of our laboratory partners. We do not believe that gift cards were given to the doctors actually ordering our test except in a single case. Since 2005, the total value of gift cards distributed by the sales force was approximately $100,000. After our general counsel learned of this practice, we stopped it. The audit committee of our board of directors later hired outside counsel to conduct an internal investigation of the matter. The investigation concluded that there was no evidence of willful wrongdoing by any of our employees, but did conclude that our internal policies and communications provided inconsistent guidance on the use of gift cards. We have subsequently revised our internal policies to eliminate any inconsistencies, and we have been taking and are continuing to take additional steps to strengthen our compliance activities. Among other things, we have adopted a new policy on interactions with healthcare professionals, which is based on the Code of Ethics on Interactions with Health Care Professionals promulgated by the Advanced Medical Technology Association, or AdvaMed, a leading medical technology association.

In late 2011, we decided to voluntarily disclose the gift card issue to the local office of the U.S. Attorney. In December 2011, our counsel disclosed this matter on our behalf to the U.S. Attorney’s Office in Raleigh, North Carolina, or the USAO. After various meetings and communications between our counsel and the USAO, the USAO notified us in writing in March 2012 that, based on the information provided by our counsel, it had closed its file without investigation and did not intend to take further action in this matter.

Following our receipt of the notification from the USAO, we made a voluntary disclosure of this matter in April 2012 under the formal self-disclosure protocol established by the Office of Inspector General of HHS, or the OIG. Although we do not believe that we violated any laws, we recognized that our conduct potentially implicated the fraud and abuse laws and we decided to voluntarily make the OIG submission to resolve any potential liability. On July 5, 2012, we entered into a settlement agreement with the OIG to settle this matter for a payment of approximately $150,000. We neither admitted nor denied any wrongdoing in connection with this settlement.

In June 2012 we were informed by attorneys with the Civil Division of the U.S. Department of Justice and the U.S. Attorney’s Office for the District of South Carolina, which we refer to collectively as the DOJ, that they were conducting a civil investigation of allegations that we defrauded federal healthcare programs, including allegations that we paid kickbacks to physicians and submitted claims to federal healthcare programs for medically unnecessary lab tests. We believe that this investigation also involves at least one other cardiovascular diagnostics company and likely arose out of a whistleblower action filed under the federal False Claims Act, which permits any individual who purports to have knowledge that false or fraudulent claims have been submitted for government funds to bring suit on behalf of the United States. Such matters are required to be filed under seal and typically are investigated by the DOJ to determine whether it will intervene in the case on behalf of the government.

We have cooperated with the DOJ’s investigation, including by responding to an extensive document request and by initiating a detailed presentation to representatives of the DOJ on the full range of our financial relationships with health care professionals and on our test ordering forms and procedures. In correspondence to our counsel dated October 19, 2012, the Acting Director of the Fraud Section of DOJ’s Civil Division, the office handling the DOJ’s investigation, advised us that the Civil Division of the DOJ does not have any present intention, based on facts now known, to pursue further the investigation of our company and/or to file or join suit against us based on the allegations that initiated the investigation, and that we do not need to produce additional documents or information. The DOJ has further advised our counsel that additional action to close the matter publicly should not be expected in the near term, however, because the government’s broader investigation, apparently of other

 

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parties, will continue for an indefinite period, which we believe is not uncommon in cases involving multiple parties.

Although we believe that we are in compliance in all material respects with applicable laws and regulations, there can be no assurance that new information will not come to light that would cause the DOJ to resume its investigation with respect to us. The DOJ letter did make clear that it does not preclude actions by agencies or agents of the United States, including the DOJ, to pursue overpayment or recoupment actions of any sort, contract actions, or any other type of legal action, which we are advised by our counsel is language typically included in letters of this type. In addition, if this matter was in fact initiated by a whistleblower under the False Claims Act, then even if the government ultimately declines to intervene and take over the case, the whistleblower has the right under the False Claims Act to conduct the action. Moreover, we cannot assure you that we will not become subject to similar government inquiries, investigations or actions in the future. Any finding of noncompliance by us with applicable laws and regulations could subject us to a variety of penalties and other sanctions as discussed above, the imposition of any of which could have a material adverse effect on us and our business. In addition, whether or not we are found to be in non-compliance with any applicable laws, we could incur significant expense in responding to or resolving any such inquiries, investigations or actions and we could be required to modify our business practices in a way that adversely affects our business.

Failure to obtain regulatory approval in international jurisdictions would prevent us from marketing products abroad, including our NMR LipoProfile test, the Vantera system and any new diagnostic tests we may develop.

We may in the future seek to market our NMR LipoProfile test, and potentially the Vantera system and any new diagnostic tests we may develop, outside the United States. In order to market these products in the European Union and many other jurisdictions, we must submit clinical data and comparative effectiveness data concerning our products and obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional clinical testing. The time required to obtain approval from foreign regulators may be longer than the time required to obtain FDA approval. The regulatory approval process outside the United States may include all of the risks associated with obtaining FDA approval.

In addition, in many countries outside the United States, it is required that our tests be approved for reimbursement before they can be approved for sale in that country. In some cases this may include approval of the price we intend to charge for our products, if approved. We may not obtain approvals from regulatory authorities outside the United States on a timely basis, or at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA, but a failure to obtain, or a delay in obtaining, regulatory approval in one country may negatively affect the regulatory process in other countries. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize any tests in any market and therefore may not be able to pursue these revenue opportunities.

Risks Related to this Offering and Our Common Stock

An active trading market for our common stock may not develop.

Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations with the underwriters and may bear no relationship to the price at which the common stock will trade upon completion of this offering. Some of our existing stockholders and their affiliated entities, including holders of more than 5% of our common stock, have indicated an interest in purchasing up to an aggregate of $3.4 million in shares of our common stock in this offering at the initial public offering price. To the extent these existing stockholders are allocated and purchase shares in this offering, such purchases would reduce the available public float for our shares because these stockholders will be restricted from selling the shares by restrictions under applicable securities laws and the lock-up agreements

 

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described in the “Shares Eligible for Future Sale” and “Underwriting” sections of this prospectus. If these existing stockholders were to purchase all of the $3.4 million of shares of our common stock in this offering as to which they have expressed an interest, the available public float would be reduced by 242,857 shares, based upon an assumed initial public offering price of $14.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus. As a result, the liquidity of our common stock could be significantly reduced from what it would have been if these shares had been purchased by investors that were not affiliated with us. Although our common stock has been approved for listing on The NASDAQ Global Market, an active trading market for our shares may never develop or be sustained following this offering. If an active market for our common stock does not develop, it may be difficult for you to sell the shares you purchase in this offering without depressing the market price for the common stock or to sell your shares at all.

The trading price of our common stock is likely to be volatile, and purchasers of our common stock could incur substantial losses.

Our stock price is likely to be volatile. The stock market in general and the market for diagnostic companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the initial public offering price. The market price for our common stock may be influenced by many factors, including:

 

   

regulatory or legal developments in the United States and foreign countries;

 

   

variations in our financial results or those of companies that are perceived to be similar to us;

 

   

changes in the structure of healthcare payment systems;

 

   

announcements by us of significant acquisitions, licenses, strategic partnerships, joint ventures or capital commitments;

 

   

market conditions in the diagnostic sector and issuance of securities analysts’ reports or recommendations;

 

   

sales of substantial amounts of our stock by insiders and large stockholders, or the expectation that such sales might occur;

 

   

general economic, industry and market conditions;

 

   

additions or departures of key personnel;

 

   

intellectual property, product liability or other litigation against us;

 

   

expiration or termination of our potential relationships with customers and strategic partners; and

 

   

the other factors described in this “Risk Factors” section.

In addition, in the past, stockholders have initiated class action lawsuits against clinical diagnostics companies following periods of volatility in the market prices of these companies’ stock. Such litigation, if instituted against us, could cause us to incur substantial costs and divert management’s attention and resources.

If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.

Equity research analysts do not currently provide research coverage of our common stock, and we cannot assure you that any equity research analysts will provide research coverage of our common stock after the completion of this offering. In particular, as a smaller company, it may be difficult for us to attract the interest of equity research analysts. A lack of research coverage may adversely affect the liquidity of and market price of our common stock. To the extent we obtain equity research analyst coverage, we will not have any control of the analysts or the content and opinions included in their reports. The price of our stock could decline if one or more

 

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equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.

If you purchase shares of our common stock in this offering, you will suffer immediate dilution of your investment.

We expect the initial public offering price of our common stock to be substantially higher than the pro forma net tangible book value per share of our common stock after this offering. Based on an assumed initial public offering price of $14.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $8.57 per share, representing the difference between our pro forma as adjusted net tangible book value per share after giving effect to this offering and the assumed initial public offering price.

In addition, as of December 31, 2012, we had outstanding stock options to purchase an aggregate of 2,056,848 shares of common stock at a weighted-average exercise price of $5.56 per share and outstanding warrants to purchase an aggregate of 85,430 shares of our common stock, after giving effect to the conversion of preferred stock issuable upon the exercise of the warrants to common stock upon completion of this offering, at an exercise price of $8.97 per share. To the extent these outstanding options and warrants are exercised, there will be further dilution to investors in this offering.

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of our common stock in the public market following this offering, the market price of our common stock could decline significantly.

Upon completion of this offering, we will have outstanding 13,888,795 shares of common stock, assuming no exercise of outstanding options or warrants. Of these shares, the 5,000,000 shares sold in this offering and 772,291 additional shares will be freely tradable, 26,364 additional shares of common stock will be eligible for sale in the public market beginning 90 days after the date of this prospectus, subject to volume, manner of sale and other limitations of Rule 144 and Rule 701, and 8,090,140 additional shares of common stock will be available for sale in the public market beginning 180 days after the date of this prospectus following the expiration of lock-up agreements between some of our stockholders and the underwriters. The representatives of the underwriters may release these stockholders from their lock-up agreements with the underwriters at any time and without notice, which would allow for earlier sales of shares in the public market.

In addition, promptly following the completion of this offering, we intend to file one or more registration statements on Form S-8 registering the issuance of approximately 3.3 million shares of common stock subject to options or other equity awards issued or reserved for future issuance under our equity incentive plans. Shares registered under these registration statements on Form S-8 will be available for sale in the public market subject to vesting arrangements and exercise of options, the lock-up agreements described above and the restrictions of Rule 144 in the case of our affiliates.

Additionally, after this offering, the holders of an aggregate of approximately 7.1 million shares of our common stock, including shares of our common stock issuable upon the exercise of outstanding warrants, or their transferees, will have rights, subject to some conditions, to require us to file one or more registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. Once we register the issuance of these shares, they can be freely sold in the public market. If these

 

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additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

Provisions in our corporate charter documents and under Delaware law may prevent or frustrate attempts by our stockholders to change our management and hinder efforts to acquire a controlling interest in us, and the market price of our common stock may be lower as a result.

There are provisions in our certificate of incorporation and bylaws as they will be in effect following this offering, that may make it difficult for a third party to acquire, or attempt to acquire, control of our company, even if a change in control was considered favorable by you and other stockholders. For example, our board of directors will have the authority to issue up to 5,000,000 shares of preferred stock. The board of directors can fix the price, rights, preferences, privileges, and restrictions of the preferred stock without any further vote or action by our stockholders. The issuance of shares of preferred stock may delay or prevent a change in control transaction. As a result, the market price of our common stock and the voting and other rights of our stockholders may be adversely affected. An issuance of shares of preferred stock may result in the loss of voting control to other stockholders.

Our charter documents will also contain other provisions that could have an anti-takeover effect, including:

 

   

only one of our three classes of directors will be elected each year;

 

   

stockholders will not be entitled to remove directors other than by a 66 2/3% vote and only for cause;

 

   

stockholders will not be permitted to take actions by written consent;

 

   

stockholders cannot call a special meeting of stockholders; and

 

   

stockholders must give advance notice to nominate directors or submit proposals for consideration at stockholder meetings.

In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for our common stock, including transactions that may be in your best interests. These provisions may also prevent changes in our management or limit the price that certain investors are willing to pay for our stock.

Our amended and restated certificate of incorporation will also provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders.

Concentration of ownership of our common stock among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.

Upon completion of this offering, our executive officers, directors and current beneficial owners of 5% or more of our common stock and their respective affiliates will, in aggregate, beneficially own approximately 46% of our outstanding common stock, assuming no participation in the offering by these stockholders. This percentage would increase to 48% if these existing stockholders were to purchase all of the $3.4 million of shares of our common stock in this offering as to which they have expressed an interest, based upon an assumed initial public offering price of $14.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus. These persons, acting together, would be able to significantly influence all matters requiring stockholder approval, including the election and removal of directors and any merger or other significant corporate transactions. The interests of this group of stockholders may not coincide with the interests of other stockholders.

 

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We will have broad discretion in the use of proceeds from this offering and may invest or spend the proceeds in ways with which you do not agree and in ways that may not yield a return.

We will have broad discretion over the use of proceeds from this offering. You may not agree with our decisions, and our use of the proceeds may not yield any return on your investment in us. Our failure to apply the net proceeds of this offering effectively could impair our ability to pursue our growth strategy or could require us to raise additional capital.

We may need to raise additional capital after this offering, and if we cannot raise additional capital when needed, we may have to curtail or cease operations.

We cannot assure you that the proceeds of this offering will be sufficient to fully fund our business and growth strategy. We may need to raise additional funds through public or private equity or debt financing to continue to fund or expand our operations.

Our actual liquidity and capital funding requirements will depend on numerous factors, including:

 

   

the extent to which our tests, including the NMR LipoProfile test and other tests under development, are successfully developed, gain regulatory clearance and market acceptance and become and remain competitive;

 

   

our ability to obtain more extensive reimbursement for our tests;

 

   

our ability to collect our accounts receivable;

 

   

the costs and timing of further expansion of our sales and marketing activities and research and development activities; and

 

   

the timing and results of any regulatory approvals that we are required to obtain for our diagnostic tests.

Additional capital, if needed, may not be available on satisfactory terms, or at all. Furthermore, any additional capital raised through the sale of equity will dilute your ownership interest in us and may have an adverse effect on the price of our common stock. In addition, the terms of the financing may adversely affect your holdings or rights. Debt financing, if available, may include restrictive covenants.

If we are not able to obtain adequate funding when needed, we may have to delay development or commercialization of our diagnostic tests or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize ourselves. We also may have to reduce research and development, sales and marketing, customer support or other expenses. Any of these outcomes could harm our business.

Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future, capital appreciation, if any, will be your sole source of gains.

We have not declared or paid cash dividends on our common stock to date. We currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of any existing or future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

We will incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies in the United States, which may adversely affect our operating results.

As a public company listed in the United States, we will incur significant additional legal, accounting and other expenses. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including regulations implemented by the SEC and NASDAQ, may increase legal and financial compliance costs and make some activities more time consuming. These laws, regulations and standards are subject to varying interpretations and, as a result, their application in practice may evolve over time as new

 

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guidance is provided by regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If notwithstanding our efforts to comply with new laws, regulations and standards, we fail to comply, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

Failure to comply with these rules might also make it more difficult for us to obtain certain types of insurance, including director and officer liability insurance, and we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors or as members of senior management.

We are an “emerging growth company,” and if we decide to comply only with reduced disclosure requirements applicable to emerging growth companies, our common stock could be less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or JOBS Act, enacted in April 2012, and, for as long as we continue to be an “emerging growth company,” we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an “emerging growth company” through 2018, although a variety of circumstances could cause us to lose that status earlier, including if the market value of our common stock held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.

Under the JOBS Act, emerging growth companies that become public can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards following the completion of this offering and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” but are also contained elsewhere in this prospectus. In some cases, you can identify forward-looking statements by the words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue” and “ongoing,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain. Forward-looking statements include statements about:

 

   

our expectation that, for the foreseeable future, substantially all of our revenues will be derived from the NMR LipoProfile test;

 

   

future demand for our NMR LipoProfile test and future tests, if any, that we may develop;

 

   

the factors that we believe drive demand for our NMR LipoProfile test and our ability to sustain such demand;

 

   

the size of the market for our NMR LipoProfile test;

 

   

our plans for the Vantera system and our expectations about deploying it on-site in third-party clinical diagnostic laboratories and the timing of its commercial availability;

 

   

the potential clearance by the FDA of our HDL-P test pursuant to our 510(k) premarket notification and the timing thereof;

 

   

the timing of our submissions of other non-cleared portions of our NMR LipoProfile test to the FDA for clearance;

 

   

the potential impact resulting from any regulation of our NMR LipoProfile test or future tests, if any, that we may develop, by the FDA or any other regulation of our business or any regulatory proceedings to which we may be subject from time to time;

 

   

our plans for pursuing coverage and reimbursement for our NMR LipoProfile test, and any changes in reimbursement affecting our business;

 

   

the ability of our NMR LipoProfile test to impact treatment decisions;

 

   

plans for future diagnostic tests;

 

   

the capacity of our laboratory to process our NMR LipoProfile test;

 

   

our anticipated use of the net proceeds of this offering;

 

   

our plans for executive and director compensation for the future;

 

   

our anticipated cash needs and our estimates regarding our capital requirements and our needs for additional financing;

 

   

anticipated trends and challenges in our business and the market in which we operate; and

 

   

the expected level of insider participation, if any, in this offering.

You should refer to the “Risk Factors” section of this prospectus for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements.

 

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As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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. We qualify all of our forward-looking statements by these cautionary statements.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of 5,000,000 shares of our common stock in this offering will be approximately $61.6 million, or approximately $71.4 million if the underwriters exercise their over-allotment option in full, based upon an assumed initial public offering price of $14.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase or decrease in the assumed initial public offering price of $14.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease the net proceeds to us from this offering by approximately $4.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. An increase or decrease of 1,000,000 in the number of shares we are offering would increase or decrease the net proceeds to us from this offering, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, by approximately $13.0 million, assuming the assumed initial public offering price stays the same. We do not expect that a change in the offering price or the number of shares by these amounts would have a material effect on our intended uses of the net proceeds from this offering, although it may impact the amount of time prior to which we may need to seek additional capital.

We currently expect to use the net proceeds from this offering as follows:

 

   

$5.2 million upon the closing of this offering to pay dividends on the outstanding shares of Series F redeemable convertible preferred stock that will convert into common stock;

 

   

approximately $22.6 million to hire additional sales and marketing personnel and to support costs associated with increased sales and marketing activities;

 

   

approximately $18.0 million for capital expenditures, including components of the Vantera system and other improvements to our laboratory infrastructure;

 

   

approximately $4.8 million to fund our research and development programs, including the expansion of our diagnostic test menu based on the Vantera system; and

 

   

the balance for other general corporate purposes, including general and administrative expenses, working capital and the potential repayment of indebtedness.

In addition, we may use a portion of the net proceeds from this offering to acquire, invest in or license complementary products, technologies or businesses, but we currently have no agreements or commitments with respect to any potential acquisition, investment or license. We may allocate funds from other sources to fund some or all of these activities.

The expected use of net proceeds from this offering represents our intentions based upon our present plans and business conditions.

Pending their use, we intend to invest the net proceeds of this offering in a variety of capital-preservation investments, including short- and intermediate-term, interest-bearing, investment-grade securities.

DIVIDEND POLICY

We have never declared or paid any dividends on our common stock. We anticipate that we will retain all of our future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Additionally, our ability to pay dividends on our common stock is limited by restrictions on our ability to pay dividends or make distributions, including restrictions under the terms of the agreements governing our credit facility.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of September 30, 2012:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to:

 

   

the conversion of the outstanding shares of our convertible preferred stock into an aggregate of 6,985,817 shares of our common stock, which will occur automatically upon the closing of this offering;

 

   

the payment of $5.2 million of accrued dividends on the outstanding shares of Series F redeemable convertible preferred stock that will convert into common stock upon the closing of this offering; and

 

   

the reclassification of the preferred stock warrant liability to additional paid-in-capital upon conversion of the preferred stock issuable upon exercise of such warrants into common stock; and

 

   

on a pro forma as adjusted basis to give further effect to our sale of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $14.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us after September 30, 2012.

 

     As of September 30, 2012  
     Actual      Pro
forma
     Pro forma
as adjusted(1)
 
     (in thousands)  

Cash and cash equivalents

   $ 10,279       $ 5,079       $ 69,335  
  

 

 

    

 

 

    

 

 

 

Revolving line of credit(2)

   $ 3,500       $ 3,500       $ 3,500   

Current maturities of long-term debt(2)

     2,400         2,400         2,400   

Long-term debt, less current maturities(2)

     1,800         1,800         1,800   

Preferred stock warrant liability

     462         —          —    

Series D redeemable convertible preferred stock, $0.001 par value; 3,544,062 shares designated, 500,408 shares issued and outstanding, actual; no shares designated, issued or outstanding, pro forma and pro forma as adjusted

     2,612         —          —    

Series D-1 redeemable convertible preferred stock, $0.001 par value; 3,480,473 shares designated, 2,980,065 shares issued and outstanding, actual; no shares designated, issued or outstanding, pro forma and pro forma as adjusted

     15,556         —          —    

Series E redeemable convertible preferred stock, $0.001 par value; 5,059,330 shares designated, 4,718,752 shares issued and outstanding, actual; no shares designated, issued or outstanding, pro forma and pro forma as adjusted

     20,795         —          —    

Series F redeemable convertible preferred stock, $0.001 par value; 3,118,678 shares designated, 2,988,506 shares issued and outstanding, actual; no shares designated, issued or outstanding, pro forma and pro forma as adjusted

     18,200         —          —    

Stockholders’ (deficit) equity:

        

Series A convertible preferred stock, $0.001 par value; 300,000 shares designated, 229,088 shares issued and outstanding, actual; no shares designated, issued or outstanding, pro forma and pro forma as adjusted

     0         —          —    

Series A-1 convertible preferred stock, $0.001 par value; 252,700 shares designated, 23,612 shares issued and outstanding, actual; no shares designated, issued or outstanding, pro forma and pro forma as adjusted

     0         —          —    

Series B convertible preferred stock, $0.001 par value; 166,667 shares designated, 154,536 shares issued and outstanding, actual; no shares designated, issued or outstanding, pro forma and pro forma as adjusted

     0         —          —    

Series B-1 convertible preferred stock, $0.001 par value; 159,536 shares designated, 5,000 shares issued and outstanding, actual; no shares designated, issued or outstanding, pro forma and pro forma as adjusted

     0         —          —    

 

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     As of September 30, 2012  
     Actual     Pro
forma
    Pro forma
as adjusted
 
     (in thousands)  

Series C convertible preferred stock, $0.001 par value; 1,275,000 shares designated, 1,022,595 shares issued and outstanding, actual; no shares designated, issued or outstanding, pro forma and pro forma as adjusted

     1        —         —    

Series C-1 convertible preferred stock, $0.001 par value; 1,274,774 shares designated, 252,179 shares issued and outstanding, actual; no shares designated, issued or outstanding, pro forma and pro forma as adjusted

     —          —         —    

Preferred stock, $0.001 per share; no shares authorized, issued or outstanding, actual or pro forma; 5,000,000 shares authorized, no shares issued or outstanding, pro forma as adjusted

     —         —         —    

Common stock, $0.001 par value; 90,000,000 shares authorized, 1,707,260 shares issued and outstanding, actual; 90,000,000 shares authorized, 8,693,078 shares issued and outstanding, pro forma; 75,000,000 shares authorized, 13,693,078 shares issued and outstanding, pro forma as adjusted

     2        9        14   

Additional paid-in-capital

     9,089        61,508        123,103   

Accumulated deficit

     (48,186     (48,186     (48,186
  

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

     (39,094     13,331        74,931   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 26,231      $ 21,031      $ 82,631   
  

 

 

   

 

 

   

 

 

 

 

(1) As of September 30, 2012, we had paid approximately $2.7 million of expenses incurred in connection with this offering.
(2) Subsequent to September 30, 2012, we refinanced our indebtedness. As of December 31, 2012, our indebtedness consisted of $16.0 million in term loans, all of which was classified as long-term on our balance sheet, and $5.0 million borrowed under our revolving line of credit, all of which was classified as current liabilities on our balance sheet.

The pro forma as adjusted information set forth above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $14.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $4.7 million assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. An increase or decrease of 1,000,000 in the number of shares we are offering would increase or decrease each of pro forma as adjusted additional paid-in capital, stockholders’ equity and total capitalization by approximately $13.0 million, assuming the assumed initial public offering price per share, which is the midpoint of the range set forth on the cover page of this prospectus, remains the same.

The number of shares of common stock outstanding in the table above does not include:

 

   

2,375,803 shares of our common stock issuable upon the exercise of stock options outstanding under our 1997 stock option plan and 2007 stock incentive plan as of September 30, 2012, at a weighted average exercise price of $4.88 per share;

 

   

69,821 shares of our common stock issuable upon the exercise of outstanding warrants as of September 30, 2012, at an exercise price of $8.97 per share; and

 

   

1,212,500 shares of our common stock to be reserved for future issuance under our equity incentive plans.

 

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DILUTION

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Net tangible book value per share is determined by dividing our total tangible assets less total liabilities and redeemable convertible preferred stock by the number of outstanding shares of our common stock.

As of September 30, 2012, we had a deficit in net tangible book value of $(42.5) million, or approximately $(24.91) per share of common stock. On a pro forma basis, after giving effect to the conversion of the outstanding shares of our convertible preferred stock into shares of our common stock, the payment of accrued dividends on the outstanding shares of Series F redeemable convertible preferred stock and the reclassification of the preferred stock warrant liability to equity immediately prior to the closing of this offering, our net tangible book value would have been approximately $9.9 million, or approximately $1.14 per share of common stock.

Investors participating in this offering will incur immediate and substantial dilution. After giving effect to the issuance and sale of 5,000,000 shares of our common stock in this offering at an assumed initial public offering price of $14.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us after September 30, 2012, our pro forma as adjusted net tangible book value as of September 30, 2012 would have been approximately $74.3 million, or approximately $5.43 per share of common stock. This represents an immediate increase in the pro forma net tangible book value of $4.29 per share to existing stockholders, and an immediate dilution in the pro forma net tangible book value of $8.57 per share to investors purchasing shares of our common stock in this offering. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

     $ 14.00   

Actual deficit in net tangible book value per share as of September 30, 2012

   $ (24.91  

Increase per share attributable to conversion of preferred stock, payment of accrued dividends and reclassification of preferred stock warrant liability

     26.05     
  

 

 

   

Pro forma net tangible book value per share before this offering

     1.14     

Increase in pro forma net tangible book value per share attributable to new investors participating in this offering

     4.29     
  

 

 

   

Pro forma as adjusted net tangible book value per share after this offering

       5.43   
    

 

 

 

Dilution per share to investors participating in this offering

     $ 8.57   
    

 

 

 

The dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $14.00 per share would increase or decrease our pro forma as adjusted net tangible book value by approximately $4.7 million, or approximately $0.34 per share, and the dilution per share to investors participating in this offering by approximately $0.66 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. An increase or decrease of 1,000,000 in the number of shares we are offering would increase or decrease our pro forma as adjusted net tangible book value as of September 30, 2012 after this offering by approximately $13.0 million, or approximately $0.41 per share, assuming the assumed initial public offering price per share remains the same, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us after September 30, 2012.

If the underwriters exercise their option in full to purchase 750,000 additional shares of common stock in this offering, the pro forma as adjusted net tangible book value per share after the offering would be $5.82 per share, the increase in the pro forma net tangible book value per share to existing stockholders would be $4.68 per share and the dilution to new investors purchasing common stock in this offering would be $8.18 per share.

 

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The following table sets forth as of September 30, 2012, on the pro forma basis described above, the differences between the number of shares of common stock purchased from us, the total consideration paid and the weighted average price per share paid by existing stockholders and by investors purchasing shares of our common stock in this offering at an assumed initial public offering price of $14.00 per share, which is the midpoint of the range set forth on the cover page on this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares purchased     Total consideration     Weighted average
price per share
 
      Number      Percent     Amount      Percent    

Existing stockholders

     8,693,078         63   $ 59,820,514         46   $ 6.88   

New investors

     5,000,000         37        70,000,000         54        14.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     13,693,078         100   $ 129,820,514         100  
  

 

 

    

 

 

   

 

 

    

 

 

   

If the underwriters exercise their option to purchase additional shares in full, the common stock held by existing stockholders will be reduced to 60% of the total number of shares of common stock outstanding after this offering, and the number of shares of common stock held by investors participating in this offering will be increased to 5,750,000 shares, or 40% of the total number of shares of common stock outstanding after this offering.

Each $1.00 increase or decrease in the assumed initial public offering price of $14.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease the total consideration paid by new investors by $5.0 million, and increase or decrease the percent of total consideration paid by new investors by 3.9 percentage points, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

The table above excludes:

 

   

2,375,803 shares of our common stock issuable upon the exercise of stock options outstanding under our 1997 stock option plan and 2007 stock incentive plan as of September 30, 2012, at a weighted average exercise price of $4.88 per share;

 

   

69,821 shares of our common stock issuable upon the exercise of outstanding warrants as of September 30, 2012, at an exercise price of $8.97 per share; and

 

   

1,212,500 shares of our common stock to be reserved for future issuance under our equity incentive plans.

To the extent that options or warrants are exercised, new options are issued under our equity benefit plans, or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

Some of our existing stockholders and their affiliated entities, including holders of more than 5% of our common stock, have indicated an interest in purchasing up to an aggregate of $3.4 million in shares of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters could determine to sell more, less or no shares to any of these existing stockholders and any of these existing stockholders could determine to purchase more, less or no shares in this offering. The foregoing discussion and tables do not reflect any potential purchases by these existing stockholders or their affiliated entities.

 

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SELECTED FINANCIAL DATA

You should read the following selected financial data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and accompanying notes included later in this prospectus. The selected financial data in this section is not intended to replace our financial statements and the accompanying notes.

We have derived the selected statement of operations data for the years ended December 31, 2009, 2010 and 2011 and the selected balance sheet data as of December 31, 2010 and 2011 from our audited financial statements that are included in this prospectus. We have derived the statement of operations data for the years ended December 31, 2007 and 2008 and the selected balance sheet data as of December 31, 2007, 2008 and 2009 from our audited financial statements that are not included in this prospectus. We have derived the selected statement of operations data for the nine months ended September 30, 2011 and 2012 and the selected balance sheet data as of September 30, 2012 from our unaudited financial statements that are included in this prospectus.

Pro forma basic and diluted net (loss) income per common share have been calculated assuming the conversion of all outstanding shares of convertible preferred stock into shares of common stock. See Note 1 to our financial statements for an explanation of the method used to determine the number of shares used in computing historical and pro forma basic and diluted net (loss) income per common share.

The unaudited financial data include, in the opinion of our management, all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair presentation of our financial position and results of operations for these periods. Our historical results are not necessarily indicative of the results to be expected in any future period and our results for any interim period are not necessarily indicative of the results that may be expected for a full fiscal year.

 

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    Year Ended December 31,     Nine Months Ended
September 30,
 
    2007     2008     2009     2010     2011     2011     2012  
    (In thousands, except share and per share data)  

Statement of Operations Data:

             

Revenues

  $ 24,758      $ 28,954      $ 34,713      $ 39,368      $ 45,807      $ 33,328      $ 41,241   

Cost of revenues

    6,720        7,354        7,792        8,139        8,529        6,367        7,622   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    18,038        21,600        26,921        31,229        37,278        26,961        33,619   

Operating expenses:

             

Research and development

    9,293        7,245        6,156        7,276        7,808        5,698        7,418   

Sales and marketing

    10,010        12,137        12,990        15,246        21,305        15,453        16,746   

General and administrative

    5,593        5,964        7,020        7,331        8,550        6,248        7,764   

Gain on extinguishment of other long-term liabilities

    —          —          —          (2,700     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    24,896        25,346        26,166        27,153        37,663        27,399        31,928   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

    (6,858     (3,746     755        4,076        (385     (438     1,691   

Total other income (expense)

    1,366        112        (495     220        (163     (130     (634
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before taxes

    (5,492     (3,634     260        4,296        (548     (568     1,057   

Income tax expense (benefit)

    —          —          2        (16     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (5,492     (3,634     258        4,312        (548     (568     1,057   

Accrual of dividends on redeemable convertible preferred stock

    (1,040     (1,040     (1,040     (1,040     (613     (612     —     

Undistributed earnings allocated to preferred stockholders

    —          —          —          (2,655     —          —          (850
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to common stockholders – basic

    (6,532     (4,674     (782     617        (1,161     (1,180     207   

Undistributed earnings re-allocated to common stockholders

    —          —          —          303        —          —          109   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to common stockholders – diluted

  $ (6,532   $ (4,674   $ (782   $ 920      $ (1,161   $ (1,180   $ 316   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to common stockholders per share – basic

  $ (4.10   $ (2.93   $ (0.49   $ 0.38      $ (0.69   $ (0.71   $ 0.12   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to common stockholders per share – diluted

  $ (4.10   $ (2.93   $ (0.49   $ 0.34      $ (0.69   $ (0.71   $ 0.11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock outstanding used in computing net (loss) income per share – basic

    1,594,640        1,594,048        1,596,920        1,611,843        1,674,018        1,666,820        1,704,736   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock outstanding used in computing net (loss) income per share – diluted

    1,594,640        1,594,048        1,596,920        2,713,770        1,674,018        1,666,820        2,984,817   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net (loss) income per share of common stock – basic

          $ (0.09     $ 0.07   
         

 

 

     

 

 

 

Pro forma net (loss) income per share of common stock – diluted

          $ (0.09     $ 0.06   
         

 

 

     

 

 

 

Weighted average shares of common stock outstanding used in computing pro forma net (loss) income per share – basic

            9,031,264          8,986,474   
         

 

 

     

 

 

 

Weighted average shares of common stock outstanding used in computing pro forma net (loss) income per share – diluted

            9,031,264          10,266,555   
         

 

 

     

 

 

 

 

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     As of December 31,     As of
September 30,

2012
 
     2007     2008     2009     2010     2011    
     (in thousands)        

Balance Sheet Data:

            

Cash and cash equivalents

   $ 7,770      $ 9,889      $ 12,045      $ 11,058      $ 12,483      $ 10,279   

Short-term investments

     2,409        —          —          —          —          —     

Accounts receivable, net

     3,009        3,076        3,363        4,194        5,626        8,057   

Total assets

     18,037        17,348        19,509        20,141        28,117        33,549   

Revolving line of credit

     —          —          —          —          —          3,500   

Long-term debt, including current portion

     187        2,000        3,000        1,200        6,000        4,200   

Preferred stock warrant liability

     785        901        1,104        597        229        462   

Total liabilities

     6,457        8,978        10,296        4,929        12,025        15,480   

Redeemable convertible preferred stock and convertible preferred stock

     51,125        52,362        53,599        55,845        57,165        57,165   

Accumulated deficit

     (49,629     (53,265     (53,007     (48,695     (49,243     (48,186

Total stockholders’ deficit

     (39,542     (43,990     (44,385     (40,632     (41,071     (39,094

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the financial statements and the related notes to those statements included later in this prospectus. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in these 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 an in vitro diagnostic company pioneering a new field of personalized diagnostics based on nuclear magnetic resonance, or NMR, technology. Our first diagnostic test, the NMR LipoProfile test, directly measures the number of low density lipoprotein, or LDL, particles in a blood sample and provides physicians and their patients with actionable information to personalize management of risk for heart disease. Our automated clinical analyzer, the Vantera system, has recently been cleared by the FDA. The Vantera system requires no previous knowledge of NMR technology to operate and has been designed to significantly simplify complex technology through ease of use and walk-away automation. We plan to selectively place the Vantera system on-site with national and regional clinical laboratories as well as leading medical centers and hospital outreach laboratories. We are driving toward becoming a clinical standard of care by decentralizing our technology and expanding our menu of personalized diagnostic tests to address a broad range of cardiovascular, metabolic and other diseases.

To date, the NMR LipoProfile test has been ordered over 8 million times, and the number of tests ordered has grown at a compound annual growth rate of approximately 30% from 2006 to 2011. The NMR LipoProfile test is reimbursed by a number of governmental and private payors, which we believe collectively represent approximately 150 million covered lives.

We currently perform all NMR LipoProfile testing at our certified and accredited laboratory facilities in Raleigh, North Carolina. To accelerate clinician and clinical diagnostic laboratory adoption of the NMR LipoProfile test and future personalized diagnostic tests, we plan to decentralize access to our technology platform through direct placement of our new Vantera system, an automated version of our NMR clinical analyzer, on site at clinical diagnostic laboratories and hospital outreach laboratories. In August 2012, we received FDA clearance to market our Vantera system commercially to third-party laboratories, which we believe will facilitate their ability to offer our NMR LipoProfile test and any other diagnostic tests that we may develop.

We have entered into agreements with some of our current clinical diagnostic laboratory customers to place the Vantera system in their laboratories. We are also in discussions with additional laboratory customers who have indicated a similar interest in the placement of the Vantera system. We currently expect these placements to begin in the first quarter of 2013. We will retain full ownership of any Vantera analyzers placed in third-party laboratories and will be responsible for support and maintenance obligations. In general, we expect that the number of Vantera analyzers that will be placed in our clinical diagnostic laboratory customers’ facilities will depend on their demonstrated annual production volume for the NMR LipoProfile test and their ability to increase demand for our tests.

We believe that the inherent analytical advantages of NMR technology will also allow us to expand our diagnostic test menu. We are currently developing NMR-based diagnostic test for use in the prediction of diabetes, including the assessment of insulin resistance, and we are investigating opportunities to develop new diagnostic tests for other diseases.

We have incurred significant losses since our inception. As of September 30, 2012, our accumulated deficit was $48.2 million. We expect to incur significant operating losses for the next several years as we seek to establish the NMR LipoProfile test as a clinical standard of care for managing a patient’s risk of cardiovascular disease.

 

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Financial Operations Overview

Revenues

Substantially all of our revenues are currently derived from sales of our NMR LipoProfile test to clinical diagnostic laboratories, physicians and other healthcare professionals for use in patient care. For the years ended December 31, 2009, 2010 and 2011 and the nine months ended September 30, 2012, sales of the NMR LipoProfile test represented approximately 85%, 87%, 93% and 94%, respectively, of our total revenues. The remainder of our revenues is derived from sales of standard analytical chemistry tests, which we refer to as ancillary tests, requested by clinicians in conjunction with our NMR LipoProfile test, as well as revenue from research contracts. Ancillary tests are FDA-approved blood tests that any clinical laboratory can process but that may be ordered from us at the same time as the NMR LipoProfile test for convenience. These tests are not run on our NMR technology platform, but instead are run on a traditional chemistry analyzer. We anticipate that the proportion of our revenues represented by sales of the NMR LipoProfile test will continue to increase as we increase the number of these tests performed for our customers.

The following table presents our revenues by service offering and source:

 

     Year Ended December 31,      Nine Months Ended
September 30,
 
     2009      2010      2011      2011      2012  
     (in thousands)                

Revenues:

              

NMR LipoProfile tests

   $ 29,424       $ 34,394       $ 42,392       $ 30,662       $ 38,938   

Ancillary tests

     4,182         3,425         2,178         1,691         1,367   

Research contracts

     1,107         1,549         1,237         975         936   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 34,713         39,368       $ 45,807       $ 33,328       $ 41,241   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Our revenues are driven by both test volume and the average selling price of our NMR LipoProfile test. We expect to increase the proportion of our business conducted on a wholesale basis through clinical diagnostic laboratories as compared to our direct distribution channel in which clinicians order the test directly from us. We expect this trend to continue as we decentralize access to our NMR LipoProfile test by placing the Vantera system directly in third-party laboratories. For direct sales, the price we ultimately receive depends upon the level of reimbursement from Medicare or commercial insurance carriers. Clinical diagnostic laboratories purchase our test at prices that we negotiate with them, which will continue to be the case for NMR LipoProfile tests performed using the Vantera system, whether the analyzer is located on-site at the customer’s laboratory or at our own facility. These clinical diagnostic laboratories are responsible for obtaining reimbursement from third-party payors or directly from patients. The average selling price of our tests sold to these laboratories is less than that for tests we sell directly to clinicians. We expect that our overall average selling price will continue to decline in the near future, as we increase the proportion of our business conducted on a wholesale basis through clinical diagnostic laboratories. We expect this trend to continue as we place the Vantera system in third-party laboratories, as the price we receive for a test performed on-site at third-party laboratories using the Vantera system will generally be less than the price for the same test performed at our own facility. However, we do not expect that our revenues, income from operations or liquidity will be materially affected by an erosion of average selling price due to changes in the channel mix, as we believe that the increase in test volumes through these laboratories and the number of laboratory customers offering our NMR LipoProfile tests will outweigh the impact of decreases in average selling price, especially if demand increases for Vantera placements.

During the initial rollout period for the Vantera system, we expect that most Vantera placements will be with our existing clinical diagnostic laboratory customers. As a result, we anticipate a gradual shift in the NMR LipoProfile tests performed from our existing laboratory facility to our customers’ facilities. We expect that the reduced volume in the number of tests performed at our facility will be partially offset by growth in NMR LipoProfile test orders from new clinical diagnostic laboratory customers who may not initially meet our test volume criteria for a Vantera system placement.

 

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Our revenues from ancillary tests, while a diminishing portion of our business, are similarly dependent upon our rates of reimbursement from various payor sources. For example, Medicare reimbursement rates are established by the Centers for Medicare and Medicaid Services each year. Changes in Medicare reimbursement rates are dependent on a number of factors that we cannot predict. Reductions in reimbursement rates for these ancillary tests would reduce our overall revenues from these tests.

Cost of Revenues and Operating Expenses

We allocate certain overhead expenses, such as rent, utilities, and depreciation of general office assets to cost of revenues and operating expense categories based on headcount and facility usage. As a result, an overhead expense allocation is reflected in cost of revenues and each operating expense category.

Cost of Revenues and Gross Margin

Cost of revenues consists of direct labor expenses, including employee benefits and stock-based compensation expenses, cost of laboratory supplies, freight costs, royalties paid under license agreements, depreciation of laboratory equipment, leasehold improvements and certain allocated overhead expenses. Once we launch the Vantera system and place the system on-site with third parties, the additional service and maintenance costs for these analyzers will also be included in cost of revenues. We expect these expenses to increase in absolute dollars as we support our customers’ use of the Vantera system, although we expect these increased expenses to be offset by increased revenues from additional test volume. During the years ended December 31, 2009, 2010 and 2011 and the nine months ended September 30, 2012, our cost of revenues represented approximately 22%, 21%, 19% and 18%, respectively, of our total revenues.

Our gross profit represents total revenues less the cost of revenues, and gross margin is gross profit expressed as a percentage of total revenues. Our gross margins were approximately 78%, 79%, 81% and 82%, respectively, for the years ended December 31, 2009, 2010 and 2011 and the nine months ended September 30, 2012. We expect our overall cost of revenues to increase in absolute dollars as we continue to increase our volume of tests performed. However, we also believe that we can achieve certain efficiencies in our laboratory operations through these increased test volumes that can help maintain our overall margins.

Research and Development Expenses

Our research and development expenses include those costs associated with performing research and development activities, such as personnel-related expenses, including stock-based compensation, fees for contractual and consulting services, travel costs, laboratory supplies and allocated overhead expenses. We expense all research and development costs as incurred.

During the years ended December 31, 2009, 2010 and 2011 and the nine months ended September 30, 2012, our research and development expenses represented approximately 18%, 18%, 17% and 18%, respectively, of our total revenues. We expect that our overall research and development expenses will continue to increase in absolute dollars as we develop additional in vitro diagnostic assay candidates that can be performed using the Vantera system.

Sales and Marketing Expenses

Our sales and marketing expenses include costs associated with our sales organization, including our direct sales force and sales management, and our marketing, managed care and business development personnel. These expenses consist principally of salaries, commissions, bonuses and employee benefits for these personnel, including stock-based compensation, as well as travel costs related to sales and marketing activities, marketing and medical education activities and allocated overhead expenses. We expense all sales and marketing costs as incurred.

 

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During the years ended December 31, 2009, 2010 and 2011 and the nine months ended September 30, 2012, our sales and marketing expenses represented approximately 37%, 39%, 47% and 41%, respectively, of our total revenues. We expect our sales and marketing costs to increase, both in absolute dollars as well as a percentage of our total revenues, as we expand our sales force, increase our geographic presence, and increase marketing and medical education to drive awareness and adoption of the NMR LipoProfile test.

General and Administrative Expenses

Our general and administrative expenses include costs for our executive, accounting and finance, legal, and human resources functions. These expenses consist principally of salaries, bonuses and employee benefits for the personnel included in these functions, including stock-based compensation and professional services fees, such as consulting, audit, tax and legal fees, general corporate costs and allocated overhead expenses, and bad debt expense. We expense all general and administrative expenses as incurred.

During the years ended December 31, 2009, 2010 and 2011 and the nine months ended September 30, 2012, our general and administrative expenses represented approximately 20%, 19%, 19% and 19%, respectively, of our total revenues. We expect that our general and administrative expenses will increase after this offering, primarily due to the costs of operating as a public company, such as additional legal, accounting and corporate governance expenses, including expenses related to compliance with the Sarbanes-Oxley Act of 2002, directors’ and officers’ insurance premiums and investor relations expenses.

Medical Device Tax

The PPACA includes provisions that, among other things, require the medical device industry to subsidize healthcare reform in the form of a 2.3% excise tax on U.S. sales of most medical devices beginning in 2013. Regulations implementing the tax were finalized in December 2012, but the long-term impact to our company remains uncertain as some members of Congress are working to delay enactment of the tax. While we continue to evaluate the impact of this tax on our overall business, this tax is applicable to the sales of our NMR LipoProfile tests and could adversely affect our results of operations, cash flows and financial condition.

Other Income (Expense)

Interest income consists of interest earned on our cash and cash equivalents. During the years ended December 31, 2009, 2010 and 2011 and the nine months ended September 30, 2012, this income has not been material, although we expect our interest income to increase following this offering as we invest the net proceeds from the offering.

Interest expense consists primarily of interest expense on our loan balances and the amortization of debt discounts and debt issuance costs. We amortize debt issuance costs over the life of the loan and report them as interest expense in our statements of operations.

We had a term loan from Square 1 with an outstanding balance of $4.2 million as of September 30, 2012. This loan carried a variable annual interest rate equal to the greater of 7.25% or the prime rate plus 3.75%. We also had a revolving line of credit from Square 1 with an outstanding balance of $3.5 million as of September 30, 2012. Borrowings under this line of credit carried a variable annual interest rate equal to the greater of 6.25% or the prime rate plus 3.0%. In December 2012, we refinanced our indebtedness and paid off the foregoing loans. As part of the refinancing, we now have term loans from Oxford Finance with an outstanding balance of $10.0 million as of December 31, 2012 and a term loan from Square 1 with an outstanding balance of $6.0 million as of December 31, 2012, as well as a new revolving line of credit with Square 1 with a maximum borrowing capacity of $6.0 million and an outstanding balance of $5.0 million as of December 31, 2012. Under the new credit facility, the term loans carry a fixed interest rate of 9.5%, while advances under the line of credit will continue to carry a variable interest rate equal to the greater of 6.25% or Square 1’s prime rate plus 3.0%.

 

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Other income and expense primarily consists of costs incurred as a result of changes in the fair value of our preferred stock warrant liability and gains and losses on sale or disposal of assets. The fair value of preferred stock warrants is re-measured each reporting period and changes in fair value are recognized in other income (expense). Upon completion of this offering, the preferred stock warrants will automatically convert into warrants to purchase common stock and no further changes in fair value will be recognized in other income (expense).

Results of Operations

Comparison of Nine Months Ended September 30, 2011 and 2012

The following table sets forth, for the periods indicated, the amounts of certain components of our statements of operations and the percentage of total revenues represented by these items, showing period-to-period changes.

 

     Nine months ended September 30,     Period-to-period change  
     2011     % of
Revenues
    2012     % of
Revenues
      Amount         Percentage    
     (in thousands, except for percentages)  

Revenues

   $ 33,328        100.0   $ 41,241        100.0   $ 7,913        23.7

Cost of revenues

     6,367        19.1        7,622        18.5        1,255        19.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Gross profit

     26,961        80.9        33,619        81.5        6,658        24.7   

Operating expenses:

            

Research and development

     5,698        17.1        7,418        18.0        1,720        30.2   

Sales and marketing

     15,453        46.4        16,746        40.6        1,293        8.4   

General and administrative

     6,248        18.7        7,764        18.8        1,516        24.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total operating expenses

     27,399        82.2        31,928        77.4        4,529        16.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Loss (income) from operations

     (438     (1.3     1,691        4.1        2,129        *   

Total other expense

     (130     (0.4     (634     (1.5     (504     *   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Loss (income) before taxes

     (568     (1.7     1,057        2.6        1,625        *   

Income tax expense (benefit)

     —         —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net income (loss)

   $ (568     (1.7 )%    $ 1,057        2.6   $ 1,625        *   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

* Percentage not meaningful

Revenues

Total revenues increased by 23.7% to $41.2 million for the nine months ended September 30, 2012 from $33.3 million for the nine months ended September 30, 2011. Revenues from sales of our NMR LipoProfile test increased to $38.9 million for the nine months ended September 30, 2012 from $30.7 million for the nine months ended September 30, 2011, resulting from growth in the number of NMR LipoProfile tests sold, particularly to our clinical diagnostic laboratory customers. This growth reflected the impact of an increase in the number of our sales representatives and greater geographic coverage of our sales force, as well as increased market acceptance of our test.

The overall number of NMR LipoProfile tests increased by 34.8% to approximately 1,459,000 tests for the nine months ended September 30, 2012 from approximately 1,082,000 tests for the nine months ended September 30, 2011. The overall average selling price of NMR LipoProfile tests decreased 7.0%, to $26.69 for the nine months ended September 30, 2012 from $28.34 for the nine months ended September 30, 2011. This decrease in average selling price was primarily the result of a continuing shift in channel mix toward clinical laboratory customers. The percentage of our total NMR LipoProfile tests sold through direct distribution channels decreased from 8% for the nine months ended September 30, 2011 to 5% for the nine months ended September 30, 2012. This continued shift reflects our current strategy of accelerating the adoption of our NMR LipoProfile test through clinical diagnostic laboratories, which we expect to result in fewer tests ordered through direct channels and an overall decrease in average selling price.

 

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Revenues from sales of ancillary tests decreased from $1.7 million for the nine months ended September 30, 2011 to $1.4 million for the nine months ended September 30, 2012. The decrease in revenues from these ancillary tests was primarily driven by the shift in testing mix and an overall reduction of reimbursement rates from Medicare. Revenues from our clinical research clients were approximately $1.0 million and $0.9 million for the nine-month periods ended September 30, 2011 and 2012, respectively.

Cost of Revenues and Gross Margin

Cost of revenues increased by 19.7%, to $7.6 million for the nine months ended September 30, 2012 from $6.4 million for the nine months ended September 30, 2011. This increase resulted primarily from the increase in the number of NMR LipoProfile tests sold to patient care clients during the nine months ended September 30, 2012. This additional testing volume resulted in increased freight costs and required additional personnel, which increased our compensation, benefit and allocated costs. These increases were partially offset by lower material costs due to fewer ancillary tests being performed and lower royalty expenses due to the expiration of the NCSU license. Gross profit as a percentage of total revenues, or gross margin, increased to 81.5% for the nine months ended September 30, 2012 from 80.9% for the nine months ended September 30, 2011. The improvement we experienced in gross margin resulted primarily from increased sales volume coupled with operating efficiencies in our clinical laboratory.

Research and Development Expenses

Research and development expenses increased by 30.2% to $7.4 million for the nine months ended September 30, 2012 from $5.7 million for the nine months ended September 30, 2011. This increase was primarily the result of $0.9 million in higher salaries and benefits, including stock-based compensation expense, $0.3 million in higher travel related expenses, from increased headcount within our research and development function, and $0.4 million in higher depreciation expense associated with immaterial correction of an error relating to prior period during the nine months ended September 30, 2012. The total number of our research and development employees increased to 47 at September 30, 2012 from 37 at September 30, 2011. As a percentage of total revenues, research and development expenses increased to 18.0% for the nine months ended September 30, 2012, as compared to 17.1% for the nine months ended September 30, 2011.

Sales and Marketing Expenses

Sales and marketing expenses increased by 8.4%, to $16.7 million for the nine months ended September 30, 2012 from $15.5 million for the nine months ended September 30, 2011. This increase reflected an increase of $1.0 million in compensation and benefits costs and travel and entertainment-related expenses as a result of the growth and expansion of our sales organization. The total number of our sales and marketing employees increased to 73 at September 30, 2012 from 70 at September 30, 2011. In addition, we experienced $0.3 million in higher allocated expenses due to increases in information technology and facility costs. While sales and marketing expenses increased in absolute dollar amounts, they decreased as a percentage of total revenues from 46.4% for the nine months ended September 30, 2011 to 40.6% for the nine months ended September 30, 2012.

General and Administrative Expenses

General and administrative expenses increased by 24.3%, to $7.8 million for the nine months ended September 30, 2012 from $6.2 million for the nine months ended September 30, 2011. This increase was primarily the result of $1.0 million in higher salaries and benefits, including stock-based compensation expense, from increased headcount within our general and administrative function, and $0.6 million in higher professional fees, from additional legal fees associated with the OIG gift card matter and the DOJ investigation and additional expenses associated with expanded compliance efforts. We incurred $0.4 million in legal and accounting expenses in the 2012 period in connection with the OIG gift card matter. The total number of our general and

 

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administrative employees increased to 34 at September 30, 2012 from 27 at September 30, 2011. In addition, we experienced $0.3 million in higher allocated expenses due to increases in information technology and facility costs. This increase was partially offset by a $0.3 million reduction in bad debt expense.

Our bad debt expense was $0.8 million for the nine months ended September 30, 2012 and $1.1 million for the nine months ended September 30, 2011. As a percentage of total revenues, bad debt expense decreased to 1.8% for the nine months ended September 30, 2012 from 3.2% for the nine months ended September 30, 2011. The decrease in bad debt expense, both in absolute dollars and as a percentage of total revenues, resulted primarily from the shift of our customer base towards clinical diagnostic laboratories, from which we typically experience improved collection rates.

As a percentage of total revenues general and administrative expenses increased to 18.8% for the nine months ended September 30, 2012, compared to 18.7% for the nine months ended September 30, 2011.

Other Income (Expense)

Other expense increased to $0.6 million for the nine months ended September 30, 2012 from an expense of $0.1 million for the nine months ended September 30, 2011. The increase was primarily attributable to a $0.1 million increase in interest expense compared to the prior year period, due to higher average principal amounts outstanding on our indebtedness during the later period. We also experienced a $0.4 million increase in other expense as a result of changes in the fair value of our preferred stock warrant liability between the periods. In addition, we incurred a $59,000 loss on the extinguishment of debt recognized during the first quarter of 2011 as a result of refinancing our credit facility with Square 1.

Comparison of Years Ended December 31, 2010 and 2011

The following table sets forth, for the periods indicated, the amounts of certain components of our statements of operations and the percentage of total revenues represented by these items, showing period-to-period changes.

 

     Year ended December 31,     Period-to-Period Change  
     2010     % of
Revenues
    2011     % of
Revenues
      Amount          Percentage    
     (in thousands, except for percentages)  

Revenues

   $ 39,368        100.0   $ 45,807        100.0   $ 6,439        16.4

Cost of revenues

     8,139        20.7        8,529        18.6        390        4.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Gross profit

     31,229        79.3        37,278        81.4        6,049        19.4   

Operating expenses:

            

Research and development

     7,276        18.5        7,808        17.0        532        7.3   

Sales and marketing

     15,246        38.7        21,305        46.5        6,059        39.7   

General and administrative

     7,331        18.6        8,550        18.7        1,219        16.6   

Gain on extinguishment of other long-term Liabilities

     (2,700     (6.9     —         —         2,700        *   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total operating expenses

     27,153        69.0        37,663        82.2        10,510        38.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Income (loss) from operations

     4,076        10.4        (385     (0.8     (4,461     *   

Total other income (expense)

     220        0.6        (163     (0.4     (383     *   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Income (loss) before taxes

     4,296        10.9        (548     (1.2     (4,844     *   

Income tax (benefit) expense

     (16     (0.0     —          —          16        *   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net income (loss)

   $ 4,312        11.0   $ (548     (1.2 )%    $ (4,860     *   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

* Percentage not meaningful

 

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Revenues

Total revenues increased by 16.4%, to $45.8 million for the year ended December 31, 2011 from $39.4 million for the year ended December 31, 2010. Revenues from sales of our NMR LipoProfile test increased to $42.4 million for the year ended December 31, 2011 from $34.4 million for the year ended December 31, 2010, resulting from growth in the number of NMR LipoProfile tests sold, particularly to our clinical diagnostic laboratory customers. This growth reflected the impact of an increase in the number of our sales representatives and greater geographic coverage of our sales force, and volume growth attributable to recently acquired clinical diagnostic laboratory customers such as Health Diagnostic Laboratory, Inc., as well as increased market acceptance of our test.

The overall number of NMR LipoProfile tests increased by 38.9% to approximately 1,508,000 tests for the year ended December 31, 2011 from approximately 1,086,000 tests for the year ended December 31, 2010. The overall average selling price of NMR LipoProfile tests decreased 11.3%, to $28.10 for the year ended December 31, 2011 from $31.67 for the year ended December 31, 2010. This decrease in average selling price was primarily the result of a continuing shift in channel mix toward clinical laboratory customers. The percentage of total NMR LipoProfile tests sold through our direct distribution channel decreased from 16% for the year ended December 31, 2010 to 8% for the year ended December 31, 2011. This decrease reflected our strategy of accelerating the adoption of our NMR LipoProfile test through clinical diagnostic laboratories.

Revenues from sales of ancillary tests decreased from $3.4 million for the year ended December 31, 2010 to $2.2 million for the year ended December 31, 2011. The decrease in revenues from ancillary tests was primarily driven by the shift in testing mix and an overall reduction of reimbursement rates from Medicare. Revenues from our clinical research clients were $1.5 million and $1.2 million for the years ended December 31, 2010 and 2011, respectively.

Cost of Revenues and Gross Margin

Cost of revenues increased by 4.8%, to $8.5 million for the year ended December 31, 2011 from $8.1 million for the year ended December 31, 2010. This increase resulted primarily from the increase in the number of NMR LipoProfile tests sold to patient care clients during the year ended December 31, 2011. This additional testing volume resulted in increased freight and material costs and repair and maintenance costs. We also experienced higher overhead costs due to increases in information technology and facility costs. Gross margin increased to 81.4% for the year ended December 31, 2011 from 79.3% for the year ended December 31, 2010. The improvement in gross margin resulted primarily from increased sales volume coupled with operating efficiencies in our clinical laboratory.

Research and Development Expenses

Research and development expenses increased by 7.3%, to $7.8 million for the year ended December 31, 2011 from $7.3 million for the year ended December 31, 2010. This increase was primarily the result of $1.5 million in higher salaries and benefits, including stock-based compensation expense, as well as associated operational costs from increased headcount within our research and development function. The total number of our research and development employees increased to 42 at December 31, 2011 from 32 at December 31, 2010. This increase was partially offset by $1.0 million in lower spending associated with contract services due to lower utilization of external consultants in the development of our Vantera system. As a percentage of total revenues, research and development expenses decreased to 17.0% for the year ended December 31, 2011, as compared to 18.5% for the year ended December 31, 2010.

Sales and Marketing Expenses

Sales and marketing expenses increased by 39.7%, to $21.3 million for the year ended December 31, 2011 from $15.2 million for the year ended December 31, 2010. This increase reflected $3.3 million in higher

 

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compensation and benefits costs as a result of the growth and expansion of our sales organization and $0.7 million in additional spending associated with travel and entertainment-related expenses, $1.9 million in higher marketing expenses associated with our market awareness efforts and medical education and $0.1 million in higher allocated expenses due to increases in information technology and facility costs. The total number of our sales and marketing employees increased to 70 at December 31, 2011 from 61 at December 31, 2010. As a percentage of total revenues, sales and marketing expenses increased to 46.5% for the year ended December 31, 2011 from 38.7% for the year ended December 31, 2010. The increased sales and marketing expenses as a percentage of total revenues resulted primarily from the expansion of our sales force as we increased our geographic presence.

General and Administrative Expenses

General and administrative expenses increased by 16.6%, to $8.6 million for the year ended December 31, 2011 from $7.3 million for the year ended December 31, 2010. This increase was attributable to a $0.9 million increase in legal and accounting expenses incurred in connection with this offering that were not capitalized as deferred offering costs, as well as additional contracted labor costs within our finance department. We also experienced $0.6 million in higher compensation and benefits costs due mainly to higher bonus expense, as we met the overall 2011 corporate financial targets on which bonuses were based. In addition, we experienced $0.1 million in higher allocated expenses due to increases in information technology and facility costs. These increases were partially offset by $0.4 million in lower bad debt expense. As a percentage of total revenues, general and administrative expenses increased to 18.7% for the year ended December 31, 2011 from 18.6% for the year ended December 31, 2010.

Our bad debt expense was $1.4 million for the year ended December 31, 2011 and $1.7 million for the year ended December 31, 2010. As a percentage of total revenues, bad debt expense decreased to 3.0% for the year ended December 31, 2011 from 4.4% for the year ended December 31, 2010. The decrease in bad debt expense as a percentage of total revenues resulted primarily from the shift of our customer base towards clinical diagnostic laboratories, from which we typically experience improved collection rates.

Other Income (Expense)

Other income (expense) changed by $0.4 million, to an expense of $0.2 million for the year ended December 31, 2011 from income of $0.2 million for the year ended December 31, 2010. The change was primarily attributable to a $0.1 million decrease in other income as a result of changes in the fair value of our preferred stock warrant liability between the periods. We also experienced a $0.2 million increase in interest expense compared to the prior year period, due to higher principal amounts outstanding on our indebtedness during the respective periods and a $0.1 million loss for extinguishment of debt during the first quarter of 2011 that we recognized as a result of refinancing our credit facility with Square 1.

 

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Comparison of Years Ended December 31, 2009 and 2010

The following table sets forth, for the periods indicated, the amounts of certain components of our statements of operations and the percentage of total revenues represented by these items, showing period-to-period changes.

 

     Year Ended December 31,     Period-to-Period Change  
     2009     % of
Revenues
    2010     % of
Revenues
    Amount     Percentage  
     (in thousands, except for percentages)  

Revenues

   $ 34,713        100.0   $ 39,368        100.0   $ 4,655        13.4

Cost of revenues

     7,792        22.4        8,139        20.7        347        4.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Gross profit

     26,921        77.6        31,229        79.3        4,308        16.0   

Operating expenses:

            

Research and development

     6,156        17.7        7,276        18.5        1,120        18.2   

Sales and marketing

     12,990        37.4        15,246        38.7        2,256        17.4   

General and administrative

     7,020        20.2        7,331        18.6        311        4.4   

Gain on extinguishment of other long-term liabilities

     —          —          (2,700     (6.9     (2,700     *   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total operating expenses

     26,166        75.4        27,153        69.0        987        3.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Income from operations

     755        2.2        4,076        10.4        3,321        439.9   

Total other income (expense)

     (495     (1.4     220        0.6        715        *   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Income before taxes

     260        0.7        4,296        10.9        4,036        1,552.3   

Income tax expense (benefit)

     2        0.0        (16     (0.0     (18     *   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net income

   $ 258        0.7   $ 4,312        11.0   $ 4,054        1,571.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

* Percentage not meaningful

Revenues

Total revenues increased by 13.4%, to $39.4 million for the year ended December 31, 2010 from $34.7 million for the year ended December 31, 2009. Revenues from sales of our NMR LipoProfile test increased to $34.4 million for the year ended December 31, 2010 from $29.4 million for the year ended December 31, 2009, resulting from growth in the number of NMR LipoProfile tests sold, particularly to our clinical diagnostic laboratory customers. This growth reflected the impact of an increase in the number of our sales representatives and greater geographic coverage of our sales force, as well as increased acceptance of our test.

The overall number of NMR LipoProfile tests increased by 23.2% to approximately 1,086,000 tests for the year ended December 31, 2010 from approximately 882,000 tests for the year ended December 31, 2009. The overall average selling price of NMR LipoProfile tests decreased 5.1%, to $31.67 for the year ended December 31, 2010 from $33.37 for the year ended December 31, 2009. This decrease in average selling price was primarily the result of a continuing shift in channel mix toward clinical laboratory customers. The percentage of total NMR LipoProfile tests sold through our direct distribution channel decreased from 19% for the year ended December 31, 2009 to 16% for the year ended December 31, 2010.

Revenues from sales of ancillary tests decreased from $4.2 million for the year ended December 31, 2009 to $3.4 million for the year ended December 31, 2010. The decrease in revenues from these ancillary tests was primarily driven by the shift in our channel mix.

Revenues from our clinical research clients increased from $1.1 million for the year ended December 31, 2009 to $1.5 million for the year ended December 31, 2010.

 

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Cost of Revenues and Gross Margin

Cost of revenues increased by 4.5%, to $8.1 million for the year ended December 31, 2010 from $7.8 million for the year ended December 31, 2009. This increase resulted primarily from the increase in the number of NMR LipoProfile tests sold to patient care and research clients during the year ended December 31, 2010. This additional testing volume resulted in increased freight and material costs and required additional personnel, which increased our compensation and benefits costs. Gross margin increased to 79.3% for the year ended December 31, 2010 from 77.6% from the year ended December 31, 2009. The improvement experienced in gross margin resulted primarily from increased sales volume coupled with operating efficiencies and an increase in our production capacity utilization.

Research and Development Expenses

Research and development expenses increased by 18.2%, to $7.3 million for the year ended December 31, 2010 from $6.2 million for the year ended December 31, 2009. This increase resulted primarily from $0.9 million of higher compensation and benefits costs, including relocation and recruiting fees, due to increased headcount within our research and development department. The total number of our research and development employees increased to 32 at December 31, 2010 from 28 at December 31, 2009. We also incurred $0.2 million in additional costs associated with contract services for the continued development of our Vantera system. As a percentage of total revenues, research and development expenses increased to 18.5% for the year ended December 31, 2010 from 17.7% for the year ended December 31, 2009.

Sales and Marketing Expenses

Sales and marketing expenses increased by 17.4%, to $15.2 million for the year ended December 31, 2010 from $13.0 million for the year ended December 31, 2009. This increase reflected an increase of $1.3 million in compensation and benefits costs and an increase of $1.0 million in travel and entertainment-related expenses as a result of the growth and expansion of our sales organization, as well as higher marketing expenses associated with market awareness and medical education. The total number of our sales and marketing employees increased to 61 at December 31, 2010 from 44 at December 31, 2009. We also incurred additional costs associated with contract services for increased marketing and market research efforts as we refined our overall product offering message and marketing program effectiveness. As a percentage of total revenues, sales and marketing expenses increased to 38.7% for the year ended December 31, 2010 from 37.4% for the year ended December 31, 2009.

General and Administrative Expenses

General and administrative expenses increased by 4.4%, to $7.3 million for the year ended December 31, 2010 from $7.0 million for the year ended December 31, 2009. This increase was primarily due to an increase in compensation and benefits costs, including stock-based compensation, attributable to general and administrative personnel. As a percentage of total revenues, general and administrative expenses decreased to 18.6% for the year ended December 31, 2010 from 20.2% for the year ended December 31, 2009.

Bad debt expense remained constant at approximately $1.8 million for each of the years ended December 31, 2010 and 2009. As a percentage of total revenues, bad debt expense decreased to 4.4% for the year ended December 31, 2010 from 5.2% for the year ended December 31, 2009. The decrease in bad debt expense as a percentage of total revenues resulted from improved collection trends due to process improvement programs within our billing department, coupled with the shift in our customer base towards clinical diagnostic laboratories.

Gain on Extinguishment of Other Long-Term Liabilities

In September 2010, we were released from a $2.7 million payment obligation to a third-party contractor for prior research and development services. We recorded the release of this liability as a gain on extinguishment of other long-term liabilities within the operating expenses section of our statement of operations for the year ended December 31, 2010.

 

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Other Income (Expense)

Other income (expense) changed by $0.7 million, to income of $0.2 million for the year ended December 31, 2010 from expense of $0.5 million for the year ended December 31, 2009. The improvement was primarily attributable to a $0.6 million increase in other income as a result of changes in the fair value of our preferred stock warrant liability between the periods. We also experienced a $0.1 million decrease in interest expense due to lower principal amounts outstanding on our indebtedness.

Liquidity and Capital Resources

Sources of Liquidity

To date, we have funded our operations principally through private placements of our capital stock, bank borrowings and, during 2009, 2010 and 2011, cash flows from operations. We have raised approximately $58.7 million from the sale of common stock and convertible preferred stock to third parties. The last of these equity financing transactions occurred in 2006.

In February 2008, we entered into a credit facility with Square 1 that provided for a term loan of $4.5 million and a revolving line of credit of up to $3.0 million. We have entered into a series of amendments to this credit facility with Square 1 to, among other things, increase the term loan to $6.0 million and the revolving line of credit capacity to $4.0 million. Interest on the term loan accrued at a variable annual rate equal to the greater of 7.25%, or the prime rate plus 3.75%. Interest on amounts borrowed under the line of credit accrued at a variable annual rate equal to the greater of 6.25%, or prime rate plus 3.00%. We were required only to make interest payments on the term loan through December 31, 2011. Repayment of principal amounts due under the term loan commenced in January 2012 and were scheduled to continue in 30 monthly installments through June 2014. As of September 30, 2012, we owed $4.2 million under the term loan, and $3.5 million under the revolving line of credit, which was scheduled to mature in May 2013.

In December 2012, we entered into a new credit facility with Square 1 and Oxford Finance and repaid the foregoing loans in full. The new credit facility provides for term loans from Oxford Finance of $10.0 million, a term loan from Square 1 of $6.0 million and a new revolving line of credit of up to $6.0 million. Our borrowing capacity under the line of credit is subject to borrowing base limitations related to our eligible accounts receivable. Interest on the term loans accrues at a fixed annual rate of 9.5%, while advances under the line of credit will continue to carry a variable interest rate equal to the greater of 6.25% or Square 1’s prime rate plus 3.0%. We are required only to make interest payments on the term loans through January 2014, and then repayments of principal and interest amounts due under the term loans will continue in monthly installments through July 2016. As of December 31, 2012, we had borrowed $5.0 million under the revolving line of credit and we had no additional available borrowing capacity. The revolving line of credit matures in December 2013.

Borrowings under the credit facility are secured by substantially all of our assets other than our intellectual property. The covenants set forth in the loan and security agreement require, among other things, that we maintain a specified liquidity ratio, measured monthly, that begins at 1.25 and is reduced to 1.0 over the term of the agreement, and that we achieve minimum three-month trailing revenue levels during the term of the agreement, which are based on 80% of our projected revenue levels. In addition, the loan and security agreement requires that our projections provided to the lenders include annual projected revenues of at least $55 million. As of November 30, 2012, our liquidity ratio was 1.35, and that ratio will increase initially as a result of the receipt of proceeds from this offering. If we fail to comply with the covenants and our other obligations under the credit facility, the lenders would be able to accelerate the required repayment of amounts due under the loan agreement and, if they are not repaid, could foreclose upon our assets securing our obligations under the credit facility. We are currently in compliance with all required covenants.

In connection with the foregoing credit facilities, we have issued warrants to Oxford Finance to purchase an aggregate of 45,978 shares of our Series E redeemable convertible preferred stock at an exercise price of $4.35 per share and warrants to Square 1 to purchase an aggregate of 27,586 shares of our Series E redeemable

 

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convertible preferred stock and 88,793 shares of our Series F redeemable convertible preferred stock, in each case at an exercise price of $4.35 per share. Upon the closing of this offering, if not exercised, the warrants will automatically become warrants to purchase an aggregate of 78,741 shares of common stock at an exercise price of $8.97 per share.

Cash and Cash Equivalents

The following table summarizes our cash and cash equivalents, accounts receivable and cash flows for the periods indicated:

 

    As of and for the Year Ended
December 31,
    As of and for the Nine
Months Ended September 30,
 
        2009             2010             2011             2011             2012      
   

(in thousands)

 

Cash and cash equivalents

  $ 12,045      $ 11,058      $ 12,483      $ 12,827      $ 10,279   

Accounts receivable, net

    3,363        4,194        5,626        5,414        8,057   

Operating activities

    1,637        1,143        96        (874     2,408   

Investing activities

    (451     (1,209     (2,168     (769     (5,801

Financing activities

    970        (921     3,497        3,412       
1,190
  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

  $ 2,156      $ (987   $ 1,425      $
1,769
  
  $ (2,203
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Our cash and cash equivalents at December 31, 2011 and September 30, 2012 were held for working capital purposes. We do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide liquidity. Accordingly, our cash and cash equivalents are invested primarily in demand deposit accounts, certificates of deposit and money market funds that are currently providing only a minimal return.

Restricted cash, which totaled $1.5 million at December 31, 2011 and September 30, 2012 and is not included in cash and cash equivalents, consists primarily of certificates of deposit that secure letters of credit related to operating leases for our office and laboratory space.

Cash Flows for the Nine Months Ended September 30, 2011 and 2012

Operating Activities

Net cash provided by operating activities was $2.4 million during the nine months ended September 30, 2012, which included net income of $1.1 million and non-cash items of $2.1 million. The non-cash items consisted of $1.0 million in depreciation and amortization expense, $0.9 million in stock compensation expense and $0.2 million in expense incurred in the fair value remeasurement of the preferred stock warrant liability. We also had a net cash outflow of $0.7 million from changes in operating assets and liabilities during the period. The significant items in the changes in operating assets and liabilities included an increase in accounts receivable of $2.4 million, an increase in prepaid expenses of $0.1 million, a decrease in current liabilities of $0.2 million and an increase in long-term liabilities of $1.6 million. The increase in accounts receivable was due primarily to the growth in our revenues. The increase in long-term liabilities was related to straight line rent accrual and deferred tenant improvements allowance associated with our facility lease.

Net cash used in operating activities was $0.9 million during the nine months ended September 30, 2011, which included a net loss of $0.6 million, partially offset by non-cash items of $0.8 million. We also had a net cash outflow of $1.1 million from changes in operating assets and liabilities during the period. The change in operating assets and liabilities was primarily driven by an increase in our accounts receivable of $1.2 million as a result of the growth in our revenues.

 

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Investing Activities

Net cash used in investing activities was $0.8 million and $5.8 million for the nine months ended September 30, 2011 and 2012, respectively. These amounts related primarily to purchases of property and equipment and costs incurred in connection with maintaining our patent and trademark portfolio. The purchases of property and equipment during the first nine months of 2011 and 2012 were primarily for hardware components purchased from third-party manufacturers for the Vantera system. The purchases of property and equipment during the first nine months of 2012 consist primarily of $4.4 million of hardware components purchased from third-party manufacturers and enhanced IT infrastructure for the Vantera system and $1.4 million in facility renovation. The capitalized patent and trademark costs during the first nine months of 2011 and 2012 were primarily for pending domestic and international patent applications.

Financing Activities

Net cash provided by financing activities was $1.2 million during the nine months ended September 30, 2012, consisting primarily of $3.5 million in proceeds from borrowings under our line of credit, offset by term loan repayments of $1.6 million and $0.7 million of deferred offering costs incurred in connection with this offering.

Net cash provided by financing activities was $3.4 million during the nine months ended September 30, 2011, consisting primarily of $6.0 million in new proceeds from the refinancing of our long-term debt with Square 1 and $0.2 million in proceeds from exercises of stock options, offset by repayment in full of our prior long-term debt in the amount of $1.2 million and $1.6 million of deferred offering costs incurred in connection with this offering.

Cash Flows for the Years Ended December 31, 2009, 2010 and 2011

Operating Activities

Net cash provided by operating activities was $0.1 million during the year ended December 31, 2011, which included net loss of $0.5 million, partially offset by net non-cash items of $1.0 million. Non-cash items for the year ended December 31, 2011 consisted primarily of depreciation and amortization expense of $0.5 million and stock-based compensation expense of $0.7 million, a $0.1 million loss on extinguishment of debt, offset by a $0.3 million decrease in the fair value of our preferred stock warrant liability. We also had a net cash outflow from changes in operating assets and liabilities of $0.3 million during the year. The significant items in the changes in operating assets and liabilities included an increase of $1.4 million in accounts receivable, an increase of $0.1 million in prepaid expenses and a decrease of $0.1 million in other long-term liabilities, offset by an increase of $1.3 million in accounts payable, accrued liabilities and other current liabilities. The increase in accounts receivable was due primarily to the growth in our revenues. The increase in accounts payable during 2011 was due to higher expected bonus and commission payouts based on performance against target goals and increased spending associated with this offering.

Net cash provided by operating activities was $1.1 million during the year ended December 31, 2010, which included net income of $4.3 million, partially offset by net non-cash items of $(1.9) million. Non-cash items for the year ended December 31, 2010 consisted primarily of a $2.7 million gain on extinguishment of other long-term liabilities and a $0.4 million increase in the fair value of our preferred stock warrant liability, offset by depreciation and amortization expense of $0.6 million and stock-based compensation expense of $0.6 million. We also had a net cash outflow from changes in operating assets and liabilities of $1.3 million during the year. The significant items in the changes in operating assets and liabilities included an increase of $0.8 million in accounts receivable and an increase of $0.2 million in prepaid expenses, a decrease of $0.2 million in accounts payable and other current liabilities, and a decrease of $0.1 million in other long-term liabilities. The increase in accounts receivable was due primarily to the growth in our revenues.

 

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Net cash provided by operating activities was $1.6 million during the year ended December 31, 2009, which included net income of $0.3 million and non-cash items of $1.5 million. Non-cash items for the year ended December 31, 2009 consisted primarily of depreciation and amortization expense of $0.8 million, stock-based compensation expense of $0.6 million and an increase in the fair value of our preferred stock warrant liability of $0.2 million. We also had a net cash outflow from changes in operating assets and liabilities of $0.2 million during the year. The significant items in the changes in operating assets and liabilities included an increase of $0.3 million in accounts receivable partially offset by an increase of $0.2 million in accounts payable and other current liabilities. The increase in accounts receivable was due primarily to the growth in our revenues.

The growth in our number of NMR LipoProfile tests performed, the impact of other revenue and expenses and the timing and amount of future working capital changes will affect the future amount of cash used in or provided by operating activities.

Investing Activities

Net cash used in investing activities was $0.5 million, $1.2 million and $2.2 million for the years ended December 31, 2009, 2010 and 2011, respectively. The amounts related primarily to purchases of property and equipment and patent and trademark costs. The purchases of property and equipment during the years ended December 31, 2009 and 2011 were primarily for hardware components purchased from third-party manufacturers for the Vantera system not yet put into service, while the purchases of property and equipment during the year ended December 31, 2010 were primarily for computer and furniture for general office use due to increased headcount, leasehold improvements related to our facilities and equipment used in test production. The capitalized patent and trademark costs during the years ended December 31, 2009, 2010 and 2011 were primarily for pending domestic and international patent applications.

Financing Activities

Net cash provided by financing activities was $3.5 million during the year ended December 31, 2011, consisting primarily of proceeds from long-term debt of $6.0 million and net proceeds from exercises of stock options and warrants of $0.6 million, partially offset by cash outlays for deferred offering costs of $1.9 million and repayment of long-term debt of $1.2 million.

Net cash used in financing activities was $0.9 million during the year ended December 31, 2010, consisting primarily of repayment of long-term debt of $1.8 million, partially offset by net proceeds from exercises of stock options and warrants of $0.9 million.

Net cash provided by financing activities was $1.0 million during the year ended December 31, 2009, consisting primarily of proceeds from long-term debt of $2.5 million, partially offset by repayment of long-term debt of $1.5 million.

Operating and Capital Expenditure Requirements

We expect to incur substantial operating losses in the future and that our operating expenses will increase as we continue to expand our sales force and increase our marketing efforts to drive market adoption of the NMR LipoProfile tests, commercially launch our Vantera system and develop additional diagnostic tests. Our liquidity requirements have historically consisted, and we expect that they will continue to consist, of sales and marketing expenses, research and development expenses, capital expenditures, working capital, debt service and general corporate expenses. As demand for placements of our Vantera system increases from our clinical diagnostic laboratory customers, we anticipate that our capital expenditure requirements will also increase in order to build additional analyzers for placement. We expect that we will use a portion of the net proceeds of this offering, in combination with our existing cash and cash equivalents, for these purposes and for the increased costs associated with being a public company. The amount by which we increase our sales and marketing expenses and

 

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research and development expenses will be dependent upon the net proceeds of this offering and cannot currently be estimated. We expect that our planned expenditures will be funded from our ongoing operations, as well as from the proceeds of this offering.

We believe the net proceeds from this offering, together with the cash generated from operations, our current cash and cash equivalents and interest income we earn on these balances, will be sufficient to meet our anticipated cash requirements through at least the next 12 months. In the future, we expect our operating and capital expenditures to increase as we increase headcount, expand our sales and marketing activities and grow our customer base. As sales of our NMR LipoProfile test grow, we expect our accounts receivable balance to increase. Any such increase in accounts receivable may not be completely offset by increases in accounts payable and accrued expenses, which could result in greater working capital requirements.

If our available cash balances and net proceeds from this offering are insufficient to satisfy our liquidity requirements, we may seek to sell common or preferred equity or convertible debt securities or enter into an additional credit facility or seek other debt financing. The sale of equity and convertible debt securities may result in dilution to our stockholders, and those securities may have rights senior to those of our common shares. If we raise additional funds through the issuance of preferred stock, convertible debt securities or other debt financing, these securities or other debt could contain covenants that would restrict our operations. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available on reasonable terms, or at all.

Our estimates of the period of time through which our financial resources will be adequate to support our operations and the costs to support research and development and our sales and marketing activities are forward-looking statements and involve risks and uncertainties and actual results could vary materially and negatively as a result of a number of factors, including the factors discussed in the section “Risk Factors” of this prospectus. We have based our estimates on assumptions that may prove to be wrong and we could utilize our available capital resources sooner than we currently expect.

Our short- and long-term capital requirements will depend on many factors, including the following:

 

   

the cost of our selling and marketing efforts;

 

   

the rate of adoption of the NMR LipoProfile test in the marketplace;

 

   

our ability to generate cash from operations;

 

   

the rate of our progress in establishing additional coverage and reimbursement with third-party payors;

 

   

our ability to control our costs and implement operating efficiencies;

 

   

demand from clinical diagnostic laboratories for placements of our Vantera system at their facilities;

 

   

the emergence of competing or complementary technological developments;

 

   

the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights or participating in litigation-related activities;

 

   

the economic and other terms and timing of any collaborations, licensing or other arrangements into which we may enter; and

 

   

the acquisition of complementary tests or technologies that we may undertake.

Critical Accounting Policies and Significant Judgments and Estimates

We have prepared our financial statements in accordance with U.S. generally accepted accounting principles. Our preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, expenses and related disclosures at the date of the financial statements, as well as revenues and expenses during the reporting periods. We evaluate our estimates

 

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and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in note 1 to our financial statements included later in this prospectus, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

We currently derive revenue from sales of our NMR LipoProfile test to clinical diagnostic laboratories and clinicians for use in patient care, from sales of ancillary tests for use in patient care requested in conjunction with the NMR LipoProfile test, and from research contracts.

Revenues from diagnostic tests for patient care, which consist of sales of the NMR LipoProfile test and sales of ancillary tests, are recognized on the accrual basis when the following revenue recognition criteria are met: (1) persuasive evidence that an arrangement exists; (2) services have been rendered or at the time final results are reported; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured. Testing services provided for patient care are covered by clinical diagnostic laboratories, programs with commercial insurance carriers, including managed care organizations, and various governmental programs, primarily Medicare.

Billings for diagnostic tests for patient care under governmental and physician-based programs are included in revenues net of contractual adjustments. These contractual adjustments represent the difference between the final settlement amount paid by the program and the estimated settlement amount based on either the list price for tests performed or the reimbursement rate set by commercial insurance carriers or governmental programs. Estimated contractual adjustments are updated either upon notification from payors as to changes in existing reimbursement rates, which are typically received prior to changes going into effect, or upon a material variance between the final settlement and the estimated contractual adjustment originally established when the revenues were recognized. To date, our final settlement adjustments have not been material.

Revenues from contract research arrangements are generally derived from studies conducted with academic institutions and pharmaceutical companies. The specific methodology for revenue recognition is determined on a case-by-case basis according to the facts and circumstances applicable to a given agreement. Our output, measured in terms of full-time equivalent level of effort or processing a set of diagnostic tests under a contractual protocol, typically triggers payment obligations under these agreements. Revenues are recognized as costs are incurred or diagnostic tests are processed. Contract research costs include all direct labor and material costs, equipment costs and fringe benefits. Advance payments received in excess of revenues recognized are classified as deferred revenue until such time as the revenue recognition criteria have been met.

Accounts Receivable

Accounts receivable are reported net of an allowance for uncollectible accounts. The process of estimating the collection of accounts receivable involves significant assumptions and judgments. Specifically, the accounts receivable allowance is based on management’s analysis of current and past due accounts, collection experience in relation to amounts billed, channel mix, any specific customer collection issues that have been identified and other relevant information. Our provision for uncollectible accounts is recorded as bad debt expense and included in general and administrative expenses. Historically, we have not experienced significant credit loss related to our customers or payors. Although we believe amounts provided are adequate, the ultimate amounts of uncollectible accounts receivable could be in excess of the amounts provided.

 

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Stock-Based Compensation Expense

We have included stock-based compensation as part of our cost of revenues and our operating expenses in our statements of operations as follows:

 

     Year Ended December 31,      Nine Months Ended
September 30,
 
         2009              2010              2011              2011              2012      
     (in thousands)  

Cost of revenues

   $ 7       $ 21       $ 8       $ 5       $ 35   

Research and development expense

     135         45         155         113         359   

Sales and marketing expense

     153         137         217         156         198   

General and administrative expense

     285         447         271         216         289   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 580       $ 650       $ 651       $ 490       $ 881   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We account for stock-based compensation arrangements with our employees, consultants and non-employee directors using a fair value method, which requires us to recognize compensation expense for costs related to all stock-based payments. To date, our only stock-based awards have been grants of stock options. The fair value method requires us to estimate the fair value of stock-based awards on the date of grant using an option pricing model. The fair value is then recognized as stock-based compensation expense over the requisite service period, which is the vesting period, of the award.

We calculate the fair value of stock-based compensation awards using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the input of subjective assumptions, including stock price volatility and the expected life of stock options. As a private company, we do not have sufficient history to estimate the volatility of our common stock price or the expected life of our options. We calculate expected volatility based on reported data for selected reasonably similar publicly traded companies within the diagnostic industry, or guideline peer group, for which the historical information is available. When selecting the public companies within the diagnostic industry, we selected companies with comparable characteristics to us, including enterprise value and financial leverage, and removed companies with significantly higher enterprise values, lower risk profiles or established positions within the industry. We also selected companies with historical share price volatility information sufficient to meet the expected life of our stock options. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of our stock options. We will continue to use the guideline peer group volatility information until the historical volatility of our common stock is relevant to measure expected volatility for future option grants.

We determine the average expected life of stock options according to the “simplified” method. Under this method, the expected term is calculated as the average of the time-to-vesting and the contractual life of the option. The assumed dividend yield is based on our expectation that we will not pay dividends in the foreseeable future, which is consistent with our history of not paying dividends. We determine the risk-free interest rate by using the weighted average assumption equivalent to the expected term based on the U.S. Treasury yield curve in effect as of the date of grant. We estimate forfeitures based on our historical analysis of actual stock option forfeitures. Although, we estimate forfeitures based on historical experience, actual forfeitures may differ. If actual results differ significantly from these estimates, stock-based compensation expense and our statements of operations could be materially impacted. We would record an adjustment for the difference in the period that the options vest.

 

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For the years ended December 31, 2009, 2010, 2011 and the nine months ended September 30, 2012, we estimated the fair value of stock options at their grant dates using the following assumptions:

 

     Year Ended December 31,     Nine Months Ended
September 30, 2012
 
       2009         2010         2011      

Expected dividend yield

     0.0     0.0     0.0     0.0

Risk-free interest rate

     2.1     2.0     2.0     0.8

Expected volatility

     46.3     49.9     50.3     51.2

Expected life (in years)

     5.6        5.6        5.6        5.6   

There is a high degree of subjectivity involved when using option-pricing models to estimate stock-based compensation. There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values. Although the fair value of stock-based awards is determined using an option-pricing model, that value may not be indicative of the fair value that would be observed in a market transaction between a willing buyer and willing seller. If factors change and we employ different assumptions when valuing our options, the compensation expense that we record in the future may differ significantly from what we have historically reported.

Determination of the Fair Value of Common Stock on Grant Dates

We are a privately held company with no active public market for our common stock. Therefore, management has for financial reporting purposes periodically determined the estimated per share fair value of our common stock at various dates using contemporaneous valuations consistent with the American Institute of Certified Public Accountants Practice Aid, “Valuation of Privately-Held Company Equity Securities Issued as Compensation,” also known as the Practice Aid. We performed these contemporaneous valuations as of October 31, 2008, December 31, 2009, November 30, 2010, April 30, 2011, September 30, 2011, December 31, 2011, March 31, 2012, June 30, 2012 and September 30, 2012. In conducting these contemporaneous valuations, management considered all objective and subjective factors that it believed to be relevant in each valuation conducted, including management’s best estimate of our business condition, prospects and operating performance at each valuation date. Within the contemporaneous valuations performed by our management, a range of factors, assumptions and methodologies were used. The significant factors included:

 

   

the fact that we are a privately held diagnostics company with illiquid securities;

 

   

our historical operating results;

 

   

our discounted future cash flows, based on our projected operating results;

 

   

valuations of comparable public companies;

 

   

the potential impact on common stock as a result of liquidation preferences of preferred stock for certain valuation scenarios;

 

   

our stage of development and business strategy;

 

   

the likelihood of achieving a liquidity event for shares of our common stock, such as an initial public offering of our common stock or sale of our company, given prevailing market conditions; and

 

   

the state of the initial public offering market for similarly situated privately held diagnostics companies.

The dates of our contemporaneous valuations have not always coincided with the dates of our stock-based compensation grants. In such instances, management’s estimates have been based on the most recent contemporaneous valuation of our shares of common stock and its assessment of additional objective and subjective factors it believed were relevant and which may have changed from the date of the most recent contemporaneous valuation through the date of the grant. In addition, our management performed retrospective valuations as of September 30, 2009, June 30, 2010 and December 31, 2010 using similar methodologies as were used in the contemporaneous valuations. These retrospective valuations are discussed in more detail below.

 

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There are significant judgments and estimates inherent in these contemporaneous and retrospective valuations. These judgments and estimates include assumptions regarding our future operating performance, the time to completing an initial public offering or other liquidity event, and the determinations of the appropriate valuation methods. If we had made different assumptions, our stock-based compensation expense, net (loss) income and net (loss) income per common share could have been significantly different.

The following table summarizes by grant date the number of shares of common stock subject to options granted from January 1, 2009 through the date of this prospectus, as well as the associated per share exercise price and the per share estimated fair value of the underlying common stock and the intrinsic value, if any, per share.

 

Grant Date

   Number of
Options
Granted
     Per Share
Exercise Price
     Estimated
Per Share
Fair Value of
Common Stock (1)
    Intrinsic
Value
Per
Share
 

January 1, 2009

     1,697       $ 2.46       $ 2.46      $ —     

February 6, 2009

     243,152         2.50         2.50        —     

February 11, 2009

     9,700         1.88         2.50 (2)      0.62   

June 18, 2009

     37,056         2.50         2.50        —     

July 9, 2009

     24,250         1.88         2.50 (2)      0.62   

September 25, 2009

     33,060         2.50         2.50        —     

November 13, 2009

     9,700         1.88         2.50 (2)      0.62   

January 1, 2010

     1,697         5.63         5.63        —     

January 15, 2010

     72,749         5.63         5.63        —     

April 14, 2010

     110,510         5.63         5.63        —     

June 23, 2010

     22,989         5.63         5.63        —     

September 3, 2010

     24,250         4.23         5.63 (2)      1.40   

October 8, 2010

     9,700         4.23         5.63 (2)      1.40   

October 8, 2010

     111,065         5.63         5.63        —     

October 28, 2010

     19,400         5.63         5.63        —     

April 8, 2011

     211,990         6.89         6.89        —     

August 1, 2011

     46,753         9.84         9.84        —     

November 18, 2011

     95,836         9.02         9.02        —     

May 18, 2012

     192,783         11.45         11.45        —     

August 2, 2012

     73,138         11.45         11.45        —     

August 7, 2012

     29,100         11.12         11.12        —     

November 28, 2012

     62,177         12.81         12.81        —     

December 5, 2012

     21,340         12.81         12.81        —     

 

(1) We reassessed the fair value of our common stock subsequent to the grant date of some of these options. As described below, management determined that, had we used the reassessed value of the common stock for financial reporting purposes, the effect would not have been material to our operating results. As a result, no change was made to the exercise price or the estimated fair market value of the common stock as reflected in this table.
(2) These were option grants to non-employee directors that, in accordance with our non-employee director compensation plan, were granted at an exercise price below fair market value, but no less than 75% of the fair market value of the common stock on the date of grant.

Common Stock Valuation Methodologies

Our management estimated our enterprise value as of the various valuation dates using a combination of the income and market approaches, which are both acceptable valuation methods in accordance with the Practice Aid. The income approach utilized the discounted cash flow, or DCF, methodology based on management’s financial forecasts and projections. The market approach utilized the guideline, or comparable, company and the guideline transaction methodologies based on comparable public companies’ equity pricing and comparable acquisition transactions. Each valuation also reflects a marketability discount, resulting from the illiquidity of our common stock.

 

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As provided in the Practice Aid, there are several approaches for allocating enterprise value of a privately held company among the securities held in a complex capital structure. The possible methodologies include the probability-weighted expected return, or PWER, method, the option-pricing method and the current value method. The current value method is more applicable to an early-stage company, and therefore, we have not used it in valuing our common stock.

Contemporaneous Valuation as of October 31, 2008

We performed a contemporaneous valuation of our common stock as of October 31, 2008 and determined the fair market value to be $2.50 per share as of that date. To estimate our enterprise value, we used the DCF methodology for the income approach and a combination of the guideline company methodology and the guideline transaction methodology for the market approach.

For the DCF methodology, management prepared detailed annual projections of future cash flows through 2013 and applied a terminal value assumption multiple to the final year to estimate the total value of the cash flows beyond the final year. Our projections of future cash flows were based on our estimated net debt-free cash flows. These cash flows were then discounted to the valuation date at an estimated weighted average cost of capital of 25%. We did not apply any discount for lack of control. Management believes that the procedures employed in the DCF methodology, including estimating the net debt-free cash flows, weighted average cost of capital, discount rate and terminal multiple, were reasonable and consistent with the Practice Aid. For example, the Practice Aid provides that venture-backed companies of a size and stage of development similar to us typically have a cost of equity capital in the 20% to 30% range, and our capital structure at the valuation date consisted almost exclusively of equity rather than debt. Our cost of equity capital was derived by applying the widely used capital asset pricing model, or CAPM. Based on our projected operating results and assuming a discount rate of 25% and a terminal value revenue multiple for 2013 at the third quartile of the comparable companies under the guideline company methodology, the DCF methodology yielded an enterprise value of $63.0 million.

For the guideline company methodology, we determined, as of the valuation date, a range of trading multiples for a group of 19 comparable public companies, based on trailing 12 months revenue. We focused on companies in the in vitro diagnostics and lab services industry that, at the time, we considered to be most comparable to us based on size and business model. The range of multiples for the comparable public companies was between 0.4x and 6.7x trailing 12 months revenue. At the time, we had received FDA clearance for our existing NMR clinical analyzer, but unlike many of the public company comparables, we did not yet have positive earnings before interest, taxes, depreciation and amortization, or EBITDA. As a result, we selected a multiple at the median of the range. When applied to our projected 2008 revenue, the guideline company methodology yielded an enterprise value of $56.6 million.

For the guideline transaction methodology, we determined a range of implied revenue multiples reflecting the ratio of the purchase price paid in the transactions to the target companies’ trailing 12 months revenue prior to the acquisition date for 13 comparable companies in the in vitro diagnostics and lab services industry that had recently been sold. We selected a multiple at the first quartile, or low end, of the range. After applying this multiple to our projected 2008 revenue, the guideline transaction methodology yielded an enterprise value of $64.7 million.

The valuations resulting from the foregoing methodologies were then combined to determine an estimated overall enterprise value, which was then reduced by the value of our debt (net of cash) to estimate the aggregate equity value available to our common and preferred equity holders. In determining our enterprise value, we weighted the income and market approaches equally. Within the market approach, we weighted the guideline companies and guideline transactions methodologies equally. After weighting the various approaches and adding back our cash and debt balances, we determined that our weighted enterprise value was $71.7 million.

 

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For the October 31, 2008 contemporaneous valuation, we allocated the weighted enterprise value using the option-pricing method, which treats the rights of the holders of preferred and common stock as equivalent to that of call options on any value of the enterprise above certain break points of value, based on the liquidation preferences of the holders of preferred stock, as well as their rights to participation and conversion. Accordingly, the value of our common stock was determined by estimating the value of its portion of each of these call option rights. In order to determine the break points, we made estimates of the anticipated timing of a potential liquidity event and estimates of the volatility of our equity securities. The anticipated timing was based on our plans toward the liquidity event and on our board of directors’ judgment. Estimating the volatility of the stock price of a privately held company is complex because there is no readily available market for the shares. We estimated the volatility of our stock based on available information on volatility of stocks of publicly traded companies in the industry.

After deducting the value of indebtedness (net of cash), preferred stock and other common share equivalents and applying a marketability discount of 23%, the estimated value attributable to common stockholders was $2.50 per share, which we determined to be the fair market value of our common stock as of October 31, 2008. The discount for lack of marketability reflects the lower value placed on securities that are not freely transferable, as compared to those that trade frequently in an established market. The marketability discount was based on an at-the-money Black-Scholes put option analysis, assuming a dividend yield of zero; a maturity of 1.6 years; a risk-free rate of 1.4%, which was equal to the rate on U.S. Treasury bills matching the expected term; and an annualized volatility of 49%, which was the average volatility of the comparable public companies over a period equal to the expected term.

Between January 1, 2009 and September 25, 2009, we granted new stock options with an exercise price of $2.50 per share. Also in September 2009, we offered to reprice our employees’ outstanding options with exercise prices of at least $3.88 per share to reduce their exercise prices to $2.50 per share. Each participant who elected to have their options repriced forfeited 25% of the number of shares underlying his or her original option. The repricing was effected in October 2009, and accordingly, we recorded the incremental stock-based compensation for such grants at that time.

Retrospective Valuation as of September 30, 2009

In connection with the preparations for this offering, we performed a retrospective valuation of our common stock as of September 30, 2009, using similar methodologies as were used in the October 31, 2008 valuation. The changes in our assumptions from those used in the October 31, 2008 contemporaneous valuation were as follows:

 

   

DCF methodology. We updated our detailed annual projections of future cash flows through 2014. Based on our projected operating results and assuming a discount rate of 25% and an assumed terminal value multiple applied to projected revenue for 2014, the DCF methodology yielded an enterprise value of $103.2 million. Our assumptions with respect to our weighted average cost of capital were substantially the same as those used in the October 31, 2008 valuation. The terminal multiple applied to 2014 projected revenues was lower than that used at October 31, 2008. We selected a multiple at the first quartile of the companies in the updated guideline company methodology, rather than the third quartile, reflecting our potentially slower growth.

 

   

Guideline company / market multiple methodology. We modified the list of comparable public companies to select 15 companies in the in vitro diagnostics and lab services space. Of these, four were classified as CLIA-based laboratory comparables, six were classified as high-growth diagnostic companies, and five were classified as large capitalization comparables. Of the 19 companies that had been used in the October 31, 2008 analysis, 12 were removed because their size or business model was considered to be no longer comparable to ours, or because they had been acquired or were traded over the counter. Eight new diagnostics and lab services companies were added.

With the new list of 15 comparable companies, we determined, as of the valuation date, a range of trading multiples based on estimates of projected full year revenue for 2009 and projected revenues for each of 2010 and 2011. We selected multiples for our projected revenues for 2009, 2010 and 2011 based on the

 

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first quartile of the range. We believed a multiple at the low end of the range was warranted to reflect potentially lower growth and margins relative to our peers. When applied to our projected three-year revenues, the market multiple methodology yielded an enterprise value of $97.3 million.

 

   

Guideline transactions methodology. We reviewed three additional acquisition transactions during 2009 in which the target company was in our industry space. After applying the average multiple of trailing 12 months revenue for the target companies to our projected 2009 through 2011 revenues, the guideline transaction methodology yielded an enterprise value of $104.9 million.

After weighting the various approaches in the same manner as in the prior contemporaneous valuation, and adding back our cash and debt balances, we determined that our weighted enterprise value was $114.0 million as of September 30, 2009.

After deducting the value of indebtedness (net of cash), preferred stock and other common share equivalents and applying a marketability discount of 16%, the estimated value of our common stock was $4.69 per share. As with the October 31, 2008 contemporaneous valuation, the marketability discount was based on an at-the-money Black-Scholes put option analysis, with updated assumptions as follows: a dividend yield of zero; a maturity of 1.5 years; a risk-free rate of 0.7%; and an annualized equity volatility of 79% and asset volatility of 51%, which were the average equity and asset volatilities of the comparable public companies over a period equal to the expected term.

The primary factors that supported the increase in the fair market value of our common stock from $2.50 per share at October 31, 2008 to $4.69 per share at September 30, 2009 were:

 

   

the increase in our projected revenues from $28.3 million for 2008 to $34.7 million for 2009 and $41.3 million for 2010;

 

   

the increase in the valuations of the publicly traded comparable companies and the corresponding increases in their revenue multiples; and

 

   

the overall improvement in the capital markets during the first three quarters of 2009.

We made two option grants for a total of 42,760 shares from September 2009 through December 2009 based on the prior valuation of $2.50 per share. We also conducted our stock option repricing in October 2009 based on the prior valuation of $2.50 per share. We determined that, had we used the higher September 30, 2009 value of the common stock for financial reporting purposes, the effect would not have been material and, therefore, no adjustment to our financial statements was necessary.

Contemporaneous Valuation as of December 31, 2009

Subsequent to September 30, 2009, management and our board of directors determined that it was probable that the commercial launch of the Vantera system would be completed in the near term and, therefore, an initial public offering or sale of the company was substantially more likely to be pursued. As a result, management began using the PWER method outlined in the Practice Aid to allocate the weighted enterprise value between common stock and preferred stock. Under the PWER method, shares of preferred stock and common stock are valued separately based on the probability-weighted average expected future returns, considering various future outcomes of our operations and liquidity events. The future outcomes we considered for valuations as of December 31, 2009 and thereafter included:

 

   

an initial public offering, or IPO, of our common stock;

 

   

a merger or sale of our company;

 

   

liquidation of our company with no value to the common stock; and

 

   

continuing operations as a viable private company.

 

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The valuation methodologies employed in connection with the continued operations scenario were consistent with the valuation methodologies we used in our previous contemporaneous valuations as of October 31, 2008 and September 30, 2009.

As of December 31, 2009, we had not commenced a formal process to pursue an IPO of our common stock or a sale of our company, although we believed that they were realistic eventual outcomes. We assigned probability weights to potential future outcomes as follows:

 

   

50% to an IPO in the middle of 2011;

 

   

35% to a sale of the company at the end of 2013;

 

   

10% to the continued operations scenario; and

 

   

5% to the liquidation scenario.

Continuing Operations Scenario. The changes in our assumptions from those used in the September 30, 2009 contemporaneous valuation were as follows:

 

   

DCF methodology. We updated our detailed annual projections of future cash flows through 2015. Based on our projected operating results and assuming a discount rate of 25% and the same terminal value multiple as used in the previous valuation applied to our projected revenue for 2015, the DCF methodology yielded an enterprise value of $104.5 million. Our assumptions with respect to our weighted average cost of capital were substantially the same as those used in the September 30, 2009 valuation. We also evaluated the comparable companies for a terminal EBITDA multiple and selected an EBITDA multiple in line with the average trailing 12 months EBITDA multiple for the CLIA-based and high-growth diagnostics companies. Applying that terminal multiple to our projected 2015 EBITDA also yielded an enterprise value of $104.5 million.

 

   

Guideline company / revenue market multiple methodology. We used the same 15 comparable companies in the in vitro diagnostics and lab services space. We selected multiples for our trailing 12 months revenues and for our projected revenues for 2010, 2011 and 2012, which in each case were based on the first quartile of the comparable company range. As was the case with the previous valuation, we believed that a multiple at the low end of the range was warranted to reflect potentially lower growth and margins relative to our peers. When applied to our trailing 12 months revenue and projected three-year revenues, the market multiple methodology yielded an enterprise value of $102.9 million.

 

   

Guideline company / EBITDA market multiple methodology. In addition to determining a range of revenue multiples among the comparable companies, we also determined a range of EBITDA multiples for projected 2011 and 2012 EBITDA, as we expected to have positive EBITDA for the first time in those years. The multiple selected for 2011 was based on the high multiple within the comparable companies group, given our projected EBITDA growth for that year. The multiple selected for 2012 was based on the mean of the group, as we expected our EBITDA to stabilize in that year. When applied to our projected 2011 and 2012 EBITDA, the market EBITDA multiple methodology yielded an enterprise value of $86.9 million.

 

   

Guideline transactions methodology. We reviewed 11 of the same acquisition transactions that were part of the earlier valuations and determined a range of both revenue multiples and EBITDA multiples. We selected a revenue multiple for our trailing 12 months revenue and our projected 2010 through 2012 revenues based on the first quartile of the comparable transaction range. We selected an EBITDA multiple for projected 2011 and 2012 EBITDA that was close to the median for the comparable transactions. After applying these multiples to our trailing and projected revenues and our projected EBITDA, the guideline transaction methodology yielded enterprise values of $100.4 million based on the revenue multiple and $106.4 million based on the EBITDA multiple.

 

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In determining our enterprise value, as with the October 31, 2008 valuation, we weighted the income and market approaches equally, and within the market approach, we weighted the guideline companies and guideline transactions methodologies equally. Within each of the guideline companies and guideline transactions methodologies, we weighted the revenue and EBITDA multiples equally. After weighting the various approaches and adding back our cash and debt balances, we determined that our weighted enterprise value was $110.8 million as of December 31, 2009. After deducting debt and preferred stock liquidation preferences and a marketability discount of 25%, the estimated value attributable to common stockholders was $4.23 per share under the continuing operations scenario.

IPO Scenarios. We assumed two IPO scenarios for the middle of 2011, which we weighted equally. Under the first “high” scenario, we assumed that we had obtained 510(k) clearance of the Vantera system at the end of 2010 and that Vantera was well-received by customers willing to provide favorable references, that we got reimbursement for the NMR LipoProfile test from managed care companies, and that we developed more diagnostic tests for our platform. For the “low” scenario, we assumed that one or more of the foregoing assumptions did not materialize.

For the high IPO scenario, we applied a multiple to our projected 2011 EBITDA based on the high multiple for the last 12 months of EBITDA among the comparable companies described above. Under this scenario, the value available for distribution to common stockholders, after payment of preferred stock dividends, was estimated to be $150.0 million. We then discounted this value back to the valuation date using a discount rate of 25% and applied a marketability discount of 25%, which yielded a per share value of $7.51 for this scenario.

For the low IPO scenario, we applied a multiple based on the average trailing 12 months EBITDA multiple for the CLIA-based and high-growth diagnostics comparables. Under this scenario, the value available for distribution to common stockholders, after payment of preferred stock dividends, was estimated to be $108.2 million. We then discounted this value back to the valuation date using a discount rate of 25% and applied a marketability discount of 25%, which yielded a per share value of $5.53 for this scenario.

Sale Scenarios. We assumed two sale scenarios for the end of 2013, which we weighted equally. The assumptions for the “high” and “low” sale scenarios were similar to those of the corresponding IPO scenarios.

For the high sale scenario, we applied a multiple to our projected 2013 EBITDA, which was based on the average multiple for the last 12 months of EBITDA among the target companies in the guideline transactions methodology described above. Under this scenario, the value available for distribution to common stockholders, after payment of preferred stock dividends and liquidation preferences, was estimated to be $234.4 million. We then discounted this value back to the valuation date using a discount rate of 25% and applied a marketability discount of 25%, which yielded a per share value of $6.58 for this scenario.

For the low sale scenario, we applied a multiple based on the low end of the range of trailing 12 months EBITDA multiples for the target companies in the comparable transactions. Under this scenario, the value available for distribution to common stockholders, after payment of preferred stock dividends and liquidation preferences, was estimated to be $162.4 million. We then discounted this value back to the valuation date using a discount rate of 25% and applied a marketability discount of 25%, which yielded a per share value of $4.62 for this scenario.

Liquidation Scenario. Under this scenario, we assumed that we were unable to raise additional funding and that we had insufficient cash to continue our operations as of the end of 2011. We also assumed that creditors would be repaid and preferred stockholders would be paid a portion of their liquidation preferences and that no value would be available for distribution to the holders of common stock.

Weighted-Average Valuation. Based on the relative weights of the two IPO scenarios, the two sale scenarios, the continuing operations scenario and the liquidation scenario, we estimated the fair market value of our common stock to be $5.63 per share as of December 31, 2009. The marketability discount of 25% applied to

 

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each of the IPO, sale and continuing operations scenarios was based upon a review of Rule 144 restricted stock studies, considering the assumed timing to each of the exit scenarios.

The primary factors that supported the increase in the fair market value of our common stock from $4.69 per share at September 30, 2009 to $5.63 per share at December 31, 2009 were:

 

   

continued revenue growth from increased sales of our NMR LipoProfile test;

 

   

the steps we had taken toward completing internal and external validation of the Vantera system required for commercial launch, which was more likely to result in a higher valuation of the company in an IPO or sale scenario;

 

   

increased venture-backed company exit activity during the fourth quarter of 2009; and

 

   

continued improvement in the capital markets during the fourth quarter of 2009.

We used this valuation of $5.63 per share for all option grants during 2010.

Retrospective Valuation as of June 30, 2010

We performed a retrospective valuation as of June 30, 2010 using the same methods as were used in the December 31, 2009 valuation, with updated probability weights to the potential future outcomes and updates of the assumptions used in each methodology. As of June 30, 2010, we still had not commenced a formal process to pursue an IPO or a sale of our company, although we continued to believe that they were highly likely outcomes. We assigned probability weights to potential future outcomes as follows:

 

   

30% to an IPO at the end of 2011;

 

   

30% to an IPO at the end of 2012;

 

   

17.5% to a sale of the company at the end of 2011;

 

   

17.5% to a sale of the company at the end of 2012; and

 

   

5% to the liquidation scenario in which no value is available for distribution to the holders of common stock.

We no longer attributed any likelihood to the continued operations as a private company scenario beyond the end of 2012.

IPO Scenarios. We assumed two IPO scenarios for 2011 and 2012, which we weighted equally. The 2011 IPO scenario was based on the same assumptions as set forth in the prior valuation for the “high” IPO scenario, except that we assumed that we would obtain 510(k) clearance of the Vantera system in early 2012. The 2012 IPO scenario was based on the same assumptions as set forth in the prior valuation for the “low” IPO scenario, or that we would face delays in software development.

For the 2011 IPO scenario, we applied a multiple to our projected 2011 revenue that was between the first quartile and the median trailing 12 months revenue multiple for the comparable companies, since we did not expect FDA clearance until 2012 and expected potentially lower growth than our publicly traded peers. The list of comparable companies was the same as those used in the previous valuation. Under this 2011 scenario, the value available for distribution to common stockholders, after payment of preferred stock dividends, was estimated to be $131.4 million. We then discounted this value back to the valuation date using a discount rate of 26% and applied a marketability discount of 20%, which yielded a per share value of $6.54 for this scenario. The discount rate we used changed slightly, from 25% to 26%, as a result of changes in the valuations of the comparable companies that impacted our assumptions used in the CAPM.

 

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For the 2012 IPO scenario, we applied a multiple of projected 2011 revenue that was in line with the median trailing 12 months revenue multiple for the comparable companies. This scenario assumes that we would receive better market traction once FDA clearance is received and the Vantera system has a proven history at clinical diagnostic laboratories. Under this 2012 scenario, the value available for distribution to common stockholders, after payment of preferred stock dividends, was estimated to be $186.4 million. We then discounted this value back to the valuation date using a discount rate of 26% and applied a marketability discount of 20%, which yielded a per share value of $7.32 for this scenario.

Sale Scenarios. We assumed two sale scenarios for 2011 and 2012, which we weighted equally. The 2011 sale scenario assumes that the IPO window is not open or we receive an attractive acquisition offer. The 2012 sale scenario assumes that one or more of the assumptions in the 2011 IPO scenario do not materialize but that we receive an attractive acquisition offer at a later date.

For the 2011 sale scenario, we applied a multiple to our projected 2011 revenue that was equal to the median trailing 12 months revenue multiple among the target companies evaluated in the guideline transactions methodology. We reviewed four comparable acquisition transactions during 2009 and early 2010, in which the target company competed in our industry or provided a service that was similar to ours. Under this scenario, the value available for distribution to common stockholders, after payment of preferred stock dividends and liquidation preferences, was estimated to be $70.3 million. We then discounted this value back to the valuation date using a discount rate of 26% and applied a marketability discount of 20%, which yielded a per share value of $3.68 for this scenario.

For the 2012 sale scenario, we applied a multiple to our projected 2012 revenue that was at the higher end of the range of trailing 12 months revenue multiples among the target companies evaluated using the guideline transactions methodology. Under this scenario, the value available for distribution to common stockholders, after payment of preferred stock dividends and liquidation preferences, was estimated to be $160.4 million. We then discounted this value back to the valuation date using a discount rate of 26% and applied a marketability discount of 20%, which yielded a per share value of $6.31 for this scenario.

Weighted-Average Valuation. Based on the relative weights of the two IPO scenarios, the two sale scenarios and the liquidation scenario, we estimated the fair market value of our common stock to be $5.92 per share as of June 30, 2010.

We reassessed stock option grants made from June 2010 through October 2010 and determined that, had we used the higher June 30, 2010 value of the common stock for financial reporting purposes, the effect would not have been material and, therefore, no adjustment to our financial statements was necessary.

Contemporaneous Valuation as of November 30, 2010

During the quarter ended December 31, 2010, we began preparations for a possible IPO by beginning discussions with potential underwriters. We planned to file a registration statement for an IPO in the latter part of the second quarter of 2011. However, we also determined that there continued to be a significant possibility of a sale of the company. Therefore, we performed a contemporaneous valuation as of November 30, 2010, using the same methodologies as in the June 30, 2010 valuation. We also assigned the same probability weights to future outcomes as for the June 30, 2010 valuation.

IPO Scenarios. We assumed the same two IPO scenarios for 2011 and 2012, which we again weighted equally.

For the 2011 IPO scenario, we applied the same multiple to our projected 2011 revenue as in the prior valuation, which was at the first quartile of trailing 12 months revenue multiple for the comparable companies, since we did not expect FDA clearance for Vantera until 2012 and the possibility for lower growth when

 

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compared to publicly traded peers. The list of comparable companies changed slightly from that used for the prior valuation. We identified 16 public companies classified as molecular diagnostics companies, other growth diagnostic players, or high-growth med-tech companies. Under this 2011 IPO scenario, the value available for distribution to common stockholders was estimated to be $130.6 million. We then discounted this value back to the valuation date using a discount rate of 25% and applied a marketability discount of 20%, which yielded a per share value of $7.24 for this scenario. The discount rate we used changed slightly, from 26% back to 25%, as a result of changes in the valuations of the comparable companies that impacted our assumptions used in the CAPM.

For the 2012 IPO scenario, we applied a multiple of projected 2011 revenue that was between the first quartile and the median trailing 12 months revenue multiple for the comparable companies. Under this 2012 scenario, the value available for distribution to common stockholders was estimated to be $185.6 million. We then discounted this value back to the valuation date using a discount rate of 25% and applied a marketability discount of 20%, which yielded a per share value of $8.11 for this scenario.

Sale Scenarios. We assumed two sale scenarios for 2011 and 2012, which we weighted equally. These scenarios were the same as those used in the June 30, 2010 valuation, including a scenario in which we face delays in software development, which would most likely result in delayed FDA clearance of Vantera and a later exit event. The 2012 sale scenario also assumed that we receive better market traction once FDA clearance for Vantera is received and the Vantera system has proven successful after placement in clinical diagnostic laboratories.

For the 2011 sale scenario, we applied a multiple to our projected 2011 revenue that was equal to the median trailing 12 months revenue multiple among the target companies evaluated in the guideline transactions methodology. We reviewed nine comparable acquisition transactions during 2009 and early 2010, in which the target company competed in our industry or provided a service that was similar to ours. Under this scenario, the value available for distribution to common stockholders was estimated to be $108.4 million. We then discounted this value back to the valuation date using a discount rate of 25% and applied a marketability discount of 20%, which yielded a per share value of $6.03 for this scenario.

For the 2012 sale scenario, we applied a multiple to our projected 2012 revenue that was between the first quartile and the average of the range of trailing 12 months revenue multiples among the target companies evaluated using the guideline transactions methodology. Under this scenario, the value available for distribution to common stockholders was estimated to be $160.4 million. We then discounted this value back to the valuation date using a discount rate of 25% and applied a marketability discount of 20%, which yielded a per share value of $6.99 for this scenario.

Weighted-Average Valuation. Based on the relative weights of the two IPO scenarios, the two sale scenarios and the liquidation scenario, we estimated the fair market value of our common stock to be $6.89 per share as of November 30, 2010. We began using this valuation for stock options granted after that date, the first of which were granted in April 2011. For the November 30, 2010 contemporaneous valuation, we used a Black-Scholes at-the-money put option analysis with normalized equity volatilities, with a maximum marketability discount of 20% based upon the stage of our company.

The primary factors that supported the increase in the fair market value of our common stock from $5.63 per share at December 31, 2009 to $6.89 per share at November 30, 2010 were:

 

   

double-digit revenue and unit growth from increased sales of our NMR LipoProfile test and corresponding improvement in our EBITDA during 2010;

 

   

a resulting increase in our revenue projections for future years, which impacted the implied IPO valuation for 2012 as compared to 2011;

 

   

further development of the Vantera system, including placement of the system at third-party locations in support of an expected regulatory submission;

 

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an increase in the weighting of the higher-value IPO scenarios from 50% to 60%, with a corresponding reduction in the lower-value continued operations scenario from 10% to zero;

 

   

increased mergers and acquisitions exit transaction volume during 2010 for venture-backed companies; and

 

   

increases in the valuations of the comparable public companies.

Retrospective Valuation as of December 31, 2010

We performed a subsequent retrospective valuation as of December 31, 2010 to confirm that there had not been any significant change in valuation since November 30, 2010. We determined that no changes were warranted in any of the outcome scenarios, their respective weightings, or the multiples used. Due to the passage of time between November 30 and December 31, 2010, the impact of the discount rate on our valuation calculations was less, which resulted in our estimate of the fair market value of our common stock increasing slightly to $7.02 per share as of December 31, 2010. We granted options to purchase an aggregate of 211,990 shares of common stock in April 2011 using the valuation of $6.89 per share from the November 30, 2010 contemporaneous valuation. We determined that, had we used the higher December 31, 2010 value of the common stock for financial reporting purposes, the effect would not have been material and, therefore, no adjustment to our financial statements was necessary.

Contemporaneous Valuation as of April 30, 2011

During the four months ended April 30, 2011, we continued preparations for an IPO, including the selection of underwriters and outside legal counsel. On May 9, 2011, management, our external legal counsel, our independent registered public accounting firm, the proposed underwriters and their external legal counsel held an organizational meeting to formally begin the IPO process and underwriter due diligence process. We continued to expect to file a registration statement for an IPO by the end of the second quarter of 2011. We assigned probability weights to potential future outcomes as follows:

 

   

50% to an IPO at the end of the third quarter of 2011;

 

   

25% to an IPO at the end of the second quarter of 2012;

 

   

10% to a sale of the company at the end of the third quarter of 2011;

 

   

10% to a sale of the company at the end of the second quarter of 2012; and

 

   

5% to the liquidation scenario in which no value is available for distribution to the holders of common stock.

IPO Scenarios. We assumed two IPO scenarios for 2011 and 2012, which we weighted two-thirds to 2011 and one-third to 2012. The 2011 IPO scenario included the same assumptions as in the 2011 IPO scenario used in the November 30, 2010 contemporaneous valuation, except for an acceleration of the IPO to the end of the third quarter rather than at the end of 2011. The 2012 IPO scenario also included the same assumptions as in the 2012 IPO scenario used in the November 30, 2010 contemporaneous valuation, except for an acceleration of the IPO to the end of the third quarter rather than at the end of 2012.

For the 2011 IPO scenario, we applied the same multiple to our projected 2011 revenue as in the prior contemporaneous valuation, which was between the low end and the first quartile of trailing 12 months revenue multiple for the comparable companies, since we did not expect FDA clearance for Vantera until 2012 and expected lower growth than our publicly traded peers. We used the same 16 comparable public companies as were used in the prior contemporaneous valuation. Under this 2011 scenario, the value available for distribution to common stockholders, after payment of preferred stock dividends, was estimated to be $125.0 million. We then discounted this value back to the valuation date using a discount rate of 25% and applied a marketability discount of 10%, which yielded a per share value of $10.00 for this scenario. Our assumptions with respect to our weighted average cost of capital were substantially the same as those used in the November 30, 2010 valuation.

 

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For the 2012 IPO scenario, we applied a multiple of projected 2012 revenue that was also between the low end and the first quartile of trailing 12 months revenue multiple for the comparable companies. Under this 2012 scenario, the value available for distribution to common stockholders, after payment of preferred stock dividends, was estimated to be $182.4 million. We then discounted this value back to the valuation date using a discount rate of 25% and applied a marketability discount of 10%, which yielded a per share value of $11.94 for this scenario.

Sale Scenarios. We assumed two sale scenarios for 2011 and 2012, which we weighted equally. These scenarios were the same as those used in the November 30, 2010 contemporaneous valuation.

For the 2011 sale scenario, we applied a multiple to our projected 2011 revenue that was equal to the median trailing 12 months revenue multiple among the target companies evaluated in the guideline transactions methodology. We reviewed 11 comparable acquisition transactions during 2009 and 2010, in which the target company competed in our industry or provided a service that was similar to ours, seven of which had enough information to calculate exit multiples. Under this scenario, the value available for distribution to common stockholders, after payment of preferred stock dividends and liquidation preferences, was estimated to be $102.6 million. We then discounted this value back to the valuation date using a discount rate of 25% and applied a marketability discount of 10%, which yielded a per share value of $8.42 for this scenario.

For the 2012 sale scenario, we applied a multiple to our projected 2012 revenue that was at the third quartile of the range of trailing 12 months revenue multiples among the target companies evaluated using the guideline transactions methodology. Under this scenario, the value available for distribution to common stockholders, after payment of preferred stock dividends and liquidation preferences, was estimated to be $152.0 million. We then discounted this value back to the valuation date using a discount rate of 25% and applied a marketability discount of 10%, which yielded a per share value of $10.11 for this scenario.

Weighted-Average Valuation. Based on the relative weights of the two IPO scenarios, the two sale scenarios and the liquidation scenario, we estimated the fair market value of our common stock to be $9.84 per share as of April 30, 2011. We began using this valuation for stock options granted after that date, specifically those granted on August 1, 2011.

We used a marketability discount of 10% for each of the exit scenarios. As with the prior valuations, we used a Black-Scholes at-the-money put option analysis, which yielded a 12% discount. We also considered the option-based approach in the Finnerty model, which provides that the discount on a privately-held security can be estimated by the value of an “average-strike” put option conveying the right to sell at an average price during the life of the option. The Finnerty model, which works under the assumption that investors do not have the unique ability to time the market, yielded a 7% discount. The selected marketability discount of 10% was in the range of the two models.

The primary factors that supported the increase in the fair market value of our common stock from $6.89 per share at November 30, 2010 to $9.84 per share at April 30, 2011 were:

 

   

closer proximity to the date of the expected exit event, which decreased the impact of the discount rate on the estimated value;

 

   

a lower discount for lack of marketability, as described above;

 

   

an increase in the estimated probability of an IPO, which generally results in a higher valuation of the common stock due to the conversion of preferred stock and resulting elimination of liquidation preferences, from 60% to 75%, and a corresponding reduction in the probability of a sale transaction from 35% to 20%;

 

   

slightly higher revenue multiples for the comparable public companies as a result of increases in their market valuations; and

 

   

a strong market for initial public offerings during the first quarter of 2011.

 

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Contemporaneous Valuation as of September 30, 2011

In June 2011, we commenced the process of filing a registration statement for an IPO. There were no single milestone events that would have caused the valuation of our common stock to change from April 2011 through September 2011. However, the stock prices of the comparable companies, as well as various market indices, decreased significantly between July 1, 2011 to December 31, 2011 due to uncertainty associated with general economic and political conditions in the United States and abroad. As a result, we performed a contemporaneous valuation of our common stock as of September 30, 2011 and assigned probability weights to potential future outcomes as follows:

 

   

20% to an IPO by the end of the fourth quarter of 2011;

 

   

50% to an IPO by the end of the fourth quarter of 2012;

 

   

25% to a sale of the company by the end of the fourth quarter of 2012; and

 

   

5% to the liquidation scenario in which no value is available for distribution to the holders of common stock.

IPO Scenarios. We assumed two IPO scenarios for 2011 and 2012, which we weighted 20% to 2011 and 50% to 2012. The 2011 IPO scenario included the same assumptions as in the 2011 IPO scenario used in the April 30, 2011 contemporaneous valuation, except that the timing of the IPO had been extended to the end of 2011. The 2012 IPO scenario also included the same assumptions as in the 2012 IPO scenario used in the April 30, 2011 contemporaneous valuation, except that the timing of the IPO had been extended to the end of 2012.

For the 2011 IPO scenario, we applied the same multiple to our projected 2011 revenue as in the prior contemporaneous valuation, which was at the first quartile of the trailing 12 months revenue multiple for the comparable companies, since we do not expect FDA clearance for Vantera until 2012 and the possibility of lower growth when compared to publicly traded peers. We used the same comparable public companies as were used in the prior contemporaneous valuation, except for 2 companies that were acquired prior to the valuation date. Under this 2011 scenario, the value available for distribution to common stockholders, after payment of preferred stock dividends, was estimated to be $115.0 million. We then discounted this value back to the valuation date using a discount rate of 24% and applied a marketability discount of 10%, which yielded a per share value of $9.76 for this scenario.

For the 2012 IPO scenario, we applied a multiple of projected 2012 revenue that was the median of trailing 12 months revenue multiples for the comparable companies. Under this 2012 scenario, the value available for distribution to common stockholders, after payment of preferred stock dividends, was estimated to be $142.4 million. We then discounted this value back to the valuation date using a discount rate of 24% and applied a marketability discount of 10%, which yielded a per share value of $9.57 for this scenario.

Sale Scenario. We assumed a 25% probability of a sale of the company by the end of the fourth quarter of 2012. This sale scenario assumed that the IPO window is not open or that we receive an attractive acquisition offer.

For the sale scenario, we applied a multiple to our projected 2012 revenue that was the median of trailing 12 months revenue multiples among the target companies evaluated using the guideline transactions methodology. Under this scenario, the value available for distribution to common stockholders, after payment of preferred stock dividends and liquidation preferences, was estimated to be $135.0 million. We then discounted this value back to the valuation date using a discount rate of 24% and applied a marketability discount of 10%, which yielded a per share value of $9.12 for this scenario.

 

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Weighted-Average Valuation. Based on the relative weights of the two IPO scenarios, the sale scenarios and a liquidation scenario in which no value is available for distribution to the holders of common stock, we estimated the fair market value of our common stock to be $9.02 per share as of September 30, 2011. We began using this valuation for stock options granted after that date, the first of which were granted on November 18, 2011, and continuing through December 31, 2011.

We used a marketability discount of 10% for each of the exit scenarios. As with the prior valuations, we used a Black-Scholes at-the-money put option analysis, which yielded a 14% discount. We also considered the option-based approach in the Finnerty model, which provides that the discount on a privately-held security can be estimated by the value of an “average-strike” put option conveying the right to sell at an average price during the life of the option. The Finnerty model, which works under the assumption that investors do not have the unique ability to time the market, yielded an 8% discount. The selected marketability discount of 10% was in the range of the two models.

The primary factors that supported the decrease in the fair market value of our common stock from $9.84 per share at April 30, 2011 to $9.02 per share at September 30, 2011 were:

 

   

extended timing to the date of the expected exit event, which increased the impact of the discount rate on the estimated value;

 

   

a decrease in the overall estimated probability of an IPO, which generally results in a lower valuation of the common stock due to the conversion of preferred stock and resulting elimination of liquidation preferences, from 75% to 70%, and a corresponding increase in the overall estimated probability of a sale transaction from 20% to 25%;

 

   

a decrease in the valuations of the publicly traded comparable companies and the corresponding decreases in their revenue multiples; and

 

   

an overall deterioration in the capital markets during the third quarter of 2011.

Contemporaneous Valuation as of December 31, 2011

In December 2011, we completed the external clinical validation of the Vantera system and submitted a 510(k) premarket notification to the FDA. In addition, the stock prices of the comparable companies, as well as various market indices, recovered during the fourth quarter of 2011 from their declines experienced during the second and third quarters of 2011 resulting from uncertainty associated with general economic and political conditions in the United States and abroad. As a result, we performed a contemporaneous valuation of our common stock as of December 31, 2011 and assigned probability weights to potential future outcomes as follows:

 

   

45% to an IPO by the end of the second quarter of 2012;

 

   

40% to an IPO by the end of the fourth quarter of 2012;

 

   

10% to a sale of the company by the end of the fourth quarter of 2012; and

 

   

5% to the liquidation scenario in which no value is available for distribution to the holders of common stock.

IPO Scenarios. We assumed two IPO scenarios for 2012, which we weighted 45% to the end of the second quarter and 40% to the end of the fourth quarter of 2012. The second quarter 2012 IPO scenario included the same assumptions as in the 2011 IPO scenario used in the September 30, 2011 contemporaneous valuation, except that the timing of the IPO had been extended to the end of the second quarter of 2012. The fourth quarter 2012 IPO scenario also included the same assumptions as in the 2012 IPO scenario used in the September 30, 2011 contemporaneous valuation.

 

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For the second quarter 2012 IPO scenario, we applied the same multiple to our actual 2011 revenue as in the prior contemporaneous valuation, which was at the first quartile of the trailing 12 months revenue multiple for the comparable companies, since we do not expect FDA clearance for Vantera until the end of 2012 and we considered the possibility of lower growth when compared to publicly traded peers. We used the same 14 comparable public companies as were used in the prior contemporaneous valuation. Under this second quarter 2012 scenario, the value available for distribution to common stockholders, after payment of preferred stock dividends, was estimated to be $124.6 million. We then discounted this value back to the valuation date using a discount rate of 24% and applied a marketability discount of 10%, which yielded a per share value of $9.78 for this scenario.

For the fourth quarter 2012 IPO scenario, we applied a multiple of projected 2012 revenue that was the median of trailing 12 months revenue multiples for the comparable companies. Under this 2012 scenario, the value available for distribution to common stockholders, after payment of preferred stock dividends, was estimated to be $153.8 million. We then discounted this value back to the valuation date using a discount rate of 24% and applied a marketability discount of 10%, which yielded a per share value of $10.66 for this scenario.

Sale Scenario. We assumed a 10% probability of a sale of the company by the end of the fourth quarter of 2012. This sa