UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement
Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant
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Filed by a Party other than the Registrant
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Check the appropriate box:
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Preliminary Proxy Statement
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Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
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Definitive Proxy Statement
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Definitive Additional Materials
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Soliciting Material Pursuant to § 240.14a-12
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TRANSGENOMIC, INC.
(Name of Registrant
as Specified In Its Charter)
(Name of Person(s)
Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate
box):
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
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(1)
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Title of each class of securities to which transaction
applies:
Precipio Diagnostics, LLC membership interests
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(2)
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Aggregate number of securities to which transaction applies:
3,820,811
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(3)
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Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
$0.2572294 per unit, calculated in accordance with Rule 0-11(c)(1)(i) based on the stated value of the membership interests being
acquired by the registrant, who is the acquiring person, established in accordance with Rule 0-11(a)(4) for securities of issuers
with an accumulated capital deficit based on one third of the stated value of such membership interests (determined based on the
stated value of the target company’s membership interests at December 31, 2016 of $2,948,475), or $982,825 in the aggregate.
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(4)
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Proposed maximum aggregate value of transaction:
$982,825
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(5)
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Total fee paid:
$113.91
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Fee paid previously with preliminary materials.
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Check box if any part of the fee is offset as provided
by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule and the date of its filing.
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(1)
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Amount Previously Paid:
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(2)
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Form, Schedule or Registration Statement No.:
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February
[●]
,
2017
To the Stockholders of Transgenomic,
Inc.:
We cordially invite you to attend a
special meeting of the stockholders of Transgenomic, Inc. (“Transgenomic”) to be held at Troutman Sanders LLP’s
offices located at 1001 Haxall Point, Richmond, Virginia 23219 on March [●], 2017 at 10:00 a.m., local time.
On October 12, 2016, Transgenomic entered into an Agreement
and Plan of Merger, as amended on February 2, 2017, (as amended, the “Merger Agreement”) with New Haven Labs Inc.,
or Merger Sub, which is a wholly owned subsidiary of Transgenomic, and Precipio Diagnostics, LLC, or Precipio. Precipio is a privately
held company specializing in harnessing the advanced expertise of leading academic researchers to provide oncologists with a superior
level of diagnostic accuracy for their cancer patients. At the effective time of the merger, Merger Sub will merge with and into
Precipio, with Precipio as the surviving entity. Following the merger, Transgenomic will change its name to Precipio, Inc. (“New
Precipio”).
When the merger is completed, (i) the outstanding common
units of Precipio will be converted into the right to receive approximately 160.6 million shares of common stock of New Precipio
(“New Precipio common stock”), together with cash in lieu of fractional units, which will result in Precipio common
unit holders owning approximately 53% of the issued and outstanding shares of New Precipio common stock on a fully diluted basis,
taking into account the issuance of shares of convertible preferred stock of New Precipio (“New Precipio preferred stock”)
in the merger and the private placement as discussed below (the “fully diluted New Precipio common stock”) and (ii) the
outstanding preferred units of Precipio will be converted into the right to receive approximately 24.1 million shares of New Precipio
preferred stock with an aggregate face amount equal to $3 million (based upon the purchase price of the new preferred stock of
New Precipio in the new preferred stock financing), which will result in the Precipio preferred unit holders owning approximately
8% of the fully diluted New Precipio common stock.
In connection with the merger, at the effective time, in addition
to the New Precipio preferred stock to be issued to holders of preferred units of Precipio, New Precipio also will issue shares
of New Precipio preferred stock and New Precipio common stock in a related private placement, whereby:
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Holders of certain secured indebtedness of Transgenomic
will receive in exchange for such indebtedness, approximately 24.1 million shares of New Precipio preferred stock in an amount
equal to $3 million, which represents approximately 8% of the fully diluted New Precipio common stock, and approximately 9.8 million
shares of New Precipio common stock, which represents approximately 3% of the fully diluted New Precipio common stock; and
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New Precipio will issue for cash up to approximately 56.2
million shares of New Precipio preferred stock for $7 million to investors in a private placement, which represents approximately
18% of the fully diluted New Precipio common stock.
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Transgenomic is also requesting your approval of the issuance
of 3.0 million shares of Transgenomic common stock upon the exercise or exchange of certain warrants issued by Transgenomic in
2016 (the “Warrants”).
Pursuant to the rules of the Nasdaq Capital Market (“Nasdaq”),
the securities exchange on which Transgenomic’s common stock is listed, both (i) the issuance of New Precipio common stock
and New Precipio preferred stock in connection with the merger and the related private placement, including the shares of New Precipio
common stock that may be issued upon future conversion of New Precipio preferred stock, and (ii) the issuance of Transgenomic common
stock upon the exercise of the Warrants requires approval of Transgenomic’s stockholders because each issuance exceeds 20%
of the number of shares of Transgenomic common stock outstanding prior to the issuance. Further, the issuance of New Precipio common
stock and New Precipio preferred stock in connection with the merger and the related private placement, including the shares that
may be issued upon future conversion of New Precipio preferred stock, requires approval of Transgenomic’s stockholders because
such issuance will result in a “change of control” of Transgenomic.
Shares of Transgenomic common stock are currently listed on
Nasdaq under the symbol “TBIO.” Transgenomic has filed an initial listing application with Nasdaq relating to New Precipio,
pursuant to Nasdaq’s “change of control” rules. After completion of the merger, Transgenomic anticipates New
Precipio common stock will trade on Nasdaq under the symbol “PRPO.”
In addition, Transgenomic is requesting your approval of the
Transgenomic, Inc. 2017 Stock Option and Incentive Plan (the “2017 Stock Option and Incentive Plan”).
At the special meeting, you will be
asked to consider and vote on:
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a proposal to approve the issuance of shares of New Precipio
common stock and New Precipio preferred stock pursuant to the merger and the related private placement, including shares of New
Precipio common stock to be issued upon conversion of New Precipio preferred stock to be issued in the merger and the private
placement and the resulting “change of control” of Transgenomic;
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a proposal to approve the issuance of shares of Transgenomic
common stock to be issued upon the exercise of the Warrants;
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a proposal to approve the 2017 Stock Option and Incentive
Plan;
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a proposal to approve, on a non-binding, advisory basis,
payment by Transgenomic of certain compensation to Transgenomic’s named executive officers that is based on or otherwise
relates to the merger; and
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a proposal to adjourn the special meeting of stockholders,
if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting
to approve the other proposals.
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The board of directors of Transgenomic
has determined that the Merger Agreement, the merger, the issuance of New Precipio common stock and New Precipio preferred stock
pursuant to the merger and the related private placement, the issuance of New Precipio common stock upon conversion of New Precipio
preferred stock and the resulting “change of control” of Transgenomic, the issuance of shares of Transgenomic common
stock upon exercise or exchange of the Warrants and the 2017 Stock Option and Incentive Plan are advisable and in the best interests
of Transgenomic stockholders and has approved the Merger Agreement, the merger, the issuance of New Precipio common stock and New
Precipio preferred stock pursuant to the merger and the related private placement, the issuance of New Precipio common stock upon
conversion of New Precipio preferred stock and the resulting “change of control” of Transgenomic, the issuance of shares
of Transgenomic common stock upon exercise of the Warrants and the 2017 Stock Option and Incentive Plan.
Accordingly, the board
of directors of Transgenomic recommends that you vote “FOR” the proposal to approve the issuance of New Precipio common
stock and convertible preferred stock in connection with the merger and the related private placement, the issuance of New Precipio
common stock upon conversion of New Precipio preferred stock and the resulting “change of control” of Transgenomic,
“FOR” the proposal to approve the issuance of Transgenomic common stock upon exercise of the Warrants, “FOR”
the proposal to approve the 2017 Stock Option and
Incentive Plan, “FOR” the proposal to approve payment by Transgenomic
of certain compensation to Transgenomic’s named executive officers that is based on or otherwise relates to the merger and
“FOR” the proposal to adjourn the special meeting, if necessary, to enable us to solicit additional proxies.
Your vote is very important. We cannot
complete the merger and the private placement without the approval of the issuance of New Precipio common stock, including the
shares that may be issued upon future conversion of New Precipio preferred stock. This approval requires the affirmative vote of
the holders of a majority of the common stock and Series A-1 Convertible Preferred Stock, voting together as a single class (with
each one share of Series A-1 Convertible Preferred Stock being entitled to 0.93 votes), present in person or represented by proxy
at the special meeting at which a quorum is present. Even if you plan to attend the special meeting, we recommend that you submit
your proxy before the special meeting so that your vote will be counted if you later decide not to attend the meeting. You can
also vote your shares via the Internet or by telephone as provided in the instructions set forth on the enclosed proxy card. If
you hold your shares in “street name” through a broker, you should follow the procedures provided by your broker.
The accompanying proxy statement explains
the proposed merger, private placement and other proposals in greater detail. We urge you to carefully read this proxy statement,
including the annexes and information incorporated by reference and the matters discussed under “Risk Factors” beginning
on page 17.
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Sincerely,
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[INSERT SIGNATURE PICTURE]
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Paul Kinnon
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President and Chief Executive Officer
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Neither the Securities and Exchange
Commission nor any state securities regulator has approved or disapproved the proposed issuance of shares of New Precipio common
stock and New Precipio preferred stock in connection with the merger and the private placement or determined whether this proxy
statement is truthful or complete. Any representation to the contrary is a criminal offense.
This proxy statement is dated February
[●], 2017 and is first being mailed to Transgenomic stockholders on or about February [●], 2017.
REFERENCE TO
ADDITIONAL INFORMATION
The documents that are incorporated
by reference in this proxy statement are included with this proxy statement. You also may obtain documents that are incorporated
by reference in this proxy statement without charge by requesting them in writing or by telephone from Transgenomic at:
Transgenomic,
Inc.
12325 Emmet Street
Omaha, Nebraska 68164
Attention: Corporate Secretary
In addition, you may also obtain these
and other documents filed with the Securities and Exchange Commission at Transgenomic’s website at www.transgenomic.com/ir/investor-information/.
Please note that copies of the documents
provided to you will not include exhibits, unless the exhibits are specifically incorporated by reference in the documents or this
proxy statement.
In order to receive timely delivery of requested documents
in advance of the special meeting, you should make any written or telephonic requests by no later than February
[●]
,
2017. Documents will be distributed within one business day of receipt of such request.
For a more detailed description of
the information incorporated by reference in this proxy statement and how you may obtain it, see the section entitled “Where
You Can Find Additional Information” on page 119.
NOTICE OF SPECIAL
MEETING OF STOCKHOLDERS
To be held on
March
[●]
, 2017
To the Stockholders of Transgenomic,
Inc.:
A special meeting of stockholders of
Transgenomic, Inc., a Delaware corporation (“Transgenomic”), will be held at Troutman Sanders LLP’s offices at
1001 Haxall Point, Richmond, Virginia 23219 on March [●], 2017 at 10:00 a.m., local time, for the following purposes:
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Proposal No. 1:
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To approve the issuance of 160,585,422 shares of common stock, par value $0.01 per share, as well as 24,087,813 shares of senior convertible preferred stock to be issued, pursuant to the Merger Agreement, dated as of October 12, 2016 and amended as of February 2, 2017, by and among Transgenomic, New Haven Labs Inc., which is a wholly owned subsidiary of Transgenomic, and Precipio Diagnostics, LLC (“Precipio”), the issuance of 24,087,813 shares of senior convertible preferred stock and approximately 9.8 million shares of common stock to be issued in a related private placement in exchange for certain indebtedness of Transgenomic, the issuance of 56,204,898 shares of senior convertible preferred stock to be issued to investors in a related private placement, the issuance of 104,380,525 shares of common stock issuable upon conversion of the senior convertible preferred stock and the resulting “change of control” of Transgenomic.
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Proposal No. 2:
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To approve the issuance of 3.0 million shares of Transgenomic common stock upon exercise or exchange of certain outstanding warrants.
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Proposal No. 3:
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To approve the Transgenomic, Inc. 2017 Stock Option and Incentive Plan.
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Proposal No. 4:
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To approve, on a non-binding, advisory basis, payment by Transgenomic of certain compensation to Transgenomic’s named executive officers that is based on or otherwise relates to the merger.
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Proposal No. 5:
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To approve a proposal to adjourn the special meeting of Transgenomic stockholders, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting of Transgenomic stockholders to approve the other proposals.
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Please refer to the accompanying proxy
statement for further information with respect to the business to be transacted at the special meeting of stockholders.
The close of business on January 17,
2017 has been fixed as the record date for determining those Transgenomic stockholders entitled to notice of and to vote at the
special meeting. Accordingly, only stockholders of record at the close of business on that date will receive this notice of, and
be eligible to vote at, the special meeting and any adjournments of the special meeting.
If Transgenomic is to complete the
merger with Precipio and the private placement, then Transgenomic’s stockholders must approve Proposal No. 1 relating to
the issuance of common stock and senior convertible preferred stock.
The Transgenomic Board recommends that
you vote
“FOR”
each of the above proposals.
Your vote is important.
Please
read the proxy statement and the instructions on the enclosed proxy card and, whether or not you plan to attend the special meeting
in person and no matter how many shares you own, please submit your proxy promptly by telephone or via the Internet in accordance
with the instructions on the enclosed proxy card, or by completing, dating and returning your proxy card in the envelope provided.
Returning your proxy by one of these three methods will not prevent you from voting in person at the special meeting. It will,
however, help assure a quorum and to avoid added proxy solicitations.
You may revoke your proxy at any time
before the vote is taken by delivering to the Secretary of Transgenomic a written revocation or a proxy with a later date (including
a proxy by telephone or via the Internet) or by voting your shares in person at the special meeting, in which case your proxy would
be disregarded.
By order of the Board of Directors
[INSERT SIGNATURE PICTURE]
Paul Kinnon
President and Chief Executive Officer
February [●], 2017
Table
of Contents
Table
of Contents
(continued)
Table
of Contents
(continued)
Annex A – Merger Agreement and First Amendment to Merger
Agreement
Annex B – Opinion of Craig-Hallum Capital Group LLC
Annex C – Form of Voting Agreement with Transgenomic
Holders
Annex D – Form of Voting Agreement with Precipio Holders
Annex E – 2017 Stock Option and Incentive Plan
SUMMARY TERM
SHEET FOR THE MERGER AND RELATED PRIVATE PLACEMENT
The following is a summary of the
proposed transaction between Transgenomic, Inc. (“Transgenomic”) and Precipio Diagnostics, LLC (“Precipio”)
pursuant to which a wholly owned subsidiary of Transgenomic will merge with and into Precipio and holders of Precipio common units
will receive shares of common stock of the combined company (the “New Precipio common stock”) and holders of Precipio
preferred units will receive senior convertible preferred stock (the “New Precipio preferred stock”). At the effective
time of the merger, Transgenomic will change its name to Precipio, Inc. The new combined company will be referred to in this proxy
statement as “New Precipio.” In connection with the merger, New Precipio also will issue New Precipio preferred stock
to certain Transgenomic debt holders and other investors in a related private placement. Transgenomic is seeking stockholder approval
of the issuance of New Precipio common stock in connection with the merger and the related private placement. This term sheet is
a summary and does not contain all of the information that may be important to you. You should carefully read this entire document,
including the annexes and the other documents to which this document refers you, for a more complete understanding of the matters
being considered at this special meeting. See the section entitled “Where You Can Find Additional Information” beginning
on page 119.
Merger Agreement (see page 12)
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On October 12, 2016, Transgenomic entered into an Agreement
and Plan of Merger, as amended on February 2, 2017, with New Haven Labs Inc. (“Merger Sub”), which is a wholly owned
subsidiary of Transgenomic, and Precipio (as amended, the “Merger Agreement”). Pursuant to the Merger Agreement, at
the effective time of the merger, Merger Sub will merge with and into Precipio, with Precipio as the surviving entity. At the
effective time of the merger, Transgenomic will change its name to Precipio, Inc.
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When the merger is completed, (i) the outstanding
common units of Precipio will be converted into the right to receive approximately 160.6 million shares of New Precipio common
stock, together with cash in lieu of fractional units, which will result in Precipio common unit holders owning approximately
53% of the issued and outstanding shares of New Precipio common stock on a fully diluted basis, taking into account the issuance
of shares New Precipio preferred stock in the merger and the private placement as discussed below (the “fully diluted New
Precipio common stock”) and (ii) the outstanding preferred units of Precipio will be converted into the right to receive
approximately 24.1 million shares of New Precipio preferred stock with an aggregate face amount equal to $3 million, which will
result in the Precipio preferred unit holders owning approximately 8% of the fully diluted New Precipio common stock.
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Private Placement (see page 7)
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In connection with the merger, at the effective time, in addition to the New Precipio preferred stock to be issued to holders
of preferred units of Precipio, New Precipio also will issue shares of New Precipio preferred stock and New Precipio common stock
in a related private placement, whereby:
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Holders of certain secured indebtedness of Transgenomic will receive in exchange for such indebtedness approximately 24.1 million
shares of New Precipio preferred stock in an amount equal to $3 million, which represents approximately 8% of the fully diluted
New Precipio common stock, and approximately 9.8 million shares of New Precipio common stock, which represents approximately 3%
of the fully diluted New Precipio common stock; and
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New Precipio will issue for cash up to approximately 56.2 million shares of New Precipio preferred stock for $7 million to
investors in a private placement, which represents approximately 18% of the fully diluted New Precipio common stock.
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The New Precipio preferred stock issued in the merger and the private placement will be issued based on a $25 million pre-money
equity valuation of New Precipio and will represent, in the aggregate, approximately 34% of the fully diluted New Precipio common
stock.
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In connection with the private placement, New Precipio will enter into an investor rights agreement with the holders of the
New Precipio preferred stock. The investor rights agreement will grant rights to such parties, including with respect to the designation
of nominees for election to the New Precipio board of directors upon the closing of the merger. The investor rights agreement also
will contain transfer restrictions and standstill restrictions relating to shares of New Precipio preferred stock and New Precipio
common stock issuable upon conversion of the New Precipio preferred stock that will be issued to such parties in connection with
the merger and the private placement. In addition, the investor rights agreement gives such parties rights with respect to the
registration under the Securities Act of 1933, as amended (the “Securities Act”) of the shares of New Precipio common
stock to be issued to such parties, including the shares that may be issued upon future conversion of the New Precipio preferred
stock.
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Voting Agreements (see page 14)
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Certain of Transgenomic’s stockholders have entered into a voting agreement with Transgenomic and Precipio (the “Transgenomic
Voting Agreement”), pursuant to which such holders have agreed to, among other things, (i) authorize and approve the
Merger Agreement and the transactions contemplated thereby and (ii) vote against any Acquisition Proposal (as defined in the Merger
Agreement). Collectively, the voting interests held by these holders represent approximately 31.84% of Transgenomic’s
voting interests as of October 12, 2016.
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In connection with the merger, certain of Precipio’s unit, warrant and note holders have entered into a voting agreement
with Transgenomic and Precipio (the “Precipio Voting Agreement” and, together with the Transgenomic Voting Agreement,
the “Voting Agreements”), pursuant to which such members and warrant holders have agreed to, among other things, (i) authorize
and approve the Merger Agreement and the transactions contemplated thereby and (ii) vote against any Acquisition Proposal (as defined
in the Merger Agreement). Collectively, the voting interests held by these holders represent approximately 71% of Precipio’s
voting interests as of October 12, 2016. The Precipio board of managers approved the Merger Agreement on October 11, 2016.
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Conversion of Outstanding Debt and Convertible Preferred
Stock (see page 75)
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As part of the private placement, holders of Transgenomic’s outstanding debt have agreed to convert the outstanding principal
and accrued interest into shares of New Precipio common stock and New Precipio preferred stock immediately prior to the effectiveness
of the merger. Additionally, holders of Series A-1 Convertible Preferred Stock have agreed to convert their shares into New Precipio
common stock immediately prior to the effectiveness of the merger.
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Bridge Loan
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On February 2, 2017, Precipio agreed to offer a line of credit to Transgenomic up to $250,000 pursuant to an unsecured promissory
note (the “Bridge Loan”). All outstanding amounts under the Bridge Loan accrue interest at a rate of 10% per annum
and are due and payable upon the earlier to occur of (a) the date that is 90 days following the date of the Bridge Loan or (b)
the closing of the merger. The proceeds of the Bridge Loan will be used by Transgenomic to finance certain general expenses until
the effective date of the merger.
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QUESTIONS
AND ANSWERS
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Q1:
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What is the merger transaction?
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A1:
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Transgenomic has entered into a Merger Agreement with Merger Sub and Precipio. Pursuant to the Merger Agreement, at the effective
time of the merger, Merger Sub will merge with and into Precipio, with Precipio as the surviving entity. At the effective time,
Transgenomic will amend its certificate of incorporation to change its name to Precipio, Inc., which will be referred to in this
proxy statement as “New Precipio.” In connection with the merger, New Precipio also will issue to holders of certain
secured indebtedness of Transgenomic, approximately 24.1 million shares of New Precipio preferred stock in an amount equal to $3
million and approximately 9.8 million shares of New Precipio common stock. New Precipio will also issue to new investors in a private
placement up to approximately 56.2 million shares of New Precipio preferred stock for up to $7 million in cash.
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Q2:
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What am I being asked to vote on?
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A2:
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You are being asked to approve the issuance of approximately 160.6 million shares of New Precipio common stock, as well as
approximately 24.1 million shares of New Precipio preferred stock to be issued, pursuant to the Merger Agreement, the issuance
of approximately 24.1 million shares of New Precipio preferred stock and approximately 9.8 million shares of New Precipio common
stock to be issued in a related private placement in exchange for certain indebtedness of Transgenomic, the issuance of approximately
56.2 million shares of New Precipio preferred stock to be issued to investors in a related private placement, the issuance of approximately
104.4 million shares of New Precipio common stock issuable upon conversion of the New Precipio preferred stock and the resulting
“change of control” of Transgenomic. This approval of the issuance of New Precipio common stock and New Precipio preferred
stock and the resulting “change of control” of Transgenomic is required to complete the merger with Precipio and the
private placement.
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You are also being asked to
approve the issuance of 3.0 million shares of Transgenomic common stock upon exercise or exchange of outstanding warrants. Transgenomic
issued certain warrants in 2016 that are exercisable or exchangeable into shares of Transgenomic common stock (the “Warrants”).
Stockholder approval is required for the Warrants to be fully exercised or exchanged. The approval of the issuance of Transgenomic
common stock upon exercise or exchange of the Warrants is not a condition to completing the merger or the private placement.
You are also being asked to
approve the Transgenomic, Inc. 2017 Stock Option and Incentive Plan (the “2017 Stock Option and Incentive Plan”). The
approval of the 2017 Stock Option and Incentive Plan is not a condition to completing the merger or the private placement.
You are also being asked to
approve, on a non-binding, advisory basis, payment by Transgenomic of certain compensation to Transgenomic’s named executive
officers that is based on or otherwise relates to the merger. This proposal, commonly known as the “say-on-golden-parachute”
proposal, gives Transgenomic stockholders the opportunity to vote, on a non-binding, advisory basis, on the compensation that Transgenomic’s
named executive officers may be entitled to receive that is based on or otherwise relates to the merger.
In addition, you may be asked
to vote to approve an adjournment of the special meeting, if necessary, to solicit additional proxies in the event that there are
not sufficient votes at the time of the special meeting to approve the other proposals. The approval of the adjournment of the
special meeting of stockholders is not a condition to completing the merger or the private placement.
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Q3:
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How does the Transgenomic board of directors recommend that I vote?
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A3:
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The Transgenomic board of directors recommends that you vote “FOR” the approval of the issuance of New Precipio
common stock and New Precipio preferred stock in connection with the merger and the private placement, the issuance of New Precipio
common stock upon conversion of the New Precipio preferred stock and the resulting “change of control” of Transgenomic,
“FOR” the approval of the issuance of Transgenomic common stock upon exercise of the Warrants, “FOR” the
approval of the 2017 Stock Option and Incentive Plan, “FOR” the approval, on a non-binding, advisory basis, of certain
compensation to Transgenomic’s named executive officers that is based on or otherwise relates to the merger and “FOR”
the approval of an adjournment of the special meeting, if necessary, to enable Transgenomic to solicit additional proxies in favor
of the other proposals. Your vote is important.
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Q4:
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How will Transgenomic’s directors and executive officers vote their shares of Transgenomic common stock in connection
with the proposals?
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A4:
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Certain Transgenomic stockholders, directors and executive officers, including its president and chief executive officer, have
entered into a voting agreement pursuant to which they have agreed to vote their voting interests of Transgenomic in favor of the
proposals to issue New Precipio common stock and the proposal to adjourn the meeting, if necessary. As of October 12, 2016, these
directors and executive officers collectively held shares representing approximately 31.84% of Transgenomic’s voting interests.
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The Transgenomic Voting Agreement
does not address the proposal to issue Transgenomic common stock upon exercise of the Warrants, or to approve the 2017 Stock Option
and Incentive Plan or to approve the merger-related compensation.
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Q5:
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Why is stockholder approval necessary for the issuance of New Precipio common stock in connection with the merger and the
private placement and the issuance of Transgenomic common stock in connection with the Warrant exercise?
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A5:
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Transgenomic’s common stock is listed on Nasdaq. Nasdaq rules require stockholder approval before the issuance of common
stock if the common stock to be issued will have voting power equal to or greater than 20% of the voting power outstanding before
the issuance, or if the number of shares of common stock to be issued will be equal to or greater than 20% of the number of shares
of common stock outstanding before the issuance or if the issuance will result in a “change of control” of the issuer.
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The shares of New Precipio
common stock and New Precipio preferred stock that will be issued in connection with the merger and the private placement, including
the shares of New Precipio common stock that may be issued upon future conversion of the New Precipio preferred stock, exceed the
thresholds under Nasdaq rules. The shares of Transgenomic common stock issuable upon exercise or exchange of the Warrants also
will exceed the threshold under Nasdaq rules. Therefore, the issuances require the approval of the Transgenomic stockholders.
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Q6:
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Why did Transgenomic enter into the merger transaction?
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A6:
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Transgenomic’s board of directors believes that the merger
with Precipio and the related private placement will provide substantial benefits to the combined company’s business and
operations by, among other things, leveraging the complementary nature of Transgenomic’s and Precipio’s businesses
and permitting the companies to benefit from an increased operating scale. For additional information regarding Transgenomic’s
reasons for entering into the Merger Agreement and the private placement, see the section entitled “The Transaction —
Transgenomic’s Reasons for the Transaction” beginning on page 35.
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Q7:
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When is the transaction expected to be completed?
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A7:
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Transgenomic and Precipio are working toward completing the merger
as soon as practicable. Transgenomic currently expects that the merger and the private placement will close on or before March
31, 2017. In addition to stockholder approval of the issuance of New Precipio common stock, there are a number of additional conditions,
including, but not limited to, approval of the listing of the additional shares of New Precipio common stock on Nasdaq and other
third party consents, that must be satisfied before the parties can complete the transaction. See the section entitled “The
Merger Agreement — Conditions to Closing the Transaction” beginning on page 70 for a more detailed discussion.
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Q8:
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Do I need to send in my stock certificates if the transaction is completed?
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A8:
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No. You will not be required to exchange your certificates representing shares of Transgenomic common stock in connection with
this transaction. You will not receive any cash or securities in connection with the merger. Instead, you will continue to hold
your existing shares of Transgenomic common stock.
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Q9:
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Who can vote at the special meeting?
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A9:
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Transgenomic has fixed the close of business on January 17, 2017
as the record date for the special meeting or any adjournment
thereof, and only the holders of Transgenomic’s common stock and Series A-1 Convertible Preferred Stock on the record date
can vote at the special meeting. As of the record date, 26,446,927 shares of Transgenomic common stock were outstanding and each
share is entitled to one vote. As of the record date 214,705 shares of Transgenomic Series A-1 Convertible Preferred Stock were
outstanding and each share is entitled to 0.93 votes.
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Q10:
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What do I need to do now?
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A10:
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After carefully reading and considering the information contained
in this proxy statement, please submit your proxy by telephone or via the Internet in accordance with the instructions set forth
in the enclosed proxy card, or complete, sign, date and mail your proxy card in the enclosed prepaid envelope as soon as possible
so that your shares may be voted at the special meeting. See the section entitled “The Special Meeting — How to Vote
Your Shares” on page 24 and the section entitled “The Special Meeting — Proxies; Counting Your Vote” on
page 25 for a more detailed discussion.
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Q11:
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What vote is required to approve the proposals?
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A11:
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The proposal to issue New Precipio common stock and New Precipio preferred stock in connection with the merger and the private
placement, the issuance of New Precipio common stock upon conversion of New Precipio preferred stock and the resulting “change
of control” of Transgenomic, the proposal to issue Transgenomic common stock in connection with the exercise or exchange
of the Warrants, the proposal to approve the 2017 Stock Option and Incentive Plan and the proposal to approve payment by Transgenomic
of certain compensation to Transgenomic’s named executive officers must each be approved by the affirmative vote of the holders
of a majority of the shares of Transgenomic’s common stock and Series A-1 Convertible Preferred Stock, voting together as
a single class (with each one share of Series A-1 Convertible Preferred Stock being entitled to 0.93 votes), present in person
or represented by proxy at the special meeting at which a quorum is present.
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The proposal to adjourn the
special meeting, if necessary, to solicit additional proxies in favor of the other proposals must be approved by the affirmative
vote of the holders of a majority of Transgenomic’s common stock and Series A-1 Convertible Preferred Stock, voting together
as a single class (with each one share of Series A-1 Convertible Preferred Stock being entitled to 0.93 votes), present in person
or represented by proxy at the special meeting, whether or not a quorum is present.
Abstentions will count as
a vote “against” the proposals. Broker non-votes will have no effect on the proposals.
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Q12:
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Are there any federal or state regulatory requirements that must be complied with or federal or state regulatory approvals
or clearances that must be obtained in connection with the merger?
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A12:
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Neither Transgenomic nor Precipio is required to make any filings or to obtain any approvals or clearances from any antitrust
regulatory authorities in the United States or other countries to consummate the transactions contemplated by the Merger Agreement.
Transgenomic must comply with applicable federal and state securities laws and regulations and Nasdaq rules and regulations in
connection with the issuance of the shares of New Precipio common stock in the transaction, including the filing with the SEC,
of this proxy statement. Transgenomic has filed an initial listing application with Nasdaq pursuant to Nasdaq’s “change
of control” rules. If such application is accepted, Transgenomic anticipates that shares of New Precipio common stock will
be listed on Nasdaq following the closing of the merger under the trading symbol “PRPO.”
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Q13:
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If my shares are held in “street name” by my broker, will my broker vote my shares for me?
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A13:
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If your shares are held in the name of a bank or broker or other nominee, you will receive separate instructions from your
bank, broker or other nominee describing how to vote your shares. The availability of telephonic or Internet voting will depend
on the bank’s or broker’s voting process. Please check with your bank or broker and follow the voting procedures your
bank or broker provides.
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You should instruct your bank,
broker or other nominee how to vote your shares. The rules applicable to broker-dealers do not grant your broker discretionary
authority to vote your shares for any of the proposals without receiving your instructions. As a result, if your broker does not
receive voting instructions from you regarding the proposals, your shares will not be voted.
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Q14:
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May I change my vote after I have submitted a proxy by telephone or via the Internet or mailed my signed proxy card?
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A14:
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Yes. You may change your vote at any time before your proxy is voted at the special meeting. You can do this in several ways.
You can send a written notice stating that you want to revoke your proxy, or you can complete and submit a new proxy card. If you
choose either of these methods, you must submit your notice of revocation or your new proxy card to Transgenomic’s Secretary
at Transgenomic, Attention: Corporate Secretary, 12325 Emmet Street, Omaha, Nebraska 68164.
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You also can change your vote
by submitting a proxy at a later date by telephone or via the Internet, in which case your later-submitted proxy will be recorded
and your earlier proxy revoked.
You also can attend the special
meeting and vote in person. Simply attending the special meeting, however, will not revoke your proxy. To revoke your earlier proxy,
you must vote at the special meeting.
If you have instructed a broker
to vote your shares, the preceding instructions do not apply, and you must follow the voting procedures received from your broker
to change your vote.
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Q15:
|
If I want to attend the special meeting, what do I do?
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A15:
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You should come to Troutman Sanders LLP’s offices at 1001 Haxall Point, Richmond, Virginia 23219 on March [●],
2017 at10:00 a.m. local time. Stockholders of record as of the record date for the special meeting (January 17, 2017) can vote
in person at the special meeting. A valid government issued identification card will be required for entry to the special meeting.
If your shares are held in street name, then you are not the stockholder of record and you must ask your bank, broker or other
nominee holder how you can vote at the special meeting.
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Q16:
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Who will bear the cost of soliciting votes for the special meeting?
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A16:
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The Transgenomic board of directors is making this solicitation and will pay the costs of soliciting proxies, including clerical
work, printing and postage. Transgenomic officers and other employees may personally solicit proxies or solicit proxies by mail,
telephone, facsimile or Internet, but it will not provide compensation for such solicitations. Transgenomic has engaged Innisfree
M&A Incorporated to assist it in the solicitation of proxies for the special meeting, and has agreed to pay Innisfree M&A
Incorporated a fee of approximately $10,000, plus reasonable expenses, for proxy solicitation services. We will also reimburse
banks, brokers and other persons holding shares in their names or in the names of nominees for expenses incurred sending material
to beneficial owners and obtaining proxies from beneficial owners.
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Q17:
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Who can help answer my questions?
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A17:
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If you have any questions or need assistance in voting your shares, please call the firm assisting in the solicitation of proxies:
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Innisfree M&A
Incorporated
501 Madison Avenue
New York, NY 10022
Stockholders May Call: (888) 750-5834 (toll-free from the U.S. and Canada)
Banks and brokers may call collect: (212) 750-5833
You may also contact:
Transgenomic,
Inc.
12325 Emmet Street
Omaha, Nebraska 68164
Attention: Corporate Secretary
Telephone: (402) 452-5400
SUMMARY
This summary highlights selected
information from this proxy statement. It does not contain all of the information that may be important to you. You should carefully
read this entire document, including the annexes and the other documents to which this document refers you, for a more complete
understanding of the matters being considered at the special meeting. See the section entitled “Where You Can Find Additional
Information” beginning on page 119. Additionally, some of the statements contained in, or incorporated by reference
into, this proxy statement are forward-looking statements. See the section entitled “Cautionary Statement Concerning Forward-Looking
Statements” beginning on page 23. All references in this proxy statement to dollars or $ are to U.S. dollars. In this
proxy statement, unless otherwise indicated, accounting principles generally accepted in the United States are referred to as “GAAP.”
Except as the context otherwise requires, references in this proxy statement to “Transgenomic” are to Transgenomic,
Inc. All share numbers and per share amounts provided in this proxy statement do not take into account the proposed reverse stock
split at a ratio of between one to ten and one to thirty approved by the Transgenomic stockholders on October 31, 2016.
The
Merger
(see page 63)
On October 12, 2016, Transgenomic entered into the Merger Agreement
with New Haven Labs Inc. (“Merger Sub”), which is a wholly owned subsidiary of Transgenomic, and Precipio. Precipio
is a privately held company specializing in harnessing the advanced expertise of leading academic researchers to provide oncologists
with a superior level of diagnostic accuracy for their cancer patients. Pursuant to the Merger Agreement, at the effective time
of the merger, Merger Sub will merge with and into Precipio, with Precipio as the surviving entity. At the effective time of the
merger, Transgenomic will change its name to Precipio, Inc. (“New Precipio”).
When the merger is completed, (i) the outstanding common
units of Precipio will be converted into the right to receive approximately 160.6 million shares of New Precipio common stock,
together with cash in lieu of fractional units, which will result in Precipio common unit holders owning approximately 53% of the
issued and outstanding shares of New Precipio common stock on a fully diluted basis, taking into account the issuance of shares
New Precipio preferred stock in the merger and the private placement as discussed below (the “fully diluted New Precipio
common stock”) and (ii) the outstanding preferred units of Precipio will be converted into the right to receive approximately
24.1 million shares of New Precipio preferred stock with an aggregate face amount equal to $3 million, which will result in the
Precipio preferred unit holders owning approximately 8% of the fully diluted New Precipio common stock.
As provided in the Merger Agreement, the New Precipio board
of directors will increase its size to seven at the effective time of the merger, two of whom will be current directors, three
of whom will be nominated by Precipio and two of whom will be nominated by the holders of the New Precipio preferred stock issued
in the private placement.
On February 2, 2017, Transgenomic and
Precipio entered into an amendment to the Merger Agreement which provided for the Bridge Loan, set a fixed number of shares of
New Precipio common stock and New Precipio preferred stock to be issued in the merger and waived certain conditions to the closing
of the merger.
See the section entitled “The
Merger Agreement” for a more detailed discussion.
The
Private Placement
(see page 74)
In connection with the merger, at the
effective time, in addition to the New Precipio preferred stock to be issued to holders of preferred units of Precipio, New Precipio
also will issue shares of New Precipio preferred stock and New Precipio common stock in a related private placement, whereby:
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·
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Holders of certain secured indebtedness of Transgenomic
will receive in exchange for such indebtedness approximately 24.1 million shares of New Precipio preferred stock in an amount
equal to $3 million, which represents approximately 8% of the fully diluted New Precipio common stock, and approximately 9.8 million
shares of New Precipio common stock, which represents approximately 3% of the fully diluted New Precipio common stock; and
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·
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New Precipio will issue for cash up to approximately 56.2
million shares of New Precipio preferred stock for $7 million to investors in a private placement, which represents approximately
18% of the fully diluted New Precipio common stock.
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·
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The New Precipio preferred stock issued in the merger and
the private placement will be issued based on a $25 million pre-money equity valuation of New Precipio and will represent, in
the aggregate, approximately 34% of the outstanding shares of New Precipio common stock on an as-converted basis, including New
Precipio preferred stock issued in the merger and the private placement.
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The New Precipio preferred stock to be issued in the merger
and the private placement will be new designations of preferred shares effectuated by a Certificate of Designation amending Transgenomic’s
Certificate of Incorporation. The cash proceeds received from the private placement will be used to finance the merger, for working
capital and growth capital to expand into new markets.
The shares of New Precipio preferred stock may be convertible
into New Precipio common stock any time at an applicable conversion price. Certain material corporate events also will require
the consent of a supermajority of holders of the New Precipio preferred stock. In the event of New Precipio’s liquidation,
dissolution or winding up, holders of the New Precipio preferred stock will be entitled to receive assets or surplus funds of New
Precipio in an amount equal to the greater of (i) 1.5 times the original purchase price of the New Precipio preferred stock,
plus
an amount equal to all unpaid and accrued dividends and dividend equivalents and (ii) the amount that would be payable on the New
Precipio preferred stock if it were converted into New Precipio common stock (the “Liquidation Preference”). This Liquidation
Preference also would be due in the event of a future merger or sale of New Precipio, unless a supermajority of holders of New
Precipio preferred stock elect otherwise. The New Precipio preferred stock will be entitled to an annual 8% cumulative payment
in lieu of interest or dividends, payable in-kind for the first two years and in cash or in-kind thereafter, at the option of the
holder. The New Precipio preferred stock also will be entitled to share on any dividends paid on the New Precipio common stock.
In connection with the private placement, New Precipio will
enter into an investor rights agreement with the holders of the New Precipio preferred stock. The investor rights agreement will
grant rights to such parties, including with respect to the designation of nominees for election to the New Precipio board of directors
upon the closing of the merger. The investor rights agreement also will contain transfer restrictions and standstill restrictions
relating to shares of New Precipio common stock that will be issued to such parties in connection with the merger and the private
placement. In addition, the investor rights agreement gives such parties rights with respect to the registration under the Securities
Act of the shares of New Precipio common stock to be issued to such parties, including the shares that may be issued upon future
conversion of the New Precipio preferred stock.
See the section entitled “Private
Placement” for a more detailed discussion.
Transgenomic’s
Reasons for the Transaction
(see page 35)
Transgenomic’s board of directors
(the “Transgenomic Board”) has approved the merger with Precipio and determined that the merger, the private placement
and the other transactions contemplated by the Merger Agreement are advisable and in the best interests of Transgenomic and its
stockholders. Accordingly, the Transgenomic Board has recommended that you vote “FOR” the issuance of shares of New
Precipio common stock pursuant to the merger and upon conversion of New Precipio preferred stock issued in the merger and the related
private placement, based on its belief, in consultation with Transgenomic’s senior management, its outside legal counsel
and its financial advisor, that the merger with Precipio and the private placement will provide substantial benefits to the combined
company’s business and operations by, among other things, leveraging the complementary nature of Transgenomic’s and
Precipio’s businesses and permitting the combined company to benefit from an increased operating scale. The factors that
the Transgenomic Board and senior management considered in connection with the merger are described in more detail under the section
entitled “The Transaction — Transgenomic’s Reasons for the Transaction.”
Opinion
of Craig-Hallum Capital Group LLC
(see page 38)
Craig-Hallum Capital Group LLC (“Craig-Hallum”)
was engaged to render an opinion to the Transgenomic Board as to whether the exchange ratio, as set forth in the Merger Agreement,
was fair, from a financial point of view, to the holders of Transgenomic common stock. On October 12, 2016, Craig-Hallum delivered
to the Transgenomic Board its oral opinion, which was subsequently confirmed in writing, that, as of the date of its opinion, based
upon and subject to the assumptions, limitations, qualifications, and factors contained in its opinion, the exchange ratio was
fair, from a financial point of view, to the holders of Transgenomic common stock. The full text of the Craig-Hallum’s written
opinion, dated October 12, 2016, is attached as Annex B to this proxy statement.
Craig-Hallum’s opinion speaks
only as of the date of the opinion. The opinion was directed to the Transgenomic Board in connection with its consideration of
the Merger Agreement and is directed only to the fairness, from a financial point of view, of the exchange ratio to holders of
Transgenomic common stock. Craig-Hallum’s opinion does not constitute a recommendation to any holder of Transgenomic common
stock as to how such holder of Transgenomic common stock should vote at any meeting of stockholders called to consider and vote
upon the Merger Agreement. It does not address the underlying business decision of Transgenomic to engage in the merger, the relative
merits of the merger as compared to any other alternative business strategies that might exist for Transgenomic or the effect of
any other transaction in which Transgenomic might engage. For a more detailed description of Craig-Hallum’s opinion, see
the section entitled “The Transaction — Opinion of Craig-Hallum Capital Group LLC” and Annex B to this proxy
statement.
The Companies
Transgenomic, Inc.
Transgenomic, Inc.
12325 Emmet Street
Omaha, Nebraska 68164
Transgenomic is a biotechnology company advancing personalized
medicine for the detection and treatment of cancer and inherited diseases through our proprietary molecular technologies and clinical
and research services. A key goal is to bring the Multiplexed ICE COLD-PCR (“MX-ICP”) product to the clinical market
through strategic partnerships and licensing agreements, enabling the use of blood and other bodily fluids for more effective and
patient-friendly diagnosis, monitoring and treatment of cancer.
MX-ICP is technology proprietary to Transgenomic. It is a reagent
that improves the ability to detect genetic mutations by 100 - 400 fold over existing technologies. This technology has been validated
internally on all currently available sequencing platforms, including Sanger, Next Gen Sequencing and Digital PCR. By enhancing
the level of detection of genetic mutations and suppressing the normal, or wild-type DNA, several benefits are provided. It is
generally understood that most current technologies are unable to consistently identify mutations that occur in less than approximately
5% of a sample. However, many mutations found at much lower levels, even as low as 0.01%, are known to be clinically relevant and
can have significant consequences to a patient: both in terms of how they will respond to a given drug or treatment and how a given
tumor is likely to change over time. More importantly, in Transgenomic’s view, is the ability to significantly improve the
level of detection while using blood, saliva and even urine as a source for DNA, rather than depending on painful, expensive and
potentially dangerous tumor biopsies.
Transgenomic believes that this is an important advancement
in patient care with respect to cancer detection, treatment and monitoring and can result in significant cost savings for the healthcare
system by replacing invasive procedures with the simple collection of blood or other bodily fluids. By broadening the types of
samples that can be used for testing and allowing all sequencing platforms to provide improved identification of low level mutations,
MX-ICP has the potential to make testing more readily available, more patient friendly, enable genetic monitoring of disease progression,
effectively guide treatment protocols, and reduce the overall cost of diagnosis and monitoring while significantly improving patient
outcomes.
Historically, Transgenomic’s operations were organized
and reviewed by management along the major product lines and presented in two business segments: Laboratory Services and Genetic
Assays and Platforms. Beginning with the quarter ended September 30, 2015, Transgenomic’s operations are now organized as
one business segment, our Laboratory Services segment, and during the fourth quarter of 2015, Transgenomic began including a portion
of our Laboratory Services segment as discontinued operations.
Transgenomic’s laboratory in
Omaha, Nebraska is focused on providing genetic analytical services related to oncology and pharmacogenomics research services
supporting Phase II and Phase III clinical trials conducted by pharmaceutical and biotechnology companies. Transgenomic’s
laboratory employs a variety of genomic testing service technologies, including our proprietary MX-ICP technology. ICE COLD-PCR
is a proprietary ultra-high sensitivity platform technology with breakthrough potential to enable wide adoption of personalized,
precision medicine in cancer and other diseases. It can be run in any laboratory that contains standard PCR systems. MX-ICP enables
detection of multiple known and unknown mutations from virtually any sample type, including tissue biopsies, blood, urine, saliva,
cell-free DNA and circulating tumor cells at levels greater than 1,000-fold higher than standard DNA sequencing techniques. It
is easy to implement and use within existing workflows. Transgenomic’s laboratory in Omaha is certified under the Clinical
Laboratory Improvement Amendments (“CLIA”) as a high complexity laboratory and is accredited by the College of American
Pathologists.
Precipio Diagnostics, LLC
Precipio Diagnostics, LLC
4 Science Park
New Haven, Connecticut 06511
Precipio is a cancer diagnostics company
providing diagnostic services to the oncology market. Precipio has partnered with premier academic institutions to capture the
expertise, experience and technologies developed within academia, and utilize them to solve the growing problem of misdiagnosis.
It has built a platform that successfully translates that expertise into a commercial setting, enabling Precipio to provide the
highest level of diagnostic accuracy within clinical services to the oncology market. Precipio is building a nationwide sales team
that offers its services to oncologists and hospitals around the country. Specimens are shipped to its laboratory in New Haven,
Connecticut where they are processed and diagnosed by academic experts at Yale School of Medicine; the end product is a pathology
report which guides its customers, oncologists as to the nature of their patients’ disease and helps them determine how best
to care for their patient.
Board of Directors
and Management of New Precipio Following the Transaction
(see page 50)
Following the transaction, the New
Precipio board of directors will be expanded to seven directors from five directors and three of the existing directors will resign.
The five vacancies created by the resignations and authorization of the increase in the board size will be filled by two directors
designated by the holders of the New Precipio preferred stock (the “preferred holder designees”) and three directors
designated by Precipio upon the closing of the merger. The holders of the New Precipio preferred stock will have the right to designate
the preferred holder designees for as long as they hold 50% of the shares issued in the private placement.
The Merger Agreement provides that
the officers of New Precipio will be agreed to by the parties prior to the effective time of the merger. It is currently anticipated
that the following current Precipio officers will serve as officers of New Precipio: Ilan Danieli, Chief Executive Officer; Carl
Iberger, Chief Financial Officer; Zaki Sabet, Vice President, Operations; and Ayman Mohamed, Vice President, Research & Development.
Steve Miller, Vice President, Business Development of Transgenomic, is expected to continue in that role.
The Special Meeting
of Transgenomic Stockholders
(see page 24)
Time; Date; Place
.
Transgenomic will hold a special meeting of stockholders at Troutman Sanders LLP’s offices located at 1001 Haxall Point,
Richmond, VA 23219 on March [●], 2017 at 10:00 a.m. local time.
Purpose of the Meeting
.
At the special meeting, you will be asked to vote on the proposals described below. In addition, at the special meeting, Transgenomic
may transact such other business as may properly come before the special meeting or any properly reconvened special meeting following
an adjournment of the special meeting.
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·
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The Issuance of Common Stock in Connection with the Merger and Private Placement Proposal (Proposal No. 1).
You will
be asked to approve the issuance of approximately 160.6 million shares of New Precipio common stock, as well as approximately 24.1
million shares of New Precipio preferred stock to be issued, pursuant to the Merger Agreement, the issuance of approximately 24.1
million shares of New Precipio preferred stock and approximately 9.8 million shares of New Precipio common stock to be issued in
a related private placement in exchange for certain indebtedness of Transgenomic, the issuance of approximately 56.2 million shares
of New Precipio preferred stock to be issued to investors in a related private placement, the issuance of approximately 104.4 million
shares of New Precipio common stock issuable upon conversion of the New Precipio preferred stock and the resulting “change
of control” of Transgenomic. This approval of the issuance of New Precipio common stock and New Precipio preferred stock
and the resulting “change of control” of Transgenomic is required to complete the merger with Precipio and the private
placement.
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·
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The Issuance of Common Stock in Connection with the Exercise or Exchange of the Warrants Proposal (Proposal No. 2).
You will be asked to approve the issuance of 3.0 million shares of Transgenomic common stock upon exercise or exchange of the Warrants.
The approval of the issuance upon exercise or exchange of the Warrants is not a condition to completion of the merger with Precipio
or the private placement.
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·
|
The 2017 Stock Option and Incentive Plan Proposal (Proposal No. 3).
You will be asked to approve the Transgenomic, Inc.
2017 Stock Option and Incentive Plan. The approval of the 2017 Stock Option and Incentive Plan is not a condition to completion
of the merger with Precipio or the private placement.
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|
·
|
The Advisory Compensation Proposal (Proposal No. 4)
. You will be asked to approve, on a non-binding, advisory basis,
payment by Transgenomic of certain compensation to Transgenomic’s named executive officers that is based on or otherwise
relates to the merger. The approval of the advisory compensation proposal is not a condition to completion of the merger with Precipio
or the private placement.
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·
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The Adjournment Proposal (Proposal No. 5).
You may be asked to approve an adjournment of the special meeting, if necessary,
to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the
other proposals. The approval of the adjournment of the special meeting is not a condition to completion of the merger with Precipio
or the private placement.
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Record Date; Shares Entitled
to Vote
.
Transgenomic has fixed the close of business on January 17, 2017 as the record date for the determination
of holders of Transgenomic common stock and Series A-1 Convertible Preferred Stock entitled to receive notice of and to vote at
the special meeting and any adjournment of the special meeting. No other shares of Transgenomic capital stock are entitled to notice
of and to vote at the special meeting. At the close of business on the record date, Transgenomic had outstanding and entitled to
vote 26,446,927 shares of Transgenomic common stock and 214,705 shares of Series A-1 Convertible Preferred Stock.
Required Votes
.
Votes cast by proxy or in person at the special meeting will be tabulated by the inspector of elections of the special meeting.
The inspector of elections also will determine whether or not a quorum is present. The presence, in person or by proxy, of the
holders of a majority of the shares of Transgenomic common stock and Series A-1 Convertible Preferred Stock, voting together as
a single class (with each one share of Series A-1 Convertible Preferred Stock being entitled to 0.93 votes), issued and outstanding
as of the record date for the special meeting is necessary to constitute a quorum at the special meeting. Shares of Transgenomic
common stock and Series A-1 Convertible Preferred Stock represented at the special meeting in person or by proxy but not voted
will be counted for purposes of determining a quorum. Accordingly, abstentions and broker “non-votes” (shares as to
which a broker or nominee has indicated that it does not have discretionary authority to vote) on a particular matter will be treated
as shares that are present and entitled to vote at the special meeting for purposes of determining the presence of a quorum.
The proposals to approve the issuance
of approximately 160.6 million shares of New Precipio common stock, as well as approximately 24.1 million shares of New Precipio
preferred stock to be issued, pursuant to the Merger Agreement, the issuance of approximately 24.1 million shares of New Precipio
preferred stock and approximately 9.8 million shares of New Precipio common stock to be issued in a related private placement in
exchange for certain indebtedness of Transgenomic, the issuance of approximately 56.2 million shares of New Precipio preferred
stock to be issued to investors in a related private placement, the issuance of approximately 104.4 million shares of New Precipio
common stock issuable upon conversion of the New Precipio preferred stock and the resulting “change of control” of
Transgenomic, to approve the issuance of 3.0 million shares of Transgenomic common stock upon exercise or exchange of the Warrants,
to approve the 2017 Stock Option and Incentive Plan and to approve, on a non-binding, advisory basis, payment by Transgenomic of
certain compensation to Transgenomic’s named executive officers that is based on or otherwise relates to the merger, must
be approved by the affirmative vote of the holders of a majority of the shares of Transgenomic common stock and Series A-1 Convertible
Preferred Stock, voting together as a single class (with each one share of Series A-1 Convertible Preferred Stock being entitled
to 0.93 votes), present in person or represented by proxy at the special meeting at which a quorum is present. The proposal to
adjourn the special meeting, if necessary, to solicit additional proxies must be approved by the affirmative vote of the holders
of a majority of the shares of Transgenomic common stock and Series A-1 Convertible Preferred Stock, voting together as a single
class (with each one share of Series A-1 Convertible Preferred Stock being entitled to 0.93 votes), present in person or represented
by proxy at the special meeting, whether or not a quorum is present.
The approval of the issuance of New
Precipio common stock and New Precipio preferred stock in accordance with the terms of the Merger Agreement and the private placement
and the resulting “change of control” of Transgenomic is a condition to the completion of the merger with Precipio
and the private placement. As a result, a vote against the proposal relating to the issuance of New Precipio common stock effectively
will be a vote against the merger of Transgenomic with Precipio and the related private placement. None of the other proposals
are conditions to the completion of the merger with Precipio or the private placement.
Recommendation of the Transgenomic
Board
.
The Transgenomic Board has determined that the merger with Precipio and the related private placement, the
issuance of Transgenomic common stock upon exercise or exchange of the Warrants, the 2017 Stock Option and Incentive Plan and the
merger-related compensation are fair to and in the best interests of Transgenomic and its stockholders and has approved the issuance
of New Precipio common stock and the New Precipio preferred stock in accordance with the Merger Agreement and the private placement
and the resulting “change of control” of Transgenomic, the issuance of Transgenomic common stock upon exercise or exchange
of the Warrants, the 2017 Stock Option and Incentive Plan, the merger-related compensation and the adjournment of the special meeting,
if necessary, to solicit additional proxies in favor of the proposals.
The Transgenomic Board recommends that
you vote “FOR” the approval of the issuance of New Precipio common stock and New Precipio preferred stock in accordance
with the Merger Agreement and the private placement and the “change of control” of Transgenomic, “FOR”
the approval of the issuance of Transgenomic common stock upon exercise or exchange of the Warrants, “FOR” the approval
of the 2017 Stock Option and Incentive Plan, “FOR” the approval of the merger-related compensation and “FOR”
the approval of the adjournment of the special meeting, if necessary, to solicit additional proxies in favor of the common stock
issuance proposals, the 2017 Stock Option and Incentive Plan proposal and the advisory compensation proposal.
The Merger Agreement
(see page 63)
The Merger Agreement, which is attached
to this proxy statement as Annex A, is described in more detail beginning on page A-1. We urge you to read the Merger Agreement
in its entirety because this document is the legal document governing the proposed merger with Precipio.
Completion of the Merger with
Precipio is Subject to Conditions
.
The obligations of Transgenomic to consummate the merger with Precipio are subject
to the satisfaction or waiver of various conditions, including:
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Precipio’s unit holders having approved the merger, Precipio’s execution of the Merger Agreement and the consummation
of the transactions contemplated therein;
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the representations and warranties of Precipio being true and correct as of the date of closing, or, to the extent they expressly
relate to a specific date, then as of that specific date, with only those exceptions which would not reasonably be expected to
have a material adverse effect;
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the issuance of New Precipio preferred stock to holders of Precipio preferred units pursuant to the merger and to certain Transgenomic
debt holders and other investors in a private placement;
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prior to the effective time of the merger, the conversion of all outstanding warrants, membership interests, promissory notes
of Precipio issued to members of Precipio into Precipio common units or preferred units, and the termination of all related warrants
and promissory notes;
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Precipio having delivered to Transgenomic a lock-up agreement executed by certain of its stockholders; and
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Precipio having satisfied other customary closing conditions.
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The obligations of Precipio to effect
the transactions contemplated by the Merger Agreement are conditioned on the satisfaction or waiver of various conditions, including:
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Transgenomic’s stockholders having approved the proposal to issue New Precipio common stock and New Precipio preferred
stock in connection with the Merger Agreement and the related private placement;
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the representations and warranties of Transgenomic and Merger Sub being true and correct in all material respects as of the
date of closing, or, to the extent they expressly related to a specific date, then as of the specific date, with only those exceptions
which would not reasonably be expected to have a material adverse effect;
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the size of the Transgenomic Board being increased to seven and the appointment of certain designees to the Transgenomic Board;
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the issuance of New Precipio preferred stock to holders of Precipio preferred units pursuant to the merger and to certain Transgenomic
debt holders and other investors in a private placement;
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the amendment of Transgenomic’s Certificate of Incorporation contemplating the issuance of the New Precipio preferred
stock and changing the name to Precipio, Inc. at the effective time of the merger;
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Transgenomic having delivered to Precipio a lock-up agreement executed by Transgenomic and certain of its stockholders;
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there being no outstanding indebtedness of Transgenomic immediately prior to the effective time of the merger other than accounts
payable to trade creditors, accrued expenses and certain indebtedness of Transgenomic, including indebtedness to its stockholders
that will be converted into common stock and new preferred stock of New Precipio;
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Transgenomic having terminated certain of its employees and all severance, retention, change of control, COBRA or other payments
due to such employees being paid in full prior to the effective time of the merger or included as a liability of Transgenomic pursuant
to the Merger Agreement;
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at the effective time of the merger, the shares of Transgenomic common stock to be issued in connection with the merger shall
have been approved for listing on Nasdaq; and
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Transgenomic having satisfied other customary closing conditions.
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The Merger Agreement May Be Terminated
under Certain Circumstances
.
The Merger Agreement may be terminated at any time prior to the closing, whether before
or after approval by Transgenomic stockholders of the issuance of New Precipio common stock and New Precipio preferred stock in
accordance with the terms of the Merger Agreement, in any of the following ways:
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by mutual written consent of Transgenomic and Precipio; or
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by either Transgenomic or Precipio if the closing date has not occurred by June 30, 2017, but only if the terminating party
is not then in material breach of any representation, warranty, covenant or other agreement contained in the Merger Agreement and
such has been the cause of, or resulted in, the failure of a timely closing; or
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by either Transgenomic or Precipio if any judgment, statute, law, ordinance, rule, regulation or other legal restraint or prohibition
that restrains, enjoins or otherwise prohibits the consummation of the merger shall be in effect and shall have become final and
non-appealable; or
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by Precipio, if Transgenomic has breached or failed to perform in any material respect any of its representations, warranties,
covenants or other agreements contained in the Merger Agreement such that the conditions to closing set forth in Merger Agreement
cannot be satisfied and such breach is not capable of being cured or has not been cured within 30 days after the giving of notice
thereof by Precipio to Transgenomic; or
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by Transgenomic, if Precipio has breached or failed to perform in any material respect any of its representations, warranties,
covenants or other agreements contained in the Merger Agreement such that the conditions to closing set forth in Merger Agreement
cannot be satisfied and such breach is not capable of being cured or has not been cured within 30 days after the giving of notice
thereof by Transgenomic to Precipio; or
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by Precipio, if Transgenomic has entered into any letter of intent or similar document or any contract relating to any alternate
acquisition proposal; or
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by Transgenomic, if Precipio has entered into any letter of intent or similar document or any contract relating to any alternate
acquisition proposal; or
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by Precipio, if Transgenomic enters into a definitive agreement to effect an unsolicited acquisition proposal made by a third
party determined in good faith by the Transgenomic Board to be (1) more favorable from a financial point of view to the stockholders
of Transgenomic than as provided under the Merger Agreement, and (2) reasonably capable of being completed on the terms proposed
without unreasonable delay; or
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by Transgenomic, if Precipio enters into a definitive agreement to effect an unsolicited acquisition proposal made by a third
party determined in good faith by the board of managers of Precipio to be (1) more favorable from a financial point of view to
the members of Precipio than as provided under the Merger Agreement, and (2) reasonably capable of being completed on the terms
proposed without unreasonable delay.
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The Voting Agreements
(see page 76)
In connection with the merger, certain of Precipio’s unit,
warrant and note holders have entered into the Precipio Voting Agreement with Transgenomic and Precipio, pursuant to which such
members and warrant holders have agreed to, among other things, (i) authorize and approve the Merger Agreement and the transactions
contemplated thereby and (ii) vote against any Acquisition Proposal (as defined in the Merger Agreement). Collectively, the voting
interests held by these Precipio holders represent approximately 71% of Precipio’s voting interests as of October 12, 2016.
The Precipio board of managers approved the Merger Agreement on October 11, 2016.
Certain of Transgenomic’s stockholders, directors and
executive officers have also entered into the Transgenomic Voting Agreement with Transgenomic and Precipio, pursuant to which such
holders have agreed to, among other things, (i) authorize and approve the Merger Agreement and the transactions contemplated
thereby and (ii) vote against any Acquisition Proposal (as defined in the Merger Agreement). Collectively, the voting interests
held by these holders represent approximately 31.84% of Transgenomic’s voting interests as of October 12, 2016.
Third Party Approvals
Required for the Merger with Precipio
(see page 57)
The Merger Agreement also provides
that the consummation of the merger is conditioned on the receipt of consents from certain other third parties, including lenders,
lessors and other commercial partners.
Conversion of Outstanding Debt
and Convertible Preferred Stock (see page 75)
Holders of Transgenomic’s outstanding
secured debt have agreed to convert the outstanding principal and accrued interest into shares of New Precipio common stock and
New Precipio preferred stock immediately prior to the effectiveness of the merger. Holders of Series A-1 Convertible Preferred
Stock have agreed to convert their shares into 214,705 shares of New Precipio common stock immediately prior to effectiveness of
the merger pursuant to the conversion provisions set forth in the Transgenomic Certificate of Incorporation.
Regulatory Matters (see page 57)
Neither Transgenomic nor Precipio is
required to make any filings or to obtain any approvals or clearances from any antirust regulatory authorities in the United States
or other countries to consummate the transactions contemplated by the Merger Agreement. Transgenomic must comply with applicable
federal and state securities laws and regulations and Nasdaq rules in connection with the issuance of shares of New Precipio common
stock in the transaction, including the filing with the SEC of this proxy statement.
Nasdaq Listing (see page 57)
Transgenomic has filed an initial listing application with Nasdaq
pursuant to Nasdaq’s “change of control” rules. If such application is accepted, Transgenomic anticipates that
the shares of New Precipio common stock will be listed on Nasdaq following the closing of the merger under the trading symbol “PRPO.”
Federal Securities Law Consequences;
Resale Restrictions (see page 59)
The shares of New Precipio common stock to be issued to unit
holders of Precipio in connection with the merger, to holders of Transgenomic Series A-1 Convertible Preferred Stock upon conversion
of such stock and to holders of Transgenomic outstanding debt upon conversion of such debt as well as the New Precipio preferred
stock to be issued in the merger and in the related private placement or pursuant to the conversion of outstanding debt of Transgenomic
will be “restricted securities.” Those shares of New Precipio common stock and New Precipio preferred stock will not
be registered under the Securities Act upon issuance and will not be freely transferable. Holders of such shares of common stock
and preferred stock may not sell their respective shares unless the shares are registered under the Securities Act or an exemption
is available under the Securities Act. In connection with the merger, as described in “The Merger Agreement – Covenants
– Form S-3 Registration Statement,” Transgenomic has agreed to file promptly after the closing of the merger a resale
“shelf” registration statement to register the shares of New Precipio common stock issued to unit holders of New Precipio
in the merger.
Material U.S. Federal
Income Tax Consequences of the Merger
(see page 59)
Each of Transgenomic and Precipio intend that the merger will
be treated for U.S. federal income tax purposes as a “reorganization” within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (“Code”). Precipio has elected to be treated as a corporation for U.S. federal
income tax purposes. Regardless of whether the merger qualifies as a “reorganization”, no gain or loss will be recognized
by Transgenomic, Precipio or the Transgenomic stockholders as a result of the merger. Additionally, if the merger qualifies as
a “reorganization”, the Precipio unit holders generally will not recognize gain or loss provided that they receive
only New Precipio common stock and/or preferred stock in the merger in exchange for their membership interests in Precipio. Transgenomic
stockholders who are also stockholders of Precipio should consult their tax advisor as to the tax consequences to them of participating
in the merger as a Precipio stockholder.
Anticipated Accounting
Treatment
(see page 59)
The merger will be treated by Transgenomic as a reverse acquisition
under the acquisition method of accounting in accordance with GAAP. For accounting purposes, Precipio is considered to be acquiring
Transgenomic in the merger.
PER SHARE
MARKET PRICE DATA
Transgenomic common stock trades on
Nasdaq under the symbol “TBIO.” The following table shows the high and low closing sale prices for Transgenomic common
stock for the periods indicated, based on Nasdaq composite transactions.
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High
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Low
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Fiscal Year 2015
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First Quarter
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$
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3.90
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$
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1.41
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Second Quarter
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$
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2.63
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$
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1.39
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Third Quarter
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$
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1.72
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$
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0.92
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Fourth Quarter
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$
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1.36
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$
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0.75
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Fiscal Year 2016
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First Quarter
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$
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1.08
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$
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0.54
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Second Quarter
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$
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0.73
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$
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0.50
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Third Quarter
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$
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0.58
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$
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0.28
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Fourth Quarter
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$
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0.37
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$
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0.16
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Fiscal Year 2017
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First Quarter (through February [●], 2017)
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$
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[●]
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$
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[●]
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The closing sale price of Transgenomic’s
common stock as reported on Nasdaq on October 12, 2016, the last trading date before the public announcement of the proposed merger
with Precipio, was $0.25 per share. The closing sale price of Transgenomic common stock as reported on Nasdaq on February [●],
2017, the latest practicable date before mailing of this proxy statement, was $[●] per share. As of the record date, there
were 77 holders of record of Transgenomic common stock and four holders of record of Transgenomic Series A-1 Convertible Preferred
Stock based on information provided by Transgenomic’s transfer agent. The number of stockholders of record does not reflect
the actual number of individual or institutional stockholders that own Transgenomic common stock because most stock is held in
the name of nominees. There are a substantially greater number of beneficial holders of Transgenomic common stock.
Transgenomic has never declared or
paid any cash dividends on its capital stock. It intends to retain future earnings, if any, to finance the operation and expansion
of its business and does not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends
will be made at the discretion of the board of directors or any authorized committee thereof after considering Transgenomic’s
financial condition, results of operations, capital requirements, business prospects and other factors the board of directors or
such committee deems relevant, and will be subject to the restrictions contained in its current or future financing instruments.
Assuming successful application for initial listing with Nasdaq,
following the completion of the merger, Transgenomic anticipates that New Precipio common stock will be listed on Nasdaq and will
trade under New Precipio’s new name, “Precipio, Inc.,” and new trading symbol “PRPO.”
RISK FACTORS
In addition to the other information
included or incorporated by reference in this proxy statement, you should carefully consider the material risks described below
in deciding whether to vote for approval of the proposals presented in this proxy statement. Additional risks and uncertainties
not presently known to Transgenomic or that are not currently believed to be material, if they occur, also may adversely affect
Transgenomic following the merger.
Although Transgenomic expects
that the merger with Precipio will result in benefits to Transgenomic, it may not realize those benefits because of integration
difficulties.
Integrating the operations of the businesses
of Precipio successfully or otherwise realizing any of the anticipated benefits of the merger with Precipio, including anticipated
cost savings and additional revenue opportunities, involves a number of potential challenges. The failure to meet these integration
challenges could seriously harm New Precipio’s results of operations and the market price of New Precipio common stock may
decline as a result.
Realizing the benefits of the merger
will depend in part on the integration of information technology, operations and personnel. These integration activities are complex
and time-consuming and the parties may encounter unexpected difficulties or incur unexpected costs, including:
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the inability of New Precipio to achieve the cost savings and operating synergies anticipated in the merger, including synergies
relating to increased purchasing efficiencies and a reduction in costs associated with the merger, which would prevent Transgenomic
from achieving the positive earnings gains expected as a result of the merger;
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diversion of management attention from ongoing business concerns to integration matters;
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difficulties in consolidating and rationalizing information technology platforms and administrative infrastructures;
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complexities associated with managing the geographic separation of the combined businesses and consolidating multiple physical
locations where management may determine consolidation is desirable;
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difficulties in integrating personnel from different corporate cultures while maintaining focus on providing consistent, high
quality customer service;
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challenges in demonstrating to customers of Transgenomic and to customers of Precipio that the merger will not result in adverse
changes in customer service standards or business focus; and
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possible cash flow interruption or loss of revenue as a result of change of ownership transitional matters.
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The parties may not successfully integrate
the operations of the businesses in a timely manner and may not realize the anticipated net reductions in costs and expenses and
other benefits and synergies of the merger with Precipio to the extent, or in the timeframe, anticipated. In addition to the integration
risks discussed above, New Precipio’s ability to realize these net reductions in costs and expenses and other benefits and
synergies could be adversely impacted by practical or legal constraints on its ability to combine operations.
If the merger is completed and
New Precipio is unable to manage its growth profitably, its business, financial results and stock price could suffer.
New Precipio’s future financial
results will depend in part on its ability to profitably manage its growth on a combined basis. Management will need to maintain
existing customers and attract new customers, recruit, retain and effectively manage employees, as well as expand operations and
integrate customer support and financial control systems. New Precipio expects to incur between $500,000 and $1,200,000 of integration-related
non-recurring expenses during that 12-month period. If the integration-related expenses and capital expenditure requirements are
greater than anticipated, or if New Precipio is unable to manage its growth profitably after the merger, the financial results
and market price of New Precipio common stock may decline.
The merger is subject to the
completion of the related private placement, which is subject to its own certain conditions, and therefore may not be completed.
It is a condition to the completion
of the merger that Transgenomic will have consummated the private placement described in “The Private Placement” beginning
on page 74. The purchase agreement for the shares of New Precipio preferred stock has not yet been entered into and the
private placement is subject to due diligence and legal review. There can be no assurance that all of these conditions will be
satisfied or that Transgenomic will be able to consummate the private placement.
Failure to complete the merger
and private placement could negatively impact the stock price and the future business and financial results of Transgenomic.
Although Transgenomic has agreed to
use reasonable efforts to obtain stockholder approval of the proposal to issue shares of Transgenomic common stock and preferred
stock, there is no assurance that these proposals will be approved. If these proposals are not approved, and as a result the merger
is not completed:
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the ongoing business of Transgenomic may be adversely affected; and
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Transgenomic may be required, under certain circumstances, to pay Precipio a termination fee of up to $256,500.
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Failure by the combined company
upon the completion of the merger to comply with the initial listing standards of Nasdaq may subject its stock to delisting from
Nasdaq.
Transgenomic is not currently in compliance
with the listing requirements for Nasdaq. To maintain listing on Nasdaq, Transgenomic must comply with Nasdaq Marketplace Rules,
which requirements include a minimum bid price of $1.00 per share. On February 23, 2016, Transgenomic was notified by the staff
of Nasdaq that it was not in compliance with the $1.00 minimum bid price requirement, as the common stock had traded below the
$1.00 minimum bid price for 30 consecutive business days. Transgenomic was provided with a 180 calendar day period, which ended
on August 22, 2016, within which to regain compliance with the minimum bid price requirement. On April 20, 2016, Transgenomic was
notified by the staff of Nasdaq that Transgenomic was not in compliance with the minimum stockholders’ equity requirement
of the Nasdaq Marketplace Rules, which requires listed companies to maintain stockholders’ equity of at least $2,500,000.
Transgenomic was provided with a 180 calendar day period, which ended on October 17, 2016, within which to regain compliance with
the minimum stockholders’ equity requirement. On August 24, 2016, Transgenomic received a determination letter from the staff
of Nasdaq stating that it had not regained compliance with the minimum bid price requirement and that it was not eligible for an
additional 180 calendar day extension because it was not in compliance with the minimum stockholders’ equity requirement.
On August 29, 2016, Transgenomic requested a hearing before the Nasdaq Hearings Panel. On October 13, 2016 Transgenomic had a hearing
before the Nasdaq Hearings Panel where it presented a plan to regain compliance with all Nasdaq listing requirements, which included
the completion of the merger and private placement.
At the hearing, Transgenomic asked that the Nasdaq Hearings
Panel continue its listing through December 31, 2016, to allow it to close the previously announced merger, which Transgenomic
expects to result in a new entity that will meet all initial listing standards for Nasdaq; however, Transgenomic noted that it
will need to effectuate a reverse stock split to ensure compliance with the minimum bid price requirement. Based on the plan presented
by Transgenomic at the hearing, the Nasdaq Hearings Panel issued a decision letter granting Transgenomic’s request for continued
listing on Nasdaq until December 31, 2016. As a condition to allowing Transgenomic to continue its listing on Nasdaq, the Nasdaq
Hearings Panel required Transgenomic, on or before November 15, 2016, to update the Nasdaq Hearing Panel on the status of the reverse
stock split, the filing of a definitive proxy statement for the merger and any feedback received from the Nasdaq staff regarding
the prospects of the application of the post-merger entity for listing on Nasdaq. Transgenomic provided such update to the Nasdaq
Hearing Panel on November 1, 2016. On December 9, 2016, Transgenomic provided another update to the Nasdaq Hearing Panel and requested
that the Nasdaq Hearing Panel extend its continued listing on Nasdaq until February 19, 2017. On December 9, 2016, confirmed by
letter dated December 27, 2016, the Nasdaq Hearing Panel granted Transgenomic’s request to extend its listing on Nasdaq,
subject to the following condition:
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On or before February 19, 2017, Transgenomic must have closed the merger and gained approval from the Nasdaq staff for listing
of shares of New Precipio common stock on Nasdaq.
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In addition, in order to fully comply with the terms of the
decision letter, Transgenomic must be able to demonstrate compliance with all requirements for continued listing on Nasdaq. A failure
by New Precipio upon the completion of the merger to comply with the initial listing standards of Nasdaq may subject its stock
to delisting from Nasdaq. Upon completion of the merger, New Precipio will be required to meet the initial listing requirements
to maintain the listing and continued trading of its shares on Nasdaq. These initial listing requirements are more difficult to
achieve than the continued listing requirements under which Transgenomic is now trading. Pursuant to the Merger Agreement, Transgenomic
agreed to use its commercially reasonable efforts to cause the shares of Transgenomic common stock being issued in the merger to
be approved for listing on Nasdaq at or prior to the effective time of the merger. Such listing is a condition precedent to closing
the merger. Based on information currently available to Transgenomic, Transgenomic anticipates that its stock will be unable to
meet the $4.00 (or, to the extent applicable, $3.00) minimum bid price initial listing requirement at the closing of the merger
unless it effects a reverse stock split. On October 31, 2016, the stockholders of Transgenomic authorized the Transgenomic Board
to effect a reverse stock split of the shares of Transgenomic common stock at a ratio of between one-for-ten to one-for-thirty.
In addition, often times a reverse stock split will not result in a trading price for the affected common stock that is proportional
to the ratio of the split. If New Precipio is unable to satisfy Nasdaq listing requirements, Nasdaq may notify Transgenomic, or
New Precipio, that its shares of common stock will be subject to delisting from Nasdaq.
Transgenomic’s continued listing on Nasdaq expires on
February 19, 2017. The merger will not be effective prior to February 19, 2017 and accordingly Transgenomic could be delisted for
a period prior to the merger effective date if Nasdaq does not otherwise agree to extend Transgenomic’s continued listing.
Upon a potential delisting from Nasdaq, if the New Precipio common stock is not then eligible for quotation on another market or
exchange, trading of the shares could be conducted in the over-the-counter market or on an electronic bulletin board established
for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it is likely that there would be significantly
less liquidity in the trading of New Precipio common stock; decreases in institutional and other investor demand for the shares,
coverage by securities analysts, market making activity and information available concerning trading prices and volume; and fewer
broker-dealers willing to execute trades in New Precipio common stock. Also, it may be difficult for New Precipio to raise additional
capital if the New Precipio common stock is not listed on a major exchange. The occurrence of any of these events could result
in a further decline in the market price of New Precipio common stock and could have a material adverse effect on New Precipio.
The announcement and pendency
of the merger may cause disruptions in the business of Transgenomic and Precipio, which could have an adverse effect on their respective
businesses, financial conditions or results of operations and, post-closing, New Precipio’s business, financial condition
or results of operations.
The announcement and pendency of the
transaction could cause disruptions in the business of Transgenomic and Precipio. Specifically:
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current and prospective employees of Transgenomic and Precipio may experience uncertainty about their future roles with
New Precipio, which might adversely affect the ability of Transgenomic and Precipio to retain key personnel and attract new
personnel;
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third parties may seek to terminate and/or renegotiate their relationships with Transgenomic as a result of the transaction;
and
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management’s attention has been focused on the merger, which may divert management’s attention from the core business
of Transgenomic and other opportunities that could have been beneficial to Transgenomic.
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These disruptions could be exacerbated
by a delay in the completion of the merger or termination of the Merger Agreement and could have an adverse effect on the business,
financial condition or results of operations of Transgenomic and Precipio prior to the completion of the merger and on New Precipio
if the merger is completed.
The merger with Precipio is subject
to the receipt of consents and approvals that may not be received.
The Merger Agreement provides that
the parties cannot complete the merger unless they receive various consents and approvals from Nasdaq and other third parties.
While Transgenomic believes that it will receive the requisite approvals, there can be no assurance that such approvals will be
received. See the sections entitled “The Transaction — Third Party Approvals Required for the Merger and the Private
Placement” on page 57 and “The Merger Agreement — Conditions to Closing the Transaction” beginning
on page 70 for a more detailed discussion.
Subject to certain limitations,
certain stockholders may sell New Precipio common stock beginning six months following the closing of the merger, which could cause
New Precipio’s stock price to decline.
The shares of New Precipio common stock to be issued to unit
holders of Precipio in connection with the merger, to holders of Transgenomic Series A-1 Convertible Preferred Stock upon conversion
of such stock and to holders of Transgenomic outstanding debt upon conversion of such debt as well as the New Precipio preferred
stock to be issued in the merger and in the related private placement or pursuant to the conversion of outstanding debt of Transgenomic
will be “restricted securities.” Those shares of New Precipio common stock and New Precipio preferred stock will not
be registered under the Securities Act upon issuance and will not be freely transferable. Holders of such shares of common stock
and preferred stock may not sell their respective shares unless the shares are registered under the Securities Act or an exemption
is available under the Securities Act. In connection with the merger, as described in “The Merger Agreement – Covenants
– Form S-3 Registration Statement,” Transgenomic has agreed to file promptly after the closing of the merger a resale
“shelf” registration statement to register the shares of New Precipio common stock issued to unit holders of New Precipio
in the merger.
In addition, at the effective time
of the merger, New Precipio will enter into the investor rights agreement with certain holders of New Precipio common stock, which
will give such parties registration rights beginning six months after the closing of the merger. Such parties also will have “piggyback”
rights to sell their shares if New Precipio proposes to register its own shares for issuance. The sale of a substantial number
of New Precipio shares by such parties or other stockholders within a short period of time could cause the stock price to decline,
make it more difficult to raise funds through future offerings of New Precipio common stock or acquire other businesses using New
Precipio common stock as consideration.
You will experience a significant
reduction in percentage ownership and voting power with respect to the Transgenomic common stock you currently own as a result
of the merger with Precipio and the private placement and the exercise or exchange of the Warrants.
In connection with the merger with
Precipio, New Precipio will issue approximately 160.6 million shares of New Precipio common stock, as well as approximately 24.1
million shares of New Precipio preferred stock, pursuant to the Merger Agreement, approximately 24.1 million shares of New Precipio
preferred stock and approximately 9.8 million shares of New Precipio common stock in a related private placement in exchange for
certain indebtedness of Transgenomic, approximately 56.2 million shares of New Precipio preferred stock to investors in a related
private placement and approximately 104.4 million shares of New Precipio common stock issuable upon conversion of the New Precipio
preferred stock. In addition, the exercise or exchange of the Warrants will result in the issuance of 3.0 million shares of Transgenomic
common stock that would not have otherwise been issuable without stockholder approval. Therefore, following the completion of the
merger and the private placement and the exercise or exchange of the Warrants, you will experience a substantial reduction in your
respective percentage ownership interests and effective voting power relative to your respective percentage ownership interests
in Transgenomic common stock and effective voting power prior to the merger. This reduction in ownership and voting power will
decrease your ability to influence the election of directors and other matters. In addition, the issuance of shares of Transgenomic
common stock could have an adverse effect on the market price for Transgenomic securities or on its ability to obtain future public
financing. If and to the extent the shares are issued, you may experience dilution in your earnings.
If the amount of Transgenomic’s
outstanding debt increases relative to the debt of Precipio prior to the completion of the merger with Precipio, the exchange ratio
will provide for Precipio unit holders to receive a higher percentage ownership of New Precipio.
The number of shares of New Precipio
common stock to be issued in connection with the merger to Precipio unit holders will be adjusted based on the relative amount
of debt outstanding of the two entities at the effective time of the merger. As a result, if the level of Transgenomic debt increases
relative to the amount of Precipio debt, the Precipio unit holders will receive a higher percentage ownership of New Precipio (up
to 80% before the private placement). The actual percentage ownership of New Precipio will not be known until the effective time
of the merger.
While the merger is pending, Transgenomic
will
be subject to contractual limitations that could adversely affect its business.
The Merger Agreement restricts Transgenomic from taking certain
specified actions while the merger is pending without Precipio’s consent, including incurring indebtedness, making capital
expenditures in excess of $5,000, acquiring any assets or selling, leasing or otherwise transferring any assets, and increasing
in any material manner the compensation, bonuses or benefits of any directors, officers, employees, former employees or consultants,
subject to certain exceptions in the ordinary course of business. These restrictions may prevent Transgenomic from pursuing otherwise
attractive business opportunities that may arise and making other changes to its business prior to the closing of the merger or
termination of the Merger Agreement.
The Merger Agreement restricts Transgenomic’s ability
to pursue certain alternatives to the merger and requires Transgenomic to pay a reverse termination fee to Precipio if it does.
The Merger Agreement contains non-solicitation provisions that,
subject to limited exceptions, restrict Transgenomic’s ability to initiate, solicit or encourage or take any action to discuss
or accept a competing third-party proposal. Although the Transgenomic Board is permitted to change its recommendation that stockholders
approve the matters relating to the merger if it determines in good faith that this action is reasonably likely to be required
to comply with its fiduciary duties and certain other conditions, doing so in certain situations would require Transgenomic to
pay a termination fee to Precipio of $256,500. Additionally, these non-solicitation provisions could discourage a potential acquiror
that might have an interest in acquiring all or a significant part of Transgenomic from considering or proposing that acquisition,
or might result in a potential acquiror proposing to pay a lower per share price to acquire Transgenomic than it might otherwise
have proposed to pay because of the added expense of the termination fee that may become payable to Precipio in certain circumstances.
Transgenomic has incurred and will continue to incur substantial
expenses in connection with the merger.
Transgenomic has incurred and will incur additional substantial
expenses in connection with the merger, whether or not the merger is completed. These costs include fees for financial advisors,
attorneys and accountants, filing fees and financial printing costs. If the merger is not consummated, Transgenomic will be responsible
for its own expenses, which are not reimbursable in the event the merger does not occur. Upon completion of the merger, the amount
of transaction costs, including the amount of Precipio’s transaction costs, will, in effect, reduce the cash reserves available
for the combined company to pursue its plan of business.
The merger and private placement will result in changes
to New Precipio’s board of directors that may affect the combined company’s business strategy and operations.
If the merger is completed, the New Precipio board of directors
will increase its size to seven at the effective time of the merger, two of whom will be current directors of Transgenomic, three
of whom will be nominated by Precipio and two of whom will be nominated by the holders of the New Precipio preferred stock issued
in the private placement. This newly composed board of directors of the combined company may effect business strategies and operating
decisions with respect to the combined company that may have an adverse impact on the combined company’s business, financial
condition and results of operations following the completion of the merger.
The opinion received by the Transgenomic Board from Craig-Hallum
has not been, and is not expected to be, updated to reflect any changes in circumstances that may have occurred since the date
of the opinion.
On October 12, 2016, Craig-Hallum delivered to the Transgenomic
Board its oral opinion, subsequently confirmed by delivery of a written opinion as to the fairness, from a financial point of view,
of the consideration to be paid in the merger. The opinion does not speak as of the time the merger will be completed or any date
other than the date of such opinion. The opinion does not reflect changes that may occur or may have occurred after the date of
the opinion, including changes to the operations and prospects of Transgenomic or Precipio, changes in general market and economic
conditions or regulatory or other factors. Any such changes may materially alter or affect the relative values of Transgenomic
and Precipio. Craig-Hallum does not have any obligation to update, revise or reaffirm its opinion to reflect subsequent developments
and has not done so. See the section entitled “The Transaction — Opinion of Craig-Hallum Capital Group LLC” and
Annex B to this proxy statement.
If the merger is completed, the future success of the
combined company depends substantially on its ability to retain key members of its management team.
If the merger is completed, the combined company will be highly
dependent on principal members of its management team, which will include Ilan Danieli, Carl Iberger, Zaki Sabet, Ayman Mohamed
and Steve Miller, as described in more detail in the section of this proxy statement entitled “The Transaction — Board
of Directors and Management of New Precipio Following the Transaction.” The inability to recruit or loss of the services
of any executive or key employee may impede the progress of the combined company’s objectives.
The pro forma financial statements are presented for illustrative
purposes only and may not be an indication of the combined company’s financial condition or results of operations following
the completion of the merger.
The pro forma financial statements contained in this proxy statement
are presented for illustrative purposes only and may not be an indication of the combined company’s financial condition or
results of operations following the merger for several reasons. The pro forma financial statements have been derived from the historical
financial statements of Transgenomic and Precipio and adjustments and assumptions have been made regarding the combined company
after giving effect to the merger. The information upon which these adjustments and assumptions have been made is preliminary,
and these kinds of adjustments and assumptions are difficult to make with accuracy. Moreover, the pro forma financial statements
do not reflect all costs that are expected to be incurred by the combined company in connection with the merger. For example, the
impact of any incremental costs incurred in integrating the two companies is not reflected in the pro forma financial statements.
As a result, the actual financial condition of the combined company following the merger may not be consistent with, or evident
from, these pro forma financial statements. The assumptions used in preparing the pro forma financial statements may not prove
to be accurate, and other factors may affect the combined company’s financial condition following the transaction. See “Unaudited
Pro Forma Combined Financial Information of Transgenomic, Inc.” for more information.
Precipio may have liabilities that are not known, probable
or estimable at this time.
As a result of the merger, Precipio will become a wholly owned
subsidiary of Transgenomic and Transgenomic will effectively assume all of Precipio’s liabilities, whether or not asserted.
There could be unasserted claims or assessments that Transgenomic failed or was unable to discover or identify in the course of
performing due diligence investigations of Precipio. In addition, there may be liabilities that are neither probable nor estimable
at this time which may become probable and estimable in the future. Any such liabilities, individually or in the aggregate, could
have a material adverse effect on Transgenomic’s business. Transgenomic may learn additional information about Precipio that
adversely affects Transgenomic, such as unknown, unasserted or contingent liabilities and issues relating to compliance with applicable
laws.
Transgenomic may not be able to complete the merger and
may elect to pursue another strategic transaction similar to the merger or a financing, which may not occur on commercially reasonably
terms or at all.
Transgenomic cannot assure you that it will complete the merger
in a timely manner or at all. The Merger Agreement is subject to many closing conditions and termination rights. If Transgenomic
does not complete the merger, the Transgenomic Board may elect to attempt to complete another strategic transaction similar to
the merger or a financing. Such attempts will likely be costly and time consuming, and Transgenomic cannot make any assurances
that a future strategic transaction or financing will occur on commercially reasonable terms or at all.
CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This proxy statement contains “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate
to expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters
that are not historical facts or that necessarily depend upon future events. In some cases, you can identify forward-looking statements
by terms such as “may,” “will,” “should,” “could,” “would,” “expect,”
“plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,”
“potential,” and similar expressions. Without limiting the generality of the preceding sentence, statements contained
in the sections “Summary,” “The Transaction — Transgenomic’s Reasons for the Transaction,”
and “The Transaction — Opinion of Craig-Hallum Capital Group LLC” include forward-looking statements. Forward-looking
statements contained in this proxy statement include projections of earnings, revenues, synergies, accretion or other financial
items; any statements of the plans, strategies and objectives of management for future operations, including the execution of integration
plans and the future management of New Precipio; approvals relating to, and the closing of, the merger with Precipio and the private
placement; any statements regarding future economic conditions or performance; and statements of belief and any statement of assumptions
underlying any of the foregoing.
The forward-looking statements contained
in this proxy statement reflect Transgenomic’s current views about future events, are based on assumptions, and are subject
to known and unknown risks and uncertainties. Many important factors could cause actual results or achievements to differ materially
from any future results or achievements expressed in or implied by Transgenomic’s forward-looking statements, including the
factors listed below. Many of the factors that will determine future events or achievements are beyond Transgenomic’s ability
to control or predict. The following factors include, among others: the ability of the parties to satisfy the conditions precedent
and consummate the proposed merger, the timing of consummation of the proposed merger, the ability of the parties to secure any
required stockholder or other approvals in a timely manner or on the terms desired or anticipated, the ability to achieve anticipated
benefits, risks related to disruption of management’s attention due to the pending merger, operating results and businesses
generally, the outcome of any legal proceedings related to the proposed merger and the general risks associated with the respective
businesses of Transgenomic and Precipio, including the general volatility of the capital markets, terms and deployment of capital,
volatility of the Transgenomic share price, changes in the biotechnology industry, interest rates or the general economy, underperformance
of Transgenomic’s and Precipio’s assets and investments and decreased ability to raise funds, the degree and nature
of Transgenomic’s and Precipio’s competition and other risks as described in Transgenomic’s reports filed with
the SEC.
The forward-looking statements contained
in this proxy statement reflect Transgenomic’s views and assumptions only as of the date of this proxy statement. You should
not place undue reliance on forward-looking statements. Except as required by law, Transgenomic assumes no responsibility for updating
any forward-looking statements.
Transgenomic’s actual results,
performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements.
Factors that could cause or contribute to such differences are discussed in the section entitled “Risk Factors” beginning
on page 17 and the section entitled “Risk Factors” included in Transgenomic’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2015, and risk factors detailed in Transgenomic’s most recent quarterly reports on
Form 10-Q. Transgenomic qualifies all of its forward-looking statements by these cautionary statements. In addition, with respect
to all of our forward-looking statements, Transgenomic claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
THE SPECIAL
MEETING
Date, Time and Place
A special meeting of Transgenomic stockholders
will be held at 10:00 a.m. local time, on March [●], 2017 at Troutman Sanders LLP’s offices located at 1001 Haxall
Point, Richmond, Virginia 23219.
Purpose of the Special Meeting
The purpose of the special meeting
is to consider and vote on the following proposals:
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Proposal No. 1:
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To approve the issuance of 160,585,422 shares of New Precipio common stock, as well as 24,087,813 shares of New Precipio preferred stock to be issued, pursuant to the Merger Agreement, the issuance of 24,087,813 shares of New Precipio preferred stock and approximately 9.8 million shares of New Precipio common stock to be issued in a related private placement in exchange for certain indebtedness of Transgenomic, the issuance of 56,204,898 shares of New Precipio preferred stock to be issued to investors in a related private placement, the issuance of 104,380,525 shares of New Precipio common stock issuable upon conversion of the New Precipio preferred stock and the resulting “change of control” of Transgenomic. The approval of the issuance of New Precipio common stock and New Precipio preferred stock and the resulting “change of control” of Transgenomic is required to complete the merger with Precipio and the private placement.
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Proposal No. 2:
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To approve the issuance of 3.0 million shares of Transgenomic common stock upon exercise or exchange of the Warrants.
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Proposal No. 3:
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To approve the Transgenomic, Inc. 2017 Stock Option and Incentive Plan.
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Proposal No. 4:
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To approve, on a non-binding, advisory basis, payment by Transgenomic of certain compensation to Transgenomic’s named executive officers that is based on or otherwise relates to the merger.
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Proposal No. 5:
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To approve a proposal to adjourn the special meeting of Transgenomic stockholders, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting of Transgenomic stockholders to approve the other proposals.
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The approval of Proposal No.
1 for the issuance of Transgenomic common stock is a condition to the completion of the merger with Precipio. Accordingly, if Transgenomic
is to complete the merger with Precipio, the stockholders must approve Proposal No. 1.
At the special meeting, Transgenomic
stockholders also will be asked to consider and vote on any other matter that may properly come before the special meeting or any
adjournment of the special meeting. At this time, the Transgenomic Board is unaware of any matters, other than those set forth
above, that may properly come before the special meeting.
Record Date; Shares Outstanding
and Entitled to Vote
Transgenomic has fixed the close of
business on January 17, 2017 as the record date for the determination of holders of Transgenomic common stock and Series A-1 Convertible
Preferred Stock entitled to notice of and to vote at the special meeting and any adjournment of the special meeting. No other shares
of Transgenomic capital stock are entitled to notice of and to vote at the special meeting. At the close of business on the record
date, Transgenomic had outstanding and entitled to vote 26,446,927 shares of Transgenomic common stock and 214,705 shares of Series
A-1 Convertible Preferred Stock.
How to Vote Your Shares
If you hold your shares in your
own name,
you may submit a proxy by telephone, via the Internet or by mail or vote by attending the special meeting and voting
in person.
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Submitting a Proxy by Telephone:
You can submit
a proxy for your shares by telephone until 11:59 p.m.
Eastern Time on March [●], 2017 by calling the toll-free telephone
number on the enclosed proxy card.
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Submitting a Proxy via the Internet:
You can submit a proxy via the Internet until 11:59 p.m. Eastern Time on March
[●], 2017 by accessing the web site listed on your proxy card and following the instructions you will find on the web site.
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Submitting a Proxy by Mail:
If you choose to submit a proxy by mail, simply mark the enclosed proxy card, date and sign
it, and return it in the postage paid envelope provided or return it to Vote Processing, c/o Broadridge, 51 Mercedes Way, Edgewood
NY 11717.
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By casting your vote in any of the three ways listed above, you are authorizing the individuals listed on the proxy to vote
your shares in accordance with your instructions.
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If your shares are held in the name
of a bank, broker or other nominee,
you will receive instructions from the holder of record that you must follow for your shares
to be voted. Please follow their instructions carefully.
Also, please note that if the holder of record of your shares is
a broker, bank or other nominee and you wish to vote in person at the special meeting, you must request a legal proxy from your
bank, broker or other nominee that holds your shares and present that proxy and proof of identification at the special meeting.
How to Change Your Vote
You will have the power to revoke your
proxy at any time before it is exercised by:
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Delivering a written notice of revocation to the Secretary of Transgenomic, dated later than the proxy, before the vote is
taken at the special meeting;
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Delivering a duly executed proxy to the Secretary of Transgenomic bearing a later date, before the vote is taken at the special
meeting;
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Submitting a proxy on a later date by telephone or via the Internet (only your last telephone or Internet proxy will be counted),
before 11:59 p.m. Eastern Time on March [●], 2017; or
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Attending the special meeting, withdrawing your proxy, and voting in person. Your attendance at the special meeting, in and
of itself, will not revoke the proxy.
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Any written notice of revocation, or
later dated proxy, should be delivered to:
Transgenomic,
Inc.
12325 Emmet Street
Omaha, Nebraska 68164
Attention: Corporate Secretary
Alternatively, you may hand deliver
a written revocation notice, or a later dated proxy, to the Secretary at the special meeting before voting begins.
If your shares of Transgenomic capital
stock are held by a bank, broker or other nominee, you must follow the instructions provided by the bank, broker or other nominee
if you wish to change your vote.
Proxies; Counting Your Vote
If you provide specific voting instructions,
your shares will be voted at the special meeting in accordance with your instructions. If you hold shares in your name and sign
and return a proxy card or submit a proxy by telephone or via the Internet without giving specific voting instructions, your shares
will be voted as follows:
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“FOR”
the issuance of 160,585,422 shares of New Precipio common stock, as well as 24,087,813 shares of New
Precipio preferred stock to be issued, pursuant to the Merger Agreement, the issuance of 24,087,813 shares of New Precipio preferred
stock and approximately 9.8 million shares of New Precipio common stock to be issued in a related private placement in exchange
for certain indebtedness of Transgenomic, the issuance of 56,204,898 shares of New Precipio preferred stock to be issued to investors
in a related private placement, the issuance of 104,380,525 shares of New Precipio common stock issuable upon conversion of the
New Precipio preferred stock and the approval of the resulting “change of control” of Transgenomic. The approval of
the issuance of New Precipio common stock and New Precipio preferred stock and the resulting “change of control” of
Transgenomic is required to complete the merger with Precipio and the private placement;
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“FOR”
the issuance of 3.0 million shares of Transgenomic common stock upon exercise or exchange of the Warrants;
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“FOR”
the approval of the 2017 Stock Option and Incentive Plan;
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“FOR”
the approval, on a non-binding, advisory basis, of payment by Transgenomic of certain compensation
to Transgenomic’s named executive officers based on or otherwise relating to the merger; and
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“FOR”
the approval of an adjournment of the special meeting of Transgenomic stockholders, if necessary,
to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting of Transgenomic
stockholders to approve the other proposals.
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At this time, Transgenomic is unaware
of any matters, other than those matters set forth above, that may properly come before the special meeting. If any other matters
properly come before the special meeting, the persons named in the enclosed proxy, or their duly constituted substitutes acting
at the special meeting or any adjournment of the special meeting, will be deemed authorized to vote or otherwise act on such matters
in accordance with their judgment.
The persons named in the enclosed proxy,
or their duly constituted substitutes acting at the special meeting or any adjournment of the special meeting, may propose and
vote for one or more adjournments of the special meeting. Proxies solicited may be voted only at the special meeting and any adjournment
of the special meeting and will not be used for any other Transgenomic meeting of stockholders.
Votes cast by proxy or in person at the special meeting will
be tabulated by the inspector of elections of the special meeting. The inspector of elections also will determine whether or not
a quorum is present.
Abstentions and Broker “Non-Votes”
An “abstention” occurs
when a stockholder sends in a proxy with explicit instructions to decline to vote regarding a particular matter. Under rules that
govern banks, brokers and others who have record ownership of company stock held in brokerage accounts for their clients who beneficially
own the shares, these banks, brokers and other such holders who do not receive voting instructions from their clients have the
discretion to vote uninstructed shares on certain matters (“discretionary matters”) but do not have discretion to vote
uninstructed shares as to certain other matters (“non-discretionary matters”). A broker may return a proxy card on
behalf of a beneficial owner from whom the broker has not received voting instructions that casts a vote with regard to discretionary
matters but expressly states that the broker is not voting as to non-discretionary matters. The broker’s inability to vote
with respect to the non-discretionary matters with respect to which the broker has not received voting instructions from the beneficial
owner is referred to as a “broker non-vote.” Under rules applicable to broker-dealers, all of the proposals to be considered
at the special meeting are considered non-discretionary matters.
Quorum and Required Votes
In deciding all matters that come before
the special meeting, each holder of common stock as of the record date is entitled to one vote per share of common stock, and each
holder of Series A-1 Convertible Preferred Stock as of the record date is entitled to 0.93 votes per share of Series A-1 Convertible
Preferred Stock. As of January 17, 2017, the record date for the special meeting, there were 26,446,927 shares of Transgenomic
common stock outstanding and 214,705 shares of Series A-1 Convertible Preferred Stock outstanding.
Votes cast by proxy or in person at
the special meeting will be tabulated by the inspector of elections of the special meeting. The inspector of elections also will
determine whether or not a quorum is present. The presence, in person or by proxy, of the holders of a majority of the shares of
Transgenomic common stock and Series A-1 Convertible Preferred Stock, voting together as a single class (with each one share of
Series A-1 Convertible Preferred Stock being entitled to 0.93 votes), issued and outstanding as of the record date for the special
meeting is necessary to constitute a quorum at the special meeting. Shares of Transgenomic common stock and Series A-1 Convertible
Preferred Stock represented at the special meeting in person or by proxy but not voted will be counted for purposes of determining
a quorum. Accordingly, abstentions and broker “non-votes” (shares as to which a broker or nominee has indicated that
it does not have discretionary authority to vote on a particular matter) will be treated as shares that are present and entitled
to vote at the special meeting for purposes of determining the presence of a quorum.
Proposal No. 1:
Proposal No.
1 to approve the issuance of New Precipio common stock and New Precipio preferred stock in accordance with the terms of the Merger
Agreement and the private placement, the issuance of shares of New Precipio common stock issuable upon conversion of New Precipio
preferred stock issued in the merger and related private placement and the resulting “change of control” of Transgenomic
requires the affirmative vote of the holders of a majority of the shares of Transgenomic common stock and Series A-1 Convertible
Preferred Stock, voting together as a single class (with each one share of Series A-1 Convertible Preferred Stock being entitled
to 0.93 votes), present in person or represented by proxy at the special meeting at which a quorum is present. Abstentions with
respect to this proposal will have the same effect as a vote against the proposal. Broker non-votes will have no effect on the
proposal.
The approval of Proposal No. 1 is a condition to the completion of the merger with Precipio and thus a vote against
this proposal effectively will be a vote against the merger with Precipio and the private placement.
Proposal No. 2:
Proposal No.
2 to approve the issuance of Transgenomic common stock upon exercise or exchange of the Warrants requires the affirmative vote
of the holders of a majority of the shares of Transgenomic common stock and Series A-1 Convertible Preferred Stock, voting together
as a single class (with each one share of Series A-1 Convertible Preferred Stock being entitled to 0.93 votes), present in person
or represented by proxy at the special meeting at which a quorum is present. Abstentions with respect to this proposal will have
the same effect as a vote against the proposal. Broker non-votes will have no effect on the proposal.
The approval of Proposal
No. 2 is not a condition to the completion of the merger with Precipio.
Proposal No. 3:
Proposal No.
3 to approve the 2017 Stock Option and Incentive Plan requires the affirmative vote of the holders of a majority of the shares
of Transgenomic common stock and Series A-1 Convertible Preferred Stock, voting together as a single class (with each one share
of Series A-1 Convertible Preferred Stock being entitled to 0.93 votes), present in person or represented by proxy at the special
meeting at which a quorum is present. Abstentions with respect to this proposal will have the same effect as a vote against the
proposal. Broker non-votes will have no effect on the proposal.
The approval of Proposal No. 3 is not a condition to the completion
of the merger with Precipio.
Proposal No. 4:
Proposal No.
4 to approve, on a non-binding, advisory basis, payment by Transgenomic of certain compensation to Transgenomic’s named executive
officers that is based on or otherwise relates to the merger requires the affirmative vote of the holders of a majority of the
shares of Transgenomic common stock and Series A-1 Convertible Preferred Stock, voting together as a single class (with each one
share of Series A-1 Convertible Preferred Stock being entitled to 0.93 votes), present in person or represented by proxy at the
special meeting at which a quorum is present. Abstentions with respect to this proposal will have the same effect as a vote against
the proposal. Broker non-votes will have no effect on the proposal.
The approval of Proposal No. 4 is not a condition to the
completion of the merger with Precipio.
Proposal No. 5:
Proposal No.
5 to adjourn the special meeting, if necessary, to enable Transgenomic to solicit additional proxies in favor of the other proposals,
requires the affirmative vote of the holders of a majority of the shares of Transgenomic common stock and Series A-1 Convertible
Preferred Stock, voting together as a single class (with each one share of Series A-1 Convertible Preferred Stock being entitled
to 0.93 votes), present in person or represented by proxy at the special meeting, whether or not a quorum is present. Abstentions
with respect to this proposal will have the same effect as a vote against the proposal. Broker non-votes will have no effect on
the proposal.
The approval of Proposal No. 5 is not a condition to the completion of the merger with Precipio.
The directors and executive officers
of Transgenomic collectively owned approximately 419,837 shares of Transgenomic common stock as of January 17, 2017 (inclusive
of shares subject to stock options exercisable within 60 days following that date) and no shares of Series A-1 Convertible Preferred
Stock. Such shares represented approximately 1.6% of Transgenomic’s outstanding voting interests (including shares subject
to stock options exercisable within 60 days held by the directors and officers) as of such date. Each member of the Transgenomic
Board has advised Transgenomic that such member intends to vote all of the shares of Transgenomic capital stock held, directly
or indirectly, by such director in favor of each of the above proposals. Certain of Transgenomic’s stockholders (including
all of Transgenomic’s executive officers and directors) have also entered into a Voting Agreement with Transgenomic and Precipio,
pursuant to which such holders have agreed to, among other things, (i) authorize and approve the Merger Agreement and the
transactions contemplated thereby and (ii) vote against any Acquisition Proposal (as defined in the Merger Agreement). Collectively,
the voting interests held by these holders represent approximately 31.84% of Transgenomic’s voting interests as of October
12, 2016.
As of the close of business on the
record date for the special meeting, Precipio and its affiliates did not beneficially own any shares of Transgenomic capital stock
(other than shares of Transgenomic common stock that Precipio may be deemed to beneficially own in connection with the Transgenomic
Voting Agreement) and, to the knowledge of Precipio, none of its directors or executive officers beneficially owned any shares
of Transgenomic capital stock.
Solicitation of Proxies
Transgenomic will bear the cost of soliciting proxies for the
special meeting. To the extent necessary, proxies may be solicited by Transgenomic’s directors, officers and employees, but
these persons will not receive any additional compensation for such solicitation. Transgenomic will reimburse brokerage firms,
banks and other custodians, nominees and fiduciaries for reasonable expenses incurred by them in sending proxy materials to the
beneficial owners of Transgenomic’s capital stock. In addition to solicitation by mail, Transgenomic will supply banks, brokers,
dealers and other custodian nominees and fiduciaries with proxy materials to enable them to send a copy of such materials by mail
to each beneficial owner of Transgenomic capital stock that they hold of record and will, upon request, reimburse them for their
reasonable expenses in so doing. Transgenomic has retained Innisfree M&A Incorporated to assist in the solicitation of proxies
for the special meeting and expects to pay them approximately $10,000 in fees for such services.
Recommendation of the Transgenomic
Board
The Transgenomic Board has determined
that the merger with Precipio and the issuance of New Precipio common stock in the merger and the issuance of New Precipio preferred
stock issued in the merger and the related private placement, the issuance of New Precipio common stock upon conversion of the
New Precipio preferred stock and the resulting “change of control” of Transgenomic, the issuance of Transgenomic common
stock upon exercise or exchange of the Warrants, the 2017 Stock Option and Incentive Plan and the merger-related compensation are
fair to and in the best interests of Transgenomic and its stockholders and approved the issuance of New Precipio common stock and
New Precipio preferred stock in accordance with the Merger Agreement and the related private placement and the resulting “change
of control” of Transgenomic, the issuance of Transgenomic common stock upon exercise or exchange of the Warrants and the
2017 Stock Option and Incentive Plan. See the sections entitled “The Transaction — Transgenomic’s Reasons for
the Transaction” beginning on page 35, “Proposal No. 2 – Approval of the Issuance of Transgenomic, Inc.
Common Stock upon Exercise or Exchange of the Warrants” beginning on page 81, “Proposal No. 3 – Approval
of 2017 Stock Option and Incentive Plan” beginning on page 84 and “Proposal No. 4 – Approval of Advisory
Compensation Proposal” beginning on page 97 for a more detailed discussion.
The Transgenomic Board recommends that
you vote
“FOR”
approval of the issuance of New Precipio common stock and New Precipio preferred stock in accordance
with the Merger Agreement and the related private placement, the issuance of New Precipio common stock upon conversion of the New
Precipio preferred stock and the resulting “change of control” of Transgenomic,
“FOR”
approval of
the issuance of Transgenomic common stock upon exercise or exchange of the Warrants,
“FOR”
approval of the 2017
Stock Option and Incentive Plan,
“FOR”
approval of certain merger-related compensation and
“FOR”
approval of an adjournment of the special meeting, if necessary, to enable Transgenomic to solicit additional proxies in favor
of the other proposals.
THE TRANSACTION
Background of the Transaction
The Transgenomic Board from time to time reviews with senior
management Transgenomic’s strategic direction and the opportunities available for growth in the context of developments in
the diagnostics industry. These reviews include periodic internal discussions of projected financial performance and potential
acquisitions, dispositions and business combinations with third parties that would add stockholder value and further Transgenomic’s
strategic objectives, as well as the potential benefits and risks of those potential transactions.
On July 10, 2014, Transgenomic executed an engagement letter
with MTS Health Partners, L.P., a healthcare investment banking firm (“MTS”), to review strategic opportunities for
Transgenomic’s Genetic Assays and Platforms (“GAP”) business unit and prepare a confidential information memorandum
and due diligence data room in connection with a potential sale of the GAP business. During the next several months, MTS contacted
potential buyers of the GAP business.
On January 15 and 22, 2015, Paul Kinnon, President and Chief
Executive Officer of Transgenomic, apprised the Transgenomic Board on the status of the potential sale of the GAP business to StoneCalibre,
LLC, a private investment firm (“StoneCalibre”).
On March 23, 2015, the Transgenomic Board met and, among other
matters, discussed strategic alternatives for the company. The Transgenomic Board considered separating the company into three
separate parts—the GAP business, the Patient Testing (“PT”) business unit and the Multiplexed ICE-COLD PCR (“ICE-COLD”)
business unit. The Transgenomic Board instructed senior management to engage MTS to explore various strategic alternatives for
the GAP business.
On April 27, 2015, the Transgenomic Board met and, among other
matters, discussed management’s proposed engagement of the Maxim Group, an investment banking firm, to act as a financial
advisor to the company in connection with a possible sale of the company or certain business segments.
On May 11, 2015, Transgenomic executed an engagement letter
with the Maxim Group to review strategic opportunities. On May 12, 2015, the Transgenomic Board met and, among other matters, discussed
potential strategic opportunities for the company on a standalone basis and on a business unit basis. On May 15, 2015, Transgenomic
executed an additional engagement letter with MTS to review strategic opportunities.
At meetings held on May 15, 2015, June 4, 2015, June 18, 2015
and July 2, 2015, the Transgenomic Board discussed, among other matters, potential strategic transaction options including the
potential sale of the GAP business and the possibility of selling the PT business. During this time, members of senior management
of Transgenomic, MTS and Maxim Group met with or sent materials to over 50 potential buyers of the GAP and PT businesses.
On July 13, 2015, Transgenomic executed a letter of intent with
StoneCalibre to purchase part of the GAP business.
On July 16, 2015, the Transgenomic Board met and, among other
matters, discussed the sale of the GAP business to StoneCalibre and the possibility of selling the remaining part of the GAP business
to ADSTEC Corporation, a Japanese instruments manufacturer (“ADSTEC”). Mr. Kinnon also informed the Transgenomic Board
that the company had made eight presentations to potential buyers regarding the sale of the PT business.
On July 30, 2015, Transgenomic received a letter of intent with
respect to the sale of the PT business from a strategic party.
At meetings held on July 30, 2015, August 11, 2015, August 20,
2015 and September 3, 2015, Mr. Kinnon updated the Transgenomic Board as to the status of the potential sale of the GAP business
as well as efforts to find a potential buyer for the PT business. Also on September 3, 2015, the Transgenomic Board approved the
sale of part of the GAP business to StoneCalibre.
On August 12, 2015, Transgenomic received a letter of intent
with respect to the sale of the PT business to another strategic buyer.
On September 10, 2015, Transgenomic completed the sale of part
of the GAP business to StoneCalibre.
On September 15, 2015, the Transgenomic Board met and, among
other matters, discussed the proposed terms of the sale of the remaining GAP business to ADSTEC as well as a potential buyer for
the PT business.
On September 25, 2015, Transgenomic executed a letter of intent
to sell the remaining portion of the GAP business to ADSTEC.
At meetings held on September 29, 2015, October 8, 2015 and
October 21, 2015, Mr. Kinnon updated the Transgenomic Board regarding the status of the sale of the remaining GAP business to ADSTEC
as well as efforts to find a potential buyer for the PT business.
At meetings held on November 10, 2015, November 19, 2015 and
November 30, 2015, the Transgenomic Board discussed, among other matters, the company’s corporate mission and strategy and
various strategic opportunities and alternatives for the company. The Transgenomic Board authorized senior management to engage
Craig-Hallum to explore strategic alternatives for the company.
On December 1, 2015, Transgenomic executed an engagement letter
with Craig-Hallum to conduct a strategic review of Transgenomic’s remaining businesses. Also on December 1, 2015, Transgenomic
completed the sale of the remaining portion of the GAP business to ADSTEC.
On December 8, 2015, Transgenomic received an updated letter
of intent with respect to the sale of the PT business from the original strategic party.
At a meeting of the Transgenomic Board on December 8, 2015,
Robert M. Patzig, Chairman of the Transgenomic Board, and Mr. Kinnon updated the Transgenomic Board on detailed discussions with
Craig-Hallum regarding potential financings. On December 9, 2015, Mr. Patzig informed the Transgenomic Board that Third Security,
LLC (“Third Security”) and its affiliates had agreed to provide bridge financing and, on December 10, 2015, that Crede
Capital Group, LLC was willing to invest additional money in Transgenomic.
At meetings held on December 11, 2015, December 14, 2015 and
December 17, 2015 the Transgenomic Board discussed, among other matters, the proposed private financing.
On December 17, 2015, a representative of BV Advisory Partners,
a strategic advisory and merchant banking firm (“BV Partners”), introduced senior management of Transgenomic to senior
management of Precipio.
On January 5, 2016, Transgenomic received an updated letter
of intent with respect to the sale of the PT business from the original strategic buyer.
On January 7, 2016, the Transgenomic Board met and approved
the terms of a private placement and recapitalization of its existing preferred stock. This financing closed on January 11, 2016
and provided the company with approximately $2.2 million of working capital for the operation of its business.
During February of 2016, members of senior management of Transgenomic
met with representatives of Craig-Hallum to develop a confidential information memorandum, a data room and related materials relating
to a potential transaction involving the remaining businesses of Transgenomic. During February, March and April 2016, representatives
of Craig-Hallum and Transgenomic contacted strategic investors regarding a potential transaction with Transgenomic.
On March 1, 2016, the potential buyer of the PT business decided
not to consummate a transaction. The Transgenomic Board then determined to wind down the PT business and sell parts of the PT business
to different buyers.
On March 7, 2016, representatives of Aegis Capital Corp., a
financial services company (“Aegis”), met with Transgenomic to discuss a potential public offering of Transgenomic
common stock.
On March 15, 2016, representatives of BV Partners contacted
Transgenomic regarding a potential acquisition of the PT business.
On March 24, 2016, the Transgenomic Board authorized senior
management to meet directly with potential purchasers of the PT business.
At meetings held on March 24, 2016, April 22, 2105 and May 19,
2016, Mr. Kinnon updated the Transgenomic Board regarding the status of potential strategic transactions.
On April 4, 2016, a representative of Craig-Hallum reported
to senior management of Transgenomic that Craig-Hallum had contacted 88 strategic investors, 24 of whom did not respond, 35 expressed
no interest, 28 executed non-disclosure agreements, received the confidential information memorandum and had access to the data
room but decided not to move forward and one made an offer.
On May 17, 2016, representatives of Aegis and Transgenomic met
to discuss the potential public offering.
On May 20, 2016, representatives of Transgenomic contacted a
representative of BV Partners regarding a potential meeting with senior management of Precipio.
On June 10, 2016, Mr. Patzig and Ilan Danieli, Chief Executive
Officer of Precipio, along with a representative of BV Partners met in New York City to discuss a potential strategic transaction
between Transgenomic and Precipio.
On June 20, 2016, members of senior management of Precipio met
telephonically with members of senior management of Transgenomic to discuss next steps and the terms of a possible merger between
the companies.
At a meeting of the Transgenomic Board on June 28, 2016, Mr.
Kinnon provided the Transgenomic Board an update regarding potential strategic transactions, including a potential strategic acquisition.
In June 2016, after having contacted over 20 potential buyers
and making 15 presentations, Transgenomic sold the assets of the PT business to a strategic buyer.
On June 30, 2016, Precipio delivered to Transgenomic a proposed
non-binding term sheet regarding a potential transaction between Precipio and Transgenomic.
On July 9, 2016, representatives of Precipio and Transgenomic
discussed valuations in connection with a potential transaction.
On July 14, 2016, representatives of Precipio, including Mr.
Danieli and Mark Rimer, a partner at Kuzari Group, a boutique private investment group and an investor in Precipio, met telephonically
with representatives of Transgenomic, including Mr. Patzig and Mr. Kinnon, to discuss further the terms of a potential transaction.
Representatives of Third Security and BV Partners were also present at the meeting.
On July 14, 2016, the Transgenomic Board met and discussed,
among other things Transgenomic’s potential strategic transactions and funding options.
At a meeting of the Transgenomic Board held on July 21, 2016,
Mr. Kinnon and Mr. Patzig updated the Transgenomic Board regarding the potential transaction with Precipio and summarized the proposed
transaction terms and economics.
On July 26, 2016, representatives of Precipio, including Mr.
Danieli and Mr. Rimer, Transgenomic, including Mr. Patzig (by telephone) and Mr. Kinnon, Third Security and BV Partners met at
Precipio’s offices in New Haven, Connecticut to conduct preliminary due diligence and discuss the process for a potential
transaction between the companies.
On August 5, 2016, representatives of Precipio, including Mr.
Danieli and Mr. Rimer, Transgenomic, including Mr. Patzig and Mr. Kinnon, Third Security and BV Partners met telephonically to
discuss the proposed timeline and due diligence for the proposed transaction.
On August 17, 2016, representatives of Precipio, including Mr.
Danieli and Mr. Rimer, Transgenomic, including Mr. Patzig and Mr. Kinnon, Third Security and BV Partners met telephonically to
continue due diligence and negotiations.
On August 18, 2016, the Transgenomic Board met and discussed,
among other things the engagement of Aegis to act as a potential financial advisor to the company.
On August 19, 2016, representatives of Precipio, including Mr.
Danieli and Mr. Rimer, Transgenomic, including Mr. Patzig and Mr. Kinnon, Third Security and BV Partners met telephonically to
discuss the terms of the proposed non-binding term sheet and negotiate the principal terms and Precipio sent a revised non-binding
term sheet to Transgenomic.
On August 22, 2016, the Transgenomic Board met and discussed,
among other things the company’s potential strategic transactions and funding options, including the latest version of a
non-binding term sheet with Precipio. The Transgenomic Board also authorized senior management to engage Aegis to act as the sole
book runner for a potential underwritten public offering.
On August 24, 2016, Transgenomic sent a revised draft of the
proposed non-binding term sheet to Precipio.
On August 25, 2016, Mr. Patzig, Mr. Rimer and a representative
of Third Security met to discuss the proposed terms of a preferred stock financing in connection with the transaction with Precipio,
and Precipio sent a revised draft of the proposed non-binding term sheet to Transgenomic.
On August 25, 2016, the Transgenomic Board met and approved
the terms of the proposed non-binding term sheet with Precipio.
On August 26, 2016, Transgenomic and Precipio each executed
and delivered the non-binding term sheet for the proposed transaction.
On August 26, 2016, Transgenomic and Aegis executed an engagement
letter with respect to a potential public offering of Transgenomic common stock.
On August 31, 2016, representatives of Precipio, including Mr.
Danieli and Mr. Rimer, Transgenomic, including Mr. Patzig and Mr. Kinnon, Third Security, BV Partners, Goodwin Procter LLP (“Goodwin”),
Precipio’s outside legal counsel, and Paul Hastings LLP, Transgenomic’s outside legal counsel, met telephonically to
discuss the timing and process for the proposed transaction and the drafting of the definitive agreements.
On August 31, 2016, members of Precipio’s management team,
including Mr. Danieli, Zaki Sabet, Vice President of Operations and Ayma Mohamed, Lab Manager, conducted a site visit to Transgenomic’s
offices in Omaha to meet with members of the team and visit the laboratory to learn about the company operations. Transgenomic’s
team provided a presentation of the company’s technology, its operations, and the current projects the company is undertaking.
Transgenomic’s lab managers provided an in-depth review of the CLIA and R&D operations of the company. The visit was
concluded on Thursday September 1, 2016 in the afternoon.
On September 7, 2016, representatives of Aegis and Transgenomic
met to begin the process of a proposed registered public offering of Transgenomic common stock. During September 2016, representatives
of Aegis and Transgenomic continued drafting a registration statement with respect to a public offering of Transgenomic common
stock.
On September 16, 2016, Goodwin distributed a first draft of
the proposed Merger Agreement to Transgenomic and its advisors and representatives.
On September 20, 2016, representatives of Precipio, including
Mr. Danieli and Mr. Rimer, Transgenomic, including Mr. Patzig and Mr. Kinnon, Third Security, BV Partners and Goodwin met telephonically
to discuss the draft Merger Agreement.
On September 21, 2016, Transgenomic engaged Troutman Sanders
LLP (“Troutman”) to act as the company’s outside legal counsel in connection the proposed transaction with Precipio.
On September 29, 2016, Mr. Patzig, Mr. Kinnon and representatives
of Troutman met telephonically to discuss process and the terms of the draft Merger Agreement.
On September 29, 2016, Transgenomic suspended the public offering
process to pursue the potential transaction with Precipio.
On September 30, 2016, representatives of Precipio, including
Mr. Danieli and Mr. Rimer, Transgenomic, including Mr. Patzig and Mr. Kinnon, Third Security, BV Partners, Goodwin and Troutman
met telephonically to discuss preliminary comments to the draft Merger Agreement, timing and process.
On September 30, 2016, Troutman distributed a revised draft
of the Merger Agreement to Precipio and its advisors and representatives. The revised agreement contained a substantially lower
termination fee as well as a requirement that certain members of Precipio agree to vote in favor of the merger. From October 1
st
to October 12
th
, 2016, Transgenomic and Precipio had multiple meetings and discussions to negotiate and finalize the
Merger Agreement and the related schedules, exhibits and other transaction documents.
On October 3, 2016, representatives of Goodwin and Troutman
had a call in which they discussed the significant open issues, including the calculation of the termination fee and voting agreements.
On October 5, 2016, BV Advisors distributed a draft term sheet
for the New Precipio preferred stock to Transgenomic, Precipio, Third Security and their respective advisors and representatives.
On October 5, 2016, representatives of Goodwin and Troutman
continued to discuss the open issues with respect to the merger. Later that day, Goodwin distributed a revised draft of the Merger
Agreement to Transgenomic and its advisors and representatives. The revised draft included reciprocal voting agreement provisions.
Later on October 5, 2016, Troutman distributed a revised draft of the Merger Agreement to Precipio and its advisors and representatives.
On October 6, 2016, Troutman distributed a draft of the Transgenomic
Voting Agreement to Precipio and its advisors and representatives. Representatives of Transgenomic, including Mr. Patzig and Mr.
Kinnon, Third Security and BV Partners met telephonically to discuss preliminary comments to the terms of the New Precipio preferred
stock. Later that day, Goodwin provided comments to the Transgenomic Voting Agreement and provided a draft of the Precipio Voting
Agreement to Transgenomic and its advisors and representatives.
On October 6, 2016, the Transgenomic Board met and, among other
matters, discussed the current status of the Precipio transaction and the terms of the Merger Agreement and the term sheet for
the New Precipio preferred stock. Representatives of Troutman also attended the meeting. Troutman provided the Transgenomic Board
a presentation on fiduciary duties under Delaware law and each of the Transgenomic Board members had an opportunity to ask questions.
Troutman then provided a summary of the material terms of the Merger Agreement, including the size of the termination fee, and
the proposed terms of the New Precipio preferred stock set forth in the draft term sheet. Mr. Patzig and Mr. Kinnon updated the
Transgenomic Board on the status of the negotiations and the main business issues. After a lengthy discussion, the Transgenomic
Board authorized Mr. Patzig and Mr. Kinnon to continue to negotiate with Precipio along the terms discussed at the meeting, including
with respect to the termination fee.
On October 7, 2016, Troutman distributed a revised draft of
the Merger Agreement to Precipio and its advisors and representatives. Also, representatives of Precipio, including Mr. Danieli
and Mr. Rimer, Transgenomic, including Mr. Patzig and Mr. Kinnon, Third Security, Goodwin and Troutman met telephonically to discuss
the draft term sheet for the New Precipio preferred stock. Precipio also distributed a revised draft of the New Precipio preferred
stock term sheet to BV Partners.
On October 8, 2016, Goodwin distributed a revised draft of the
Merger Agreement to Transgenomic and its advisors and representatives. During October 8 and 9, 2016, Precipio, Transgenomic, Third
Security and BV Partners negotiated the terms of the New Precipio preferred stock term sheet. On October 9, 2016, Precipio distributed
a revised draft of the New Precipio preferred stock term sheet reflecting the terms that had been agreed.
On October 10, 2016, Troutman distributed a revised draft of
the Merger Agreement to Precipio and its advisors and representatives. Later that day, Goodwin distributed a revised draft of the
Merger Agreement to Transgenomic and its advisors and representatives. Representatives of Goodwin and Troutman continued to negotiate
the open issues.
On October 11, 2016, Mr. Patzig and Mr. Danieli discussed the
working capital adjustment in the Merger Agreement and agreed to increase the working capital deficit maximum for both companies
and eliminate the termination right if the working capital deficit exceeded the maximum for both companies. Following the agreement,
Troutman distributed a revised draft of the Merger Agreement to Precipio and its advisors and representatives. Later that evening,
Goodwin distributed a revised draft of the Merger Agreement to Transgenomic and its advisors and representatives.
On October 11, 2016, the Transgenomic Board met to discuss the
current status of the Precipio transaction and the terms of the Merger Agreement and the term sheet for the New Precipio preferred
stock. Representatives of Troutman also attended the meeting. Troutman provided the Transgenomic Board a summary of its prior presentation
on fiduciary duties under Delaware law and each of the Transgenomic Board members had an opportunity to ask questions. Troutman
then provided a summary of the material terms of the Merger Agreement and the proposed terms of the New Precipio preferred stock
set forth in the revised draft term sheet. Mr. Patzig and Mr. Kinnon updated the Transgenomic Board on the status of the negotiations
and the main business issues.
On October 12, 2016, representatives of Precipio, including
Mr. Danieli and Mr. Rimer, Transgenomic, including Mr. Patzig and Mr. Kinnon, Third Security, BV Partners and Goodwin met telephonically
to finalize the Merger Agreement. Later that day, Troutman Sanders distributed the execution draft of the Merger Agreement to Precipio
and its advisors and representatives, including the termination fee that Transgenomic was willing to accept.
On October 12, 2016, the Transgenomic Board met to discuss the
current status of the Precipio transaction and the terms of the Merger Agreement and the term sheet for the New Precipio preferred
stock. Representatives of Troutman and Craig-Hallum also attended the meeting. Troutman provided the Transgenomic Board an update
of its fiduciary duties under Delaware law and each of the Transgenomic Board members had an opportunity to ask questions. Troutman
then provided a summary of the material terms of the Merger Agreement and the terms of the New Precipio preferred stock set forth
in the final term sheet. Mr. Patzig and Mr. Kinnon updated the Transgenomic Board on the status of the negotiations and the main
business issues. Craig-Hallum delivered to the Transgenomic Board a written report regarding its financial analysis of the proposed
transaction and its oral opinion, confirmed by delivery of its written opinion dated October 12, 2016, that, as of that date, and
based upon and subject to the assumptions contained the fairness opinion, the exchange ratio determined in accordance with the
Merger Agreement was fair, from a financial point of view, to the holders of Transgenomic common stock. The Transgenomic Board
members all had an opportunity to ask questions to the representatives of Craig-Hallum. After Craig-Hallum left the meeting, the
Transgenomic Board had a detailed discussion regarding the proposed transaction with Precipio. Mr. Patzig reminded the Transgenomic
Board of the efforts over the past two years to find financing or to sell the business which had not been successful except for
the current transaction. The Transgenomic Board discussed the alternatives including continuing independent or trying to pursue
a public offering, a different merger or related transaction or alternative financing. Doit L. Koppler, II, a member of the Transgenomic
Board and affiliated with Third Security and certain of its affiliates recused himself from the meeting. In addition, the Transgenomic
Board was aware that Mr. Patzig has an interest in the funds managed by Third Security that own Transgenomic common stock, preferred
stock and secured debt (the “Transgenomic Securities”) and determined such investments in Transgenomic Securities held
by the Third Security managed funds was immaterial to Mr. Patzig. The remaining members of the Transgenomic Board voted to approve
the Merger Agreement and the other transaction agreements and to recommend that the stockholders of Transgenomic vote to approve
the proposals set forth in the proxy statement to be sent to Transgenomic stockholders.
On October 12, 2016, Transgenomic and
Precipio entered into the Merger Agreement, exchanged executed versions of the Voting Agreements and the New Precipio preferred
stock term sheet and issued a press release announcing their execution of the Merger Agreement.
On January 31, 2017, the Transgenomic
Board met to discuss the current status of the Precipio transaction and the terms of the Merger Agreement in connection with filing
the Proxy Statement and closing the merger. The Transgenomic Board reviewed the proposed terms for an amendment to the Merger Agreement,
the proposed Bridge Loan and the conversion of the outstanding secured debt of Transgenomic. The Board authorized Mr. Patzig and
Mr. Kinnon to negotiate the final terms of the proposals in accordance with the terms presented at the meeting.
On February 2, 2017, the audit committee
of the Transgenomic Board, in accordance with the Transgenomic Corporate Governance Guidelines, approved the conversion of secured
indebtedness of Transgenomic held by the lenders into shares of New Precipio preferred stock and New Precipio common stock. Also
on February 2, 2017, the Transgenomic Board met and approved the final terms of the Bridge Loan, the First Amendment to the Agreement
and Plan of Merger and the conversion of secured indebtedness of Transgenomic held by the lenders into shares of New Precipio preferred
stock and New Precipio common stock pursuant to an amendment to the loan agreement.
On February 2, 2017, Transgenomic and
Precipio entered into the First Amendment to the Agreement and Plan of Merger which provided for the following: (a) the Bridge
Loan to Transgenomic was authorized; (b) the exchange ratio set forth in the Merger Agreement was revised to provide that outstanding
common units of Precipio will be converted into the right to receive an amount of shares of New Precipio common stock equal to
80% of the outstanding shares of New Precipio common stock (not taking into account the issuance of New Precipio preferred stock
in the merger or the private placement); (c) the continual listing of the existing shares of Transgenomic’s common stock
on Nasdaq was waived as a condition to the closing of the merger; (d) the deadline pursuant to which a “shelf” registration
statement on Form S-3 or other appropriate form is required to be filed by New Precipio with the SEC was extended to June 1, 2017;
(e) certain indebtedness of Transgenomic was permitted to remain outstanding as of the effective date of the merger; (f) certain
actions taken by each of Transgenomic and Precipio since the date the Merger Agreement were authorized and (g) certain additional
conditions to the closing of the merger were removed from the Merger Agreement.
Transgenomic’s Reasons for
the Transaction
The Transgenomic Board, after considering
various reasons described herein and below, determined that the Merger Agreement, the related private placement, and the transactions
contemplated thereby, are advisable, fair to and in the best interests of Transgenomic and its stockholders, and approved, adopted
and declared advisable the Merger Agreement, the private placement, and the transactions contemplated thereby. If the issuance
of shares of New Precipio common stock is approved, then in accordance with the Merger Agreement, Merger Sub will merge with and
into Precipio, with Precipio as the surviving entity. The approval of the issuance of New Precipio common stock is a condition
to the completion of the merger with Precipio and the private placement. Therefore, the Transgenomic Board recommends that you
vote “
FOR
” the issuance of approximately 160.6 million shares of New Precipio common stock, as well as approximately
24.1 million shares of New Precipio preferred stock to be issued, pursuant to the Merger Agreement, the issuance of approximately
24.1 million shares of New Precipio preferred stock and approximately 9.8 million shares of New Precipio common stock to be issued
in a related private placement in exchange for certain indebtedness of Transgenomic, the issuance of approximately 56.2 million
shares of New Precipio preferred stock to be issued to investors in a related private placement, the issuance of approximately
104.4 million shares of New Precipio common stock issuable upon conversion of the New Precipio preferred stock and the approval
of the resulting “change of control” of Transgenomic, and “
FOR
” the proposal to approve an adjournment
of the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time
of the special meeting to approve Proposal No. 1. The approval of the adjournment of the special meeting is not a condition to
completion of the merger with Precipio or the private placement.
The Transgenomic Board believes that the merger will provide
substantial benefits to Transgenomic’s business and operations by, among other things, enhancing the ability of the combined
company to be the leading platform for accurate diagnosis. In evaluating the transaction, the Transgenomic Board consulted with
members of Transgenomic management and legal and financial advisors, and in reaching its decision to approve the transactions and
recommend the issuance of shares by Transgenomic’s stockholders, the Transgenomic Board considered a substantial amount of
information and a number of reasons that it believes support its decision to enter into the transactions, including, but not limited
to, the following material reasons (not necessarily in order of relative importance):
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that
no material ICE-COLD PCR licenses have been signed, and Transgenomic management believes that raising additional
capital to continue operations as a stand-alone business would not be possible given Transgenomic’s current capital structure
and lack of commercial progress to date with ICE-COLD PCR;
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previous processes to pursue strategic alternatives by Transgenomic to liquidate unutilized assets, sell the company, merge
or enter into commercial licensing arrangements were unsuccessful, including the failure to sell Transgenomic’s PT business
which resulted in a wind-down of that business
;
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|
as of September 30, 2016, Transgenomic had just short of $0.1 million in cash, $9.2 million in accounts payable and accrued
expenses and $7.8 million in debt and management believes it has exhausted all of its alternatives in terms of raising capital
outside of the merger and private placement;
|
|
·
|
that Transgenomic stockholders will have the opportunity to participate in the future performance of New Precipio, rather than
face potential bankruptcy with Transgenomic;
|
|
·
|
the oral opinion of Craig-Hallum delivered to the Transgenomic Board on October 12, 2016, which was subsequently confirmed
by delivery of a written opinion, to the effect that, that, as of the date of its opinion, based upon and subject to the assumptions,
limitations, qualifications, and factors contained in its opinion, the exchange ratio provided for in the Merger Agreement was
fair, from a financial point of view, to the holders of Transgenomic common stock, as more fully described below under the caption
“—Opinion of Craig-Hallum Capital Group LLC” beginning on page 38; the full text of the written opinion
of Craig-Hallum, which sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations
on the review undertaken in rendering the opinion, is attached as Annex B to this proxy statement;
|
|
·
|
knowledge of Transgenomic’s business, operations, financial condition and prospects, as well as an assessment of Precipio’s
business and financial condition, taking into account the results of Transgenomic’s due diligence review of Precipio;
|
|
·
|
belief, with input from Transgenomic management, that the value offered to Transgenomic stockholders in the proposed transaction
with Precipio is more favorable to Transgenomic stockholders than the potential value of remaining an independent public company;
|
|
·
|
the long-term and recent historical trading price ranges with respect to shares of Transgenomic common stock;
|
|
·
|
the complementary nature of Transgenomic’s business and operations and Precipio’s business and operations, including
the significant value creation opportunity in leveraging the combination of Precipio’s unique scalable scientific platform
and Transgenomic’s powerful proprietary technology;
|
|
·
|
that New Precipio would be a larger, more diversified company than either Transgenomic or Precipio on its own;
|
|
·
|
the expectation that the private placement transaction would create a better capitalized organization with a lower cost of
capital than a standalone Transgenomic, as the debt holders of Transgenomic will convert outstanding debt into approximately 24.1
million shares of New Precipio preferred stock in an amount equal to $3 million and approximately 9.8 million shares of New Precipio
common stock, which will, among other things, allow New Precipio to pursue business development opportunities not otherwise available
to Precipio or Transgenomic as standalone entities;
|
|
·
|
that the issuance of New Precipio preferred stock to investors in the private placement of up to $7 million in connection with
the merger satisfies Transgenomic’s immediate need for working capital financing on terms more favorable to Transgenomic
than were otherwise available to the company, and that such proceeds will not be otherwise available;
|
|
·
|
that certain of Precipio’s unit, warrant and note holders have entered into the Precipio Voting Agreement with Transgenomic
and Precipio, pursuant to which they agreed to support the transactions contemplated by the Merger Agreement;
|
|
·
|
that the Merger Agreement provided sufficient flexibility for the Transgenomic Board to change its recommendation regarding
the Merger Agreement in the case of a superior proposal or material unforeseen intervening event;
|
|
·
|
the merger and related private placement are key components of Transgenomic’s plan to regain compliance with Nasdaq listing
standards;
|
|
·
|
the depth of experience of the management team of Precipio; and
|
|
·
|
the terms and conditions of the Merger Agreement, including the parties’ representations, warranties and covenants.
|
The Transgenomic Board weighed the foregoing against a number
of risks and potentially negative reasons, including, but not limited to, the following reasons:
|
·
|
the restrictions on the conduct of Transgenomic’s business during the period between execution of the Merger Agreement
and the completion of the merger;
|
|
·
|
the dilution to the existing Transgenomic stockholders;
|
|
·
|
the risk that the anticipated benefits of the merger may not be realized;
|
|
·
|
the risk that changes in the regulatory or competitive landscape may adversely affect the benefits anticipated to result from
the merger;
|
|
·
|
the challenges inherent in combining the businesses, operations and workforces of two companies, including the potential for
(i) unforeseen difficulties in integrating operations and systems, (ii) the possible distraction of management attention for an
extended period of time and (iii) difficulties in assimilating employees;
|
|
·
|
the potential effect of the merger and subsequent integration and/or market factors on Transgenomic’s and/or Precipio’s
historical business, including their respective relationships with employees, customers, suppliers, and other business partners;
|
|
·
|
the risk that the transaction, and subsequent integration of the two businesses, may preclude other business development opportunities;
|
|
·
|
the substantial costs that Transgenomic has incurred and will continue to incur in connection with the merger, including the
costs of integrating the businesses of Transgenomic and Precipio and the transaction expenses arising from the merger;
|
|
·
|
the risk that Transgenomic or Precipio may lose key personnel prior to the completion of the merger;
|
|
·
|
the risk that the merger may not be completed despite the combined efforts of Transgenomic and Precipio or that completion
may be delayed, even if the requisite approvals are obtained from Transgenomic stockholders and owners of the outstanding membership
interests of Precipio;
|
|
·
|
the possibility of stockholder litigation and the attendant costs, delays and diversion of management attention and resources;
|
|
·
|
that the non-solicitation covenant in the Merger Agreement imposes restrictions on Transgenomic’s ability to solicit
other potential strategic transaction partners after signing;
|
|
·
|
the fact that Transgenomic may be obligated to pay Precipio a termination fee of $256,500 in certain circumstances as summarized
under “The Merger Agreement — Effect of Termination”;
|
|
·
|
that the market price of Transgenomic common stock could be affected by many factors, including:
|
|
o
|
if the Merger Agreement is terminated, the reason or reasons for such termination and whether such termination resulted from
factors adversely affecting Transgenomic;
|
|
o
|
the possibility that, in the event of the termination of the Merger Agreement, possible acquirers or other strategic transaction
partners may consider Transgenomic to be a less attractive acquisition candidate; and
|
|
o
|
the possible sale of Transgenomic common stock by short-term investors and material fluctuation in the market price of its
common stock in response to an announcement of the merger or in the event that the Merger Agreement is terminated;
|
|
·
|
the risk of changes in circumstances between the date of the signing of the Merger Agreement and the completion of the merger
transactions, which will not be reflected in the opinion delivered by Craig-Hallum to the Transgenomic Board on October 12, 2016;
and
|
|
·
|
the risks of the type and nature described under the heading “Risk Factors” beginning on page 17 and the
matters described above under the heading “Cautionary Statement Concerning Forward-Looking Statements.”
|
This discussion of the reasons considered by the Transgenomic
Board in reaching its conclusions and recommendation summarizes the material reasons considered by the Transgenomic Board, but
is not intended to be exhaustive. The Transgenomic Board based its recommendation on the totality of the information presented.
The Transgenomic Board believes that, overall, the potential
benefits of the merger and private placement to Transgenomic’s stockholders outweigh the risks and uncertainties of the transactions.
In view of the wide variety of reasons considered in connection with its evaluation of the transactions and the complexity of these
matters, the Transgenomic Board did not find it useful and did not attempt to assign any relative or specific weights to the various
reasons that it considered in reaching its determination to recommend that Transgenomic stockholders vote “
FOR
”
the proposal to approve the issuance of approximately 160.6 million shares of New Precipio common stock, as well as approximately
24.1 million shares of New Precipio preferred stock to be issued, pursuant to the Merger Agreement, the issuance of approximately
24.1 million shares of New Precipio preferred stock and approximately 9.8 million shares of New Precipio common stock to be issued
in a related private placement in exchange for certain indebtedness of Transgenomic, the issuance of approximately 56.2 million
shares of New Precipio preferred stock to be issued to investors in a related private placement, the issuance of approximately
104.4 million shares of New Precipio common stock issuable upon conversion of the New Precipio preferred stock and the resulting
“change of control” of Transgenomic, and “
FOR
” the proposal to approve an adjournment of the special
meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special
meeting. Additionally, in considering the matters described above, each member of the Transgenomic Board applied his or her own
business judgment to the process and may have assigned varying weights to different reasons supporting the decision to approve
the transactions.
The foregoing discussion of the information and reasons considered
by the Transgenomic Board is forward-looking in nature.
This information should be read in light of the risks described above
under “Cautionary Statement Concerning Forward-Looking Statements”.
Opinion of Craig-Hallum Capital
Group LLC
The Transgenomic Board retained Craig-Hallum to act as a financial
advisor to the Transgenomic Board in connection with its consideration of strategic alternatives, including a possible business
combination transaction, and, if requested, to render to the Transgenomic Board an opinion as to the fairness, from a financial
point of view, of the consideration to be paid in a business combination transaction. On October 12, 2016, at a meeting of the
Transgenomic Board held to evaluate the proposed transaction, Craig-Hallum delivered to the Transgenomic Board an oral opinion,
subsequently confirmed by delivery of a written opinion, to the effect that, as of that date and based upon and subject to the
factors and assumptions set forth therein, the exchange ratio, as set forth in the Merger Agreement, was fair, from a financial
point of view, to the holders of Transgenomic common stock.
The full text of the written opinion of Craig-Hallum, dated
October 12, 2016, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken
in connection with the opinion, is attached as Annex B to this proxy statement. The following summary of Craig-Hallum’s opinion
in this proxy statement is qualified in its entirety by reference to the full text of the opinion. Craig-Hallum provided its opinion
for the information and assistance of the Transgenomic Board in connection with its consideration of the merger. Craig-Hallum’s
opinion was not intended to and does not constitute a recommendation as to how any holder of Transgenomic common stock should vote
or take any action with respect to the merger or any other matter.
In arriving at its opinion, Craig-Hallum, among other things:
|
·
|
reviewed the financial terms of a draft of the Merger Agreement dated as of October 12, 2016;
|
|
·
|
reviewed certain business, financial and other information and data with respect to Transgenomic publicly available or made
available to Craig-Hallum from internal records of Transgenomic;
|
|
·
|
reviewed certain business, financial and other information and data with respect to Precipio made available to Craig-Hallum
from internal records of Precipio;
|
|
·
|
reviewed certain internal financial projections for Transgenomic and Precipio on a stand-alone basis prepared for financial
planning purposes and furnished to Craig-Hallum by management of Transgenomic and Precipio, respectively;
|
|
·
|
reviewed and analyzed certain forecasted pro forma financial information relating to the operating performance of Transgenomic
following completion of the merger that were furnished to Craig-Hallum by management of Precipio;
|
|
·
|
conducted discussions with members of the senior management of Transgenomic and Precipio with respect to the business and prospects
of Transgenomic and Precipio, respectively, on a stand-alone basis and on a combined basis;
|
|
·
|
reviewed the reported prices and trading activity of Transgenomic common stock and similar information for certain other companies
deemed by Craig-Hallum to be comparable to Transgenomic;
|
|
·
|
compared the financial performance of Transgenomic and Precipio with that of certain other publicly traded companies deemed
by Craig-Hallum to be comparable to Transgenomic and Precipio, respectively;
|
|
·
|
reviewed the financial terms, to the extent publicly available, of certain comparable merger transactions that Craig-Hallum
deemed relevant; and
|
|
·
|
performed a discounted cash flows analysis for Transgenomic and Precipio, each on a stand-alone basis and on a pro forma combined
basis.
|
In addition, Craig-Hallum conducted such other analyses, examinations
and inquiries and considered such other financial, economic and market criteria as Craig-Hallum deemed necessary and appropriate
in arriving at its opinion.
Summary of Financial Analyses
In accordance with customary investment banking practice, Craig-Hallum
employed generally accepted valuation methods in reaching its fairness opinion. The following is a summary of the material financial
analyses performed by Craig-Hallum in connection with the preparation of its fairness opinion, which was reviewed with, and formally
delivered to, the Transgenomic Board at a meeting held on October 12, 2016. The preparation of analyses and a fairness opinion
is a complex analytic process involving various determinations as to the most appropriate and relevant methods of financial analysis
and the application of those methods to the particular circumstances. Therefore, this summary does not purport to be a complete
description of the analyses performed by Craig-Hallum or of its presentation to the Transgenomic Board on October 12, 2016.
This summary includes information presented in tabular format,
which tables must be read together with the text of each analysis summary and considered as a whole in order to fully understand
the financial analyses presented by Craig-Hallum. The tables alone do not constitute a complete summary of the financial analyses.
The order in which these analyses are presented below, and the results of those analyses, should not be taken as an indication
of the relative importance or weight given to these analyses by Craig-Hallum or the Transgenomic Board. Except as otherwise noted,
the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on
or before October 12, 2016, and is not necessarily indicative of current market conditions. All analyses conducted by Craig-Hallum
were going concern analyses and Craig-Hallum expressed no opinion regarding the liquidation value of any entity.
The exchange ratio was determined through arm’s-length
negotiations between Transgenomic and Precipio and was approved by the Transgenomic Board. Craig-Hallum did not provide advice
to the Transgenomic Board during these negotiations nor recommend any specific consideration to Transgenomic or the Transgenomic
Board or suggest that any specific consideration constituted the only appropriate consideration for the merger, including but not
limited to the exchange ratio. In addition, Craig-Hallum’s opinion and its presentation to the Transgenomic Board were one
of many factors taken into consideration by the Transgenomic Board in deciding to approve the merger.
For purposes of its stand-alone analyses performed on Transgenomic,
Craig-Hallum utilized Transgenomic’s internal financial projections for the fiscal years ending December 31, 2016 through
December 31, 2020, prepared by and furnished to Craig-Hallum by the management of Transgenomic. For purposes of its stand-alone
analyses performed on Precipio, Craig-Hallum utilized Precipio’s internal financial projections for the fiscal years ending
December 31, 2016 through December 31, 2020, prepared by and furnished to Craig-Hallum by the management of Precipio. For purposes
of its pro forma combined analyses performed on the combined company assuming completion of the merger, Craig-Hallum utilized the
combined company’s internal financial projections for the fiscal years ending December 31, 2016 through December 31, 2020,
prepared by and furnished to Craig-Hallum by the management of Precipio.
Transgenomic Historical Trading Analyses
Craig-Hallum reviewed the historical closing price for Transgenomic
common stock over the one-year period ended October 11, 2016, in order to provide background information on the prices at which
Transgenomic common stock has historically traded. The tables below summarize some of these historical closing prices, as well
as the performance of Transgenomic common stock over the one-year period ended October 11, 2016, as compared to stock market indices.
For purposes of these analyses, “Molecular Diagnostics Comparable Companies” is an equal-weight composite index comprised
of the public companies listed below deemed by Craig-Hallum in its professional judgment to be comparable to Transgenomic:
|
·
|
Foundation Medicine, Inc.
|
Craig-Hallum also noted that shares of
Transgenomic common stock were thinly traded relative to the common stock of most publicly traded companies.
Closing Trading Price on or Prior to October 11, 2016
|
|
Price
|
|
October 11, 2016 Closing Price
|
|
$
|
0.24
|
|
52 Week High
|
|
$
|
1.36
|
|
52 Week Low
|
|
$
|
0.24
|
|
One-Year Stock Performance as of October 11, 2016
|
|
Percentage Increase (Decrease)
|
|
Transgenomic common stock
|
|
|
(73.9
|
)%
|
Molecular Diagnostics Comparable Companies
|
|
|
(0.21
|
)%
|
Nasdaq Composite Index
|
|
|
7.01
|
%
|
Russell 2000 Index
|
|
|
10.73
|
%
|
Comparable Public Company Analyses
Craig-Hallum reviewed, among other things, selected historical
financial data and estimated financial data of each of Transgenomic and Precipio based on projections provided by its respective
management, and compared them to corresponding financial data, where applicable, for U.S. listed public companies that Craig-Hallum
deemed comparable to each of Transgenomic and Precipio. Craig-Hallum also derived multiples for each of the comparable companies,
Transgenomic and Precipio based on such financial data and market trading prices, as applicable, and compared them. Craig-Hallum
selected these companies based on characteristics described below using the most recently available public information obtained
by searching SEC filings, public company disclosures, press releases, equity research reports, industry and popular press reports,
databases and other sources.
Although Craig-Hallum selected the companies reviewed in these
analyses because, among other things, their businesses are reasonably similar to that of Transgenomic and Precipio, no selected
company is identical to Transgenomic or Precipio. Accordingly, Craig-Hallum’s comparison of selected companies to Transgenomic
and Precipio and analysis of the results of such comparisons was not purely quantitative, but instead necessarily involved qualitative
considerations and professional judgments concerning differences in financial and operating characteristics and other factors that
could affect the relative value of Transgenomic and Precipio.
Comparable Public Company Analysis of
Transgenomic
For Transgenomic, the comparable group consisted of six U.S.
publicly traded companies in the diagnostic testing sector that have financial profiles deemed comparable to Transgenomic and have
a focus on technologies designed to improve diagnostic testing effectiveness (the “Transgenomic Comparable Group”).
Based on these criteria, Craig-Hallum identified and analyzed the following selected companies:
|
·
|
Bio-Rad Laboratories, Inc.
|
In all instances, multiples were based on closing stock prices
on October 11, 2016. With respect to the Transgenomic Comparable Group table below, the information Craig-Hallum presented included
the following valuation and operating data:
|
·
|
multiple of EV to revenue for the last twelve months, or EV / LTM Revenue
|
|
·
|
multiple of EV to EBITDA for the last twelve months, or EV / LTM EBITDA
|
|
·
|
multiple of EV to projected revenue for the fiscal year ending December 31, 2017, or EV / 2017E Revenue
|
|
·
|
multiple of EV to projected EBITDA for the fiscal year ending December 31, 2017, or EV / 2017E EBITDA
|
|
·
|
multiple of EV to projected revenue for the fiscal year ending December 31, 2018, or EV / 2018E Revenue
|
|
·
|
multiple of EV to projected EBITDA for the fiscal year ending December 31, 2018, or EV / 2018E EBITDA
|
|
Transgenomic Comparable Group
|
|
|
Minimum
|
|
|
25
th
Percentile
|
|
|
Median
|
|
|
Mean
|
|
|
75
th
Percentile
|
|
|
Maximum
|
|
EV / LTM Revenue(1)
|
|
|
1.2
|
x
|
|
|
2.1
|
x
|
|
|
2.5
|
x
|
|
|
3.5
|
x
|
|
|
5.0
|
x
|
|
|
6.7
|
x
|
EV / LTM EBITDA(1)(2)
|
|
|
15.2
|
x
|
|
|
16.0
|
x
|
|
|
16.9
|
x
|
|
|
16.9
|
x
|
|
|
17.7
|
x
|
|
|
18.6
|
x
|
EV / 2017E Revenue(3)
|
|
|
0.7
|
x
|
|
|
2.2
|
x
|
|
|
2.2
|
x
|
|
|
3.0
|
x
|
|
|
4.9
|
x
|
|
|
5.2
|
x
|
EV / 2017E EBITDA(2)(3)
|
|
|
15.6
|
x
|
|
|
15.7
|
x
|
|
|
15.9
|
x
|
|
|
15.9
|
x
|
|
|
16.0
|
x
|
|
|
16.2
|
x
|
EV / 2018E Revenue(3)
|
|
|
0.4
|
x
|
|
|
1.5
|
x
|
|
|
2.0
|
x
|
|
|
2.3
|
x
|
|
|
2.8
|
x
|
|
|
4.9
|
x
|
EV / 2018E EBITDA(2)(3)
|
|
|
15.3
|
x
|
|
|
15.3
|
x
|
|
|
15.3
|
x
|
|
|
15.3
|
x
|
|
|
15.3
|
x
|
|
|
15.3
|
x
|
|
(1)
|
LTM for the selected public company analysis is based on latest publicly reported financial results.
For Transgenomic, LTM is as of June 30, 2016.
|
|
(2)
|
EBITDA is defined as earnings before interest, taxes, depreciation and amortization.
|
|
(3)
|
Projected fiscal year 2017 and 2018 revenue and EBITDA for Transgenomic were based on projections by Transgenomic’s management.
Projected fiscal year 2017 and 2018 revenue and EBITDA for the selected public companies were based on equity research analyst
consensus estimates.
|
Based on the analysis above, Craig-Hallum then applied the range
of Transgenomic Comparable Group trading multiples to the applicable revenue metrics of Transgenomic. The analysis indicated the
following implied enterprise value of Transgenomic as compared to Transgenomic’s stand-alone statistic:
|
|
|
|
|
Implied Enterprise Value of Transgenomic (millions)
|
|
|
|
Transgenomic
Only
(millions)
|
|
|
Minimum
|
|
|
25
th
Percentile
|
|
|
Median
|
|
|
Mean
|
|
|
75
th
Percentile
|
|
|
Maximum
|
|
LTM Revenue
|
|
$
|
1.2
|
|
|
$
|
1.5
|
|
|
$
|
2.6
|
|
|
$
|
3.1
|
|
|
$
|
4.2
|
|
|
$
|
6.1
|
|
|
$
|
8.1
|
|
2017E Revenue
|
|
$
|
2.4
|
|
|
$
|
1.7
|
|
|
$
|
5.2
|
|
|
$
|
5.3
|
|
|
$
|
7.3
|
|
|
$
|
11.9
|
|
|
$
|
12.6
|
|
2018E Revenue
|
|
$
|
6.7
|
|
|
$
|
2.8
|
|
|
$
|
10.1
|
|
|
$
|
13.3
|
|
|
$
|
15.5
|
|
|
$
|
18.7
|
|
|
$
|
32.8
|
|
Comparable Public Company Analysis of
Precipio
For Precipio, the comparable group consisted of five U.S. publicly
traded companies in the diagnostic testing sector that have financial profiles deemed comparable to Precipio and have a focus on
services or technologies designed to improve diagnostic testing efficiency and effectiveness (the “Precipio Comparable Group”).
Based on these criteria, Craig-Hallum identified and analyzed the following selected companies:
In all instances, multiples were based on closing stock prices
on October 11, 2016. With respect to the Precipio Comparable Group table below, the information Craig-Hallum presented included
the following valuation and operating data:
|
|
Precipio Comparable Group
|
|
|
Minimum
|
|
|
25
th
Percentile
|
|
|
Median
|
|
|
Mean
|
|
|
75
th
Percentile
|
|
|
Maximum
|
|
EV / LTM Revenue(1)
|
|
|
1.3
|
x
|
|
|
2.1
|
x
|
|
|
3.1
|
x
|
|
|
3.5
|
x
|
|
|
4.3
|
x
|
|
|
6.7
|
x
|
EV / LTM EBITDA(1)(2)
|
|
|
27.4
|
x
|
|
|
27.4
|
x
|
|
|
27.4
|
x
|
|
|
27.4
|
x
|
|
|
27.4
|
x
|
|
|
27.4
|
x
|
EV / 2017E Revenue(3)
|
|
|
0.7
|
x
|
|
|
2.2
|
x
|
|
|
2.7
|
x
|
|
|
2.7
|
x
|
|
|
3.2
|
x
|
|
|
5.0
|
x
|
EV / 2017E EBITDA(2)(3)
|
|
|
14.3
|
x
|
|
|
25.8
|
x
|
|
|
37.4
|
x
|
|
|
37.4
|
x
|
|
|
49.0
|
x
|
|
|
60.6
|
x
|
EV / 2018E Revenue(3)
|
|
|
0.4
|
x
|
|
|
1.4
|
x
|
|
|
2.3
|
x
|
|
|
1.7
|
x
|
|
|
2.3
|
x
|
|
|
2.3
|
x
|
EV / 2018E EBITDA(2)(3)
|
|
|
11.1
|
x
|
|
|
16.0
|
x
|
|
|
21.0
|
x
|
|
|
21.0
|
x
|
|
|
25.9
|
x
|
|
|
30.9
|
x
|
|
(1)
|
LTM for the selected public company analysis is based on latest publicly reported financial results. For Precipio, LTM
is as of June 30, 2016.
|
|
(2)
|
EBITDA is defined as earnings before interest, taxes, depreciation and amortization.
|
|
(3)
|
Projected fiscal year 2017 and 2018 revenue and EBITDA for Precipio were based on projections by Precipio’s management.
Projected fiscal year 2017 and 2018 revenue and EBITDA for the selected public companies were based on equity research analyst
consensus estimates.
|
Based on the analysis above, Craig-Hallum then applied the range
of Precipio Comparable Group trading multiples to the applicable revenue metrics of Precipio. The analysis indicated the following
implied enterprise value of Precipio as compared to Precio’s stand-alone statistic:
|
|
|
|
|
Implied Enterprise Value of Precipio (millions)
|
|
|
|
Precipio
Only
(millions)
|
|
|
Minimum
|
|
|
25
th
Percentile
|
|
|
Median
|
|
|
Mean
|
|
|
75
th
Percentile
|
|
|
Maximum
|
|
LTM Revenue
|
|
$
|
2.6
|
|
|
$
|
3.3
|
|
|
$
|
5.5
|
|
|
$
|
8.2
|
|
|
$
|
9.2
|
|
|
$
|
11.2
|
|
|
$
|
17.7
|
|
2017E Revenue
|
|
$
|
5.5
|
|
|
$
|
3.8
|
|
|
$
|
11.9
|
|
|
$
|
14.7
|
|
|
$
|
15.1
|
|
|
$
|
17.9
|
|
|
$
|
27.4
|
|
2018E Revenue
|
|
$
|
11.4
|
|
|
$
|
4.7
|
|
|
$
|
15.7
|
|
|
$
|
26.6
|
|
|
$
|
19.4
|
|
|
$
|
26.7
|
|
|
$
|
26.7
|
|
Comparable M&A Transaction Analysis
Craig-Hallum performed a comparable M&A transaction analysis,
which is designed to imply a value for a company based on publicly available financial terms of the selected transactions that
share some characteristics with the merger. Craig-Hallum selected these transactions based on information obtained by searching
SEC filings, public company disclosures, press releases, equity research reports, industry and popular press reports, databases
and other sources. Craig-Hallum selected these transactions based on the following criteria:
|
·
|
transactions with a target company in the diagnostic testing sector with a focus on services and technologies that improve
the diagnostic testing efficiency and effectiveness;
|
|
·
|
transactions announced since January 1, 2010;
|
|
·
|
transactions with an implied enterprise value less than $1.5 billion at the time of announcement; and
|
|
·
|
transactions with publicly available information regarding terms of the transaction.
|
The group was comprised of the following transactions and is
referred to in this proxy statement as the “Precedent Transaction Group:”
Buyer
|
|
Target
|
Myriad Genetics, Inc.
|
|
AssureRx Health, Inc.
|
Luminex Corporation
|
|
Nanosphere, Inc.
|
NeoGenomics Laboratories, Inc.
|
|
Clarient, Inc.
|
OpGen, Inc.
|
|
AdvanDx, Inc.
|
Opko Health, Inc.
|
|
Bio-Reference Laboratories Inc.
|
Neogenomics Inc.
|
|
Path Logic, Inc.
|
Myriad Genetics, Inc.
|
|
Crescendo Bioscience, Inc.
|
bioMérieux S.A.
|
|
Argene SA
|
Luminex Corporation
|
|
EraGen Biosciences, Inc.
|
GE Healthcare Limited
|
|
Clarient, Inc.
|
With respect to the Precedent Transaction Group, Craig-Hallum
calculated the ratio of implied EV to historical revenue for the LTM. Craig-Hallum then compared the results of these calculations
with similar calculations for each of Transgenomic and Precipio.
The selected transactions analysis showed that, based on the
estimates and assumptions used in the analysis, the implied valuation multiples of Transgenomic and Precipio were within the range
of valuation multiples of the Precedent Transaction Group when comparing the ratio of the implied EV to the historical revenue
for the LTM.
Results of Craig-Hallum’s analysis were presented for
the Precedent Transaction Group, as shown in the following table:
|
|
Precedent Transaction Group
|
|
|
Minimum
|
|
|
25
th
Percentile
|
|
|
Median
|
|
|
Mean
|
|
|
75
th
Percentile
|
|
|
Maximum
|
|
Implied EV (millions)
|
|
$
|
1.0
|
|
|
$
|
41.0
|
|
|
$
|
176.0
|
|
|
$
|
308.0
|
|
|
$
|
374.0
|
|
|
$
|
1,445.0
|
|
Implied EV to LTM Revenue (1)
|
|
|
0.3
|
x
|
|
|
1.8
|
x
|
|
|
4.1
|
x
|
|
|
3.8
|
x
|
|
|
4.5
|
x
|
|
|
9.5
|
x
|
(1) LTM for the Precedent Transaction Group is based on latest
publicly reported financial results. Based on the analysis above, Craig-Hallum then applied the range of the Precedent Transaction
Group trading multiples to the applicable financial metrics of each of Transgenomic and Precipio. The analysis indicated the following
implied enterprise value of each of Transgenomic and Precipio, respectively, as compared to such company’s stand-alone statistic:
|
|
|
|
|
Implied Enterprise Value (millions)
|
|
|
|
Stand-Alone
Value
(millions)
|
|
|
Minimum
|
|
|
25
th
Percentile
|
|
|
Median
|
|
|
Mean
|
|
|
75
th
Percentile
|
|
|
Maximum
|
|
Transgenomic
LTM Revenue
|
|
$
|
1.2
|
|
|
$
|
0.4
|
|
|
$
|
2.1
|
|
|
$
|
5.0
|
|
|
$
|
4.6
|
|
|
$
|
5.4
|
|
|
$
|
11.4
|
|
Precipio
LTM Revenue
|
|
$
|
2.6
|
|
|
$
|
0.8
|
|
|
$
|
4.6
|
|
|
$
|
10.8
|
|
|
$
|
10.0
|
|
|
$
|
11.8
|
|
|
$
|
24.8
|
|
No target company or transaction utilized in the comparable
M&A transaction analysis is identical to Precipio or the merger. In evaluating the precedent transactions, Craig-Hallum made
judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Precipio, such as the impact of competition on the business of Precipio
or the industry generally, industry growth and the absence of any adverse material change in the financial condition and prospects
of Precipio or the industry or in the financial markets in general.
Discounted Cash Flow Analyses
The discounted cash flow analysis is a widely used valuation
methodology that relies upon numerous assumptions, including asset growth rates, earnings growth rates, discount rates, and terminal
multiples, and the results of such methodology are highly dependent on these assumptions. The analysis does not purport to be indicative
of the actual or expected implied enterprise values of each of Transgenomic and Precipio on a stand-alone or a pro forma combined
basis. In addition, the analyses are based on internal financial projections of management of Transgenomic or Precipio, as applicable.
Discounted Cash Flow Analysis of Transgenomic
Craig-Hallum conducted an illustrative discounted cash flow
analysis for Transgenomic on a stand-alone basis, which is designed to estimate the implied enterprise value of a company by calculating
the present value of the estimated future unlevered free cash flows of the company. Craig-Hallum calculated a range of implied
enterprise values for Transgenomic by estimating the present value of hypothetical projected cash flows through fiscal year 2020
using an assumed tax rate of 40.0%. The free cash flows for each year were calculated as follows: operating income less taxes plus
depreciation and amortization, plus equity-based compensation, less capital expenditures, plus/less change in net working capital.
The unlevered free cash flows of Transgenomic for fiscal year 2017 through fiscal year 2020 used by Craig-Hallum in its analysis
were $(9.1 million), $(5.1 million), $(1.6 million) and $(0.5 million), respectively. The free cash flows were then discounted
to present values as of January 1, 2017, using a range of terminal value multiples of 2.1x to 2.9x and a range of discount rates
of 18.0% to 22.0% (such range was derived from an analysis of the estimated weighted average cost of capital using Transgenomic
and the Transgenomic Comparable Group data, which was adjusted upward in Craig-Hallum’s professional judgment to account
for inherent business risk relative to Transgenomic) to calculate a range of implied total enterprise values for Transgenomic.
From this analysis, Craig-Hallum derived the following implied enterprise values of Transgenomic:
|
|
Transgenomic
|
|
|
|
Minimum
|
|
|
25
th
Percentile
|
|
|
Median
|
|
|
Mean
|
|
|
75
th
Percentile
|
|
|
Maximum
|
|
Implied EV (millions)
|
|
$
|
(0.1
|
)
|
|
$
|
1.4
|
|
|
$
|
2.9
|
|
|
$
|
2.9
|
|
|
$
|
4.5
|
|
|
$
|
6.2
|
|
Discounted Cash Flow Analysis of Precipio
Craig-Hallum also conducted an illustrative discounted cash
flow analysis for Precipio on a stand-alone basis. Craig-Hallum calculated a range of implied enterprise values for Precipio by
estimating the present value of hypothetical projected cash flows through fiscal year 2020 using an assumed tax rate of 40.0%.
The free cash flows for each year were calculated as follows: operating income less taxes plus depreciation and amortization, plus
equity-based compensation, less capital expenditures, plus/less change in net working capital. The unlevered free cash flows of
Precipio for fiscal year 2017 through fiscal year 2020 used by Craig-Hallum in its analysis were $(0.4 million), $0.7 million,
$4.4 million and $15.8 million, respectively. The free cash flows were then discounted to present values as of January 1, 2017,
using a range of terminal value multiples of 2.7x to 3.5x and a range of discount rates of 17.0% to 21.0% (such range was derived
from an analysis of the estimated weighted average cost of capital using Precipio and the Precipio Comparable Group data, which
was adjusted upward in Craig-Hallum’s professional judgment to account for inherent business risk relative to Precipio) to
calculate a range of implied total enterprise values for Precipio. From this analysis, Craig-Hallum derived the following implied
enterprise values of Precipio:
|
|
Precipio
|
|
|
|
Minimum
|
|
|
25
th
Percentile
|
|
|
Median
|
|
|
Mean
|
|
|
75
th
Percentile
|
|
|
Maximum
|
|
Implied EV (millions)
|
|
$
|
90.3
|
|
|
$
|
102.2
|
|
|
$
|
109.2
|
|
|
$
|
109.3
|
|
|
$
|
116.8
|
|
|
$
|
130.4
|
|
Discounted Cash Flow Analysis of Combined
Company
Finally, Craig-Hallum conducted an illustrative discounted cash
flow analysis for Transgenomic and Precipio on a pro forma combined basis assuming completion of the merger (for purposes of this
section of the proxy statement, the “Combined Company”). Craig-Hallum calculated a range of implied enterprise values
for the Combined Company by estimating the present value of hypothetical projected cash flows through fiscal year 2020 using an
assumed tax rate of 40.0%. The free cash flows for each year were calculated as follows: operating income less taxes plus depreciation
and amortization, plus equity-based compensation, less capital expenditures, plus/less change in net working capital. The unlevered
free cash flows of the Combined Company for fiscal year 2017 through fiscal year 2020 used by Craig-Hallum in its analysis were
$(4.1 million), $(1.0 million), $3.7 million and $15.5 million, respectively. The free cash flows were then discounted to present
values as of January 1, 2017, using a range of terminal value multiples of 2.5x to 3.3x (such range was derived from the weighted
average terminal value multiples of each of Transgenomic and Precipio based on the exchange ratio) and a range of discount rates
of 17.0% to 21.0% (such range was derived from the weighted average of the weighted average cost of capital of each of Transgenomic
and Precipio based on the exchange ratio, which was adjusted upward in Craig-Hallum’s professional judgment to account for
inherent business risk relative to each of Transgenomic and Precipio) to calculate a range of implied total enterprise values for
the Combined Company. From this analysis, Craig-Hallum derived the following implied enterprise values of the Combined Company:
|
|
Combined Company
|
|
|
|
Minimum
|
|
|
25
th
Percentile
|
|
|
Median
|
|
|
Mean
|
|
|
75
th
Percentile
|
|
|
Maximum
|
|
Implied EV (millions)
|
|
$
|
89.3
|
|
|
$
|
99.3
|
|
|
$
|
110.0
|
|
|
$
|
121.2
|
|
|
$
|
116.8
|
|
|
$
|
133.2
|
|
Relative Contribution Analysis
Craig-Hallum performed a relative contribution analysis for
Transgenomic and Precipio based on the valuation methodologies described above. In performing the relative contribution analysis,
Craig-Hallum compared the range of stand-alone implied enterprise values for each company derived from the minimum, 25
th
percentile, 75
th
percentile and maximum values calculated for each of the comparable public company, comparable M&A
transaction and discounted cash flow analyses. Craig-Hallum then compared these ranges to generate the implied relative contribution
for each company for each analysis. Craig-Hallum then compared the implied relative contribution ranges to the exchange ratio.
|
|
Implied
Relative Contribution
|
|
|
|
Transgenomic
|
|
|
Precipio
|
|
Methodology
|
|
Minimum
(1)
|
|
|
25
th
Percentile
(2)
|
|
|
75
th
Percentile
(3)
|
|
|
Maximum
(4)
|
|
|
Minimum
(4)
|
|
|
25
th
Percentile
(3)
|
|
|
75
th
Percentile
(2)
|
|
|
Maximum
(1)
|
|
Comparable Public
Company (LTM)
|
|
|
7.8
|
%
|
|
|
23.6
|
%
|
|
|
55.1
|
%
|
|
|
70.9
|
%
|
|
|
29.1
|
%
|
|
|
44.9
|
%
|
|
|
76.4
|
%
|
|
|
92.2
|
%
|
Comparable Public Company
(2017E)
|
|
|
5.7
|
%
|
|
|
23.4
|
%
|
|
|
58.9
|
%
|
|
|
76.7
|
%
|
|
|
23.3
|
%
|
|
|
41.1
|
%
|
|
|
76.6
|
%
|
|
|
94.3
|
%
|
Comparable Public Company
(2018E)
|
|
|
9.3
|
%
|
|
|
28.8
|
%
|
|
|
67.9
|
%
|
|
|
87.4
|
%
|
|
|
12.6
|
%
|
|
|
32.1
|
%
|
|
|
71.2
|
%
|
|
|
90.7
|
%
|
Comparable M&A Transaction
|
|
|
1.4
|
%
|
|
|
24.5
|
%
|
|
|
70.5
|
%
|
|
|
93.5
|
%
|
|
|
6.5
|
%
|
|
|
29.5
|
%
|
|
|
75.5
|
%
|
|
|
98.6
|
%
|
Discounted Cash Flow
|
|
|
0.0
|
%
|
|
|
1.6
|
%
|
|
|
4.8
|
%
|
|
|
6.4
|
%
|
|
|
93.6
|
%
|
|
|
95.2
|
%
|
|
|
98.4
|
%
|
|
|
100.0
|
%
|
Exchange Ratio
|
|
|
|
|
|
|
|
|
|
|
28.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71.9
|
%
|
|
|
|
|
|
(1)
|
Based on the lowest implied enterprise value for Transgenomic
relative to the highest implied enterprise value for Precipio.
|
|
(2)
|
Based on the 25
th
percentile implied enterprise
value for Transgenomic relative to the 75
th
percentile implied enterprise value for Precipio.
|
|
(3)
|
Based on the 75
th
percentile implied enterprise
value for Transgenomic relative to the 25
th
percentile implied enterprise value for Precipio.
|
|
(4)
|
Based on the highest implied enterprise value for Transgenomic
relative to the lowest implied enterprise value for Precipio.
|
Miscellaneous
The summary set forth above does not contain a complete description
of the analyses performed by Craig-Hallum, but does summarize the material analyses performed by Craig-Hallum in rendering its
opinion. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary
description. Craig-Hallum believes that its analyses and the summary set forth above must be considered as a whole and that selecting
portions of its analyses or of the summary, without considering the analyses as a whole or all of the factors included in its analyses,
would create an incomplete view of the processes underlying the analyses set forth in the Craig-Hallum opinion. In arriving at
its opinion, Craig-Hallum considered the results of all of its analyses and did not attribute any particular weight to any factor
or analysis. Instead, Craig-Hallum made its determination as to fairness on the basis of its experience and financial judgment
after considering the results of all of its analyses. The fact that any specific analysis has been referred to in the summary above
is not meant to indicate that this analysis was given greater weight than any other analysis. In addition, the ranges of valuations
resulting from any particular analysis described above should not be taken to be Craig-Hallum’s view of the actual value
of Transgenomic, Precipio or the Combined Company.
No company or transaction used in the above analyses as a comparison
is directly comparable to Transgenomic, Precipio, the merger or the other transactions contemplated by the Merger Agreement. Accordingly,
an analysis of the results of the comparisons is not mathematical; rather, it involves complex considerations and judgments about
differences in the companies and transactions to which Transgenomic, Precipio and the merger were compared and other factors that
could affect the public trading value or transaction value of the companies involved.
Craig-Hallum performed its analyses solely for purposes of providing
its opinion to the Transgenomic Board. In performing its analyses, Craig-Hallum made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters. Certain of the analyses performed by Craig-Hallum are
based upon forecasts of future results furnished to Craig-Hallum by the management of Transgenomic and Precipio, which are not
necessarily indicative of actual future results and may be significantly more or less favorable than actual future results. These
forecasts are inherently subject to uncertainty because, among other things, they are based upon numerous factors or events beyond
the control of the parties or their respective advisors. Craig-Hallum does not assume responsibility if future results are materially
different from forecasted results.
Craig-Hallum relied upon and assumed, without assuming liability
or responsibility for independent verification, the accuracy and completeness of all information that was publicly available or
was furnished, or otherwise made available, to Craig-Hallum or discussed with or reviewed by Craig-Hallum. Craig-Hallum further
relied upon the assurances of management of Transgenomic and Precipio that the financial information provided to Craig-Hallum was
prepared on a reasonable basis in accordance with industry practice, and that management of each of Transgenomic and Precipio was
not aware of any information or facts that would make any information provided to Craig-Hallum incomplete or misleading. Without
limiting the generality of the foregoing, for the purpose of Craig-Hallum’s opinion, Craig-Hallum assumed that with respect
to financial forecasts, estimates of net operating loss tax benefits or other estimates and other forward-looking information reviewed
by Craig-Hallum, that such information was reasonably prepared based on assumptions reflecting the best currently available estimates
and judgments of management of Transgenomic and Precipio as to the expected future results of operations and financial condition
of Transgenomic, Precipio and the Combined Company. Craig-Hallum expressed no opinion as to any such financial forecasts, net operating
loss or other estimates or forward-looking information or the assumptions on which they were based. For purposes of the aforementioned
analyses, Craig-Hallum assumed that Liabilities (as such term is defined in the Merger Agreement) of Transgenomic are equal to
$8.0 million and that Liabilities of Precipio are equal to $1.2 million. Craig-Hallum relied, with Transgenomic’s consent,
on advice of the outside counsel and Transgenomic’s independent registered public accounting firm, and on the assumptions
of management of Transgenomic and Precipio, as to all accounting, legal, regulatory, tax and financial reporting matters with respect
to Transgenomic, Precipio and the merger. Craig-Hallum’s opinion does not address any accounting, legal, regulatory,
tax and financial reporting matters. Without limiting the foregoing, Craig-Hallum also assumed that the merger qualifies as a “reorganization”
described in Section 368(a) of the Code, that the Merger Agreement constitutes a “plan of reorganization” within
the meaning of Section 1.368-2(g) of the regulations promulgated under the Code and that the parties to the Merger Agreement
each are a “party to the reorganization” within the meaning of Section 368(a) of the Code.
In arriving at its opinion, Craig-Hallum assumed that the executed
Merger Agreement was in all material respects identical to the last draft reviewed by Craig-Hallum. Craig-Hallum relied upon and
assumed, without independent verification, that (i) the representations and warranties of all parties to the Asset Purchase Agreement
and all other related documents and instruments that are referred to therein were true and correct, (ii) each party to such agreements
would fully and timely perform all of the covenants and agreements required to be performed by such party, (iii) the merger would
be consummated pursuant to the terms of the Merger Agreement without amendments thereto and (iv) all conditions to the consummation
of the merger would be satisfied without waiver by any party of any conditions or obligations thereunder. Additionally, Craig-Hallum
assumed that all the necessary regulatory approvals and consents required for the merger would be obtained in a manner that would
not adversely affect Transgenomic, Precipio or the contemplated benefits of the merger.
In arriving at its opinion, Craig-Hallum did not perform any
appraisals, valuations or other independent analyses of any specific assets or liabilities (fixed, contingent or other) of Transgenomic
or Precipio, and was not furnished or provided with any such appraisals or valuations, nor did Craig-Hallum evaluate the solvency
of Transgenomic or Precipio under any state or federal law relating to bankruptcy, insolvency or similar matters. The analyses
performed by Craig-Hallum in connection with its opinion were going concern analyses. Craig-Hallum expressed no opinion regarding
the liquidation value of Transgenomic, Precipio or any other entity. Without limiting the generality of the foregoing, Craig-Hallum
undertook no independent analysis of any pending or threatened litigation, regulatory action, possible unasserted claims or other
contingent liabilities, to which Transgenomic, Precipio or any of its affiliates was a party or may be subject, and at the direction
of Transgenomic and with its consent, Craig-Hallum’s opinion made no assumption concerning, and therefore did not consider,
the possible assertion of claims, outcomes or damages arising out of any such matters. Craig-Hallum also assumed that neither Transgenomic
nor Precipio is a party to any material pending transaction, including without limitation any financing, recapitalization, acquisition
or merger, other than the merger.
Craig-Hallum’s opinion was necessarily based upon the
information available to it and facts and circumstances as they existed and were subject to evaluation on the date of its opinion.
Events occurring after the date of its opinion could materially affect the assumptions used in preparing its opinion. Craig-Hallum
did not express any opinion as to the price at which shares of capital stock of Transgenomic have traded or may trade following
announcement of the merger or at any future time. Craig-Hallum did not undertake to reaffirm or revise its opinion or otherwise
comment upon any events occurring after the date of its opinion and does not have any obligation to update, revise or reaffirm
its opinion.
Craig-Hallum’s opinion addressed solely the fairness,
from a financial point of view, to the holders of Transgenomic common stock of the exchange ratio, as set forth in the Merger Agreement,
and did not address any other terms or agreement relating to the merger or related transactions. Craig-Hallum was not requested
to opine as to, and its opinion does not address, the basic business decision to proceed with or effect and the merger, the merits
of the merger relative to any alternative transaction or business strategy that may be available to Transgenomic or any other terms
contemplated by the Merger Agreement. Furthermore, Craig-Hallum expressed no opinion with respect to the amount or nature of the
compensation to any officer, director or employee, or any class of such persons, relative to the compensation to be received by
the holders of any class of securities, creditors, or other constituencies of Transgenomic or Precipio in the merger, or relative
to or in comparison with the exchange ratio.
Craig-Hallum is a nationally recognized investment banking firm
and is regularly engaged as financial advisor in connection with mergers and acquisitions, underwritings, secondary distributions
of listed and unlisted securities, private placements, and valuations for corporate and other purposes. The Transgenomic Board
selected Craig-Hallum to render its fairness opinion in connection with the merger contemplated by the Merger Agreement on the
basis of its experience and reputation in acting as financial advisor in connection with mergers and acquisitions.
Craig-Hallum rendered to the Transgenomic Board a fairness opinion
in connection with the merger and upon delivery of the opinion will receive a fee of $125,000 from Transgenomic (the “Opinion
Fee”). The Opinion Fee was not contingent upon the consummation of the merger or the conclusions reached in Craig-Hallum’s
opinion. Pursuant to the terms of the engagement letter dated December 1, 2015, as amended August 29, 2016 and October 10, 2016,
Craig-Hallum agreed to serve a financial advisor to the Transgenomic Board in connection with its consideration of strategic alternatives,
including a possible business combination transaction. Under the engagement letter, Craig-Hallum will also receive a fee of $175,000
from Transgenomic, all of which is contingent upon the consummation of the merger. Transgenomic has agreed to indemnify Craig-Hallum
against certain liabilities and reimburse Craig-Hallum for certain expenses in connection with its services. In the ordinary
course of its business, Craig-Hallum and its affiliates may actively trade securities of Transgenomic for its own account or the
account of its customers and, accordingly, may at any time hold a long or short position in such securities. In addition, one of
Craig-Hallum’s investment banking professionals (who is not a member of Craig-Hallum’s Fairness Opinion Committee)
holds unsecured debt of Transgenomic with a principal value of approximately $100,000. This individual and other Craig-Hallum
professionals hold shares of Transgenomic common stock and warrants to purchase Transgenomic common stock. Except as noted in the
succeeding sentence, Craig-Hallum had not received fees or other compensation from Transgenomic or Precipio in the past two years
prior to the issuance of its opinion. Since 2014, Craig-Hallum has received $903,028 in additional fees and reimbursable expenses
related to general investment banking and advisory work performed for Transgenomic, including acting as underwriter for Transgenomic’s
February 2015 public offering of securities, for which Craig-Hallum received an underwriting discount of approximately $488,000.
Craig-Hallum and its affiliates may from time to time perform various investment banking and financial advisory services for Transgenomic
and for other clients and customers that may have conflicting interests with Transgenomic, for which Craig-Hallum would expect
to receive compensation.
Consistent with applicable legal and regulatory requirements,
Craig-Hallum has adopted policies and procedures to establish and maintain the independence of Craig-Hallum’s research department
and personnel. As a result, Craig-Hallum’s research analysts may hold opinions, make statements or investment recommendations
and/or publish research reports with respect to the merger and other participants in the transaction that differ from the opinions
of Craig-Hallum’s investment banking personnel.
Certain Financial Information
In the course of the discussions described under “–
Background of the Transaction,” the management of Transgenomic prepared and provided to Precipio internal financial projections
for the fiscal years ending December 31, 2016 through December 31, 2020, and the management of Precipio prepared and provided to
Transgenomic internal financial projections for the fiscal years ending December 31, 2016 through December 31, 2020. Such projections
were also furnished to the Transgenomic Board and Craig-Hallum, in connection with the Transgenomic Board’s consideration
of the merger and Craig-Hallum’s opinion analysis.
Transgenomic and Precipio do not usually
publicly disclose internal financial projections of the type referenced above, and even though such internal financial projections
are being disclosed in this section, they were not prepared with a view toward public disclosure. Such internal financial projections
were based on numerous variables and assumptions that are inherently uncertain and may be beyond the control of management, including,
without limitation, factors related to general economic and competitive conditions. Accordingly, actual results could vary significantly
from those set forth in the internal financial projections reproduced in this section below. See “Cautionary Statement Concerning
Forward-Looking Statements” on page 23.
The internal financial projections
were prepared by the management of Transgenomic and Precipio in good faith and on a reasonable basis based on the best information
available to them at the time of their preparation. The internal financial projections, however, are not actual results and should
not be relied upon as being necessarily indicative of actual future results, and readers of this proxy statement are cautioned
not to place undue reliance on this information. Neither Transgenomic’s nor Precipio’s independent auditors, nor any
other independent accountants, have compiled, examined or performed any procedures with respect to the financial projections set
forth below, nor have they expressed any opinion or any other form of assurance with respect thereto. The internal financial projections
were not prepared in compliance with GAAP, the published guidelines of the SEC regarding projections or the guidelines established
by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information.
Except as required by law, neither Transgenomic nor Precipio intends to update these financial projections or to make other projections
public in the future.
In addition, because the internal financial
projections cover multiple years, they will necessarily become less predictive with each successive year and become subject to
increasing uncertainty in the years beyond 2016. Though the internal financial projections are being presented with numeric specificity,
the assumptions upon which the internal financial projections were based necessarily involve judgments with respect to, among other
things, future economic and competitive conditions, many of which are difficult to predict accurately and are beyond the control
of Transgenomic’s and Precipio’s management. Also, the economic and business environments can and do change quickly,
which add a significant level of unpredictability and execution risk. It is expected that differences between actual and projected
results will occur, and actual results may be materially greater or less than those contained in the internal financial projections.
There can be no assurance that the internal financial projections, or the assumptions underlying the internal financial projections,
will be realized. Accordingly, readers of this proxy statement are cautioned not to place undue reliance on the internal financial
projections included in this section.
Transgenomic’s internal financial
projections included the following:
|
|
2016E
|
|
|
2017E
|
|
|
2018E
|
|
|
2019E
|
|
|
2020E
|
|
Revenues
|
|
$
|
1,792
|
|
|
$
|
2,411
|
|
|
$
|
6,692
|
|
|
$
|
10,835
|
|
|
$
|
12,547
|
|
COGS
|
|
$
|
2,124
|
|
|
$
|
1,020
|
|
|
$
|
2,270
|
|
|
$
|
3,105
|
|
|
$
|
3,205
|
|
Gross Profit
|
|
$
|
(332
|
)
|
|
$
|
1,391
|
|
|
$
|
4,422
|
|
|
$
|
7,730
|
|
|
$
|
9,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A & R&D
|
|
$
|
7,479
|
|
|
$
|
7,551
|
|
|
$
|
7,929
|
|
|
$
|
8,325
|
|
|
$
|
8,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Profit
|
|
$
|
(7,811
|
)
|
|
$
|
(6,160
|
)
|
|
$
|
(3,507
|
)
|
|
$
|
(596
|
)
|
|
$
|
601
|
|
Precipio’s internal financial
projections included the following:
Revenue distribution
|
|
2016E
|
|
|
2017E
|
|
|
2018E
|
|
|
2019E
|
|
|
2020E
|
|
Services
|
|
$
|
2.62
|
|
|
$
|
5.51
|
|
|
$
|
11.38
|
|
|
$
|
29.32
|
|
|
$
|
63.74
|
|
Technology
|
|
$
|
-
|
|
|
$
|
4.78
|
|
|
$
|
5.71
|
|
|
$
|
6.86
|
|
|
$
|
8.24
|
|
Total
|
|
|
2.62
|
|
|
|
10.29
|
|
|
|
17.09
|
|
|
|
36.18
|
|
|
|
71.98
|
|
Services
|
|
|
100
|
%
|
|
|
54
|
%
|
|
|
67
|
%
|
|
|
81
|
%
|
|
|
89
|
%
|
Technology
|
|
|
0
|
%
|
|
|
46
|
%
|
|
|
33
|
%
|
|
|
19
|
%
|
|
|
11
|
%
|
You should not regard the inclusion of these projections
in this proxy statement as an indication that Transgenomic, Precipio or any of their respective affiliates, advisors or other representatives
considered or consider the projections to be necessarily predictive of actual future events. None of Transgenomic, Precipio or
any of their respective affiliates, advisors or other representatives has made or makes any representations regarding the ultimate
performance of Transgenomic or Precipio compared to the information contained in the projections.
Transgenomic and Precipio
made no representations in the Merger Agreement or otherwise concerning such financial projections.
Board of Directors and Management
of New Precipio Following the Transaction
In connection with the merger, the
New Precipio board of directors will be expanded to seven directors from five directors and three of the existing directors will
resign. The five vacancies created by the resignations and the authorization of the increase in the board size will be filled by
two directors designated by the holders of the New Precipio preferred stock (the “preferred holder designees”) and
three directors designated by Precipio upon the closing of the merger. The holders of the New Precipio preferred stock will have
the right to designate the preferred holder designees for as long as they hold 50% of the shares issued in the private placement.
The following table sets forth information
regarding the current directors of Transgenomic who will continue to serve as directors on the New Precipio board of directors
and their positions after completion of the transaction:
|
|
|
|
|
|
Year First
|
|
Term as Director
|
Name
|
|
Age
|
|
Position with Transgenomic
|
|
Became Director
|
|
Will Expire(1)
|
|
|
|
|
|
|
|
|
|
Robert M. Patzig
|
|
48
|
|
Chairman of the Board of Directors
|
|
2010
|
|
2019
|
Michael A. Luther
|
|
59
|
|
Director
|
|
2014
|
|
2018
|
|
(1)
|
Directors’ terms of office are scheduled to expire at the annual meeting of stockholders to be held in the year indicated.
|
The Merger Agreement provides that
the officers of New Precipio will be agreed to by the parties prior to the effective time of the merger. It is currently anticipated
that the following current Precipio officers will serve as officers of New Precipio: Ilan Danieli, Chief Executive Officer; Carl
Iberger, Chief Financial Officer; Zaki Sabet, Vice President, Operations; and Ayman Mohamed, Vice President, Research & Development.
Steve Miller, Vice President, Business Development of Transgenomic, is expected to continue in that role.
Interests of Transgenomic’s
Executive Officers and Directors in the Transaction
Except as described below with respect
to Paul Kinnon, Transgenomic’s President and Chief Executive Officer and a member of the Transgenomic Board, and Doit L.
Koppler, II, a member of Transgenomic Board, none of the Transgenomic directors or executive officers have any interests in the
merger and the related private placement that may be different from, or in addition to the interests of the Transgenomic stockholders
generally. Mr. Patzig has an interest in funds managed by Third Security that own Transgenomic common stock, preferred stock and
secured debt. The Transgenomic Board was aware of these potential conflicts of interest and considered them, among other matters,
in reaching its decision to approve the merger and the private placement and to recommend that you approve the issuance of New
Precipio common stock in connection with the merger and the private placement.
Interests of Paul Kinnon
The employment agreement, dated September 27, 2013, between
Transgenomic and Paul Kinnon (the “Kinnon Employment Agreement”) provides for a severance payment to Mr. Kinnon equal
to 12 months of Mr. Kinnon’s then-current base salary if he is discharged other than for “Cause” (as defined
in the Kinnon Employment Agreement), other than due to Mr. Kinnon’s disability, or if Mr. Kinnon resigns for “Good
Reason” (as defined in the Kinnon Employment Agreement), regardless of whether or not the termination follows a change in
control, in each case, provided that Mr. Kinnon executes a severance agreement and general release in favor of Transgenomic. The
Kinnon Employment Agreement further provides that the vesting of the equity awards granted by Transgenomic to Mr. Kinnon will accelerate
in full and become fully vested upon a Change in Control, as defined in the Transgenomic, Inc. 2006 Equity Incentive Plan. It is
currently anticipated that Mr. Kinnon will be terminated at or prior to the effective time of the merger and that Mr. Danieli will
serve as Chief Executive Officer of New Precipio. Further, the consummation of the merger would trigger a Change in Control as
defined under the Kinnon Employment Agreement with regard to the equity awards granted by Transgenomic to Mr. Kinnon. Therefore,
pursuant to the terms of the Kinnon Employment Agreement, it is anticipated that the equity awards granted to Mr. Kinnon will accelerate
in full and become fully vested, and Mr. Kinnon will be entitled to receive a severance payment equal to 12 months of Mr. Kinnon’s
then-current base salary. As of February 1, 2017, Mr. Kinnon holds 56,666 unvested stock options under the 2006 Equity Incentive
Plan for which vesting is expected to accelerate in connection with the merger. As described below in the section entitled “Payments
and Benefits to Transgenomic’s Named Executive Officers” on page 52, using an assumed stock price of $0.206,
the average closing price per share of Transgenomic common stock over the first five business days following the announcement of
the merger, all unvested equity awards for Mr. Kinnon are out of the money, and therefore no value is included in connection with
the acceleration. In addition, such unvested equity awards for Mr. Kinnon are out of the money as of February 1, 2017. During the
period in which the stock options may be exercised following the merger, the market price of the common stock may be higher or
lower than the assumed stock price disclosed above. The severance payments will be made over 12 months in accordance with Transgenomic’s
payroll practices, provided that payment of these amounts is subject to the provisions of Section 409A of the Code which may require
that payments be delayed for six months (with interest) following termination of employment. If Mr. Kinnon breaches any of the
covenants in the Kinnon Employment Agreement related to the protection of Transgenomic’s interests, including non-solicitation
of employees for six months following termination of employment and confidentiality and non-disparagement following termination
of employment, he is not entitled to further severance payments. See the section entitled “2016 Executive Compensation”
on page 90 for a more detailed discussion.
Transgenomic previously granted 124,886 incentive stock options
and 149,280 non-qualified stock options to Mr. Kinnon under the Transgenomic, Inc. 2006 Equity Incentive Plan. On December 13,
2016, the Board agreed to extend the period during which these stock options may be exercised following Mr. Kinnon’s termination
of employment (i) by Transgenomic without “Cause” or (ii) by Mr. Kinnon for “Good Reason” (each of the
foregoing capitalized terms as defined in the Kinnon Employment Agreement) to 24 months after such termination, but in no event
shall such period extend beyond the Term of Options as defined in the applicable award agreements, and for purposes of any incentive
stock option, such extension shall be considered the grant of a new award on the same terms except that the exercise price shall
be the greater of (i) the exercise price set forth in the original grant or (ii) the fair market value on the date of the extension.
The Kinnon Employment Agreement includes a modified cutback
provision, such that if payments or benefits received or to be received by Mr. Kinnon pursuant to the Kinnon Employment Agreement
or any other agreement, contract, award or arrangement would constitute a “parachute payment” as described in Section
280G of the Code and would subject Mr. Kinnon and Transgenomic to golden parachute penalties under Section 280G of the Code and
related provisions, the aggregate payments or benefits will either be paid to Mr. Kinnon in full or reduced to an amount that would
not result in golden parachute penalties, whichever results in the receipt by Mr. Kinnon of the greatest amount of aggregate payments
or benefits, after taking into account all taxes, including the excise tax imposed under Section 4999 of the Code on excess parachute
payments (the “Modified Cutback Provision”). The determinations regarding Section 280G parachute payments and the application
of the Modified Cutback Provision are to be made in good faith by Transgenomic’s independent auditors. For purposes of this
disclosure, Transgenomic does not expect that the aggregate payments and benefits to Mr. Kinnon following termination of his employment
in connection with the merger will exceed the maximum amount that may be paid to Mr. Kinnon without triggering golden parachute
penalties under Section 280G of the Code.
Payments and Benefits to Transgenomic’s Named Executive
Officers
The following table sets forth the information required by Item
402(t) of Regulation S-K promulgated by the SEC regarding certain compensation which Transgenomic’s named executive officers
may receive that is based on or that otherwise relates to the merger. The amounts are calculated assuming that the effective date
of the merger and a qualifying termination of employment for Mr. Kinnon occurred on February 1, 2017. The amounts below were determined
using a per share price of Transgenomic common stock of $0.206, the average closing price per share of Transgenomic common stock
over the first five business days following the announcement of the merger agreement, and are based on multiple assumptions that
may or may not actually occur or be accurate on the relevant date, including the assumptions described in the footnotes to the
table. As a result of the foregoing assumptions, the actual amounts, if any, to be received may materially differ from the amounts
set forth below.
The merger-related compensation payable
to Transgenomic’s named executive officers is the subject of a non-binding, advisory vote of Transgenomic stockholders, as
described under “Approval of Advisory Compensation Proposal (Proposal No. 4)” beginning on page 97.
Golden Parachute Compensation*
Name
|
|
Cash
|
|
|
Equity
|
|
|
Pension/
NQDC
|
|
|
Perquisites/
Benefits
|
|
|
Tax
Reimbursement
|
|
|
Other
|
|
|
Total
|
|
Paul Kinnon
|
|
$
|
350,000
|
(1)
|
|
|
—
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
350,000
|
|
*This table assumes the merger was completed and Mr. Kinnon’s
employment was terminated on February 1, 2017, and that all required conditions to the payment of these amounts have been satisfied. Mr.
Leon Richards, former Chief Accounting Officer, resigned effective September 30, 2016 and, therefore, no payments will be made
to Mr. Richards in connection with the merger.
|
(1)
|
The cash payment to Mr. Kinnon consists of severance payments
equal to 12 months of Mr. Kinnon’s then-current base salary upon a qualifying termination, regardless of whether or not
the termination follows a change in control, provided that Mr. Kinnon executes a severance agreement and general release in favor
of Transgenomic. The severance payments will be made over 12 months in accordance with Transgenomic’s payroll
practices, provided that payment of these amounts is subject to the provisions of Section 409A of the Code which may require that
payments be delayed for six months following termination of employment. Any severance payments required to be delayed
will be paid in a lump sum to Mr. Kinnon six months and 1 day following termination of employment, and the remaining severance
payments will be paid in accordance with Transgenomic’s payroll practices for the remainder of the 12 months. Any
delayed severance payments will accrue interest at the Wall Street Journal prime rate in effect on a date chosen by Transgenomic,
which accrued interest is not reflected in this amount. If Mr. Kinnon breaches any of the covenants in the Kinnon Employment Agreement
related to the protection of Transgenomic’s interests, including non-solicitation of employees for six months following
termination of employment and confidentiality and non-disparagement following termination of employment, he is not entitled to
further severance payments.
|
|
(2)
|
As described above, Mr. Kinnon’s unvested stock options
under the 2006 Equity Incentive Plan will accelerate upon a change in control as defined in the 2006 Equity Incentive Plan as
follows: 6,666 stock options granted on February 18, 2014 with an exercise price of $5.54 and 50,000 stock options granted on
April 1, 2015 with an exercise price of $1.44. Based on a per share price of Transgenomic common stock of $0.206, the
average closing price per share of Transgenomic common stock over the first five business days following the announcement of the
merger agreement, all unvested equity awards for Mr. Kinnon are out of the money (
i.e.
, the exercise price is above the
assumed stock price), and therefore no value is included in connection with the acceleration. On December 13, 2016, the Transgenomic
Board extended the period during which Mr. Kinnon’s stock options may be exercised to 24 months following a qualifying termination
(but not beyond the term of options set forth in the applicable award agreements).
|
As described above, the Kinnon Employment Agreement includes
a Modified Cutback Provision. The determinations regarding Section 280G parachute payments and the application of the Modified
Cutback Provision are to be made in good faith by Transgenomic’s independent auditors. For purposes of this disclosure, Transgenomic
does not expect that the aggregate payments and benefits to Mr. Kinnon following termination of his employment in connection with
the merger will exceed the maximum amount that may be paid to Mr. Kinnon without triggering golden parachute penalties under Section
280G of the Code.
Third Security Participation in Private Placement and
Conversion of Debt and Convertible Preferred Stock into Common Stock
Doit L. Koppler, II is employed by Third Security and is affiliated
with certain of its affiliates, which collectively hold more than 10% of Transgenomic’s voting interests. Certain affiliates
of Third Security (the “Lenders”) hold the secured indebtedness of Transgenomic, $3 million of which is being converted
into approximately 24.1 million shares of New Precipio preferred stock in connection with the private placement that will represent
approximately 8% of fully diluted New Precipio common stock. The remainder of the secured indebtedness and all accrued interest
held by the Lenders will convert into approximately 9.8 million shares of New Precipio common stock immediately prior to effectiveness
of the merger at a price equal to $0.50 per share, representing approximately 3% of the fully diluted New Precipio common stock.
See “– Conversion of Outstanding Debt – Conversion of the Revolving Line and Term Loan.” Third Security
owns 214,705 shares of Transgenomic Series A-1 Convertible Preferred Stock which will convert into 214,705 shares of Transgenomic
common stock immediately prior to the effectiveness of the merger pursuant to the conversion provisions set forth in the Transgenomic
Certificate of Incorporation. See “Description of Transgenomic Capital Stock – Preferred Stock”.
Conversion of Outstanding Debt
As a condition to closing, the Merger Agreement requires that
Transgenomic will not have any indebtedness as of the closing other than trade payables and accrued expenses and certain outstanding
debt, including secured debt that converts upon the effectiveness of the merger into approximately 9.8 million shares of New Precipio
common stock and approximately 24.1 million shares of New Precipio preferred stock. On December 13, 2016 and February 2, 2017,
the audit committee of the Transgenomic Board, in accordance with the Transgenomic Corporate Governance Guidelines, approved the
conversion of secured indebtedness of Transgenomic held by the Lenders into shares of New Precipio preferred stock and New Precipio
common stock. See “— Conversion of Revolving Line and Term Loan.”
Conversion of Revolving Line and Term Loan
On March 13, 2013 (the “Effective Date”), Transgenomic
entered into a Loan and Security Agreement with the Lenders for (a) a revolving line of credit (the “Revolving Line”)
with borrowing availability of up to $4.0 million, subject to reduction based on our eligible accounts receivable, and (b) a term
loan (the “Term Loan” and, together with the Revolving Line, the “Loan Agreement”) of $4.0 million. Proceeds
were used to pay off a three-year senior secured promissory note payable to PGxHealth, LLC, which was entered into on December
29, 2010 in conjunction with Transgenomic’s acquisition of the FAMILION family of genetic tests, and for general corporate
and working capital purposes.
On August 2, 2013, Transgenomic entered into an amendment to
the Loan Agreement (the “Amendment”). The Amendment, which became effective as of June 30, 2013, reduced Transgenomic’s
future minimum revenue covenants under the Loan Agreement and modified the interest rates applicable to the amounts advanced under
the Revolving Line.
On November 14, 2013, Transgenomic entered into a second amendment
to the Loan Agreement (the “Second Amendment”). The Second Amendment, which became effective as of October 31, 2013,
reduced Transgenomic’s future minimum revenue covenants under the Loan Agreement.
On January 27, 2014, Transgenomic entered into a third amendment
to the Loan Agreement (the “Third Amendment”). Pursuant to the Third Amendment, the Lenders agreed to waive certain
events of default under the Loan Agreement, and the parties amended certain provisions of the Loan Agreement, including the minimum
liquidity ratio that Transgenomic must maintain during the term of the Loan Agreement.
On March 3, 2014, Transgenomic entered into a fourth amendment
to the Loan Agreement (the “Fourth Amendment”). Pursuant to the terms of the Fourth Amendment, Transgenomic was not
required to make any principal or interest payments under the Term Loan for the period from March 1, 2014 through March 31, 2015.
The interest on the debt that was deferred and not paid was capitalized as part of the Term Loan. The amount of interest that was
capitalized from March 1, 2014 to March 31, 2015 was $0.4 million.
On October 22, 2014, Transgenomic entered into a fifth amendment
to the Loan Agreement (the “Fifth Amendment”). Pursuant to the Fifth Amendment, the parties amended certain provisions
of the Loan Agreement, including reducing the minimum liquidity and revenue covenants under the Loan Agreement. The Fifth Amendment
also reduced the aggregate amount that Transgenomic may borrow under the Revolving Line from $4.0 million to $3.0 million.
On April 1, 2015, Transgenomic entered into a sixth amendment
to the Loan Agreement (the “Sixth Amendment”). Pursuant to the Sixth Amendment, among other things, (a) the Lenders
waived specified events of default under the terms of the Loan Agreement, (b) commencing April 1, 2015, Transgenomic began making
monthly interest payments with respect to the Term Loan to the Lenders, (c) Transgenomic was not obligated to make monthly payments
of principal under the Term Loan to the Lenders until April 1, 2016, (d) Transgenomic made an initial prepayment of a portion of
the Term Loan balance in the amount of approximately $148,000 on April 1, 2015 and is required to make one or more additional prepayments
to the Lenders under the Loan Agreement upon the occurrence of certain events, as defined in the Loan Agreement, and (e) Transgenomic
was not required to comply with the minimum liquidity ratio under the terms of the Loan Agreement until the earliest to occur of
a specified event, as defined in the Loan Agreement, or March 31, 2016. The Sixth Amendment also extended the time period in which
Transgenomic must provide certain reports and statements to the Lenders and amends the circumstances pursuant to which Transgenomic
may engage in certain sales or transfers of Transgenomic’s business or property without the consent of the Lenders.
As of June 30, 2015, Transgenomic was in compliance with all
financial covenants of the Loan Agreement, but was not in compliance with the restrictions limiting the amount that Transgenomic
may borrow under the Revolving Line. Accordingly, on August 10, 2015, Transgenomic received a waiver from the Lenders relating
to this non-compliance and paid the Lenders an aggregate of $0.7 million, which brought Transgenomic back into compliance with
the terms of the Revolving Line.
On September 4, 2015, Transgenomic entered into a seventh amendment
to the Loan Agreement (the “Seventh Amendment”). The Seventh Amendment, among other things, (a) provided that the Lenders
waived specified events of default under the terms of the Loan Agreement, (b) reduced Transgenomic’s future minimum revenue
covenants under the Loan Agreement, (c) reduced Transgenomic’s borrowing availability under the Revolving Line to approximately
$2.3 million, and (d) limited Transgenomic’s borrowing base under the Loan Agreement to the amount of the Revolving Line.
On January 6, 2016, Transgenomic entered into an eighth amendment
to the Loan Agreement (the “Eighth Amendment”). The Eighth Amendment, among other things, (a) provided that the Lenders
waived specified events of default under the terms of the Loan Agreement, (b) reduced Transgenomic’s future minimum revenue
covenants under the Loan Agreement, (c) extended the maturity date of the Loan Agreement until November 1, 2017, and (d) provided
for the repayment of an overadvance of $750,000 previously provided by the Lenders to Transgenomic pursuant to the Loan Agreement.
On June 6, 2016, Transgenomic entered into a ninth amendment
to the Loan Agreement (the “Ninth Amendment”). The Ninth Amendment, among other things, (a) provided that the Lenders
waived specified events of default under the terms of the Loan Agreement, (b) amended the prepayment terms of the Loan Agreement,
(c) provided for the reduction of amounts available under the Revolving Line upon the prepayment or repayment of certain amounts
by Transgenomic, (d) removed the minimum liquidity ratio and minimum net revenue financial covenants applicable to Transgenomic
under the Loan Agreement, (e) amended the circumstances pursuant to which Transgenomic may engage in certain sales or transfers
of Transgenomic’s business or property without the consent of the Lenders, and (f) capitalized certain amounts owed by Transgenomic
to the Lenders and added such overdue amounts to the outstanding principal amount of the Revolving Line.
As a result of the Ninth Amendment, the overadvance that existed
at March 31, 2016 was added to the outstanding principal amount of the Revolving Line and no overadvance existed as of September
30, 2016.
The independent members of
the Transgenomic Board determined in good faith that it was in the best interests of Transgenomic and its stockholders to provide
an incentive for the Lenders to convert the outstanding principal and accrued interest under the Revolving Line and Term Loan and
agreed with the Lenders that such conversions would be on the same terms as the conversion provisions of the outstanding unsecured
convertible promissory notes. See “— Unsecured Convertible Promissory Notes”.
On February 2, 2017, Transgenomic entered into a tenth amendment
to the Loan Agreement (the “Tenth Amendment”). The Tenth Amendment, among other things, (i) provides that the Lenders
will waive specified events of default under the terms of the Loan Agreement until the effective time of the Merger (or the termination
of the Merger Agreement in accordance with its terms), (ii) provides for the conversion of all outstanding indebtedness owed to
the Lenders under the Loan Agreement (the “Outstanding Indebtedness”) into shares of Transgenomic common stock and
preferred stock (collectively, the “Conversion Shares”) effective as of the closing date of the Merger and (iii) the
termination of the Loan Documents (as defined in the Loan Agreement) and the termination and release of all security interests
and liens of the Lenders in the Collateral (as defined in the Loan Agreement) in each case immediately following the conversion
of the Outstanding Indebtedness into Conversion Shares. In connection with the Tenth Amendment, the Lenders have agreed to convert
the outstanding principal and accrued interest under the Revolving Line and the Term Loan into (i) approximately 9.8 million shares
of New Precipio common stock immediately prior to the effectiveness of the merger at a price equal to $0.50 per share and (ii)
24.1 million shares of New Precipio preferred stock. As of December 31, 2016, the outstanding amount owed under the Revolving Line
and the Term Loan was $7.243 million of principal and $556,642 of accrued interest. The issuance of the Conversion Shares is subject
to the approval of the Transgenomic stockholders in accordance with Nasdaq Capital Market listing rules.
Certain affiliates of Third Security, LLC, including the Lenders,
have agreed to enter into two call option agreements pursuant to which (i) the Lenders will grant an option to purchase an aggregate
of approximately 7.9 million shares of New Precipio Common Stock for an aggregate exercise price of $1.00 for all such shares to,
Kuzven Precipio Investor LLC, a principal investor of Precipio, and (ii) the Lenders will grant an option to purchase an aggregate
of approximately 7.9 million shares of New Precipio Common Stock for an aggregate exercise price of $1.00 for all such shares to
an affiliate of BV Advisory Partners, LLC.
Unsecured Convertible Promissory Notes
On December 31, 2014, Transgenomic entered into an Unsecured
Convertible Promissory Note Purchase Agreement (the “Note Purchase Agreement”) with an accredited investor (the “Investor”),
pursuant to which Transgenomic agreed to issue and sell to the Investor in a private placement an unsecured convertible promissory
note (the “Initial Note”). Transgenomic issued the Initial Note in the aggregate principal amount of $750,000 to the
Investor on December 31, 2014. Pursuant to the terms of the Initial Note, interest accrued at a rate of 6% per year and the Initial
Note was set to mature on December 31, 2016 (the “Maturity Date”). Under the Initial Note, the outstanding principal
and unpaid interest accrued was convertible into shares of Transgenomic common stock as follows: (i) commencing upon the date of
issuance of the Initial Note (but no earlier than January 1, 2015), the Investor was entitled to convert, on a one-time basis,
up to 50% of the outstanding principal and unpaid interest accrued under the Initial Note, into shares of Transgenomic common stock
at a conversion price equal to the lesser of (a) the average closing price of the common stock on the principal securities exchange
or securities market on which Transgenomic common stock is then traded (the “Market”) for the 20 consecutive trading
days immediately preceding the date of conversion, and (b) $2.20 (subject to adjustment for stock splits, stock dividends, other
distributions, recapitalizations and the like); and (ii) commencing February 15, 2015, the Investor was entitled to convert, on
a one-time basis, any or all of the remaining outstanding principal and unpaid interest accrued under the Initial Note, into shares
of Transgenomic common stock at a conversion price equal to 85% of the average closing price of Transgenomic common stock on the
Market for the 15 consecutive trading days immediately preceding the date of conversion. The Initial Note has been converted in
full into 502,786 shares of Transgenomic common stock, in accordance with the terms of the Initial Note.
On January 15, 2015, Transgenomic entered into the Note Purchase
Agreement with seven accredited investors (the “Additional Investors”) and, on January 20, 2015, issued and sold to
the Additional Investors, in a private placement, notes (the “Additional Notes”) in an aggregate principal amount of
$925,000. The Additional Notes have the same terms and conditions as the Initial Note (except with respect to the Remaining Note
as described below). As of January 19, 2017, $800,000 of the aggregate principal amount of the Additional Notes, and accrued interest
thereon, has been converted into an aggregate of 654,029 shares of Transgenomic common stock. Craig-Hallum acted as the sole placement
agent for the Additional Notes and Transgenomic issued to Craig-Hallum a convertible promissory note, upon the same terms and conditions
as the Additional Notes, in an aggregate principal amount equal to 5% of the proceeds received by Transgenomic, or $46,250. On
January 19, 2017, Craig-Hallum converted the principal amount and accrued interest on its convertible promissory note into an aggregate
of 43,129 shares of Transgenomic common stock.
As of January 17, 2017, one Additional Note remains outstanding
with an aggregate amount due on such Note of $139,876 ($125,000 in principal amount and $14,876 of accrued interest) (the “Remaining
Note”). The Additional Investor holding the Remaining Note (the “Remaining Investor”) agreed to extend the Maturity
Date of the Remaining Note pursuant to a January 17, 2017 amendment to the Remaining Note between Transgenomic and the Remaining
Investor (the “Amendment”). The Amendment provides that two-thirds of the outstanding principal amount of the Remaining
Note must be paid upon the earlier to occur of the closing of the merger between Merger Sub and Precipio as contemplated by the
Merger Agreement or June 16, 2017 (such applicable date, the “Deferred Maturity Date”). The remaining one-third of
the principal amount outstanding on the Remaining Note must be paid on the six month anniversary of the Deferred Maturity Date
(the “Extended Maturity Date”). On the applicable Deferred Maturity Date, all accrued and unpaid interest on the Remaining
Note as of the Deferred Maturity Date will be converted into shares of Transgenomic’s common stock at a conversion price
based on the average closing price of Transgenomic common stock on the Market for the 20 consecutive trading days immediately preceding
the date of conversion, but in no event will the conversion price be less than $0.25 per share. Interest that accrues on the remaining
principal amount of the Remaining Note from the Deferred Maturity Date will be payable on the Extended Maturity Date, unless the
Remaining Note is converted in which case such interest will be payable in shares of Transgenomic’s common stock as part
of the conversion.
In exchange for extending the Maturity Date of the Remaining
Note, Transgenomic will issue to the Remaining Investor on the applicable Deferred Maturity Date a warrant to purchase shares of
Transgenomic’s common stock having an aggregate value of $6,250 with an exercise price to be determined as of the date of
issuance of the warrant based on the average closing price of Transgenomic common stock on the Market for the 20 consecutive trading
days immediately preceding the date of issuance of the warrant, subject to the approval of the Market if necessary. The warrant
will expire two years from the date of issuance.
Bridge Loan
On February 2, 2017, Precipio agreed to offer a line of credit
to Transgenomic up to $250,000 pursuant to an unsecured promissory note (the “Bridge Loan”). All outstanding amounts
under the Bridge Loan accrue interest at a rate of 10% per annum and are due and payable upon the earlier to occur of (a) the date
that is 90 days following the date of the Bridge Loan or (b) the closing of the merger. The proceeds of the Bridge Loan will be
used by Transgenomic to finance certain general expenses until the effective date of the merger.
Third Party Approvals Required
for the Merger and the Private Placement
The Merger Agreement also provides that the consummation of
the merger is conditioned on the receipt of consents from certain other third parties, including lenders, lessors and other commercial
partners.
Regulatory Matters
Neither Transgenomic nor Precipio is
required to make any filings or to obtain any approvals or clearances from any antirust regulatory authorities in the United States
or other countries to consummate the transactions contemplated by the Merger Agreement. Transgenomic must comply with applicable
federal and state securities laws and regulations and Nasdaq rules in connection with the issuance of shares of New Precipio common
stock in the transaction, including the filing with the SEC of this proxy statement.
Because Transgenomic common stock is listed on Nasdaq, Transgenomic
is subject to The NASDAQ Stock Market Listing Rules. The NASDAQ Stock Market Listing Rule 5635(a) requires stockholder approval
with respect to issuances of Transgenomic common stock, among other instances, when the shares to be issued are being issued in
connection with the acquisition of the stock or assets of another company and are equal to 20% or more of the outstanding shares
of Transgenomic common stock before the issuance. The NASDAQ Stock Market Listing Rule 5635(b) requires stockholder approval when
any issuance or potential issuance will result in a “change of control” of the issuer. Although Nasdaq has not adopted
any rule on what constitutes a “change of control” for purposes of Rule 5635(b), Nasdaq has previously indicated that
the acquisition of, or right to acquire, by a single investor or affiliated investor group, as little as 20% of the common stock
(or securities convertible into or exercisable for common stock) or voting power of an issuer could constitute a change of control.
In addition, Rule 5635(d) of The NASDAQ Stock Market Listing Rules requires stockholder approval if a listed company issues common
stock or securities convertible into or exercisable for common stock in a private placement equal to 20% or more of the common
stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the
stock.
Nasdaq Listing
Transgenomic common stock currently is listed on Nasdaq under
the symbol “TBIO.” Transgenomic has filed an initial listing application with Nasdaq pursuant to Nasdaq’s “change
of control” rules. If such application is accepted, Transgenomic anticipates that the shares of New Precipio common stock
will be listed on Nasdaq following the closing of the merger under the trading symbol “PRPO.”
As previously disclosed, Transgenomic
is not currently in compliance with the listing requirements for Nasdaq. To maintain listing on Nasdaq, Transgenomic must comply
with Nasdaq Marketplace Rules, which requirements include a minimum bid price of $1.00 per share. On February 23, 2016, Transgenomic
was notified by the staff of Nasdaq that it was not in compliance with the $1.00 minimum bid price requirement, as the common stock
had traded below the $1.00 minimum bid price for 30 consecutive business days. Transgenomic was provided with a 180 calendar day
period, which ended on August 22, 2016, within which to regain compliance with the minimum bid price requirement. On April 20,
2016, Transgenomic was notified by the staff of Nasdaq that Transgenomic was not in compliance with the minimum stockholders’
equity requirement of the Nasdaq Marketplace Rules, which requires listed companies to maintain stockholders’ equity of at
least $2,500,000. Transgenomic was provided with a 180 calendar day period, which ended on October 17, 2016, within which to regain
compliance with the minimum stockholders’ equity requirement. On August 24, 2016, Transgenomic received a determination letter
from the staff of Nasdaq stating that it had not regained compliance with the minimum bid price requirement and that it was not
eligible for an additional 180 calendar day extension because it was not in compliance with the minimum stockholders’ equity
requirement. On August 29, 2016, Transgenomic requested a hearing before the Nasdaq Hearings Panel. On October 13, 2016, Transgenomic
had a hearing before the Nasdaq Hearings Panel where it presented a plan to regain compliance with all Nasdaq listing requirements,
which included the completion of the merger and private placement.
At the hearing, Transgenomic asked that the Nasdaq Hearings
Panel continue its listing through December 31, 2016, to allow it to close the previously announced merger, which Transgenomic
expects to result in a new entity that will meet all initial listing standards for Nasdaq; however, Transgenomic noted that it
will need to effectuate a reverse stock split to ensure compliance with the minimum bid price requirement. Based on the plan presented
by Transgenomic at the hearing, the Nasdaq Hearings Panel issued a decision letter granting Transgenomic’s request for continued
listing on Nasdaq until December 31, 2016. As a condition to allowing Transgenomic to continue its listing on Nasdaq, the Nasdaq
Hearings Panel required Transgenomic, on or before November 15, 2016, to update the Nasdaq Hearing Panel on the status of the reverse
stock split, the filing of a definitive proxy statement for the merger and any feedback received from the Nasdaq staff regarding
the prospects of the application of the post-merger entity for listing on Nasdaq. Transgenomic provided such update to the Nasdaq
Hearing Panel on November 1, 2016. On December 9, 2016, Transgenomic provided another update to the Nasdaq Hearing Panel and requested
that the Nasdaq Hearing Panel extend its continued listing on Nasdaq until February 19, 2017. On December 9, 2016, confirmed by
letter dated December 27, 2016, the Nasdaq Hearing Panel granted Transgenomic’s request to extend its listing on Nasdaq,
subject to the following condition:
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On or before February 19, 2017, Transgenomic must have closed the merger and gained approval from the Nasdaq staff for listing
of shares of New Precipio common stock on Nasdaq.
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In addition, in order to fully comply with the terms of the
decision letter, Transgenomic must be able to demonstrate compliance with all requirements for continued listing on Nasdaq. A failure
by New Precipio upon the completion of the merger to comply with the initial listing standards of Nasdaq may subject its stock
to delisting from Nasdaq. Upon completion of the merger, New Precipio will be required to meet the initial listing requirements
to maintain the listing and continued trading of its shares on Nasdaq. These initial listing requirements are more difficult to
achieve than the continued listing requirements under which Transgenomic is now trading. Pursuant to the Merger Agreement, Transgenomic
agreed to use its commercially reasonable efforts to cause the shares of Transgenomic common stock being issued in the merger to
be approved for listing on Nasdaq at or prior to the effective time of the merger. Based on information currently available to
Transgenomic, Transgenomic anticipates that its stock will be unable to meet the $4.00 (or, to the extent applicable, $3.00) minimum
bid price initial listing requirement at the closing of the merger unless it effects a reverse stock split. On October 31, 2016,
the stockholders of Transgenomic authorized the Transgenomic Board to effect a reverse stock split of the shares of Transgenomic
common stock at a ratio of between one-for-ten to one-for-thirty. In addition, often times a reverse stock split will not result
in a trading price for the affected common stock that is proportional to the ratio of the split. If New Precipio is unable to satisfy
Nasdaq listing requirements, Nasdaq may notify Transgenomic, or New Precipio, that its shares of common stock will be subject to
delisting from Nasdaq.
Transgenomic’s continued listing on Nasdaq expires
on February 19, 2017. The merger will not be effective prior to February 19, 2017 and accordingly Transgenomic could be
delisted for a period prior to the merger effective date if Nasdaq does not otherwise agree to extend Transgenomic’s
continued listing. Upon a potential delisting from Nasdaq, if the New Precipio common stock is not then eligible for
quotation on another market or exchange, trading of the shares could be conducted in the over-the-counter market or on an
electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such
event, it is likely that there would be significantly less liquidity in the trading of New Precipio common stock; decreases
in institutional and other investor demand for the shares, coverage by securities analysts, market making activity and
information available concerning trading prices and volume; and fewer broker-dealers willing to execute trades in New
Precipio common stock. Also, it may be difficult for New Precipio to raise additional capital if the New Precipio common
stock is not listed on a major exchange. The occurrence of any of these events could result in a further decline in the
market price of New Precipio common stock and could have a material adverse effect on New Precipio.
Federal Securities Law Consequences;
Resale Restrictions
The shares of New Precipio common stock to be issued to unit
holders of Precipio in connection with the merger, to holders of Transgenomic Series A-1 Convertible Preferred Stock upon conversion
of such stock and to holders of Transgenomic outstanding debt upon conversion of such debt as well as the New Precipio preferred
stock to be issued in the merger and in the related private placement or pursuant to the conversion of outstanding debt of Transgenomic
will be “restricted securities.” Those shares of New Precipio common stock and New Precipio preferred stock will not
be registered under the Securities Act upon issuance and will not be freely transferable. Holders of such shares of common stock
and preferred stock may not sell their respective shares unless the shares are registered under the Securities Act or an exemption
is available under the Securities Act. In connection with the merger, as described in “The Merger Agreement – Covenants
– Form S-3 Registration Statement,” Transgenomic has agreed to file promptly after the closing of the merger a resale
“shelf” registration statement to register the shares of Precipio common stock issued to unit holders of New Precipio
in the merger.
Anticipated Accounting Treatment
The merger will be treated by Transgenomic as a reverse acquisition
under the acquisition method of accounting in accordance with GAAP. For accounting purposes, Precipio is considered to be acquiring
Transgenomic in the merger. Management of Transgenomic and Precipio have made a preliminary estimate of the purchase price calculated
as described in Note 2 to the section entitled “Unaudited Pro Forma Combined Financial Information of Transgenomic, Inc.”
beginning on page 104 of this proxy statement. The net tangible and intangible assets acquired and liabilities assumed in
connection with the merger are recorded at their estimated transaction date fair values. The acquisition method of accounting is
dependent upon certain valuations and other studies that have yet to commence or progress to a stage where there is sufficient
information for a definitive measurement. A final determination of these estimated fair values, which cannot be made prior to the
completion of the merger, will be based on the actual net tangible and intangible assets of Transgenomic that exist as of the date
of completion of the merger.
Material U.S. Federal Income Tax
Consequences of the Merger
The following discussion summarizes certain material U.S. federal
income tax consequences of the merger. This discussion does not address any tax consequences arising under the laws of any state,
local or non-U.S. jurisdiction, or under any U.S. federal laws other than those pertaining to income tax. This discussion is based
upon the Code, the Treasury regulations promulgated under the Code and court and administrative rulings and decisions, all as in
effect on the date hereof. These laws may change, possibly retroactively, and any change could affect the accuracy of the statements
and conclusions set forth in this discussion.
Transgenomic and Precipio intend the merger to qualify as a
“reorganization” within the meaning of Section 368(a) of the Code. Precipio has made an election to be taxed as a corporation
for U.S. federal income tax purposes. In addition, if the merger were for any reason to not qualify as a “reorganization”
within the meaning of Section 368(a) of the Code, the merger, together with any contemporaneous contributions of cash and
debt to Transgenomic may constitute a tax-deferred transaction under Section 351 of the Code.
No gain or loss will be recognized by Transgenomic, or Precipio
or the Transgenomic stockholders as a result of the Merger, regardless of whether it qualifies as a reorganization. Additionally,
as a “reorganization” within the meaning of Section 368(a) or a transaction qualifying under Section 351(a) of the
Code, no gain or loss will be recognized by the Precipio unit holders as they will receive only New Precipio common stock and/or
New Precipio preferred stock, as applicable, in the merger in exchange for their membership interests in Precipio. Transgenomic
stockholders who are also unit holders of Precipio should consult their tax advisor as to the tax consequences to them of participating
in the merger as a Precipio unit holder.
This is a summary of
the material U.S. federal income tax consequences of the merger and is not tax advice.
No Appraisal Rights
Under applicable law, Transgenomic
stockholders do not have the right to an appraisal of the value of their shares in connection with the merger with Precipio.
Independent Registered Public
Accounting Firm
Representatives of Ernst & Young LLP (“Ernst &
Young”), the independent registered public accounting firm for Transgenomic as of the date of the Merger Agreement, are not
expected to be present at the special meeting.
On January 12, 2017, the Audit Committee of Transgenomic’s
Board approved the dismissal of Ernst & Young as Transgenomic’s independent registered public accounting firm and accordingly
Transgenomic notified Ernst & Young of such action effective as of January 12, 2017. The dismissal of Ernst & Young as
Transgenomic’s independent registered public accounting firm did not result from any dissatisfaction with the quality of
professional services rendered by Ernst & Young. The audit reports of Ernst & Young on Transgenomic’s consolidated
financial statements as of and for the two most recent fiscal years did not contain an adverse opinion or a disclaimer of opinion,
and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During the Transgenomic’s two most recent fiscal years,
and any subsequent interim period prior to termination of the client-auditor relationship with Ernst & Young on January 12,
2017, there were no “disagreements” (as that term is described in Item 304(a)(1)(iv) of Regulation S-K and the related
instructions) between Transgenomic and Ernst & Young on any matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of Ernst & Young, would have caused Ernst
& Young to make reference to the subject matter of such disagreements in their reports on Transgenomic’s consolidated
financial statements with respect to such periods.
During Transgenomic’s two most recent fiscal years, and
any subsequent interim period prior to termination of the client-auditor relationship with Ernst & Young on January 12, 2017,
there were no “reportable events” as that term is described in Item 304(a)(1)(v) of Regulation S-K and the related
instructions, except for the material weaknesses in Transgenomic’s internal control over financial reporting disclosed in
its Form 10-K for the fiscal year ended December 31, 2014 (filed April 15, 2015), related to the design of controls over proper
timing and recognition of revenue and over the elements used in our analysis and evaluation of the allowance for doubtful accounts
to ensure that the allowance for doubtful accounts was reasonably stated. The ineffectiveness of these controls did not result
in an adjustment to the financial statements or a restatement of prior year financial statements. In response to the material weaknesses,
Transgenomic’s management developed remediation plans to address the control deficiencies identified in 2014. These remediation
actions were implemented during 2015 and included enhancements that included (i) with respect to revenue recognition, (a) a reconciliation
of proof of delivery (fax confirmation) for invoiced and unbilled reports and (b) a review of error processing queues, among other
steps, and (ii) with respect to allowances for doubtful accounts, (a) a review of the payor and client accounts receivable aging
(b) review of write offs, (c) a review of current and historical payment trends and (d) a review of actual cash collections and
a hindsight analysis, among other steps. Transgenomic’s management determined that these remediation actions were effectively
designed and demonstrated effective operation for a sufficient period of time to enable Transgenomic’s management to conclude
that the 2014 material weaknesses were remediated as of December 31, 2015.
While Transgenomic has not engaged a new independent registered
public accounting firm as of the date of this proxy statement, it has begun a search process to identify Ernst & Young’s
successors. The Company will disclose its engagement of a new independent registered public accounting firm once the process has
been completed and as required by the SEC’s rules and regulations. Ernst & Young has been given the opportunity to make
a statement at the special meeting if they so desire and will be available should any matter arise requiring their presence.
PROPOSAL NO.
1
APPROVAL OF THE ISSUANCE OF NEW PRECIPIO COMMON STOCK AND NEW PRECIPIO
PREFERRED STOCK IN CONNECTION WITH THE MERGER AND PRIVATE
PLACEMENT
Under the terms of the Merger Agreement,
Merger Sub will merge with and into Precipio, with Precipio as the surviving entity. As a result Precipio will become a wholly
owned subsidiary of Transgenomic. Precipio is a privately held company specializing in harnessing the advanced expertise of leading
academic researchers to provide oncologists with a superior level of diagnostic accuracy for their cancer patients.
When the merger is completed, (i) the outstanding common
units of Precipio will be converted into the right to receive approximately 160.6 million shares of New Precipio common stock,
together with cash in lieu of fractional units, which will result in Precipio common unit holders owning approximately 53% of the
issued and outstanding shares of New Precipio common stock on a fully diluted basis, taking into account the issuance of shares
of New Precipio preferred stock in the merger and the private placement as discussed below (the “fully diluted New Precipio
common stock”) and (ii) the outstanding preferred units of Precipio will be converted into the right to receive approximately
24.1 million shares of New Precipio preferred stock with an aggregate face amount equal to $3 million, which will result in the
Precipio preferred unit holders owning approximately 8% of the fully diluted New Precipio common stock.
In connection with the merger, at the effective time, in addition
to the New Precipio preferred stock to be issued to holders of preferred units of Precipio, New Precipio also will issue shares
of New Precipio preferred stock and New Precipio common stock in a related private placement, whereby:
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Holders of certain secured indebtedness of Transgenomic will receive in exchange for such indebtedness approximately 24.1 million
shares of New Precipio preferred stock in an amount equal to $3 million, which represents approximately 8% of the fully diluted
New Precipio common stock, and approximately 9.8 million shares of New Precipio common stock, which represents approximately 3%
of the fully diluted New Precipio common stock; and
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New Precipio will issue for cash up to approximately 56.2 million shares of New Precipio preferred stock for $7 million to
investors in a private placement, which represents approximately 18% of the fully diluted New Precipio common stock.
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New Precipio preferred stock will be issued based on a $25 million pre-money equity valuation of New Precipio and will represent,
in the aggregate, approximately 34% of the outstanding shares of New Precipio common stock on an as-converted basis, including
New Precipio preferred stock issued in the merger and the private placement.
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Pursuant to the rules of Nasdaq, the securities exchange on which Transgenomic’s common stock is listed, the issuance
of New Precipio common stock in connection with the merger, including the shares that may be issued upon future conversion of the
New Precipio preferred stock, requires approval of Transgenomic’s stockholders because the issuance exceeds 20% of the number
of shares of Transgenomic common stock outstanding prior to the issuance and the issuance may result in a “change of control”
of Transgenomic.
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Third Security owns 214,705 shares of Transgenomic Series A-1
Convertible Preferred Stock which will convert into 214,705 shares of Transgenomic common stock immediately prior to the closing
of the merger pursuant to the conversion provisions set forth in the Transgenomic Certificate of Incorporation. See “Description
of Transgenomic Capital Stock – Preferred Stock – Series A-1 Convertible Preferred Stock”.
The Lenders have agreed to
convert the outstanding principal and accrued interest under the Revolving Line and the Term Loan into (i) approximately 9.8 million
shares of New Precipio common stock immediately prior to the effectiveness of the merger at a price equal to $0.50 per share and
(ii) approximately 24.1 million shares of New Precipio preferred stock in an amount equal to $3 million. As of December 31, 2016,
the outstanding amount owed under the Revolving Line and the Term Loan was $7.243 million of principal and $556,642 of accrued
interest. See “The Transaction – Conversion of Outstanding Debt – Conversion of the Revolving Line and Term Loan.”
Effect of the Proposed Issuance
of Common Stock and Preferred Stock
The shares of New Precipio common stock
to be issued pursuant to Proposal No. 1 in connection with the merger and the related private placement, including the shares of
New Precipio common stock that may be issued upon future conversion of the New Precipio preferred stock, would be identical to
the shares of Transgenomic common stock now issued and outstanding. However, the stock issuance will dilute the ownership and voting
interests of our existing stockholders. When the merger is completed, (i) the outstanding common units of Precipio will be
converted into the right to receive approximately 160.6 million shares of New Precipio common stock, together with cash in lieu
of fractional units, which will result in Precipio common unit holders owning approximately 53% of the fully diluted New Precipio
common stock and (ii) the outstanding preferred units of Precipio will be converted into the right to receive approximately
24.1 million shares of New Precipio preferred stock with an aggregate face amount equal to $3 million, which will result in the
Precipio preferred unit holders owning approximately 8% of the fully diluted New Precipio common stock. In connection with the
merger, at the effective time, in addition to the New Precipio preferred stock to be issued to holders of preferred units of Precipio,
New Precipio also will issue shares of New Precipio preferred stock and New Precipio common stock in a related private placement,
whereby (a) the Lenders will receive in exchange for certain indebtedness approximately 24.1 million shares of New Precipio preferred
stock with an aggregate face amount equal to $3 million, which represents approximately 8% of the fully diluted New Precipio common
stock, and approximately 9.8 million shares of New Precipio common stock, which represents approximately 3% of the fully diluted
New Precipio common stock, and (b) New Precipio will issue for cash up to approximately 56.2 million shares of New Precipio preferred
stock for $7 million to investors in a private placement, which represents approximately 18% of the fully diluted New Precipio
common stock. When and if the shares of New Precipio preferred stock are converted, such conversion will result in further dilution
of your shares.
Vote Required and Board of Directors
Recommendation
Approval of the proposal to issue shares
of New Precipio common stock and New Precipio preferred stock in connection with the merger and private placement, the issuance
of New Precipio common stock upon conversion of New Precipio preferred stock and the resulting “change of control”
of Transgenomic requires the affirmative vote of the holders of a majority of the shares of Transgenomic common stock and Series
A-1 Convertible Preferred Stock, voting together as a single class (with each one share of Series A-1 Convertible Preferred Stock
being entitled to 0.93 votes), present in person or represented by proxy at the special meeting at which a quorum is present. Abstentions
with respect to this proposal will have the same effect as a vote against the proposal. Broker non-votes will have no effect on
the proposal.
The approval of Proposal No. 1 is a condition to the completion of the merger with Precipio, and thus a vote against
this proposal effectively will be a vote against the merger with Precipio.
The Transgenomic Board has determined
that the merger with Precipio and the issuance of New Precipio common stock and New Precipio preferred stock pursuant to the merger
and related private placement, the issuance of New Precipio common stock upon conversion of the New Precipio preferred stock and
the resulting “change of control” of Transgenomic is fair to and in the best interests of Transgenomic and its stockholders
and has approved the issuance of New Precipio common stock and New Precipio preferred stock in accordance with the Merger Agreement
and the related private placement and recommends that you vote “
FOR
” approval of the stock issuances.
For a more detailed description of
the Merger Agreement and the transactions contemplated by the Merger Agreement, see the sections below entitled “The Merger
Agreement,” “The Private Placement” and “The Voting Agreements.”
THE MERGER
AGREEMENT
The following is a summary of the
material provisions of the Merger Agreement and is qualified in its entirety by reference to the Merger Agreement, a copy of which
is attached to this proxy statement as Annex A and which we incorporate by reference into this document. This summary may not contain
all of the information about the Merger Agreement that is important to you. We urge you to read the entire Merger Agreement carefully
because it is the legal document governing the proposed merger with Precipio.
The description of the Merger Agreement in this proxy statement
has been included to provide you with information regarding its terms, and we recommend that you read carefully the Merger Agreement
in its entirety. Except for its status as the contractual document that establishes and governs the legal relations among the parties
with respect to the transaction, we do not intend for its text to be a source of business or operational information about Transgenomic
or Precipio. That kind of information can be found elsewhere in this proxy statement and in the documents incorporated herein by
reference. The Merger Agreement contains representations and warranties of the parties as of specific dates and may have been used
for the purposes of allocating risk between the parties other than establishing matters as facts. Those representations and warranties
are qualified in several important respects, which you should consider as you read them in the Merger Agreement, including contractual
standards of materiality that may be different from what may be viewed as material to stockholders. Only the parties themselves
may enforce and rely on the terms of the Merger Agreement. As stockholders, you are not third party beneficiaries of the Merger
Agreement and therefore may not directly enforce or rely upon its terms and conditions and you should not rely on its representations,
warranties or covenants as characterizations of the actual state of facts or condition of Transgenomic or Precipio or any of their
respective affiliates. Moreover, information concerning the subject matter of the representations and warranties may have changed
since the date of the Merger Agreement and subsequently developed or new information qualifying a representation or warranty may
have been included in this proxy statement.
General; Structure of Transaction
On October 12, 2016, Transgenomic entered
into the Merger Agreement with Merger Sub and Precipio. Pursuant to the Merger Agreement, Merger Sub will merge with and into Precipio,
with Precipio as the surviving entity.
On February 2, 2017, Transgenomic and
Precipio entered into the First Amendment to the Agreement and Plan of Merger which provided for the following: (a) the Bridge
Loan to Transgenomic was authorized; (b) the exchange ratio set forth in the Merger Agreement was revised to provide that outstanding
common units of Precipio will be converted into the right to receive an amount of shares of New Precipio common stock equal to
80% of the outstanding shares of New Precipio common stock (not taking into account the issuance of New Precipio preferred stock
in the merger or the private placement); (c) the continual listing of the existing shares of Transgenomic’s common stock
on Nasdaq was waived as a condition to the closing of the merger; (d) the deadline pursuant to which a “shelf” registration
statement on Form S-3 or other appropriate form is required to be filed by New Precipio with the SEC was extended to June 1, 2017;
(e) certain indebtedness of Transgenomic was permitted to remain outstanding as of the effective date of the merger; (f) certain
actions taken by each of Transgenomic and Precipio since the date the Merger Agreement were authorized and (g) certain additional
conditions to the closing of the merger were removed from the Merger Agreement.
Closing of the Transaction
Unless the parties agree otherwise,
the closing of the merger with Precipio will take place remotely via the exchange of final documents and signature pages thereto
no later than the second business day following the satisfaction or waiver of all closing conditions, except for those conditions
that, by their nature, have to be satisfied at the closing, but subject to the satisfaction or waiver of those conditions. See
the section below entitled “— Conditions to Closing the Transaction” beginning on page 70 for a more detailed
discussion of the conditions. The merger is expected to be consummated promptly after the special meeting of Transgenomic’s
stockholders described in this proxy statement.
Consideration for the Transaction
If the merger is completed, (i) the
outstanding common units of Precipio will be converted into the right to receive approximately 160.6 million shares of New Precipio
common stock, together with cash in lieu of fractional units, which will result in Precipio common unit holders owning approximately
53% of the fully diluted New Precipio common stock and (ii) the outstanding preferred units of Precipio will be converted
into the right to receive approximately 24.1 million shares of New Precipio preferred stock with an aggregate face amount equal
to $3 million, which will result in the Precipio preferred unit holders owning approximately 8% of the fully diluted New Precipio
common stock.
If the merger is completed, at the
effective time, in addition to the New Precipio preferred stock to be issued to holders of preferred units of Precipio, New Precipio
also will issue shares of New Precipio preferred stock and New Precipio common stock in a related private placement, whereby:
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Holders of certain secured indebtedness of Transgenomic will receive in exchange for such indebtedness, approximately 24.1
million shares of New Precipio preferred stock in an amount equal to $3 million, which represents approximately 8% of the fully
diluted New Precipio common stock, and approximately 9.8 million shares of New Precipio common stock, which represents approximately
3% of the fully diluted New Precipio common stock;
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New Precipio will issue for cash up to approximately 56.2 million shares of New Precipio preferred stock for $7 million to
investors in a private placement, which represents approximately 18% of the fully diluted New Precipio common stock; and
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New Precipio preferred stock will be issued based on a $25 million pre-money equity valuation of New Precipio and will represent,
in the aggregate, approximately 34% of the outstanding shares of New Precipio common stock on an as-converted basis, including
New Precipio preferred stock issued in the merger and the private placement.
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Representations and Warranties
The Merger Agreement contains representations
and warranties of each of Transgenomic, Merger Sub and Precipio. These representations are subject, in some cases, to specified
exceptions and qualifications contained in the Merger Agreement or in the information provided pursuant to disclosure obligations
set forth in the Merger Agreement. Some of the representations and warranties are qualified as to “materiality” or
“material adverse effect.” For the purpose of the Merger Agreement, a “material adverse effect” with respect
to either Precipio or Transgenomic, as applicable, means a material adverse effect on the business, results of operations, properties
or assets of Precipio or Transgenomic and its subsidiaries, as applicable, taken as a whole, with certain exclusions.
Representations and Warranties
of Precipio
The Merger Agreement contains representations
and warranties of Precipio relating to, among other things:
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proper corporate organization and existence;
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the capitalization of Precipio;
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subsidiaries of Precipio;
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enforceability of the Merger Agreement;
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due authorization, execution and delivery of the Merger Agreement;
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authorizations and approvals;
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financial statements and undisclosed liabilities;
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material contracts, agreements and instruments of Precipio;
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assets other than real property;
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employee benefit plans;
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labor and employment matters;
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transactions with affiliates;
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absence of certain changes or events;
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brokers and intermediaries; and
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required approval of Precipio’s members.
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Representations and Warranties
of Transgenomic and Merger Sub
The Merger Agreement contains representations
and warranties of Transgenomic and Merger Sub relating to, among other things:
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proper corporate organization and existence;
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capitalization of Transgenomic;
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enforceability of the Merger Agreement;
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due authorization, execution and delivery of the Merger Agreement;
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authorizations and consents;
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financial statements and undisclosed liabilities;
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absence of certain changes or events;
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assets other than real property;
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transactions with affiliates;
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brokers and intermediaries;
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controls and procedures;
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material contracts, agreements and instruments of Transgenomic;
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employee benefit plans;
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labor and employment matters;
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the filing of this proxy statement;
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required stockholder vote.
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Covenants
The parties to the Merger Agreement
have various obligations and responsibilities under the Merger Agreement, including, but not limited to, the following covenants:
Conduct of the Business of Precipio.
Subject to certain exceptions, Precipio has agreed to (i) conduct its business and operations in the ordinary course consistent
with past practices, and (ii) use commercially reasonable efforts to (A) preserve intact its business organization, (B) maintain
in effect all of its material foreign, federal, state and local permits, (C) retain the services of its executive officers and
key employees, and (D) preserve the goodwill of its material customers and suppliers. In addition, Precipio will not take any of
the following actions without the prior written consent of Transgenomic:
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issue, sell or grant, or authorize or propose the issuance, sale or grant of units, or securities convertible into or exchangeable
for units, rights, warrants or options to acquire units or convertible securities;
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redeem, purchase or otherwise acquire any outstanding units;
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declare, pay or otherwise make any dividend or distribution in respect of units, or adjust, split, combine, subdivide or reclassify
any of its units;
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incur any indebtedness;
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make any loans, advances, capital contributions or investments;
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sell, lease, license or otherwise transfer, abandon or permit to lapse, or create or incur any encumbrance on any intellectual
property or assets Precipio except (1) as required to be effected prior to the effective time of the merger, pursuant to Precipio’s
contracts in force on the date of the Merger Agreement, or (2) dispositions of inventory, equipment or other assets that are no
longer used or useful in the conduct of the business of Precipio;
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make any capital expenditures in excess or incur any obligations or liabilities in the amount of $5,000 in the aggregate;
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acquire any business, by merger or consolidation, purchase of substantial assets or equity interests, or by any other manner;
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except as required by applicable law or to comply with the terms of any employee benefit plan, increase in any material manner
the compensation, bonuses or benefits of any directors, officers, employees, former employees or consultants except, in the case
of employees that are not officers or members of board of managers of Precipio, increases in salaries, wages and benefits of employees
made in the ordinary course of business;
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except as required by applicable law or as contemplated by the terms of the Merger Agreement, adopt, enter into, terminate
or amend any employee benefit plan;
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grant any severance, change of control, retention or termination benefits to any director, officer, employee, former employee
or consultant, except in the ordinary course of business with respect to an employee or independent contractor who is not a member
of the board of managers of Precipio or an executive officer of Precipio;
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take any action to accelerate the vesting or payment of any compensation or benefit under any employee benefit plan, except
as provided in the Merger Agreement;
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hire any officer or other employee, except to replace existing officers or employees in the ordinary course of business;
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terminate the employment of any director, officer, employee or consultant of Precipio, except in the ordinary course of business;
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make any change in any method of accounting other than those required by GAAP;
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make or change any material tax election that is inconsistent with past practice, change any material annual tax accounting
period, adopt or change any material method of tax accounting, enter into any closing agreement with respect to a material tax,
or settle any material tax claim, audit or assessment;
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settle, or propose to settle, any legal proceeding;
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other than in the ordinary course of business consistent with past practice, amend or modify certain material contracts;
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other than in the ordinary course of business consistent with past practice, enter into any material contract;
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amend the organizational documents of Precipio;
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adopt a plan or agreement of complete or partial liquidation or dissolution or resolutions providing for a complete or partial
liquidation, dissolution, restructuring, recapitalization or other reorganization of Precipio;
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take any action that would reasonably be expected to prevent or materially impede, interfere with, hinder or delay the consummation
by Transgenomic the transactions contemplated by the Merger Agreement;
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conduct any research or development activities, including the conduct of any clinical trial or study, except for research and
development activities related to the goods and services of Precipio in the ordinary course of business; and
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engage in any action that could reasonably be expected to cause the merger to fail to qualify as a “reorganization”
within the meaning of Section 368(a) of the Code.
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Conduct of the Business of Transgenomic.
Subject to certain exceptions, Transgenomic has agreed, and has agreed to cause its subsidiaries to agree, to (i) conduct its business
and operations in the ordinary course consistent with past practices, (ii) use commercially reasonable efforts to preserve intact
its business organization, (iii) maintain in effect all of its material foreign, federal, state and local permits and (iv) use
commercially reasonable efforts to retain the services of its executive officers and key employees, and to preserve the goodwill
of its material customers and suppliers. In addition, Transgenomic and its subsidiaries will not take any of the following actions
without the prior written consent of Precipio:
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issue, sell or grant, or authorize or propose the issuance, sale or grant of additional shares of capital stock of any class,
or securities convertible into or exchangeable for shares, rights, warrants or options to acquire shares or convertible securities;
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redeem, purchase or otherwise acquire any outstanding shares of capital stock of Transgenomic and its subsidiaries;
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incur any indebtedness;
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except as contemplated by the Merger Agreement, amend the organizational documents of Transgenomic in a manner that would result
in a material adverse effect;
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adopt a plan or agreement of complete or partial liquidation or dissolution or resolutions providing for a complete or partial
liquidation, dissolution, restructuring, recapitalization or other reorganization of Transgenomic or any of its subsidiaries;
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take any action that would reasonably be expected to prevent or materially impede, interfere with, hinder or delay the consummation
by Transgenomic the transactions contemplated by the Merger Agreement;
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conduct any research or development activities, including the conduct of any clinical trial or study, except for research and
development activities related to the goods and services of Transgenomic in the ordinary course of business;
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make any loans, advances, capital contributions or investments;
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sell, lease, license or otherwise transfer, abandon or permit to lapse, or create or incur any encumbrance on any intellectual
property or assets of Transgenomic except (1) as required to be effected prior to the effective time of the merger, pursuant to
Transgenomic’s contracts in force on the date of the Merger Agreement, or (2) dispositions of inventory, equipment or other
assets that are no longer used or useful in the conduct of the business of Transgenomic;
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make any capital expenditures in excess or incur any obligations or liabilities in the amount of $5,000 in the aggregate;
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acquire any business, by merger or consolidation, purchase of substantial assets or equity interests, or by any other manner;
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except as required by applicable law or to comply with the terms of any employee benefit plan, increase in any material manner
the compensation, bonuses or benefits of any directors, officers, employees, former employees or consultants except, in the case
of employees that are not officers or members of the Transgenomic Board, increases in salaries, wages and benefits of employees
made in the ordinary course of business;
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except as required by applicable law or as contemplated by the terms of the Merger Agreement, adopt, enter into, terminate
or amend any employee benefit plan;
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grant any severance, change of control, retention or termination benefits to any director, officer, employee, former employee
or consultant, except in the ordinary course of business with respect to an employee or independent contractor who is not a member
of the Transgenomic Board or an executive officer of Transgenomic;
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take any action to accelerate the vesting or payment of any compensation or benefit under any employee benefit plan, except
as provided in the Merger Agreement;
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hire any officer or other employee, except to replace existing officers or employees in the ordinary course of business;
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terminate the employment of any director, officer, employee or consultant of Transgenomic, except in the ordinary course of
business;
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adopt, enter into, terminate or amend any stock plan, except as required by law;
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grant any awards under any stock plan;
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make any change in any method of accounting other than those required by GAAP;
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make or change any material tax election that is inconsistent with past practice, change any material annual tax accounting
period, adopt or change any material method of tax accounting, enter into any closing agreement with respect to a material tax,
or settle any material tax claim, audit or assessment;
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settle, or propose to settle, any legal proceeding;
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other than in the ordinary course of business consistent with past practice, amend or modify certain material contracts;
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other than in the ordinary course of business consistent with past practice, enter into any material contract;
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engage in any action that could reasonably be expected to cause the merger to fail to qualify as a “reorganization”
within the meaning of Section 368(a) of the Code.
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Access to Information.
Precipio and Transgenomic each have agreed to give the other party and its authorized representatives reasonable access during
normal business hours to its books, contracts, records, offices, employees, agents, facilities, properties and other assets as
Precipio or Transgenomic, as the case may be, may from time to time reasonably request. Any such access must be conducted in a
manner that does not materially interfere with the businesses or operations of Precipio or Transgenomic, as the case may be. In
addition, all information accessed by Precipio or Transgenomic or their respective representatives will be treated as confidential
by the party accessing such information.
Public Announcements.
No party to the Merger Agreement will issue or cause to be published a press release or other public announcement regarding the
transaction without the prior written consent of Precipio and Transgenomic. If, upon advice of counsel, any party is required by
law to issue a press release or other public announcement, then such party will use reasonable efforts to allow Transgenomic reasonable
time to comment on such release or announcement in advance of its issuance.
Private Placement.
Precipio
and its members will provide all certifications and documentation, including investor questionnaires, reasonably requested by Transgenomic
to allow Transgenomic to issue the shares of New Precipio common stock and New Precipio preferred stock to such holders in a manner
that satisfies the requirements of Rule 506 of Regulation D under the Securities Act, including certifications to Transgenomic
that the shares of New Precipio are being acquired by each member of Precipio for investment only and not with a view towards,
or with any intention of, a distribution or resale thereof for at least a period of six months following the closing of the merger.
Proxy Statement; Special Meeting.
The Merger Agreement requires Transgenomic to call and hold a special meeting of stockholders as promptly as practicable to approve
the issuance of New Precipio common stock, including the shares issuable upon conversion of the New Precipio preferred stock, in
connection with the Merger Agreement and the related private placement. Transgenomic agreed, as promptly as practicable, to file
with the SEC a proxy statement, containing the recommendation of the Transgenomic Board that its stockholders vote in favor of
the Transgenomic stock issuance proposal, respond promptly to any SEC comments with respect to the preliminary proxy statement,
mail a definitive proxy statement to Transgenomic stockholders and solicit proxies from its stockholders for approval of the Transgenomic
stock issuance proposal. Precipio has agreed to cooperate with Transgenomic in connection with the preparation and filing of this
proxy statement, including providing Transgenomic promptly upon request with the information concerning Precipio required to be
included in this proxy statement.
Mutual Non-Solicitation.
Under the Merger Agreement, Precipio and Transgenomic are subject to customary “no shop” provisions that limit their
respective abilities to solicit alternative acquisition proposals from third parties or to provide confidential information to
third parties, subject to a “fiduciary out” provision that allows Precipio and Transgenomic to provide information
and participate in discussions with respect to certain unsolicited written proposals and to terminate the Merger Agreement and
enter into an acquisition agreement with respect to a superior proposal in compliance with the terms of the Merger Agreement. Precipio
and Transgenomic shall notify the other as promptly as practicable, and in no event later than twenty-four hours after receipt
of any inquiries, discussions, negotiations, proposals or expressions of interest with respect to an alternate acquisition proposal
received by Transgenomic or Precipio, as applicable. Both Precipio and Transgenomic shall keep the other fully informed, on a current
basis, of the status and material developments (including any changes to the terms) of such alternate acquisition proposal.
Employment Arrangements.
Precipio has agreed to cause certain employment agreements to be terminated at or prior to the effective time of the merger. Prior
to the effective time of the merger, Transgenomic has agreed to terminate certain of its employees, and will require any employees
that will not continue with New Precipio to execute a separation agreement.
Listing.
Transgenomic
will use commercially reasonable efforts to maintain its existing listing on Nasdaq and cause the shares of New Precipio common
stock to be approved for listing on Nasdaq within a reasonable period of time following the effective time of the merger.
Board Designation and Resignations.
The Merger Agreement provides that Transgenomic will cause the number of members of its board of directors to be fixed at seven.
Subject to certain adjustments in the Merger Agreement, three directors of New Precipio will be designated by Precipio, two directors
of New Precipio will be designated by Transgenomic, and two directors of New Precipio will be designated by the holders of New
Precipio preferred shares immediately following the private placement. Transgenomic will obtain the necessary resignations of the
directors of Transgenomic serving immediately prior to the effective time of the merger who are not among the directors designated
to serve on the board of directors of New Precipio.
Indemnification of Officers and
Directors.
The organizational documents of New Precipio will continue to contain provisions no less favorable with respect
to indemnification than are set forth in such organizational documents as of the date of the Merger Agreement. From the effective
time of the merger through the sixth anniversary thereof, New Precipio will, (i) to the fullest extent permitted by law, indemnify
and hold harmless each present and former director, manager and officer of Precipio or Transgenomic or any of its subsidiaries
against all costs and expenses, judgments, fines, fees, losses, claims, damages, liabilities and settlement amounts paid in connection
with any claim, action, suit, proceeding or investigation (whether arising before or after the closing), arising out of or pertaining
to the fact of his or her capacity as an officer, director, employee, fiduciary or agent, occurring on or before the closing and
(ii) subject to certain conditions, advance the expenses incurred by any indemnified party in connection with any such matter to
the fullest extent permitted by law. In addition, Precipio will obtain and pay for “tail” insurance coverage for the
managers and officers of Precipio. Such “tail” insurance coverage will be in an amount and scope at least as favorable
as Precipio’s existing policies with respect to claims arising out of or relating to events which occurred before or at the
effective time of the merger.
Tax Matters.
Under the
terms of the Merger Agreement, the holders of Precipio’s securities will prepare and timely file all required tax returns
of Precipio, and pay all taxes due and owing, relating to periods of Precipio ending on or prior to the closing of the merger.
Unless the parties agree that the merger does not qualify as a reorganization under Section 368(a) of the Code, each of Precipio
and Transgenomic agree to use reasonable best efforts to cause the merger to qualify as a “reorganization” within the
meaning of Section 368(a) of the Code, and agree that they will not take any actions (or fail to take any action) which would prevent
the merger with from qualifying as a “reorganization” within the meaning of Section 368(a) of the Code. From the date
of the Merger Agreement through and after the closing of the merger, the holders of Precipio’s securities, Transgenomic,
Precipio, and New Precipio shall reasonably cooperate and shall provide such assistance to the other party, and make available
to the other party, as reasonably requested, the books and records, documents, information or data, in each case relating to taxes
of Precipio or Transgenomic, as applicable, for taxable periods ending on or prior to the closing of the merger for purposes of
preparing or reviewing tax returns, for complying with or representing Precipio’s, New Precipio’s, or Transgenomic’s
interests in any tax controversy or other investigative demand, for reporting purposes, or for any other legitimate tax-related
reason not injurious to the other party.
Form S-3 Registration Statement.
Under the Merger Agreement, Transgenomic has agreed to file promptly after the closing of the merger with the SEC a “shelf”
registration statement on Form S-3 or other appropriate form no later than June 1, 2017.
Further Assurances.
Each
party to the Merger Agreement agrees that the officers of New Precipio will be authorized to execute such documents and perform
such further acts as may be reasonably required to perfect or confirm any and all right, title and interest in, to and under such
rights, properties or assets in New Precipio or to carry out the provisions of the Merger Agreement and the transactions contemplated
thereby.
Conditions to Closing the Transaction
The parties obligations to consummate
the merger is conditioned on (i) Precipio’s members approval of the merger, the execution of the Merger Agreement and the
consummation of the transactions contemplated therein; (ii) Transgenomic’s stockholders adopting and approving the proposal
to issue New Precipio common stock, including the shares issuable upon conversion of the New Precipio preferred stock, in connection
with the merger and the private placement at the special meeting of stockholders called for this purpose; (iii) no governmental
order or any other law shall have been adopted, issued, enacted, promulgated, enforced or entered that remains in effect and restrains,
enjoins or otherwise prohibits the consummation of the merger; (iv) no legal proceeding, pending or threatened, challenging the
merger, seeking to restrain the merger, relating to the merger and seeking to obtain from Transgenomic, Precipio or Merger Sub
any material damages or other relief, or seeking to prohibit or limit in any material or adverse respect a party’s ability
to vote, transfer or receive dividends with respect to or otherwise exercise ownership rights with respect to the stock of Transgenomic;
(v) the execution of employment agreements by certain individuals identified in the Merger Agreement; (vi) consummation of
the private placement; and (vii) the approval of the listing of the shares of Transgenomic’s common stock to be offered
in connection with the merger for listing on Nasdaq.
In addition, the obligation of Transgenomic
to effect the transactions contemplated by the Merger Agreement is conditioned on the satisfaction or waiver of various other conditions,
including:
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Precipio unit holders having approved the merger and Precipio’s execution of the Merger Agreement and the consummation
of the transactions contemplated therein;
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the representations and warranties of Precipio being true and correct as of the date of closing, or, to the extent they expressly
relate to a specific date, then as of that specific date, with only those exceptions which would not reasonably be expected to
have a material adverse effect;
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prior to the effective time of the merger, the conversion of all outstanding warrants, membership interests, promissory notes
of Precipio issued to members of Precipio into Precipio common units or preferred units, and the termination of all related warrants
and promissory notes;
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Precipio having delivered to Transgenomic a lock-up agreement executed by certain of its stockholders; and
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Precipio having satisfied other customary closing conditions.
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The obligation of Precipio to effect
the transactions contemplated by the Merger Agreement is conditioned on the satisfaction or waiver of various conditions, including:
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Transgenomic’s stockholders having approved the proposal to issue New Precipio common stock, including shares issuable
upon conversion of the New Precipio preferred stock, in connection with the Merger Agreement and the related private placement;
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the representations and warranties of Transgenomic and Merger Sub being true and correct in all material respects as of the
date of closing, or, to the extent they expressly related to a specific date, then as of the specific date, with only those exceptions
which would not reasonably be expected to have a material adverse effect;
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the size of the Transgenomic Board being increased to seven and the appointment of certain designees to the Transgenomic Board;
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the amendment of Transgenomic’s Certificate of Incorporation contemplating the issuance of the New Precipio preferred
stock and changing the name to Precipio, Inc. at the effective time of the merger;
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Transgenomic having delivered to Precipio a lock-up agreement executed by Transgenomic and certain of its stockholders;
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there being no outstanding indebtedness of Transgenomic immediately prior to the effective time of the merger other than accounts
payable to trade creditors, accrued expenses and certain indebtedness of Transgenomic, including indebtedness, to its stockholders
that will be converted into common stock and new preferred stock of New Precipio;
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Transgenomic having terminated certain of its employees and all severance, retention, change of control, COBRA or other payments
due to such employees being paid in full prior to the effective time of the merger or included as a liability of Transgenomic in
pursuant to the Merger Agreement; and
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Transgenomic having satisfied other customary closing conditions.
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Termination
The Merger Agreement may be terminated
on or prior to the date of closing of the merger as follows:
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by mutual written consent of Transgenomic and Precipio; or
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by either Transgenomic or Precipio if the closing date has not occurred by June 30, 2017, but only if the terminating party
is not then in material breach of any representation, warranty, covenant or other agreement contained in the Merger Agreement and
such has been the cause of, or resulted in, the failure of a timely closing; or
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by either Transgenomic or Precipio if any judgment, statute, law, ordinance, rule, regulation or other legal restraint or prohibition
that restrains, enjoins or otherwise prohibits the consummation of the merger shall be in effect and shall have become final and
non-appealable; or
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by Precipio, if Transgenomic has breached or failed to perform in any material respect any of its representations, warranties,
covenants or other agreements contained in the Merger Agreement such that the conditions to closing set forth in Merger Agreement
cannot be satisfied and such breach is not capable of being cured or has not been cured within 30 days after the giving of notice
thereof by Precipio to Transgenomic; or
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by Transgenomic, if Precipio has breached or failed to perform in any material respect any of its representations, warranties,
covenants or other agreements contained in the Merger Agreement such that the conditions to closing set forth in Merger Agreement
cannot be satisfied and such breach is not capable of being cured or has not been cured within 30 days after the giving of notice
thereof by Transgenomic to Precipio; or
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by Precipio, if Transgenomic has entered into any letter of intent or similar document or any contract relating to any alternate
acquisition proposal; or
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by Transgenomic, if Precipio has entered into any letter of intent or similar document or any contract relating to any alternate
acquisition proposal; or
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by Precipio, if Transgenomic enters into a definitive agreement to effect an unsolicited acquisition proposal made by a third
party determined in good faith by the Transgenomic Board to be (1) more favorable from a financial point of view to the stockholders
of Transgenomic than as provided under the Merger Agreement, and (2) reasonably capable of being completed on the terms proposed
without unreasonable delay; or
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by Transgenomic, if Precipio enters into a definitive agreement to effect an unsolicited acquisition proposal made by a third
party determined in good faith by the board of managers of Precipio to be (1) more favorable from a financial point of view to
the members of Precipio than as provided under the Merger Agreement, and (2) reasonably capable of being completed on the terms
proposed without unreasonable delay.
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Effect of Termination
In the event of termination of the
Merger Agreement by the parties in accordance with the provisions described above under the heading “— Termination,”
the Merger Agreement will become void and of no further force and effect, and none of the parties to the Merger Agreement will
have any liability in respect of such termination, except that nothing in the Merger Agreement will relieve any party from liability
for any intentional or willful breach of the provisions of the Merger Agreement prior to the termination of the Merger Agreement.
Certain provisions, including the treatment of confidential information, will survive the termination of the Merger Agreement.
If the Merger Agreement is terminated
by Precipio or Transgenomic pursuant to (i) the Transgenomic Board failing to recommend that Transgenomic’s stockholders
vote to approve the issuance of New Precipio common stock in connection with the merger; (ii) Transgenomic failing to include in
this proxy statement a recommendation by the Transgenomic Board to vote in favor of the each of the proposals in this proxy statement;
(iii) the Transgenomic Board failing to make, withholding, withdrawing, amending, changing, qualifying or publicly proposing to
withhold, withdraw, amend, change or qualify in a manner adverse to Precipio, its recommendation that the stockholders of Transgenomic
vote in favor and adopt each of the proposals in this proxy statement, knowingly making any public statement inconsistent with
such recommendation, failing to recommend against acceptance of any alternate acquisition proposal within ten business days after
the public announcement of any such alternate acquisition proposal, approving, adopting, recommending or proposing publicly to
approve, adopt or recommend any alternate acquisition proposal, or making any public statement inconsistent with its recommendation;
(iv) Transgenomic entering into any letter of intent or similar document or any contract relating to any alternate acquisition
proposal or (v) Transgenomic entering into a definitive agreement to effect an alternate acquisition proposal, then Transgenomic
shall pay to Precipio, by wire transfer of immediately available funds within three business days after termination of the Merger
Agreement, a nonrefundable fee in an amount equal to $256,500.
If the Merger Agreement is terminated
by Transgenomic or Precipio pursuant to (i) Precipio’s board of managers failing to recommend that its members vote or act
by written consent to approve the merger; (ii) Precipio’s board of managers failing to make, withholding, withdrawing,
amending, changing, qualifying or publicly proposing to withhold, withdraw, amend, change or qualify in a manner adverse to Transgenomic,
its recommendation that the members of Precipio vote in favor of each of the merger, the execution of the Merger Agreement and
the consummation of the transaction contemplated therein, knowingly making any public statement inconsistent with such recommendation,
failing to recommend against acceptance of any alternate acquisition proposal within ten business days after the public announcement
of any such alternate acquisition proposal, approving, adopting, recommending or proposing publicly to approve, adopt or recommend
any alternate acquisition proposal, or making any public statement inconsistent with its recommendation; (iii) Precipio entering
into any letter of intent or similar document or any contract relating to any alternate acquisition proposal; or (iv) Precipio
entering into a definitive agreement to effect an alternate acquisition proposal, Precipio shall pay to Transgenomic, by wire transfer
of immediately available funds within three business days after termination of the Merger Agreement, a nonrefundable fee in an
amount equal to $256,500.
Expenses
Except as expressly provided in the
Merger Agreement, all costs and expenses incurred in connection with Merger Agreement and the transactions contemplated by the
Merger Agreement will be paid by the party incurring such costs and expenses.
Amendments
The Merger Agreement may not be amended
except in writing signed on behalf of each of the parties thereto.
THE PRIVATE
PLACEMENT
In connection with entering into
the Merger Agreement, Transgenomic, Precipio and BV Advisory Partners, LLC entered into a non-binding term sheet (the “Term
Sheet”) for the private placement whereby New Precipio will issue up to $10 million in a new Senior Convertible Preferred
Stock (the “New Precipio preferred stock”). The proceeds received from this offering of New Precipio preferred stock
will be used to finance the merger, for working capital and growth capital to expand into new markets. This summary is based upon
the Term Sheet, which may not reflect the final terms of the New Precipio preferred stock or the private placement.
General
Subject to the approval of the matters
set forth in this proxy statement by the Transgenomic stockholders, the Transgenomic Board will approve and file a Certificate
of Designation with Secretary of State of the State of Delaware amending Transgenomic’s Certificate of Incorporation to designate
the New Precipio preferred stock. In connection with the merger, at the effective time, New Precipio will issue shares of New Precipio
preferred stock and New Precipio common stock in a related private placement, whereby (i) holders of certain secured indebtedness
of Transgenomic will receive in exchange for such indebtedness approximately 24.1 million shares of New Precipio preferred stock
in an amount equal to $3 million, which represents approximately 8% of the fully diluted New Precipio common stock, and approximately
9.8 million shares of New Precipio common stock, which represents approximately 3% of the fully diluted New Precipio common stock;
and (ii) New Precipio will issue in a private placement for cash up to approximately 56.2 million shares of New Precipio preferred
stock for $7 million to new investors who will invest individually or through a special purpose vehicle, which represents approximately
18% of the fully diluted New Precipio common stock.
The number of shares of New Precipio
preferred stock that will be issued in connection with the private placement is approximately 80.3 million shares. The New Precipio
preferred stock issued in the merger and the private placement will be issued based on a $25 million pre-money equity valuation
of New Precipio and will represent, in the aggregate, approximately 34% of the outstanding shares of New Precipio common stock
on an as-converted basis, including New Precipio preferred stock issued in the merger and the private placement.
Summary of Terms of the New Precipio
Preferred Stock
Convertibility
The New Precipio preferred stock will
be convertible into New Precipio common stock at any time at the then applicable conversion price. The initial conversion price
will equal the purchase price for the New Precipio preferred stock, but will be subject to anti-dilution protections including
adjustments for stock splits, stock dividends, other distributions, recapitalizations and the like. Additionally, each holder of
the New Precipio preferred stock will have a right to convert his, her or its New Precipio preferred stock into securities issued
in any future private offering of New Precipio stock at a 15% discount to the proposed price in such private offering.
Dividends
The New Precipio preferred stock will
be entitled to an annual 8% cumulative payment in lieu of interest or dividends, payable in-kind for the first two years and in
cash or in-kind thereafter, at the option of the holder. The New Precipio preferred stock also will be entitled to share in any
dividends paid on the New Precipio common stock.
Liquidation Preference
In the event of New Precipio’s
liquidation, dissolution or winding up, holders of the New Precipio preferred stock will be entitled to receive assets or surplus
funds of New Precipio in an amount equal to the greater of (i) 1.5 times the original purchase price of the New Precipio preferred
stock,
plus
an amount equal to all unpaid and accrued dividends and dividend equivalents and (ii) the amount that would
be payable on the New Precipio preferred stock if it were converted into New Precipio common stock (the “Liquidation Preference”).
This Liquidation Preference also would be due in the event of a future merger or sale of New Precipio, unless a supermajority of
holders of New Precipio preferred stock elect otherwise.
Board Representation
In connection with the private placement,
and as provided in the Merger Agreement, the New Precipio board of directors will increase its size to seven at the effective time
of the merger. Two members of the New Precipio board of directors will be current directors, three will be nominated by Precipio
and two will be nominated by the holders of the New Precipio preferred stock.
Protective Provisions
Certain material corporate events will
require the consent of a supermajority of holders of the New Precipio preferred stock or approval of at least one of the members
of the Transgenomic Board appointed by the holders of New Precipio preferred stock.
Investor Rights Agreement
In connection with the private placement,
New Precipio will enter into an investor rights agreement with the holders of the New Precipio preferred stock. The investor rights
agreement will contain transfer restrictions and standstill restrictions relating to shares of New Precipio preferred stock and
New Precipio common stock issuable upon conversion of the New Precipio preferred stock that will be issued to such parties in connection
with the merger and the private placement. In addition, the investor rights agreement will give such parties rights with respect
to the registration under the Securities Act of the shares of New Precipio common stock to be issued to such parties, including
the shares that may be issued upon future conversion of the New Precipio preferred stock.
The investor rights agreement also
will provide each holder of New Precipio preferred stock with (i)
pro rata
preemptive rights with respect to any new issuance
of preferred stock and (ii)
pro rata
rights of first refusal on any transfers of New Precipio preferred stock.
Fees and Expenses
New Precipio will be required to pay
certain fees and expenses of BV Advisory Partners, LLC, including a monthly consulting fee and a break-up fee in the event the
merger is not consummated.
Conversion of Outstanding Debt
and Convertible Preferred Stock
The Lenders have agreed to convert the outstanding principal
and accrued interest under the Revolving Line and the Term Loan into (i) approximately 24.1 million shares of New Precipio preferred
stock in an amount equal to $3 million and (ii) approximately 9.8 million shares of New Precipio common stock at a price equal
to $0.50 per share. As of December 31, 2016, the outstanding amount owed under the Revolving Line and the Term Loan was $7.243
million of principal and $556,642 of accrued interest. See “The Transaction—Conversion of Outstanding Debt—Conversion
of Revolving Line and Term Loan.” Holders of Series A-1 Convertible Preferred Stock have agreed to convert their shares into
214,705 shares of New Precipio common stock immediately prior to the effectiveness of the merger in accordance with the terms of
Transgenomic’s Certificate of Incorporation. See “Description of Transgenomic Capital Stock – Preferred Stock
– Series A-1 Convertible Preferred Stock.”
THE VOTING
AGREEMENTS
In connection with entering into
the Merger Agreement, Transgenomic, Precipio and certain Transgenomic security holders entered into a Voting Agreement (the “Transgenomic
Voting Agreement”), and Transgenomic, Precipio and certain unit, warrant and note holders of Precipio also entered into a
Voting Agreement (the “Precipio Voting Agreement” and, together with the Transgenomic Voting Agreement, the “Voting
Agreements”). A copy of the Transgenomic Voting Agreement is attached hereto as Annex C. A copy of the Precipio Voting Agreement
is attached hereto as Annex D. This summary may not contain all of the information about the Voting Agreements that is important
to you. We urge you to read the Transgenomic Voting Agreement carefully because it is the legal document relating to how certain
directors, executive officers and significant stockholders of Transgenomic will vote their stock, options and other rights to acquire
stock in connection with the proposals described in this proxy statement. Additionally, we urge you to read the Precipio Voting
Agreement carefully because it is the legal document relating to how certain directors, executive officers and significant unit
holders of Precipio will vote in connection with the transactions with Transgenomic described in this proxy statement.
Transgenomic Voting Agreement
General
On October 12, 2016, Transgenomic,
Precipio, all of the executive officers and directors of Transgenomic and certain significant Transgenomic security holders entered
into the Transgenomic Voting Agreement. Collectively, the voting interests held by these holders represent approximately 31.84
% of Transgenomic’s voting interests as of October 12, 2016. In this description, these individuals and entities are referred
to collectively as the “Supporting Stockholders” and to each individually as a “Supporting Stockholder.”
Agreement of Supporting Stockholders to Vote
Pursuant to the Transgenomic Voting
Agreement, each of the Supporting Stockholders has agreed to take the following actions at any meeting of the stockholders of Transgenomic
or any adjournment or postponement thereof, or in connection with any written consent of such stockholders, with respect to the
merger, the Merger Agreement or Acquisition Proposal (as defined in the Merger Agreement):
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appear at such meeting or otherwise cause the all shares owned by the Supporting Stockholder to be counted as present thereat
for purposes of calculating a quorum;
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vote (or cause to be voted), or deliver a written consent (or cause a written consent to be delivered) covering all of the
shares owned by the Supporting Stockholder: (i) in favor of adoption and approval of all matters contemplated by the Merger Agreement
as to which stockholders of Transgenomic are called upon to vote as necessary for consummation of the merger and the other transactions
contemplated by the Merger Agreement; and (ii) against any Acquisition Proposal; and
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vote (or cause to be voted), or deliver a written consent (or cause a written consent to be delivered) covering all of the
shares owned by the Supporting Stockholder against any of the following actions (other than those actions that relate to the merger
and any other transactions contemplated by the Merger Agreement): (i) any merger, consolidation, business combination, sale of
assets or reorganization of Transgenomic or any subsidiary thereof, (ii) any sale, lease or transfer of all or substantially all
of the assets of Transgenomic or any subsidiary thereof, (iii) any reorganization, recapitalization, dissolution, liquidation or
winding up of Transgenomic or any subsidiary thereof, (iv) any material change in the capitalization of Transgenomic or any subsidiary
thereof, or the corporate structure of Transgenomic or any subsidiary thereof or (v) any other action that is intended, or would
reasonably be expected to, impede, interfere with, delay, postpone or materially and adversely affect the merger or any other transactions
contemplated by the Merger Agreement.
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Covenants
The Supporting Stockholders have various
obligations and responsibilities under the Transgenomic Voting Agreement, including, but not limited to, the following covenants:
Agreement to Retain Shares.
Each Supporting Stockholder has agreed that he, she or it shall not, directly or indirectly:
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sell, pledge, encumber, assign, grant an option with respect to, transfer or dispose of any share or any interest in a share
or enter into an agreement to do any of the foregoing (each, a “Transfer”) any of the shares owned by such Supporting
Stockholder (i) unless the transferee has executed a counterpart to the Transgenomic Voting Agreement and agreed in writing to
hold such shares (or interest in such shares) subject to all of the terms and provisions of the Transgenomic Voting Agreement,
(ii) except by will or operation of law or (iii) as contemplated by the Merger Agreement,
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grant any proxies or powers of attorney that are not consistent with the terms of the Transgenomic Voting Agreement, or deposit
any shares into a voting trust or enter into a voting agreement with respect to any shares or
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take any action that would make any representation or warranty of any Supporting Stockholder contained in the Transgenomic
Voting Agreement untrue or incorrect in any material respect or have the effect of preventing or disabling such Supporting Stockholder
from performing such Supporting Stockholder’s material obligations under the Transgenomic Voting Agreement.
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No Solicitation
. Each Supporting
Stockholder (on behalf of itself and any subsidiaries or affiliates) has agreed in his capacity as a stockholder not to (i) initiate,
solicit, seek or knowingly encourage or support any inquiries, proposals or offers that constitute or may reasonably be expected
to lead to, any Acquisition Proposal, (ii) engage or participate in, or facilitate, any discussions or negotiations regarding,
or furnish any nonpublic information to any person in connection with, any inquiries, proposals or offers that constitute, or may
reasonably be expected to lead to, any Acquisition Proposal, (iii) enter into any letter of intent, agreement in principle or other
similar type of agreement relating to any Acquisition Proposal, or enter into any agreement or agreement in principle requiring
Transgenomic to abandon, terminate or fail to consummate the transactions contemplated by the Transgenomic Voting Agreement, (iv)
initiate a stockholders’ vote or action by consent of Transgenomic’s stockholders with respect to any Acquisition Proposal,
(v) become a member of a “group” (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) with respect to any voting securities of Transgenomic that takes any action in support of any
Acquisition Proposal or (vi) propose or agree to do any of the foregoing.
Further Assurances.
Each Supporting
Stockholder has agreed to execute and deliver, or cause to be executed and delivered, such additional or further consents, documents
and other instruments as Transgenomic or Precipio may reasonably request for the purpose of carrying out the transactions contemplated
by the Transgenomic Voting Agreement and the Merger Agreement.
Irrevocable Proxy
Each Supporting Stockholder has given
Transgenomic an irrevocable proxy to vote such Supporting Stockholder’s shares if such Supporting Stockholder is unable to
perform his, her or its obligations under the Transgenomic Voting Agreement. Such irrevocable proxy automatically terminates upon
the termination of the Transgenomic Voting Agreement.
Waiver of Appraisal Rights
Pursuant to the Transgenomic Voting
Agreement, each Supporting Stockholder has agreed to waive any and all rights he, she or it may have as to appraisal, dissent or
any similar or related matter with respect to any of such Stockholder’s shares of Transgenomic that may arise with respect
to the merger or any of the transactions contemplated by the Merger Agreement.
Termination
The Transgenomic Voting Agreement will
terminate upon the earlier to occur of (i) the effective time of the merger, (ii) such date and time as the Merger Agreement shall
be terminated pursuant to the terms thereof or otherwise, (iii) such time as there is a Parent Change of Recommendation (as such
term is defined in the Merger Agreement) or (iv) upon mutual written agreement of the parties to terminate the Transgenomic Voting
Agreement.
Specific Performance
Each of the parties to the Transgenomic
Voting Agreement has agreed that irreparable damage would occur in the event any provision of the Transgenomic Voting Agreement
was not performed in accordance with the terms thereof or was otherwise breached. Accordingly, the Supporting Stockholders agreed
that the parties to the Transgenomic Voting Agreement shall be entitled to seek specific relief thereunder, including, without
limitation, an injunction or injunctions to prevent and enjoin breaches of the provisions of the Transgenomic Voting Agreement
and to enforce specifically the terms and provisions thereof, in addition to any other remedy to which they may be entitled at
law or in equity. Additionally, the parties agreed to waive any requirements for the securing or posting of any bond with respect
to any such remedies.
Amendment
The Transgenomic Voting Agreement may
not be amended, supplemented or modified, and no provisions may be modified or waived, except by an instrument in writing signed
on behalf of each of the parties thereto.
Precipio Voting Agreement
General
On October 12, 2016, Transgenomic,
Precipio, certain Precipio executive officers, directors and significant security holders entered into the Precipio Voting Agreement.
Collectively, the voting interests held by these holders represent approximately 71% of Precipio’s voting interests as of
October 12, 2016. In this description, these individuals and entities are referred to collectively as the “Holders”
and to each individually as a “Holder.”
Agreement of Holders to Vote
Pursuant to the Precipio Voting Agreement,
each of the Holders has agreed to take the following actions at any meeting of the unit holders of Precipio or any adjournment
or postponement thereof, or in connection with any written consent of such unit holders, with respect to the merger, the Merger
Agreement or any Acquisition Proposal (as defined in the Merger Agreement):
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appear at such meeting or otherwise cause the all units owned by the Holder to be counted as present thereat for purposes of
calculating a quorum;
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vote (or cause to be voted), or deliver a written consent (or cause a written consent to be delivered) covering all of the
units owned by the Holder: (i) in favor of adoption and approval of all matters contemplated by the Merger Agreement as to which
unit holders of Precipio are called upon to vote as necessary for consummation of the merger and the other transactions contemplated
by the Merger Agreement; and (ii) against any Acquisition Proposal; and
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vote (or cause to be voted), or deliver a written consent (or cause a written consent to be delivered) covering all of the
units owned by the Holder against any of the following actions (other than those actions that relate to the merger and any other
transactions contemplated by the Merger Agreement): (i) any merger, consolidation, business combination, sale of assets or reorganization
of Precipio or any subsidiary thereof, (ii) any sale, lease or transfer of all or substantially all of the assets of Precipio or
any subsidiary thereof, (iii) any reorganization, recapitalization, dissolution, liquidation or winding up of Precipio or any subsidiary
thereof, (iv) any material change in the capitalization of Precipio or any subsidiary thereof, or the corporate structure of Precipio
or any subsidiary thereof or (v) any other action that is intended, or would reasonably be expected to, impede, interfere with,
delay, postpone or materially and adversely affect the merger or any other transactions contemplated by the Merger Agreement.
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Covenants
The Holders have various obligations
and responsibilities under the Precipio Voting Agreement, including, but not limited to, the following covenants:
Agreement to Retain Units.
Each
Holder has agreed that he, she or it shall not, directly or indirectly:
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Transfer any of the units owned by such Holder (i) unless the transferee has executed a counterpart to the Precipio Voting
Agreement and agreed in writing to hold such units (or interest in such units) subject to all of the terms and provisions of the
Precipio Voting Agreement, (ii) except by will or operation of law or (iii) as contemplated by the Merger Agreement,
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grant any proxies or powers of attorney that are not consistent with the terms of the Precipio Voting Agreement, or deposit
any units into a voting trust or enter into a voting agreement with respect to any units or
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take any action that would make any representation or warranty of any Holder contained in the Precipio Voting Agreement untrue
or incorrect in any material respect or have the effect of preventing or disabling such Holder from performing such Holder’s
material obligations under the Precipio Voting Agreement.
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No Solicitation
. Each Holder
(on behalf of itself and any subsidiaries or affiliates) has agreed in his capacity as a unit holder not to (i) initiate, solicit,
seek or knowingly encourage or support any inquiries, proposals or offers that constitute or may reasonably be expected to lead
to, any Acquisition Proposal, (ii) engage or participate in, or facilitate, any discussions or negotiations regarding, or furnish
any nonpublic information to any person in connection with, any inquiries, proposals or offers that constitute, or may reasonably
be expected to lead to, any Acquisition Proposal, (iii) enter into any letter of intent, agreement in principle or other similar
type of agreement relating to any Acquisition Proposal, or enter into any agreement or agreement in principle requiring Precipio
to abandon, terminate or fail to consummate the transactions contemplated by the Precipio Voting Agreement, (iv) initiate a unit
holders’ vote or action by consent of Precipio’s unit holders with respect to any Acquisition Proposal, (v) become
a member of a “group” (within the meaning of Section 13(d) of the Exchange Act) with respect to any voting securities
of Precipio that takes any action in support of any Acquisition Proposal or (vi) propose or agree to do any of the foregoing.
Further Assurances.
Each Holder
has agreed to execute and deliver, or cause to be executed and delivered, such additional or further consents, documents and other
instruments as Transgenomic or Precipio may reasonably request for the purpose of carrying out the transactions contemplated by
the Precipio Voting Agreement and the Merger Agreement.
Irrevocable Proxy
Each Holder has given Precipio an irrevocable
proxy to vote such Holder’s units if such Holder is unable to perform his, her or its obligations under the Precipio Voting
Agreement. Such irrevocable proxy automatically terminates upon the termination of the Precipio Voting Agreement.
Waiver of Appraisal Rights
Pursuant to the Precipio Voting Agreement,
each Holder has agreed to waive any and all rights he, she or it may have as to appraisal, dissent or any similar or related matter
with respect to any of such Holder’s units of Precipio that may arise with respect to the merger or any of the transactions
contemplated by the Merger Agreement.
Termination
The Precipio Voting Agreement will
terminate upon the earlier to occur of (i) the effective time of the merger, (ii) such date and time as the Merger Agreement shall
be terminated pursuant to the terms thereof or otherwise, (iii) such time as there is a Company Change of Recommendation (as such
term is defined in the Merger Agreement) or (iv) upon mutual written agreement of the parties to terminate the Precipio Voting
Agreement.
Specific Performance
Each of the parties to the Precipio
Voting Agreement has agreed that irreparable damage would occur in the event any provision of the Precipio Voting Agreement was
not performed in accordance with the terms thereof or was otherwise breached. Accordingly, the Holders agreed that the parties
to the Precipio Voting Agreement shall be entitled to seek specific relief thereunder, including, without limitation, an injunction
or injunctions to prevent and enjoin breaches of the provisions of the Precipio Voting Agreement and to enforce specifically the
terms and provisions thereof, in addition to any other remedy to which they may be entitled at law or in equity. Additionally,
the parties agreed to waive any requirements for the securing or posting of any bond with respect to any such remedies.
Amendment
The Precipio Voting Agreement may not
be amended, supplemented or modified, and no provisions may be modified or waived, except by an instrument in writing signed on
behalf of each of the parties thereto.
Lock Up Agreements
The parties to the Voting Agreements have agreed to execute
lock up agreements with New Precipio pursuant to which such parties will agree not to sell any shares of New Precipio common stock
that such parties hold after the merger for a period of six months following the effectiveness of the merger.
* * *
THE BOARD OF
DIRECTORS HAS APPROVED
THE ISSUANCE OF NEW PRECIPIO COMMON STOCK AND NEW PRECIPIO PREFERRED STOCK IN THE MERGER AND THE RELATED PRIVATE PLACEMENT,
THE ISSUANCE OF NEW PRECIPIO COMMON STOCK UPON CONVERSION OF THE NEW PRECIPIO PREFERRED STOCK AND THE RESULTING “CHANGE OF
CONTROL” OF TRANSGENOMIC
AND RECOMMENDS THAT YOU VOTE “FOR” PROPOSAL NO 1.
PROPOSAL NO.
2
APPROVAL OF THE ISSUANCE OF TRANSGENOMIC, INC. COMMON STOCK
UPON EXERCISE OR EXCHANGE OF THE WARRANTS
In 2016, Transgenomic issued certain
warrants (“Warrants”) to certain affiliates of Third Security, LLC (“Third Security Investors”) and Crede
Capital Group, LLC or its affiliates (“Crede”). At the time of issuance, these Warrants included a maximum aggregate
amount of 4,773,765 shares of Transgenomic common stock (the “Maximum Warrant Shares”) that were issuable to Third
Security Investors and Crede, as applicable, upon the exercise or exchange thereof.
Pursuant to the rules of Nasdaq, the
securities exchange on which Transgenomic’s common stock is listed, the issuance of 3,000,000 of the Maximum Warrant Shares
pursuant to the exercise and/or exchange provisions in the Warrants requires approval of Transgenomic’s stockholders because
the issuance exceeds 20% of the number of shares of Transgenomic common stock outstanding as of the date of the Warrants. Accordingly,
the terms of the Warrants require Transgenoimc’s stockholders to approve certain further issuances of common stock pursuant
to the Warrants.
Certain Terms of the Warrants
Placement Warrants
In January 2016, Transgenomic issued warrants to Crede and Third
Security Investors to purchase an aggregate of 1,773,929 shares of Transgenomic common stock (the “Placement Warrants”).
The Placement Warrants were immediately exercisable upon issuance, have a term of five years and have an exercise price of $1.21
per share of Transgenomic common stock. Each Placement Warrant includes both cash and “cashless exercise” features
and an exchange feature whereby the holder of the Placement Warrant may exchange (the “Exchange Right”) all or any
portion of the Placement Warrant for a number of shares of Transgenomic common stock equal to the quotient obtained by dividing
the “Exchange Amount” by the closing bid price of Transgenomic common stock on the second trading day prior to the
date the Placement Warrant is exchanged (the “Exchange Price”). Under the Placement Warrants, the “Exchange Amount”
is based upon a Black Scholes option pricing model. Each Placement Warrant provides that the number of shares that may be issued
upon exercise of the Exchange Right is limited to the number of shares that may be purchased pursuant to the terms of the Placement
Warrant, unless Transgenomic has previously obtained stockholder approval or approval from The Nasdaq Stock Market LLC to issue
any additional shares of Transgenomic common stock (the “Additional Shares”) pursuant to the Exchange Right (the “Required
Approvals”). For any Exchange Right exercised more than 90 days following the issuance of the Placement Warrants, if Transgenomic
has not obtained either of the Required Approvals, Transgenomic will be required to pay the Placement Warrant holder an amount
in cash for any Additional Shares that Transgenomic cannot issue without the Required Approvals based on the Exchange Amount.
The Placement Warrants further provide
that, to the extent the closing bid price of Transgenomic common stock on the second trading day prior to the date the Placement
Warrant is exchanged is less than $0.50, the Exchange Price will be deemed to be equal to $0.50, and, in addition to issuing shares
of Transgenomic common stock based on this Exchange Price, Transgenomic will be required to pay to the Placement Warrant holder
an amount in cash equal to the product obtained by multiplying (a) $0.50 minus the closing bid price of Transgenomic common stock
on the second trading day prior to the date the Placement Warrant is exchanged, by (b) the aggregate number of shares of Transgenomic
common stock issued to the Placement Warrant holder by Transgenomic in such exchange at an Exchange Price equal to $0.50.
Amended Warrant
In January 2016, Transgenomic also issued a warrant (the “Amended
Warrant”) that amended an outstanding warrant previously issued to Crede in July 2015 to purchase up to 1,161,972 shares
of Transgenomic common stock (the “Original Warrant”). The Amended Warrant amended the Original Warrant to provide
that the Amended Warrant is subject to the same terms and conditions as the Placement Warrants and, therefore, includes both cash
and “cashless exercise” features and an Exchange Right whereby the number of shares issuable pursuant to the Exchange
Right is equal to the “Amended Warrant Exchange Amount”, which is based on a Black Scholes option pricing model. The
Amended Warrant is exercisable for up to 1,161,972 shares of Transgenomic common stock in the event Transgenomic has obtained either
of the Required Approvals with respect to the Amended Warrant. In the event Crede exercises the Amended Warrant more than 90 days
following the issuance of the Amended Warrant, if Transgenomic has not obtained either of the Required Approvals, Transgenomic
will be required to pay Crede an amount in cash for the shares of Transgenomic common stock that Transgenomic cannot issue under
the Amended Warrant pursuant to such exercise without the Required Approvals based on the Amended Warrant Exchange Amount.
The Amended Warrant also provides that,
to the extent the closing bid price of Transgenomic common stock on the second trading day prior to the date the Amended Warrant
is exchanged is less than $0.50, the Exchange Price will be deemed to be equal to $0.50, and, in addition to issuing shares of
Transgenomic common stock based on this Exchange Price (assuming receipt of the Required Approvals), Transgenomic will be required
to pay to Crede an amount in cash equal to the product obtained by multiplying (a) $0.50 minus the closing bid price of Transgenomic
common stock on the second trading day prior to the date the Amended Warrant is exchanged, by (b) the aggregate number of shares
of Transgenomic common stock issued to Crede by us in such exchange at an Exchange Price equal to $0.50.
Crede Warrants
An aggregate maximum amount of 4,512,903
shares of Transgenomic common stock are issuable to Crede under the Warrants. The Placement Warrants issued to Crede provide for
the issuance of up to 1,612,903 shares of Transgenomic common stock issuable upon the exercise or the exchange of the warrant,
with a maximum amount of up to 2,612,903 shares of Transgenomic common stock issuable upon any exchange of such Placement Warrant
in accordance with the Exchange Right (the “Crede Placement Warrant”). The Amended Warrant issued to Crede provides
for the issuance of up to 1,161,972 shares of Transgenomic common stock issuable upon the exercise or the exchange of the Amended
Warrant, with a maximum amount of up to 1,900,000 shares of Transgenomic common stock issuable upon the exchange of the warrant
in accordance with the Exchange Right.
As of January 17, 2017, 606,484 of
the original 1,612,903 shares of Transgenomic common stock subject to the Crede Placement Warrant remain to be issued under the
warrant. Pursuant to the terms of the Crede Placement Warrant, 1,000,000 Additional Shares of the 2,612,903 maximum number of shares
of Transgenomic common stock issuable upon the exchange of the Crede Placement Warrant are subject to the approval of Transgenomic
stockholders before such Additional Shares may be issued in connection with any exchange of the Crede Placement Warrant pursuant
to the Exchange Right.
As of January 17, 2017, all 1,161,972
shares of Transgenomic common stock subject to the Amended Warrant remain to be issued under the warrant. Pursuant to the terms
of the Amended Warrant, no shares of Transgenomic common stock may be issued, whether pursuant to an exercise or exchange, without
the approval of Transgenomic stockholders.
Third Security Investors Warrant
An aggregate maximum amount of 260,862
shares of Transgenomic common stock are issuable to Third Security Investors under the Placement Warrants. The Placement Warrants
issued to Third Security Investors provide for the issuance of up to 161,026 shares of Transgenomic common stock issuable upon
the exercise or exchange of the warrant, with a maximum amount of up to 260,862 shares of Transgenomic common stock issuable upon
the exchange of the warrant in accordance with the Exchange Right (the “Third Security Investors Warrant”).
As of January 17, 2017, all 161,026
shares of Transgenomic common stock subject to the Third Security Investors Warrant remain to be issued under the warrant. Pursuant
to the terms of the Third Security Investors Warrant, 99,836 Additional Shares of the 260,862 maximum number of shares of Transgenomic
common stock issuable upon the exchange of the Third Security Investors Warrant are subject to the approval of Transgenomic stockholders
before such Additional Shares may be issued in connection with any exchange of the Third Security Investors Warrant pursuant to
the Exchange Right.
Effect of the Proposed Issuance
of Common Stock
The shares of Transgenomic common stock
to be issued pursuant to Proposal No. 2 in connection with the exercise and/or exchange of the Warrants would be identical to the
shares of Transgenomic common stock now issued and outstanding. However, the stock issuance will dilute the ownership and voting
interests of our existing stockholders.
Vote Required and Board of Directors
Recommendation
Approval of the proposal to issue 3,000,000
shares of Transgenomic common stock upon exercise of the Warrants requires the affirmative vote of the holders of a majority of
the shares of Transgenomic common stock and Series A-1 Convertible Preferred Stock, voting together as a single class (with each
one share of Series A-1 Convertible Preferred Stock being entitled to 0.93 votes), present in person or represented by proxy at
the special meeting at which a quorum is present. Abstentions with respect to this proposal will have the same effect as a vote
against the proposal. Broker non-votes will have no effect on the proposal. The approval of Proposal No. 2 is not a condition to
the completion of the merger with Precipio.
THE BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE “FOR” PROPOSAL NO 2.
PROPOSAL NO.
3
APPROVAL OF 2017 STOCK OPTION AND INCENTIVE PLAN
Proposal
The Transgenomic Board believes that stock options, restricted
stock units, restricted stock awards and other stock-based incentive awards can play an important role in the success of the Transgenomic
(and, after the merger, New Precipio) (Transgenomic or New Precipio, as applicable, is referred to in this proposal as the “Company”)
by encouraging and enabling the employees, officers, non-employee directors and other key persons of the Company and its subsidiaries
upon whose judgment, initiative and efforts the Company largely depends for the successful conduct of its business to acquire a
proprietary interest in the Company. The Transgenomic Board anticipates that providing these people with a direct ownership stake
will assure a closer identification of the interests of these individuals with those of the Company and its stockholders, thereby
stimulating their efforts on the Company’s behalf and strengthening their desire to remain with the Company. All share numbers
set forth below do not take into account the proposed reverse stock split at a ratio of between one to ten and one to thirty approved
by the Transgenomic stockholders on October 31, 2016.
Vote Required and Board of Directors
Recommendation
Approval of the 2017 Stock Option and Incentive Plan (the “2017
Plan”) which is attached to this proxy statement as Annex E, requires the affirmative vote of the holders of a majority of
the shares of Transgenomic common stock and Series A-1 Convertible Preferred Stock, voting together as a single class (with each
one share of Series A-1 Convertible Preferred Stock being entitled to 0.93 votes), present in person or represented by proxy at
the special meeting at which a quorum is present. Abstentions with respect to this proposal will have the same effect as a vote
against the proposal. Broker non-votes will have no effect on the proposal. The approval of Proposal No. 3 is not a condition to
the completion of the merger with Precipio.
The 2017 Plan is intended to serve as a successor to and replacement
for the Transgenomic, Inc. 2006 Equity Incentive Plan, as amended (the “Amended 2006 Plan”), which expired pursuant
to its terms on July 12, 2016. If approved, the 2017 Plan will take effect on March [●], 2017, the day of the Special Meeting,
and will expire on March [●], 2027. If the Transgenomic stockholders do not approve the 2017 Plan, then Transgenomic will
not be able to make additional awards under the Amended 2006 Plan and Transgenomic does not expect to be able to offer competitive
equity packages to retain our current employees or hire new employees.
Transgenomic executive officers and members of the Transgenomic
Board will be eligible to receive awards under the 2017 Plan and therefore have an interest in this proposal. Effective December
13, 2016, the Board approved the issuance of options to acquire 5,000 shares of Transgenomic common stock to Mya Thomae, Doit Koppler
II, Michael A. Luther, and Robert M. Patzig, as well as an additional grant of an option to acquire 100,000 shares of Transgenomic
common stock to Robert M. Patzig, Chairman of the Transgenomic Board, in connection with his role in negotiating the Merger Agreement
and related transactions, all of which options are subject to the approval of the 2017 Plan by the Transgenomic stockholders. Upon
such approval by the Transgenomic stockholders, these options will be effective as of December 13, 2016.
Summary of Material Features of
the 2017 Plan
The material features of the 2017 Plan are:
|
·
|
20,000,000 shares of common stock have been reserved for the issuance under the 2017 Plan;
provided, however,
in the
event the merger with Precipio is not consummated, the Company will reduce the number of shares reserved under the 2017 Plan to
2,000,000;
|
|
·
|
Until the merger with Precipio is completed, awards with respect to no more than 2,000,000 shares may be granted under the
2017 Plan;
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·
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Shares of common stock that are forfeited, cancelled, held back upon the exercise or settlement of an award to cover the exercise
price or tax withholding, reacquired by the Company prior to vesting, satisfied without the issuance of common stock or otherwise
terminated (other than by exercise) under the 2017 Plan are added back to the shares of common stock available for issuance under
the 2017 Plan;
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·
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Shares of common stock reacquired by the Company on the open market will not be added to the reserved pool under the 2017 Plan;
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·
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The award of stock options (both incentive and non-qualified options), stock appreciation rights, restricted stock awards,
restricted stock units, unrestricted stock awards, cash-based awards, performance share awards and dividend equivalent rights is
permitted under the 2017 Plan;
|
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·
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No dividends or dividend equivalents may be paid on full value awards (restricted stock, restricted stock units and performance
share awards) subject to performance vesting until such shares are actually earned upon satisfaction of the performance criteria;
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·
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The value of all equity awards made under the 2017 Plan and all other cash compensation paid by the Company to any non-employee
director in any calendar year may not exceed $500,000.
|
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·
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Any material amendment to the 2017 Plan is subject to approval by the Company’s stockholders; and
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·
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The term of the 2017 Plan will expire on March [●], 2027.
|
The maximum aggregate market value of the common stock that
could potentially be issued under the 2017 Plan assuming the merger with Precipio is completed will be based on the closing price
of Transgenomic’s common stock on the date the 2017 Plan is approved and the number of shares to be reserved under the 2017
Plan, which is 20,000,000. For example, assuming the 2017 Plan was approved on February [●], 2017, the most recent date prior
to the date of this proxy statement, based on the closing price of Transgenomic’s common stock as reported on such date,
the maximum aggregate market value of the common stock that could potentially be issued under the 2017 Plan would be $[●].
The shares the Company issues under the 2017 Plan will be authorized but unissued shares or shares that the Company reacquires.
Qualified Performance-Based Compensation
under Section 162(m) of the Code
To ensure that certain awards granted under the 2017 Plan to
“covered employees” (as defined in the 2017 Plan) qualify as “performance-based compensation” under Section
162(m) of the Code, the 2017 Plan provides that the administrator of the 2017 Plan may require that the vesting of such awards
be conditioned on the satisfaction of performance criteria that may include any or all of the following: (1) total stockholder
return, (2) earnings before interest, taxes, depreciation and amortization, (3) net income (loss) (either before or after interest,
taxes, depreciation and/or amortization), (4) changes in the market price of the common stock, (5) economic value-added, (6) funds
from operations or similar measure, (7) sales or revenue, (8) acquisitions or strategic transactions, (9) operating income (loss),
(10) cash flow (including, but not limited to, operating cash flow and free cash flow), (11) return on capital, assets, equity
or investment, (12) return on sales, (13) gross or net profit levels, (14) productivity, (15) expense, (16) margins, (17) operating
efficiency, (18) customer satisfaction, (19) working capital, (20) earnings (loss) per share of common stock, (21) sales or market
shares and (22) number of customers, any of which may be measured either in absolute terms or as compared to any incremental increase
or as compared to results of a peer group. The administrator of the 2017 Plan will select the particular performance criteria within
90 days following the commencement of a performance cycle. Subject to adjustments for stock splits and similar events, the maximum
award granted to any one individual that is intended to qualify as “performance-based compensation” under Section 162(m)
of the Code will not exceed 3,000,000 shares of common stock (
provided, however,
that if the merger with Precipio is not
consummated, the Company will reduce such number to 300,000 shares of common stock) for any performance cycle and options or stock
appreciation rights with respect to no more than 2,000,000 shares of common stock (
provided, however,
that if the merger
with Precipio is not consummated, the Company will reduce such number to 200,000 shares of common stock) may be granted to any
one individual during any calendar year period. If a performance-based award is payable in cash, it cannot exceed $1,000,000 for
any performance cycle.
Summary of the 2017 Plan
The following description of certain features of the 2017 Plan
is intended to be a summary only. The summary is qualified in its entirety by the full text of the 2017 Plan, which is attached
hereto as Annex E.
Plan Administration
. The 2017 Plan will be administered
by the Transgenomic Compensation Committee. The administrator has full power to select, from among the individuals eligible for
awards, the individuals to whom awards will be granted, to make any combination of awards to participants, and to determine the
specific terms and conditions of each award, subject to the provisions of the 2017 Plan. The administrator may delegate to the
Company’s Chief Executive Officer the authority to grant awards to employees who are not subject to the reporting and other
provisions of Section 16 of the Exchange Act, and not subject to Section 162(m) of the Code, subject to certain limitations and
guidelines.
Eligibility
. Persons eligible to participate in
the 2017 Plan will be those full or part-time officers, employees, non-employee directors and other key persons (including consultants)
of the Company and its subsidiaries as selected from time to time by the administrator in its discretion. Approximately 25 individuals
would be currently eligible to participate in the 2017 Plan, which includes one officer, 20 employees who are not officers, and
four non-employee directors.
Plan Limits
. A total of 20,000,000 shares of common
stock have been reserved under the 2017 Plan. In the event the merger with Precipio is not consummated, the Company will reduce
such number to 2,000,000 shares of common stock. Awards with respect to no more than 2,000,000 shares may be granted under the
2017 Plan after the merger with Precipio is completed. The maximum award of stock options or stock appreciation rights granted
to any one individual will not exceed 2,000,000 shares of common stock (
provided, however,
that if the merger with Precipio
is not consummated, the Company will reduce such number to 200,000 shares of common stock) (in each case, subject to adjustment
for stock splits and similar events) for any calendar year period. If any award of restricted stock, restricted stock units or
performance shares granted to an individual is intended to qualify as “performance-based compensation” under Section
162(m) of the Code, then the maximum award shall not exceed 1,000,000 shares of common stock (
provided, however,
that if
the merger with Precipio is not consummated, the company will reduce such number to 100,000 shares of common stock) (in each case,
subject to adjustment for stock splits and similar events) to any one such individual in any performance cycle. If any cash-based
award is intended to qualify as “performance-based compensation” under Section 162(m) of the Code, then the maximum
award to be paid in cash in any performance cycle may not exceed $1,000,000. In addition, no more than 20,000,000 shares of common
stock (provided, however, that if the merger with Precipio is not consummated, the Company will reduce such number to 200,000 shares
of common stock) (in each case, subject to adjustment for stock splits and similar events) may be issued in the form of incentive
stock options.
Stock Options
. The 2017 Plan permits the granting
of (1) options to purchase common stock intended to qualify as incentive stock options under Section 422 of the Code and (2) options
that do not so qualify. Options granted under the 2017 Plan will be non-qualified options if they fail to qualify as incentive
options or exceed the annual limit on incentive stock options. Incentive stock options may only be granted to employees of the
Company and its subsidiaries. Non-qualified options may be granted to any persons eligible to receive incentive options and to
non-employee directors and consultants of the Company. The option exercise price of each option will be determined by the administrator
but may not be less than 100% of the fair market value of the common stock on the date of grant. In the case of an incentive stock
option granted to a 10% owner of the Company, the exercise price may not be less than 110% of the fair market value on the date
of grant. Fair market value for this purpose will be the last reported sale price of the shares of common stock on Nasdaq on the
date of grant. The administrator has discretion to reduce the exercise price of outstanding stock options or to effect the repricing
of stock options through cancellation and re-grants.
The term of each option will be fixed by the administrator and
may not exceed ten years from the date of grant. The administrator will determine at what time or times each option may be exercised.
Options may be made exercisable in installments and the exercisability of options may be accelerated by the administrator. In general,
unless otherwise permitted by the administrator, no option granted under the 2017 Plan is transferable by the optionee other than
by will or by the laws of descent and distribution, and options may be exercised during the optionee’s lifetime only by the
optionee, or by the optionee’s legal representative or guardian in the case of the optionee’s incapacity.
Upon exercise of options, the option exercise price must be
paid in full either in cash, by certified or bank check or other instrument acceptable to the administrator or by delivery (or
attestation to the ownership) of shares of common stock that are not then subject to any restrictions under any Company plan. Subject
to applicable law, the exercise price may also be delivered to us by a broker pursuant to irrevocable instructions to the broker
from the optionee. In addition, the administrator may permit non-qualified options to be exercised using a net exercise feature,
which reduces the number of shares issued to the optionee by the number of shares with a fair market value equal to the exercise
price.
To qualify as incentive options, options must meet additional
federal tax requirements, including a $100,000 limit on the value of shares subject to incentive options that first become exercisable
by a participant in any one calendar year.
Stock Appreciation Rights
. The administrator may
award stock appreciation rights subject to such conditions and restrictions as the administrator may determine. Stock appreciation
rights entitle the recipient to shares of common stock equal to the value of the appreciation in the stock price over the exercise
price. The exercise price may not be less than the fair market value of the common stock on the date of grant. The administrator
has discretion to reduce the exercise price of outstanding stock appreciation rights or to effect the repricing of stock appreciation
rights through cancellation and re-grants. The maximum term of a stock appreciation right is ten years.
Restricted Stock Awards
. The administrator may
award shares of common stock to participants subject to such conditions and restrictions as the administrator may determine. These
conditions and restrictions may include the achievement of certain performance goals (as summarized above) and/or continued employment
with the Company through a specified restricted period.
Restricted Stock Units
. The administrator may
award restricted stock units to any participants. Restricted stock units are ultimately payable in the form of shares of common
stock and may be subject to such conditions and restrictions as the administrator may determine. These conditions and restrictions
may include the achievement of certain performance goals (as summarized above) and/or continued employment with the Company through
a specified vesting period. In the administrator’s sole discretion, it may permit a participant to make an advance election
to receive a portion of his or her future cash compensation otherwise due in the form of restricted stock units, subject to the
participant’s compliance with the procedures established by the administrator and requirements of Section 409A of the Code.
During the deferral period, the restricted stock units may be credited with dividend equivalent rights.
Unrestricted Stock Awards
. The administrator may
also grant shares of common stock that are free from any restrictions under the 2017 Plan. Unrestricted stock may be granted to
any participant in recognition of past services or other valid consideration and may be issued in lieu of cash compensation due
to such participant.
Cash-Based Awards
. The administrator may grant
cash bonuses under the 2017 Plan to participants. The cash bonuses may be subject to the achievement of certain performance goals
(as summarized above).
Performance Share Awards
. The administrator may
grant performance share awards to any participant that entitle the recipient to receive shares of common stock upon the achievement
of certain performance goals (as summarized above) and such other conditions as the administrator shall determine.
Dividend Equivalent Rights
. The administrator
may grant dividend equivalent rights to participants, which entitle the recipient to receive credits for dividends that would be
paid if the recipient had held specified shares of common stock. Dividend equivalent rights may be granted as a component of another
award (other than a stock option or stock appreciation right) or as a freestanding award. Dividend equivalent rights may be settled
in cash, shares of common stock or a combination thereof, in a single installment or installments, as specified in the award.
Sale Event Provisions
. The 2017 Plan provides
that upon the effectiveness of a “sale event,” as defined in the 2017 Plan, all awards under the 2017 Plan will automatically
terminate unless the parties to the sale event agree that such awards will be assumed, continued or substituted by the successor
entity. In the event of such termination, except as otherwise provided in the relevant award certificate, all stock options and
stock appreciation rights will automatically become fully exercisable and the restrictions and conditions on all other awards with
time-based conditions will become fully vested and nonforfeitable as of the effective time of the sale event. All awards with conditions
and restrictions relating to the attainment of performance goals may become vested and nonforfeitable in the administrator’s
discretion or to the extent specified in the relevant award agreement. In the event of such termination, (i) the Company may make
or provide for a cash payment to participants holding options and stock appreciation rights, in exchange for the cancellation thereof,
equal to the difference between the per share cash consideration in the sale event and the exercise price of the options or stock
appreciation rights or (ii) each participant shall be permitted, within a specified period of time prior to the consummation of
the sale event, as determined by the administrator, to exercise all outstanding options and stock appreciation rights held by such
participant. The Company shall also have the option to make or provide for payment, in cash or in kind, to grantees holding other
awards in an amount equal to the sale price multiplied by the number of vested shares underlying such awards.
Adjustments for Stock Dividends, Stock Splits, Etc
.
The 2017 Plan requires the administrator to make appropriate adjustments to the number of shares of common stock that are subject
to the 2017 Plan, to certain limits in the 2017 Plan, and to any outstanding awards to reflect stock dividends, stock splits, extraordinary
cash dividends and similar events.
Tax Withholding
. Participants in the 2017 Plan
are responsible for the payment of any federal, state or local taxes that the Company required by law to withhold upon the exercise
of options or stock appreciation rights or vesting of other awards. Subject to approval by the administrator, participants may
elect to have the minimum tax withholding obligations satisfied by authorizing the Company to withhold shares of common stock to
be issued pursuant to exercise or vesting.
Amendments and Termination
. The Transgenomic Board
may at any time amend or discontinue the 2017 Plan and the administrator may at any time amend or cancel any outstanding award
for the purpose of satisfying changes in the law or for any other lawful purpose. However, no such action may adversely affect
any rights under any outstanding award without the holder’s consent. To the extent required under Nasdaq rules, any amendments
that materially change the terms of the 2017 Plan will be subject to approval by the Company’s stockholders. Amendments shall
also be subject to approval by the Company’s stockholders if and to the extent determined by the administrator to be required
by the Code to preserve the qualified status of incentive options or to ensure that compensation earned under the 2017 Plan qualifies
as performance-based compensation under Section 162(m) of the Code.
Effective Date of 2017 Plan
. The Transgenomic
Board initially adopted the 2017 Plan on December 13, 2016 and it will become effective on March [●], 2017, subject to stockholder
approval. Awards of incentive options may be granted under the 2017 Plan until March [●], 2027. No other awards may be granted
under the 2017 Plan after March [●], 2027.
Plan Benefits
Because the grant of awards under the 2017 Plan is within the
discretion of the administrator, Transgenomic cannot determine the dollar value or number of shares of common stock that will in
the future be received by or allocated to any participant in the 2017 Plan. Accordingly, in lieu of providing information regarding
benefits that will be received under the 2017 Plan, the following table provides information concerning the benefits that were
received by the following persons and groups for all past grants up to and including December 31, 2016: each named executive officer;
all current executive officers, as a group; all current directors who are not executive officers, as a group; and all employees
who are not executive officers, as a group.
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Options
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Other Awards
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Name and Position
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Average
Exercise Price
($)
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Number (#)
|
|
|
Dollar
Value ($)
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|
|
Number (#)
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|
Paul Kinnon
President and Chief Executive Officer
|
|
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3.62
|
|
|
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274,166
|
|
|
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284,882
|
|
|
|
83,333
|
|
Leon Richards
Former Chief Accounting Officer
(1)
|
|
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2.14
|
|
|
|
108,624
|
|
|
|
29,304
|
|
|
|
15,000
|
|
All current executive officers, as a group
|
|
|
3.62
|
|
|
|
274,166
|
|
|
|
284,882
|
|
|
|
83,333
|
|
All current directors who are not executive officers, as a group
(2)
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3.37
|
|
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95,998
|
|
|
|
—
|
|
|
|
—
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All current employees who are not executive officers, as a group
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|
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6.45
|
|
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350,522
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|
|
|
—
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—
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(1)
|
Mr. Richards resigned from Transgenomic effective September
30, 2016, and the unvested option awards included in this table were terminated as of that date in accordance with their terms.
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(2)
|
Does not include the issuance of options to acquire 5,000
shares of Transgenomic common stock to Mya Thomae, Doit Koppler II, Michael A. Luther, and Robert M. Patzig, as well
as an additional grant of an option to acquire 100,000 shares of Transgenomic common stock to Robert M. Patzig, Chairman of the
Transgenomic Board, in connection with his role in negotiating the Merger Agreement and related transactions, all of which options
were approved by the Board on December 13, 2016 and are subject to approval of the 2017 Plan by the Transgenomic stockholders.
Upon the approval of the 2017 Plan by Transgenomic stockholders, these options will be effective as of December 13, 2016.
|
Tax Aspects under the Code
The following is a summary of the principal federal income tax
consequences of certain transactions under the 2017 Plan. It does not describe all federal tax consequences under the 2017 Plan,
nor does it describe state or local tax consequences.
Incentive Options
. No taxable income is generally
realized by the optionee upon the grant or exercise of an incentive option. If shares of common stock issued to an optionee pursuant
to the exercise of an incentive option are sold or transferred after two years from the date of grant and after one year from the
date of exercise, then (i) upon sale of such shares, any amount realized in excess of the option price (the amount paid for the
shares) will be taxed to the optionee as a long-term capital gain, and any loss sustained will be a long-term capital loss, and
(ii) the company will not be entitled to any deduction for federal income tax purposes. The exercise of an incentive option will
give rise to an item of tax preference that may result in alternative minimum tax liability for the optionee.
If shares of common stock acquired upon the exercise of an incentive
option are disposed of prior to the expiration of the two-year and one-year holding periods described above (a “disqualifying
disposition”), generally (i) the optionee will realize ordinary income in the year of disposition in an amount equal to the
excess (if any) of the fair market value of the shares of common stock at exercise (or, if less, the amount realized on a sale
of such shares of common stock) over the option price thereof and (ii) the company will be entitled to deduct such amount. Special
rules apply where all or a portion of the exercise price of the incentive option is paid by tendering shares of common stock.
If an incentive option is exercised at a time when it no longer
qualifies for the tax treatment described above, the option is treated as a non-qualified option. Generally, an incentive option
will not be eligible for the tax treatment described above if it is exercised more than three months following termination of employment
(or one year in the case of termination of employment by reason of disability). In the case of termination of employment by reason
of death, the three-month rule does not apply.
Non-Qualified Options
. No income is realized by
the optionee at the time the option is granted. Generally (i) at exercise, ordinary income is realized by the optionee in an amount
equal to the difference between the option price and the fair market value of the shares of common stock on the date of exercise,
and the Company receives a tax deduction for the same amount and (ii) at disposition, appreciation or depreciation after the date
of exercise is treated as either short-term or long-term capital gain or loss depending on how long the shares of common stock
have been held. Special rules apply where all or a portion of the exercise price of the non-qualified option is paid by tendering
shares of common stock. Upon exercise, the optionee will also be subject to Social Security taxes on the excess of the fair market
value over the exercise price of the option.
Other Awards
. The Company generally will be entitled
to a tax deduction in connection with an award under the 2017 Plan in an amount equal to the ordinary income realized by the participant
at the time the participant recognizes such income. Participants typically are subject to income tax and recognize such tax at
the time that an award is exercised, vests or becomes non-forfeitable, unless the award provides for a further deferral.
Parachute Payments
. The vesting of any portion
of an option or other award that is accelerated due to the occurrence of a change in control (such as a sale event) may cause a
portion of the payments with respect to such accelerated awards to be treated as “parachute payments,” as defined in
the Code. Any such parachute payments may be non-deductible to the company, in whole or in part, and may subject the recipient
to a non-deductible 20% federal excise tax on all or a portion of such payment (in addition to other taxes ordinarily payable).
Limitation on Deductions
. Under Section 162(m)
of the Code, the company’s deduction for certain awards under the 2017 Plan may be limited to the extent that the chief executive
officer or other executive officer whose compensation is required to be reported in the summary compensation table (other than
the principal financial officer) receives compensation in excess of $1 million a year (other than performance-based compensation
that otherwise meets the requirements of Section 162(m) of the Code). The 2017 Plan is structured to allow certain awards to qualify
as performance-based compensation.
THE BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE “FOR” PROPOSAL NO 3.
2016 Executive Compensation
Summary Compensation Table
The following table sets forth compensation awarded to, paid
to or earned by Transgenomic’s “named executive officers” for services rendered during fiscal years 2016 and
2015.
Name and Principal
Position
|
|
Year
|
|
|
Salary ($)
|
|
|
SARs and Option
Awards(1) ($)
|
|
|
All Other
Compensation
($)
|
|
|
Total ($)
|
|
Paul Kinnon (2)
|
|
|
2016
|
|
|
|
350,000
|
|
|
|
—
|
|
|
|
11,075
|
(3)
|
|
|
361,075
|
|
President, Chief Executive Officer and Interim Chief Financial Officer
|
|
|
2015
|
|
|
|
350,000
|
|
|
|
68,925
|
|
|
|
11,075
|
(3)
|
|
|
430,000
|
|
Leon Richards (4)
|
|
|
2016
|
|
|
|
150,000
|
|
|
|
—
|
|
|
|
21,669
|
(5)
|
|
|
171,669
|
|
Former Chief Accounting Officer
|
|
|
2015
|
|
|
|
200,000
|
|
|
|
73,520
|
|
|
|
8,380
|
(6)
|
|
|
281,900
|
|
|
(1)
|
The amounts in this column reflect the aggregate grant
date fair value of the stock appreciation rights (“SARs”) and stock option awards granted during the respective fiscal
year as computed in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 718, excluding the effect of estimated forfeitures. The amounts shown for 2015 do not correspond to
the actual value that will be recognized by the named executive officer. The assumptions used in the calculation of these amounts
are included in Note 12 “Equity Incentive Plan” to the consolidated financial statements contained in Transgenomic’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the SEC on April 14, 2016. See the table entitled
“2015 Grants of Plan-Based Awards” for information on SARs and stock options granted in 2015.
|
|
(2)
|
See “Agreements with Transgenomic’s Named Executive
Officers – Paul Kinnon Employment Agreement” for a description of the Kinnon Employment Agreement with Transgenomic.
Mr. Kinnon was appointed as Transgenomic’s President and Chief Executive Officer effective as of September 30, 2013 and
Transgenomic’s Interim Chief Financial Officer effective as of October 31, 2014.
|
|
(3)
|
Amounts paid to Mr. Kinnon in 2016 and 2015 consisted of
$10,600 in 401(k) matching contributions and $475 in long term disability insurance.
|
|
(4)
|
Mr. Richards resigned from Transgenomic effective September
30, 2016.
|
|
(5)
|
Amounts paid to Mr. Richards in 2016 consisted of $6,000
in 401(k) matching contributions, accrued vacation pay of $15,384 and $285 in long term disability insurance.
|
|
(6)
|
Amounts paid to Mr. Richards in 2015 consisted of $8,000
in 401(k) matching contributions and $380 in long term disability insurance.
|
2016 Grants of Plan-Based Awards
There were no grants of plan-based awards in fiscal year 2016
to Transgenomic’s named executive officers.
Outstanding Equity Awards at Fiscal 2016 Year-End
The following table provides certain information
concerning outstanding option awards and SARs held by Transgenomic’s named executive officers as of December 31, 2016.
As of December 31, 2016, no other equity awards granted to Transgenomic’s named executive officers were outstanding.
Stock Appreciation Rights and Option
Awards
Name
|
|
SARs and Option
Award Grant
Date
|
|
Number of Securities
Underlying
Unexercised SARs
and Options (#)
(Exercisable)
|
|
|
Number of
Securities
Underlying
Unexercised
SARs and
Options (#)
(Unexercisable)
|
|
|
SARs and
Option
Exercise
Price ($)
|
|
|
SARS and
Option
Expiration
Date
|
Paul Kinnon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
9/30/2013
|
|
|
179,166
|
|
|
|
—
|
|
|
|
4.32
|
|
|
9/30/2023
|
SARs
|
|
9/30/2013
|
|
|
83,333
|
|
|
|
—
|
|
|
|
4.32
|
|
|
9/30/2023
|
Stock options
|
|
2/18/2014
|
|
|
13,333
|
|
|
|
6,667
|
(1)
|
|
|
5.54
|
|
|
2/18/2024
|
Stock options
|
|
4/1/2015
|
|
|
25,000
|
|
|
|
50,000
|
(1)
|
|
|
1.44
|
|
|
4/1/2025
|
Leon Richards (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The award vests over three years, with one-third of the
shares subject to the award vesting on each anniversary of the grant date.
|
|
(2)
|
Mr. Richards resigned from Transgenomic effective September
30, 2016, and all unvested option and SARs awards were terminated as of that date in accordance with their terms.
|
Fiscal Year 2016 SARs and Option Exercises and Stock Vested
No SARs or stock options
were exercised by either of
Transgenomic’s
named executive officers during fiscal
year 2016.
Agreements with Transgenomic’s
Named
Executive Officers
Paul Kinnon Employment Agreement
Transgenomic has entered into the Kinnon Employment Agreement
with Paul Kinnon, its President and Chief Executive Officer. The Kinnon Employment Agreement provides that Mr. Kinnon will be employed
by Transgenomic for a period of one year, subject to automatic renewal for additional one-year periods, unless terminated by either
party upon written notice to the other at least three months prior to the expiration of the then-current term. Under the terms
of the Kinnon Employment Agreement, Mr. Kinnon is paid an initial base salary of $350,000 per year. His base salary will be reviewed
by the Compensation Committee of the Transgenomic Board for an increase on at least an annual basis and may be adjusted at any
time in the Compensation Committee’s sole and absolute discretion, provided that any decrease in base salary must either
be with Mr. Kinnon’s written permission, or be part of an across-the-board reduction that affects all senior executives of
Transgenomic by the same percentage. Commencing January 1, 2014, Mr. Kinnon became eligible to receive an annual bonus based on
his performance under agreed-upon goals, objectives and formulas, provided that his target bonus for any year may not be less than
40% of his then-current base salary. The Kinnon Employment Agreement provides for a severance payment to Mr. Kinnon equal to 12
months of Mr. Kinnon’s then-current base salary if he is discharged other than for “Cause” (as defined in the
Kinnon Employment Agreement), other than due to Mr. Kinnon’s disability, or if Mr. Kinnon resigns for “Good Reason”
(as defined in the Kinnon Employment Agreement), regardless of whether or not the termination follows a change in control, in each
case provided that Mr. Kinnon executes a severance agreement and general release in favor of Transgenomic. The severance payments
will be made over 12 months in accordance with Transgenomic’s payroll practices, provided that payment of these amounts is
subject to the provisions of Section 409A of the Code which may require that payments be delayed for six months (with interest)
following termination of employment. If Mr. Kinnon breaches any of the covenants in the Kinnon Employment Agreement related to
the protection of Transgenomic’s interests, including non-solicitation of employees for six months following termination
of employment and confidentiality and non-disparagement following termination of employment, he is not entitled to further severance
payments. The Kinnon Employment Agreement also provides that Transgenomic will reimburse Mr. Kinnon for certain expenses associated
with commuting from Solana Beach, California to Transgenomic’s offices in Omaha, Nebraska and New Haven, Connecticut. The
Kinnon Employment Agreement further provides that the vesting of the equity awards granted by Transgenomic to Mr. Kinnon described
below, as well as all future equity awards granted to Mr. Kinnon by Transgenomic, will accelerate in full and become fully vested
upon a Change in Control, as defined in the Amended 2006 Plan.
Pursuant to the terms of the Kinnon Employment Agreement, Mr.
Kinnon was granted an option to purchase 179,166 shares of Transgenomic common stock with a per share exercise price equal to the
fair market value of one share of Transgenomic common stock on the date of grant, which was September 30, 2013. One-third of the
shares subject to the option vested on the first anniversary of the date of grant, and the remaining shares vested in 24 substantially
equal installments thereafter.
Mr. Kinnon was also granted stock appreciation rights (“SARs”)
pursuant to the terms of the Kinnon Employment Agreement with respect to 83,333 shares of common stock with a per share exercise
price equal to the fair market value of one share of Transgenomic common stock on the date of grant, which was September 30, 2013.
34% of the SARs vested on the first anniversary of the date of grant, and the remaining SARs vested ratably over the remaining
24 months. The SARs were granted pursuant to the Amended 2006 Plan and a SARs agreement. Upon exercise of the SARs, Mr. Kinnon
will be entitled to receive shares of Transgenomic common stock or cash, subject to the terms of the SARs agreement.
On May 3, 2013, in connection with Mr. Kinnon’s services
to Transgenomic and pursuant to the terms of a Consulting Agreement between Transgenomic and Mr. Kinnon, Mr. Kinnon was granted
an option to purchase 12,500 shares of common stock. Pursuant to the terms of the Kinnon Employment Agreement, the option was rescinded
and terminated on September 30, 2013.
On February 18, 2014, Mr. Kinnon was granted an option to purchase
20,000 shares of common stock. The option vests over a three-year period, with one-third of the shares subject to the option vesting
on each of the first three anniversaries of the date of grant, subject to Mr. Kinnon’s continued employment with (or providing
continuous service to) Transgenomic on each such date. Additionally, on April 1, 2015, Mr. Kinnon was granted an option to purchase
75,000 shares of common stock. The option vests over a three-year period, with one-third of the shares subject to the option vesting
on each of the first three anniversaries of the date of grant, subject to Mr. Kinnon’s continued employment with (or providing
continuous service to) Transgenomic on each such date.
Transgenomic previously granted 124,886 incentive stock options
and 149,280 non-qualified stock options to Mr. Kinnon under the Transgenomic, Inc. 2006 Equity Incentive Plan. On December
13, 2016, the Board agreed to extend the period during which these stock options may be exercised following Mr. Kinnon’s
termination of employment (i) by Transgenomic without “Cause” or (ii) by Mr. Kinnon for “Good Reason” (each
of the foregoing capitalized terms as defined in the Kinnon Employment Agreement) to 24 months after such termination, but in no
event shall such period extend beyond the Term of Options as defined in the applicable award agreements, and for purposes of any
incentive stock option, such extension shall be considered the grant of a new award on the same terms except that the exercise
price shall be the greater of (i) the exercise price set forth in the original grant or (ii) the fair market value on the date
of the extension.
The Kinnon Employment Agreement includes a modified cutback
provision, such that if payments or benefits received or to be received by Mr. Kinnon pursuant to the Kinnon Employment Agreement
or any other agreement, contract, award or arrangement would constitute a “parachute payment” as described in Section
280G of the Code and would subject Mr. Kinnon and Transgenomic to golden parachute penalties under Section 280G of the Code and
related provisions, the aggregate payments or benefits will either be paid to Mr. Kinnon in full or reduced to an amount that would
not result in golden parachute penalties, whichever results in the receipt by Mr. Kinnon of the greatest amount of aggregate payments
or benefits, after taking into account all taxes, including the excise tax imposed under Section 4999 of the Code on excess parachute
payments. The determinations regarding Section 280G parachute payments and the application of the Modified Cutback Provision are
to be made in good faith by Transgenomic’s independent auditors. For purposes of this disclosure, Transgenomic does not expect
that the aggregate payments and benefits to Mr. Kinnon following termination of his employment in connection with the merger will
exceed the maximum amount that may be paid to Mr. Kinnon without triggering golden parachute penalties under Section 280G of the
Code.
Leon Richards Offer Letter
Transgenomic has entered into an Offer Letter dated November
6, 2012 with Leon Richards, its Chief Accounting Officer (the “Richards Offer Letter”). Under the terms of the Richards
Offer Letter, Mr. Richards agreed to serve as Transgenomic’s Corporate Controller and is paid a base salary of $7,291.67
per semi-monthly pay period. Mr. Richards is entitled to a bonus opportunity equal to 25% of his salary for meeting the corporate
objectives as defined by the Transgenomic Board. Mr. Richards resigned from Transgenomic effective September 30, 2016.
On June 2, 2015, Transgenomic entered into an amendment (the
“Richards Offer Letter Amendment”) to the Richards Offer Letter, which provides that, in the event Mr. Richards’
employment with Transgenomic is terminated without “Cause” (as defined in the Richards Offer Letter Amendment) prior
to or within 12 months following a “Change in Control” (as defined in the Richards Offer Letter Amendment) of Transgenomic,
he shall be entitled to receive an amount equal to nine months of his base salary at the time of his termination, subject to Mr.
Richards signing and delivering a release of claims to Transgenomic. The Richards Offer Letter Amendment further provides that
in the event Mr. Richards is employed with Transgenomic upon a Change in Control, any stock options that are outstanding and unvested
as of immediately prior to such Change in Control shall vest in their entirety, and become fully exercisable, as of immediately
prior to, and contingent upon, such Change in Control. The Richards Offer Letter Amendment also provides that unless Mr. Richards’
employment is terminated by Transgenomic for Cause, he will have until the earlier of the following dates to exercise any then-vested
and outstanding stock options: (i) 180 days after the termination of his employment, or (ii) the date on which the stock options
otherwise would become unexercisable, ignoring the fact that his employment terminated.
Pursuant to the terms of the Richards Offer Letter, Mr. Richards
was granted an option to purchase 4,166 shares of common stock with a per share exercise price equal to the fair market value of
one share of Transgenomic common stock on the date of grant, which was January 1, 2013. The option vested over a three-year period,
with one-third of the shares subject to the option vesting on each of the first three anniversaries of the date of grant.
On May 3, 2013, Mr. Richards was granted an option to purchase
1,458 shares of common stock. The option vests over a three-year period, with one-third of the shares subject to the option vesting
on each of the first three anniversaries of the date of grant, subject to Mr. Richards’ continued employment with Transgenomic
on each such date. Mr. Richards was also granted an option to purchase 3,000 shares of common stock on February 18, 2014. The option
vests over a three-year period, with one-third of the shares subject to the option vesting on each of the first three anniversaries
of the date of grant, subject to Mr. Richards’ continued employment with Transgenomic on each such date.
On November 4, 2014, Mr. Richards was granted an option to purchase
20,000 shares of common stock. The option vests over a three-year period, with one-third of the shares subject to the option vesting
on each of the first three anniversaries of the date of grant, subject to Mr. Richards’ continued employment with Transgenomic
on each such date. Mr. Richards was also granted SARs on November 4, 2014 with respect to 15,000 shares of common stock with a
per share exercise price equal to the fair market value of one share of common stock on the date of grant. The SARs vest over a
three-year period, with 34% of the SARs vesting on the first anniversary of the date of grant and the balance vesting ratably over
the remaining 24 months, subject to Mr. Richards’ continued employment with Transgenomic on each such date.
On April 1, 2015, Mr. Richards was granted an option to purchase
80,000 shares of common stock. The option vests over a three-year period, with one-third of the shares subject to the option vesting
on each of the first three anniversaries of the date of grant, subject to Mr. Richards’ continued employment with (or providing
continuous service to) Transgenomic on each such date.
Potential Payments Upon Termination or Change of Control
Transgenomic has entered into the Kinnon Employment Agreement.
The Kinnon Employment Agreement provides for a severance payment to Mr. Kinnon equal to 12 months of Mr. Kinnon’s then-current
base salary if he is discharged without “Cause” (as defined in the Kinnon Employment Agreement), other than due to
Mr. Kinnon’s disability, or if Mr. Kinnon resigns for “Good Reason” (as defined in the Kinnon Employment Agreement),
regardless of whether or not the termination follows a change in control, in each case provided that Mr. Kinnon executes a severance
agreement and general release in favor of Transgenomic. The Kinnon Employment Agreement further provides that the vesting of the
equity awards granted by Transgenomic to Mr. Kinnon will accelerate in full and become fully vested upon a Change in Control, as
defined in the Transgenomic, Inc. 2006 Equity Incentive Plan. It is currently anticipated that Mr. Kinnon will be terminated at
or prior to the effective time of the merger and that Mr. Danieli will serve as Chief Executive Officer of New Precipio. Further,
the consummation of the merger would trigger a Change in Control as defined under the Kinnon Employment Agreement with regard to
the equity awards granted by Transgenomic to Mr. Kinnon. Therefore, pursuant to the terms of the Kinnon Employment Agreement, it
is anticipated that the equity awards granted to Mr. Kinnon will accelerate in full and become fully vested, and Mr. Kinnon will
be entitled to receive a severance payment equal to 12 months of Mr. Kinnon’s then-current base salary. As of February 1,
2017, Mr. Kinnon holds 56,666 unvested stock options under the 2006 Equity Incentive Plan for which vesting is expected to accelerate
in connection with the merger. As described in “The Transaction – Interests of Transgenomic’s Executive Officers
and Directors in the Transaction – Payments and Benefits to Transgenomic’s Named Executive Officers” on page
52, using an assumed stock price of $0.206, the average closing price per share of Transgenomic common stock over the first
five business days following the announcement of the merger, all unvested equity awards for Mr. Kinnon are out of the money, and
therefore no value is included in connection with the acceleration. In addition, such unvested equity awards for Mr. Kinnon are
out of the money as of February 1, 2017. During the period in which the stock options may be exercised following the merger, the
market price of the common stock may be higher or lower than the assumed stock price disclosed above. The severance payments will
be made over 12 months in accordance with Transgenomic’s payroll practices, provided that payment of these amounts is subject
to the provisions of Section 409A of the Code which may require that payments be delayed for six months following termination of
employment. If Mr. Kinnon breaches any of the covenants in the Kinnon Employment Agreement related to the protection of Transgenomic’s
interests, including non-solicitation of employees for six months (with interest) following termination of employment and confidentiality
and non-disparagement following termination of employment, he is not entitled to further severance payments.
Additionally, pursuant to the terms of the Richards Offer Letter,
as amended by the Richards Offer Letter Amendment, in the event Mr. Richards’ employment with Transgenomic is terminated
without “Cause” (as defined in the Richards Offer Letter Amendment) prior to or within 12 months following a “Change
in Control” (as defined in the Richards Offer Letter Amendment) of Transgenomic, he will be entitled to receive an amount
equal to nine months of his base salary at the time of his termination, subject to Mr. Richards signing and delivering a release
of claims to Transgenomic. Mr. Richards resigned effective September 30, 2016 and, therefore, no payments will be made to Mr. Richards
in connection with a change of control transaction.
Compensation Risk Analysis
Transgenomic has reviewed its material compensation policies
and practices for all employees and has concluded that these policies and practices are not reasonably likely to have a material
adverse effect on Transgenomic. While risk-taking is a necessary part of growing a business, Transgenomic’s compensation
philosophy is focused on aligning compensation with the long-term interests of its stockholders as opposed to rewarding short-term
management decisions that could pose long-term risks.
Director Compensation
It is the Transgenomic Board’s general policy that compensation
for independent directors should be a mix of cash and equity-based compensation. As part of a director’s total compensation,
and to create a direct linkage between corporate performance and stockholder interests, the Transgenomic Board believes that a
meaningful portion of a director’s compensation should be provided in, or otherwise based on, the value of appreciation in
Transgenomic’s common stock.
The Transgenomic Board has the authority to approve all compensation
payable to Transgenomic’s directors, although Transgenomic’s Compensation Committee is responsible for making recommendations
to the Transgenomic Board regarding this compensation. Additionally, Transgenomic’s Chief Executive Officer may also make
recommendations or assist Transgenomic’s Compensation Committee in making recommendations regarding director compensation.
The Transgenomic Board and Compensation Committee annually review Transgenomic’s director compensation. In connection with
director compensation decisions in 2016, the Transgenomic Board and the Compensation Committee reviewed in 2012 the market director
compensation data paid by companies in the life sciences industry as reported by Top 5 Data Services, Inc. (the “2011 Director
Competitive Analysis”). The 2011 Director Competitive Analysis contained data for 217 publicly traded medical device companies
and 331 biopharmaceutical companies, with 65 companies assigned to both sectors based on their mix of products. Based on its review
of the 2011 Director Competitive Analysis, the Transgenomic Board did not make any changes to Transgenomic’s director compensation
program in 2016 and continued with the program adopted in 2011 and used in 2012, 2013, 2014 and 2015, which is further discussed
below.
Cash Compensation
Directors who are also one of Transgenomic’s employees
are not separately compensated for serving on the board of directors other than reimbursement for out-of-pocket expenses related
to attendance at board of directors meetings and committee meetings. Independent directors are paid an annual retainer of $20,000
and receive reimbursement for out-of-pocket expenses related to attendance at board of directors and committee meetings. Independent
directors serving on any committee of the board of directors are paid an additional annual retainer of $2,500 unless they are also
a chairperson of a committee. The chairperson of the Audit Committee receives an additional annual retainer of $8,000 and the chairperson
of any other committee receives an additional annual retainer of $4,000. All directors’ fees paid annually or quarterly were
prorated for partial periods. In addition, any independent director who attends more than four meetings per quarter, which includes
committee meetings, receives $500 for each meeting attended over the four.
Equity-Based Compensation
From 2011 through 2013, Transgenomic’s director compensation
policy was to grant annually to each continuing independent director an option to purchase 2,083 shares of Transgenomic common
stock. In 2014, the amount of that grant was 3,000 shares and in 2015 it was 5,000 shares. These options vest in full after one
year, subject to the director’s continued service with Transgenomic through the vesting date. Under Transgenomic’s
policy, additional annual grants of options may be made each year by the Transgenomic Compensation Committee in its sole discretion.
Upon initial appointment to the Transgenomic Board, Transgenomic’s independent directors are also entitled to receive an
option to purchase shares of Transgenomic’s common stock under the Amended 2006 Plan, with the number of shares as determined
by the Transgenomic Board or the Compensation Committee, which option vests in full after one year, subject to the director’s
continued service with Transgenomic through the vesting date. All options granted to independent directors have exercise prices
equal to the fair market value of Transgenomic’s common stock on the grant date, as determined in accordance with the Amended
2006 Plan.
On April 1, 2015, Transgenomic’s independent directors,
as of that date, were each granted a non-qualified option to purchase 5,000 shares of Transgenomic’s common stock with
an exercise price equal to $1.44. The options vested in full on April 1, 2016, the one year anniversary of the grant date. Effective
December 13, 2016, the Board approved the issuance of options to acquire 5,000 shares of Transgenomic common stock to Mya Thomae,
Doit Koppler II, Michael A. Luther, and Robert M. Patzig, as well as an additional grant of an option to acquire 100,000 shares
of Transgenomic common stock to Robert M. Patzig, Chairman of the Transgenomic Board, in connection with his role in negotiating
the Merger Agreement and related transactions, all of which options are subject to the approval of the 2017 Plan by the Transgenomic
stockholders. Upon such approval by the Transgenomic stockholders, these options will be effective as of December 13, 2016. Other
than these options, no options were granted to Transgenomic’s independent directors during 2016.
Director Summary Compensation Table
The following table provides information regarding Transgenomic’s
compensation for non-employee directors during the year ended December 31, 2016. Directors who are Transgenomic’s employees
did not receive compensation for serving on the Transgenomic Board or its committees in fiscal 2016.
Name
|
|
Fees Earned or Paid in Cash ($)
|
|
|
Option Awards ($) (1)
|
|
|
Total ($)
|
|
Doit L. Koppler, II
|
|
|
30,000
|
|
|
|
—
|
|
|
|
30,000
|
|
Robert M. Patzig
|
|
|
42,000
|
|
|
|
—
|
|
|
|
42,000
|
|
Michael A. Luther, Ph.D.
|
|
|
35,000
|
|
|
|
—
|
|
|
|
35,000
|
|
Mya Thomae
|
|
|
28,000
|
|
|
|
—
|
|
|
|
28,000
|
|
John D. Thompson (2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
(1)
|
Does not include the issuance of options to acquire 5,000
shares of Transgenomic common stock to Mya Thomae, Doit Koppler II, Michael A. Luther, and Robert M. Patzig, as well
as an additional grant of an option to acquire 100,000 shares of Transgenomic common stock to Robert M. Patzig, Chairman of the
Transgenomic Board, in connection with his role in negotiating the Merger Agreement and related transactions, all of which options
were approved by the Board on December 13, 2016 and are subject to approval of the 2017 Plan by the Transgenomic stockholders.
Upon the approval of the 2017 Plan by Transgenomic stockholders, these options will be effective as of December 13, 2016. Other
than these options, there were no grants of plan-based awards in fiscal year 2016 to Transgenomic Directors.
|
|
(2)
|
Mr. Thompson resigned from the board of directors effective
January 14, 2016.
|
The following table sets forth each independent director’s
aggregate number of option awards outstanding as of December 31, 2016:
Name
|
|
Vested Stock Option
Awards(1)
|
|
|
Unvested Stock Option
Awards(1)
|
|
|
Aggregate Stock Option
Awards(1)
|
|
Doit L. Koppler, II
|
|
|
15,499
|
|
|
|
—
|
|
|
|
15,499
|
|
Robert M. Patzig
|
|
|
65,499
|
|
|
|
—
|
|
|
|
65,499
|
|
Michael A. Luther, Ph.D.
|
|
|
10,000
|
|
|
|
—
|
|
|
|
10,000
|
|
Mya Thomae
|
|
|
5,000
|
|
|
|
—
|
|
|
|
5,000
|
|
John D. Thompson (2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
(1)
|
Does not include the issuance of options to acquire 5,000
shares of Transgenomic common stock to Mya Thomae, Doit Koppler II, Michael A. Luther, and Robert M. Patzig, as well
as an additional grant of an option to acquire 100,000 shares of Transgenomic common stock to Robert M. Patzig, Chairman of the
Transgenomic Board, in connection with his role in negotiating the Merger Agreement and related transactions, all of which options
were approved by the Board on December 13, 2016 and are subject to approval of the 2017 Plan by the Transgenomic stockholders.
Upon the approval of the 2017 Plan by Transgenomic stockholders, these options will be effective as of December 13, 2016.
|
|
(2)
|
Mr. Thompson resigned from the Board effective January
14, 2016 and all unvested option awards were terminated as of that date in accordance with their terms.
|
PROPOSAL NO.
4
APPROVAL OF ADVISORY COMPENSATION PROPOSAL
As required by Section 14A of the Exchange
Act and the applicable SEC rules issued thereunder, Transgenomic is required to submit a proposal to Transgenomic stockholders
for a non-binding, advisory vote to approve payment by Transgenomic of certain compensation to Transgenomic’s named executive
officers that is based on or otherwise relates to the merger. This proposal, commonly known as the “say-on-golden-parachute”
proposal, gives Transgenomic stockholders the opportunity to vote, on a non-binding, advisory basis, on the compensation that Transgenomic’s
named executive officers may be entitled to receive that is based on or otherwise relates to the merger.
This compensation is summarized and included in the section
entitled “Interests of Transgenomic’s Executive Officers and Directors in the Transaction,” including the table
and the footnotes to the table, beginning on page 51. That summary includes all compensation and benefits that may be paid
or become payable to Transgenomic’s named executive officers that are based on or otherwise relate to the merger.
The Transgenomic Board encourages you to review carefully the
named executive officer merger-related compensation information disclosed in this proxy statement.
The Transgenomic Board unanimously recommends that Transgenomic’s
stockholders approve the following resolution:
“RESOLVED, that the stockholders of Transgenomic approve,
on a non-binding, advisory basis, the compensation that will or may become payable to Transgenomic’s named executive officers
that is based on or otherwise relates to the merger as disclosed pursuant to Item 402(t) of Regulation S-K in the in the section
entitled “Interests of Transgenomic’s Executive Officers and Directors in the Transaction,” including the Golden
Parachute Compensation table and the footnotes to that table.”
Because the vote on this proposal is advisory only, it will
not be binding on Transgenomic. Accordingly, if the merger is completed, the compensation will be payable, subject only to the
conditions applicable thereto, regardless of the outcome of the non-binding, advisory vote of Transgenomic’s stockholders.
Vote Required
The affirmative vote of the holders
of a majority of the shares of Transgenomic common stock and Series A-1 Convertible Preferred Stock, voting together as a single
class (with each one share of Series A-1 Convertible Preferred Stock being entitled to 0.93 votes), present in person or represented
by proxy at the special meeting, whether or not a quorum is present, is required to approve the non-binding, advisory compensation
proposal. Abstentions with respect to this proposal will have the same effect as a vote against the proposal. Failures to vote
and broker “non-votes” will have no effect on this proposal.
THE BOARD OF
DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE
ADVISORY COMPENSATION PROPOSAL.
PROPOSAL NO.
5
APPROVAL OF POSSIBLE ADJOURNMENT OF THE SPECIAL MEETING
You may be asked to vote to approve
a proposal to adjourn the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient
votes at the time of the special meeting to approval the other proposals. Transgenomic currently does not intend to propose adjournment
of the special meeting of stockholders if there are sufficient votes to approve each of the other proposals.
Vote Required
The affirmative vote of the holders
of a majority of the shares of Transgenomic common stock and Series A-1 Convertible Preferred Stock, voting together as a single
class (with each one share of Series A-1 Convertible Preferred Stock being entitled to 0.93 votes), present in person or represented
by proxy at the special meeting, whether or not a quorum is present, is required to approve the adjournment of the special meeting
of stockholders. Abstentions with respect to this proposal will have the same effect as a vote against the proposal. Failures to
vote and broker “non-votes” will have no effect on this proposal.
THE BOARD OF
DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE
PROPOSAL TO ADJOURN THE SPECIAL MEETING, IF NECESSARY, TO SOLICIT ADDITIONAL PROXIES IF THERE ARE NOT SUFFICIENT VOTES IN FAVOR
OF THE OTHER PROPOSALS.
PRECIPIO BUSINESS
DESCRIPTION
Precipio is a cancer diagnostics company
providing diagnostic services to the oncology market. Precipio has partnered with premier academic institutions to capture the
expertise, experience and technologies developed within academia, and utilize them to solve the growing problem of misdiagnosis.
It has built a platform that successfully translates that expertise into a commercial setting, enabling Precipio to provide the
highest level of diagnostic accuracy within clinical services to the oncology market. Precipio is building a nationwide sales team
that offers its services to oncologists and hospitals around the country. Specimens are shipped to its laboratory in New Haven,
Connecticut where they are processed and diagnosed by academic experts at Yale School of Medicine; the end product is a pathology
report which guides its customers, oncologists, as to the nature of their patients’ disease and helps them determine how
best to care for their patient.
PRECIPIO MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Information
Management’s Discussion and
Analysis contains forward-looking statements. These statements are based on management’s current views, assumptions or beliefs
of future events and financial performance and are subject to uncertainty and changes in circumstances. Readers of this report
should understand that these statements are not guarantees of performance or results. Many factors could affect our actual financial
results and cause them to vary materially from the expectations contained in the forward-looking statements. These factors include,
among other things: our expected revenue, income (loss), receivables, operating expenses, supplier pricing, availability and prices
of raw materials, insurance reimbursements, product pricing, sources of funding operations and acquisitions, our ability to raise
funds, sufficiency of available liquidity, future interest costs, future economic circumstances, business strategy, industry conditions,
our ability to execute our operating plans, the success of our cost savings initiatives, competitive environment and related market
conditions, actions of governments and regulatory factors affecting our business, retaining key employees and other risks. In some
cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,”
“expect,” “intend,” “plan,” “project,” “target,” “can,”
“could,” “may,” “should,” “will,” “would” or the negative versions
of these terms and other similar expressions.
You are cautioned not to place undue
reliance on these forward-looking statements. The forward-looking statements we make are not guarantees of future performance and
are subject to various assumptions, risks and other factors that could cause actual results to differ materially from those suggested
by these forward-looking statements. Actual results may differ materially from those suggested by the forward-looking statements
that we make. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by law.
The following discussion should be
read together with our financial statements and related notes contained in this report. Results for the nine months ended September 30,
2016 are not necessarily indicative of results that may be attained in the future.
Overview
We are a cancer diagnostics company
providing clinical diagnostic services to the oncology market. As the field of cancer continues to evolve and gain complexity,
the resources needed to accurately diagnose cancer require increased specialization and the further development of expertise. The
market however, has driven the field towards a generalist approach, and thus is not providing the level of specialization required
to accurately diagnose the many cancer sub-classifications understood today.
This generalist approach to cancer
diagnostics results in an alarmingly high rate of diagnostic error that increases:
|
·
|
patient pain and suffering,
|
|
·
|
oncologists’ inability to treat patients correctly,
|
|
·
|
waste of critical and expensive healthcare resources, and
|
|
·
|
potential risk of litigation
|
Business model:
We have partnered with premier academic
institutions to capture the expertise, experience and technologies developed within academia, and utilize them to address the growing
problem of misdiagnosis. We have built a platform that successfully translates that expertise into a commercial setting, enabling
us to provide the highest level of diagnostic accuracy within clinical services to the oncology market. Since our inception in
2011, throughout the thousands of patients we have diagnosed, we have demonstrated a superior level of accuracy. We are building
a nationwide sales team that offers our services to oncologists and hospitals around the country. Specimens are shipped to our
laboratory in New Haven, CT where they are processed and diagnosed by academic experts at Yale School of Medicine, resulting in
a pathology report which guides oncologists as to the nature of their patients’ disease and helps them determine how best
to care for their patient.
As part of our academic collaboration,
we have been introduced to several intellectual property (IP) technologies developed within these academic institutions; these
technologies have often been proven, patented and published, and are ready for commercialization. Our ability to commercially adapt
academic expertise, and our place in the marketplace, has provided academia with an attractive partner to commercialize and monetize
these technologies. As we grow, our plan is to incorporate into our platform additional IP developed within academic institutions,
which support our vision of reducing diagnostic error. Our platform will combine a service side of the business, characterized
by good margins, steady recurring revenue, and healthy growth; and an IP side of the business which exclusively licenses technology
from academia (thus avoiding costly R&D), and which can generate significant shareholder value.
2016 Overview and Recent Highlights
During 2016, we have continued to grow
our business and build our sales force nationwide. Our revenue has grown as compared to the prior year, with most of it coming
from recurring revenue from long-term physician customers. The key drivers of our growth include the ability to build a strong
direct-to-the-physician sales team; deliver a clear message that differentiates us from our competition; and duplicate the customer
adoption and retention success that we have seen in the market place. We believe that the avenue to grow the business as rapidly
as possible and maximize shareholder values will require several changes including a capital infusion to grow the Company. We recently
hired Carl R. Iberger as Chief Financial Officer of the Company. This is a key addition to our management team as we move forward
with our growth plans. In October 2016, we entered into a Merger Agreement with an industry leader in genetic technology that we
feel provides the Company with additional market opportunities to expand our service offerings, grow revenues and leverage existing
infrastructure and capacity. See Note 12-Subsequent Events in the Notes to Unaudited Condensed Financial Statements for more discussion
on the merger.
Uncertainties
We have suffered recurring losses from
operations. At September 30, 2016, we had cash and cash equivalents of $68,000. Our losses from operations and our net member
deficit raise substantial doubt about our ability to continue as a going concern. Our plans in regard to these matters are described
in Note 1 of the Notes to Unaudited Condensed Financial Statements. The outcome of these plans cannot be predicted with any certainty
at this time and raises substantial doubt that we will be able to continue as a going concern.
Results of Operations
Nine Months Ended September 30,
2016 and 2015
Net Revenue.
Net revenue is
as follows:
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
Total Net Revenue
|
|
$
|
1,407,232
|
|
|
$
|
1,021,599
|
|
|
$
|
385,633
|
|
|
|
38
|
%
|
Net revenue increased by approximately
$386,000, or 38%, during the nine months ended September 30, 2016 as compared to the same period in 2015. The increase reflects
increased net patient service revenues of approximately $450,000, which is due to a 30% increase in cases processed during the
nine months ended September 30, 2016 as compared to the same period of 2015. This increase was partially offset by an increase
of approximately $65,000 in the allowance for doubtful accounts recorded for the nine months of 2016 as compared to the prior year
period.
Cost of Diagnostic Services.
Cost of diagnostic services includes material and supply costs for the patient tests performed and other direct costs (primarily
personnel costs and rent) associated with the operations of our laboratory. Cost of diagnostic services increased by approximately
$140,000, or 24%, to $710,000 for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015.
The increase is due to personnel costs and reagent supplies as a result of the increased revenues in the current year period.
Gross Profit.
Gross profit was
as follows:
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Profit %
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Gross Profit
|
|
$
|
697,470
|
|
|
$
|
451,286
|
|
|
|
50
|
%
|
|
|
44
|
%
|
Gross profit was $0.7 million, or 50%
of total net revenue, during the first nine months of 2016, compared to $0.5 million, or 44% of total net revenue, during the same
period of 2015. The increase in gross profit in the current year is a result of increased revenue during the nine months ended
September 30, 2016 as compared to the first nine months of 2015. The gross profit as a percent of revenue increased 6 basis points
during the nine months ended September 30, 2016 as compared to the first nine months of 2015 and is due to increased volume and
improved laboratory processes. Our cost of diagnostic services includes a number of fixed costs and our laboratory is operating
below capacity for the current cost structure. As such, we believe that our gross profit as a percent of revenue will grow as our
revenue increases.
Operating Expenses.
Operating
expenses primarily consist of personnel costs, professional fees, travel costs, facility costs, depreciation and amortization.
Our operating expenses of approximately $1.6 million during the nine month period ended September 30, 2016 remained flat as
compared to the same period in 2015.
Other Income (Expense).
Other
expense for the nine months ended September 30, 2016 and 2015 includes interest expense related to our capital leases and
debt and equity instruments of approximately $379,000 and $121,000, respectively. The increase in the current year is due to increased
interest bearing instruments outstanding during the nine months ended September 30, 2016 as compared to the same period of 2015.
Liquidity and Capital Resources
Our working capital positions at September 30,
2016 and December 31, 2015 were as follows:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
Change
|
|
Current assets (including cash and cash equivalents of $67,963 and $234,688, respectively)
|
|
$
|
655,264
|
|
|
$
|
778,753
|
|
|
$
|
(123,489
|
)
|
Current liabilities
|
|
|
5,914,722
|
|
|
|
2,853,882
|
|
|
|
3,060,913
|
|
Working capital (deficit)
|
|
$
|
(5,259,458
|
)
|
|
$
|
(2,075,129
|
)
|
|
$
|
(3,184,402
|
)
|
During 2016, we entered into 12% senior
notes aggregating $175,000 with unit holders of the Company. The senior notes are payable at the closing of a qualified public
offering as outlined in the agreements, but no later than five years from issuance. During 2016, the Company also issued additional
convertible bridge notes for $455,000. The notes accrue interest at a rate of 14% and were payable no later than December 31, 2016.
Subsequent to December 31, 2016, the holders of the notes agreed to waive the maturity date and the notes are now payable on demand
and accrue interest until paid.
Also during the nine months ended September
30, 2016, the Company restructured equity through a redemption and exchange agreement by exchanging Member Equity comprised of
Series A and Series B Convertible Preferred Units in the amount of $1,715,000, plus declared dividends on these preferred units
of $432,716, and Convertible Bridge Notes of $1,120,000 for new Senior Notes of $2,683,895 and new Junior Notes of $583,821. The
Senior and Junior Notes accrue interest at a rate of 12% and 15%, respectively, and have maturity dates ranging from March 2021
to September 2021, or earlier based on certain qualifying events as outlined in the note agreements.
During the nine months ended September
30, 2016, the Company also issued $61,072 of new Senior Notes to satisfy an accumulated interest obligation on existing member
debt, under the same terms as the Senior Notes.
See Note 5 - “Notes Payable”
and Note 6 - “Convertible Bridge Notes Payable” in the Notes to Unaudited Condensed Financial Statements for additional
information regarding our outstanding debt and debt servicing obligations.
At September 30, 2016, we had
cash on hand of $68,000. Our current operating plan projects improved operating results. As with any operating plan, there are
risks associated with our ability to execute it. Therefore, there can be no assurance that we will be able to satisfy our obligations,
or achieve the operating improvements as contemplated by the current operating plan. If we are unable to execute this plan, we
will need to find additional sources of cash not contemplated by the current operating plan and/or raise additional capital to
sustain continuing operations as currently contemplated. However, there can be no assurance that the additional funding sources
will be available to us at reasonable terms or at all. If we are unable to achieve our operating plan or obtain additional financing,
our business would be jeopardized and we may not be able to continue as a going concern
Analysis of Cash Flows - Nine Months
Ended September 30, 2016 and 2015
Net Change in Cash and Cash Equivalents.
Cash and cash equivalents decreased by $167,000 during the nine months ended September 30, 2016, compared to a decrease of
$488,000 during the nine months ended September 30, 2015.
Cash Flows Used in Operating Activities.
The cash flows used in operating activities of $642,000 during the nine months ended September 30, 2016 included a net loss
of $1,252,000, an increase in accounts receivable of $314,000 and other working capital uses of $65,000, less non-cash adjustments
of $533,000. These were partially offset by an increase in accrued expenses and accounts payable of $364,000 and an increase in
deferred revenue of $92,000. The cash flows used in operating activities in the first nine months of 2015 included the net loss
of $1,248,000 and an increase in accounts receivable of $527,000, less non-cash adjustments of $426,000. These were partially offset
by an increase in accounts payable of $81,000 and other working capital uses of $69,000.
Cash Flows Used in Investing Activities.
There were no cash flows used in investing activities for the nine months ended September 30, 2016 and $11,000 in capital
expenditure purchases for the nine months ended September 30, 2015.
Cash Flows Provided by Financing
Activities.
Cash flows provided by financing activities totaled $475,000 for the nine months ended September 30, 2016,
which included proceeds of $15,000 from the issuance of convertible bridge notes and $615,000 from the issuance of senior notes.
These proceeds were partially offset by payments on our debt and capital lease obligations of $155,000. Cash flows provided by
financing activities during the nine months ended September 30, 2015 included proceeds of $945,000 from the issuance of convertible
bridge notes partially offset by $85,000 of payments on our debt, capital lease obligations and for deferred financing costs. The
senior notes are payable at the closing of a qualified public offering as outlined in the agreements, but no later than five years
from issuance. Subsequent to December 31, 2016, the holders of the bridge notes agreed to waive the maturity date and the notes
are now payable on demand and accrue interest until paid.
Off-Balance Sheet Arrangements
At each of September 30, 2016
and December 31, 2015, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current
or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
Contractual Obligations and Commitments
We have entered into certain capital
and operating leases and purchase commitments as part of our normal course of business. Our contractual obligations and commitments
are discussed in Note 8 - “Commitments and Contingencies” in the Notes to Unaudited Condensed Financial Statements.
Critical Accounting Policies and
Estimates
Accounting policies used in the preparation
of our financial statements may involve the use of management judgments and estimates. Certain of our accounting policies are considered
critical as they are both important to the portrayal of our financial statements and require significant or complex judgments on
the part of management. Our judgments and estimates are based on experience and assumptions that we believe are reasonable under
the circumstances. Further, we evaluate our judgments and estimates from time to time as circumstances change. Actual financial
results based on judgments or estimates may vary under different assumptions or circumstances. Our critical accounting policies
are discussed in Note 2 - “Summary of Significant Accounting Policies” in the Notes to Unaudited Condensed Financial
Statements.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements
are discussed in Note 2 - “Summary of Significant Accounting Policies” in the Notes to Unaudited Condensed Financial
Statements.
Impact of Inflation
We do not believe that price inflation
or deflation had a material adverse effect on our financial condition or results of operations during the periods presented.
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION OF TRANSGENOMIC, INC.
The following unaudited pro forma condensed
combined financial information has been prepared to assist you in your analysis of the financial effects of the merger of Merger
Sub, a wholly owned subsidiary of Transgenomic, with Precipio. The unaudited pro forma condensed combined financial information
was prepared using the historical consolidated financial statements of Transgenomic and Precipio. This information should be read
in conjunction with, and is qualified in its entirety by, the consolidated financial statements and accompanying notes of Transgenomic
and Precipio included in or incorporated by reference into this proxy statement. All Transgenomic historical financial statement
information can be derived from the Transgenomic’s Form 10-K and 10-Q filings.
The merger will be accounted for as
a reverse acquisition under the acquisition method of accounting in accordance with GAAP. The accompanying unaudited pro forma
condensed combined financial information gives effect to the merger, assuming the issuance of New Precipio common stock and preferred
stock. The pro forma adjustments related to the merger are preliminary and do not reflect the final purchase price, final debt
components, final New Precipio common and preferred stock agreements or final allocation of the excess of the purchase price over
the fair value of the assets and liabilities assumed in connection with the merger, as the process to assign a fair value to the
various tangible and intangible assets acquired and liabilities assumed has only just commenced. A final determination of these
estimated fair values, which cannot be made prior to the completion of the merger, will be based on the actual net tangible and
intangible assets of Transgenomic that exist as of the date of completion of the merger. Accordingly, the pro forma adjustments,
including the allocations of purchase price, are very preliminary and have been made solely for the purpose of providing unaudited
pro forma condensed consolidated financial information. Final adjustments will result in modifications to the final purchase price,
debt components and allocation of the purchase price, which will affect the fair value assigned to the tangible or intangible assets
and amount of interest expense, depreciation and amortization expense, and other recorded in the statement of operations. The effect
of the changes to the statements of operations could be material. The unaudited pro forma condensed combined financial information
is not necessarily indicative of the combined results of operations or financial position that might have been achieved for the
dates or periods indicated, nor is it necessarily indicative of the results of operations or financial position that may occur
in the future.
The historical consolidated financial
information has been adjusted in the unaudited pro forma condensed combined financial information to give effect to pro forma events
that are (1) directly attributable to the merger, (2) factually supportable, and (3) with respect to the statements of operations,
expected to have a continuing impact on the combined results. The pro forma condensed combined financial information does not reflect
revenue opportunities and cost savings that New Precipio expects to realize after the merger. No assurance can be given with respect
to the estimated revenue opportunities and operating cost savings that are expected to be realized as a result of the merger. The
pro forma condensed combined financial information also does not reflect expenses related to integration activity or exit costs
that may be incurred by Transgenomic or Precipio in connection with this merger.
The unaudited pro forma condensed combined
balance sheet assumes that the merger took place on September 30, 2016 and combines Transgenomic’s unaudited September 30,
2016 condensed consolidated balance sheet with the unaudited condensed consolidated balance sheet of Precipio as of September 30,
2016. The unaudited pro forma condensed combined statements of operations for the fiscal year ended December 31, 2015 and the nine
months ended September 30, 2016 assume that the merger took place on January 1, 2015. The unaudited pro forma condensed combined
statement of operations for the fiscal year ended December 31, 2015 combines Transgenomic’s audited consolidated statement
of operations for the fiscal year ended December 31, 2015 with Precipio’s audited statement of operations for the fiscal
year ended December 31, 2015. The unaudited pro forma condensed combined statement of operations for the nine months ended September
30, 2016 combines Transgenomic’s unaudited condensed consolidated statement of operations for the nine months ended September
30, 2016 with Precipio’s unaudited condensed statement of operations for the nine months ended September 30, 2016.
TRANSGENOMIC, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of September 30, 2016
(in thousands)
|
|
Historical
|
|
|
|
|
|
|
|
|
|
|
|
Transgenomic
(j)
|
|
|
Precipio (k)
|
|
|
Pro Forma
Adjustments
|
|
|
Notes
|
|
New Precipio
Combined
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
71
|
|
|
$
|
68
|
|
|
$
|
7,000
|
|
|
g
|
|
$
|
7,139
|
|
Accounts receivable, net
|
|
|
180
|
|
|
|
460
|
|
|
|
-
|
|
|
|
|
|
640
|
|
Inventories, net
|
|
|
36
|
|
|
|
95
|
|
|
|
-
|
|
|
|
|
|
131
|
|
Other current assets
|
|
|
314
|
|
|
|
32
|
|
|
|
-
|
|
|
|
|
|
346
|
|
Assets held for sale
|
|
|
265
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
265
|
|
Total current assets
|
|
|
866
|
|
|
|
655
|
|
|
|
7,000
|
|
|
|
|
|
8,521
|
|
Property and Equipment, net
|
|
|
172
|
|
|
|
293
|
|
|
|
-
|
|
|
|
|
|
465
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
6,821
|
|
|
a
|
|
|
6,821
|
|
Acquired intangibles
|
|
|
-
|
|
|
|
-
|
|
|
|
28,950
|
|
|
b
|
|
|
28,950
|
|
Intangibles, net
|
|
|
982
|
|
|
|
-
|
|
|
|
(982
|
)
|
|
c
|
|
|
-
|
|
Other assets
|
|
|
58
|
|
|
|
10
|
|
|
|
-
|
|
|
|
|
|
68
|
|
|
|
$
|
2,078
|
|
|
$
|
958
|
|
|
$
|
41,789
|
|
|
|
|
$
|
44,825
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
7,814
|
|
|
$
|
4,549
|
|
|
$
|
(12,004
|
)
|
|
f,h
|
|
$
|
359
|
|
Accounts payable
|
|
|
6,273
|
|
|
|
798
|
|
|
|
-
|
|
|
|
|
|
7,071
|
|
Accrued Compensation
|
|
|
225
|
|
|
|
49
|
|
|
|
-
|
|
|
|
|
|
274
|
|
Accrued Expenses
|
|
|
2,704
|
|
|
|
382
|
|
|
|
(317
|
)
|
|
f
|
|
|
2,769
|
|
Deferred revenue
|
|
|
176
|
|
|
|
92
|
|
|
|
-
|
|
|
|
|
|
268
|
|
Other liabilities
|
|
|
1,068
|
|
|
|
45
|
|
|
|
-
|
|
|
|
|
|
1,113
|
|
Liabilities held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Total current liabilities
|
|
|
18,260
|
|
|
|
5,915
|
|
|
|
(12,321
|
)
|
|
|
|
|
11,854
|
|
Long Term Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
-
|
|
|
|
-
|
|
|
|
9,525
|
|
|
a
|
|
|
9,525
|
|
Long-term debt
|
|
|
-
|
|
|
|
356
|
|
|
|
-
|
|
|
|
|
|
356
|
|
Common stock warrant liability
|
|
|
1,430
|
|
|
|
-
|
|
|
|
(1,430
|
)
|
|
l
|
|
|
-
|
|
Other long-term liabilities
|
|
|
212
|
|
|
|
175
|
|
|
|
-
|
|
|
|
|
|
387
|
|
Total liabilities
|
|
|
19,902
|
|
|
|
6,446
|
|
|
|
(4,226
|
)
|
|
|
|
|
22,122
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
2
|
|
|
|
2,895
|
|
|
|
(2,897
|
)
|
|
e,i
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231
|
|
|
f
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
538
|
|
|
g
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231
|
|
|
h
|
|
|
1,000
|
|
Common stock
|
|
|
241
|
|
|
|
47
|
|
|
|
1,491
|
|
|
d
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
e
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
|
|
|
f
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
l
|
|
|
1,922
|
|
Additional paid-in capital
|
|
|
201,522
|
|
|
|
-
|
|
|
|
(186,690
|
)
|
|
a-h
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,991
|
|
|
d,f
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,388
|
|
|
l
|
|
|
28,211
|
|
Accumulated other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Accumulated deficit
|
|
|
(219,589
|
)
|
|
|
(8,430
|
)
|
|
|
219,589
|
|
|
a
|
|
|
(8,430
|
)
|
Total stockholders’ deficit
|
|
|
(17,824
|
)
|
|
|
(5,488
|
)
|
|
|
46,015
|
|
|
|
|
|
22,703
|
|
|
|
$
|
2,078
|
|
|
$
|
958
|
|
|
$
|
41,789
|
|
|
|
|
$
|
44,825
|
|
TRANSGENOMIC, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Twelve Months Ended December 31, 2015
(dollars in thousands)
|
|
Historical
|
|
|
|
|
|
|
|
|
|
|
|
Transgenomic (e)
|
|
|
Precipio (g)
|
|
|
Pro Forma
Adjustments
|
|
|
Notes
|
|
New Precipio
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,653
|
|
|
$
|
1,480
|
|
|
$
|
-
|
|
|
|
|
$
|
3,133
|
|
Cost of goods sold
|
|
|
1,940
|
|
|
|
815
|
|
|
|
(173
|
)
|
|
a
|
|
|
2,582
|
|
Gross profit
|
|
|
(287
|
)
|
|
|
665
|
|
|
|
173
|
|
|
|
|
|
551
|
|
Operating Expenses
|
|
|
8,908
|
|
|
|
2,169
|
|
|
|
1,917
|
|
|
a,b
|
|
|
12,994
|
|
Operating loss from continuing operations
|
|
|
(9,195
|
)
|
|
|
(1,504
|
)
|
|
|
(1,744
|
)
|
|
|
|
|
(12,443
|
)
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(724
|
)
|
|
|
(188
|
)
|
|
|
718
|
|
|
c
|
|
|
(194
|
)
|
Warrant revaluation
|
|
|
(205
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
(205
|
)
|
Other, net
|
|
|
(14
|
)
|
|
|
12
|
|
|
|
-
|
|
|
|
|
|
(2
|
)
|
Total other income (expense)
|
|
|
(943
|
)
|
|
|
(176
|
)
|
|
|
718
|
|
|
|
|
|
(401
|
)
|
Loss from continuing operations before income taxes
|
|
|
(10,138
|
)
|
|
|
(1,680
|
)
|
|
|
(1,026
|
)
|
|
|
|
|
(12,844
|
)
|
Income tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Net loss from continuing operations
|
|
|
(10,138
|
)
|
|
|
(1,680
|
)
|
|
|
(1,026
|
)
|
|
|
|
|
(12,844
|
)
|
Preferred stock dividends
|
|
|
(1,324
|
)
|
|
|
-
|
|
|
|
284
|
|
|
d
|
|
|
(1,040
|
)
|
NET LOSS FROM CONTINUING OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS
|
|
$
|
(11,462
|
)
|
|
$
|
(1,680
|
)
|
|
$
|
(742
|
)
|
|
|
|
$
|
(13,884
|
)
|
Basic and diluted loss per common share from continuing operations
|
|
$
|
(0.93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.07
|
)
|
Basic and diluted weighted-average shares of common stock outstanding
|
|
|
12,321,739
|
|
|
|
|
|
|
|
179,914,951
|
|
|
|
|
|
192,236,690
|
|
TRANSGENOMIC, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2016
(dollars in thousands)
|
|
Historical
|
|
|
|
|
|
|
|
|
|
|
|
Transgenomic
(f)
|
|
|
Precipio
(g)
|
|
|
Pro Forma
Adjustments
|
|
|
Notes
|
|
New Precipio
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,198
|
|
|
$
|
1,407
|
|
|
$
|
-
|
|
|
|
|
$
|
2,605
|
|
Cost of goods sold
|
|
|
1,477
|
|
|
|
710
|
|
|
|
(158
|
)
|
|
a
|
|
|
2,029
|
|
Gross profit
|
|
|
(279
|
)
|
|
|
697
|
|
|
|
158
|
|
|
|
|
|
576
|
|
Operating Expenses
|
|
|
5,457
|
|
|
|
1,573
|
|
|
|
1,439
|
|
|
a,b
|
|
|
8,469
|
|
Operating loss from continuing operations
|
|
|
(5,736
|
)
|
|
|
(876
|
)
|
|
|
(1,281
|
)
|
|
|
|
|
(7,893
|
)
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(782
|
)
|
|
|
(379
|
)
|
|
|
782
|
|
|
c
|
|
|
(379
|
)
|
Warrant revaluation
|
|
|
357
|
|
|
|
-
|
|
|
|
(7
|
)
|
|
h
|
|
|
350
|
|
Other, net
|
|
|
(1
|
)
|
|
|
3
|
|
|
|
-
|
|
|
|
|
|
2
|
|
Total other income (expense)
|
|
|
(426
|
)
|
|
|
(376
|
)
|
|
|
775
|
|
|
|
|
|
(27
|
)
|
Loss from continuing operations before income taxes
|
|
|
(6,162
|
)
|
|
|
(1,252
|
)
|
|
|
(506
|
)
|
|
|
|
|
(7,920
|
)
|
Income tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Net loss from continuing operations
|
|
|
(6,162
|
)
|
|
|
(1,252
|
)
|
|
|
(506
|
)
|
|
|
|
|
(7,920
|
)
|
Preferred stock/unit dividends
|
|
|
(21
|
)
|
|
|
(432
|
)
|
|
|
(327
|
)
|
|
d
|
|
|
(780
|
)
|
Deemed dividends on exchange of preferred units
|
|
|
-
|
|
|
|
(1,422
|
)
|
|
|
1,422
|
|
|
|
|
|
-
|
|
NET LOSS FROM CONTINUING OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS
|
|
$
|
(6,183
|
)
|
|
$
|
(3,106
|
)
|
|
$
|
589
|
|
|
|
|
$
|
(8,700
|
)
|
Basic and diluted loss per common share from continuing operations
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.05
|
)
|
Basic and diluted weighted-average shares of common stock outstanding (Note 4)
|
|
|
21,896,943
|
|
|
|
|
|
|
|
170,339,747
|
|
|
|
|
|
192,236,690
|
|
TRANSGENOMIC, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
1. Description of Transaction and Basis of Presentation
Description of Transaction.
On October 12, 2016, Transgenomic entered into a merger agreement,
as amended on February 2, 2017, with New Haven Labs Inc. (“Merger Sub”), which is a wholly owned subsidiary of Transgenomic
and Precipio (as amended, the “Merger Agreement”). Pursuant to the Merger Agreement, at the effective time of the merger,
Merger Sub will merge with and into Precipio, with Precipio as the surviving entity. When the merger is completed, (i) the
outstanding common units of Precipio will be converted into the right to receive approximately 160.6 million shares of New Precipio
common stock, together with cash in lieu of fractional units, in the merger and the private placement as discussed below and (ii) the
outstanding preferred units of Precipio will be converted into the right to receive approximately 24.1 million shares of New Precipio
preferred stock with an aggregate face amount equal to $3 million.
In connection with the merger, at the effective time, in addition
to the New Precipio preferred stock to be issued to holders of preferred units of Precipio, New Precipio also will issue shares
of New Precipio preferred stock and New Precipio common stock in a related private placement, whereby:
|
·
|
Holders of certain secured indebtedness of Transgenomic will receive in exchange for such indebtedness approximately 24.1 million
shares of New Precipio preferred stock in an amount equal to $3 million, and approximately 9.8 million shares of New Precipio common
stock; and
|
|
·
|
New Precipio will issue for cash up to approximately 56.2 million shares of New Precipio preferred stock for $7 million to
investors in a private placement.
|
Basis of Presentation.
The historical consolidated financial information has been adjusted
in the unaudited pro forma combined financial information to give effect to pro forma events that are (1) directly attributable
to the merger, (2) factually supportable, and (3) with respect to the statements of operations, expected to have a continuing impact
on the combined results. The pro forma condensed combined financial information does not reflect revenue opportunities and cost
savings that New Precipio expects to realize after the merger. No assurance can be given with respect to the estimated revenue
opportunities and operating cost savings that are expected to be realized as a result of the merger. The pro forma financial information
also does not reflect expenses related to integration activity or exit costs that may be incurred by Transgenomic or Precipio in
connection with this merger. The final determination of the purchase price allocation will be based on the fair values of assets
acquired and liabilities assumed as of the date the transaction closes, and could result in a significant change to the unaudited
pro forma condensed combined financial information, including goodwill.
The final terms of the New Precipio preferred stock have not
been finalized and as such the accounting treatment could change from what is presented.
2. Estimated Purchase Consideration
The estimated purchase consideration based on the value of the
equity of Transgenomic, the accounting acquiree, is as follows:
(in thousands)
|
|
|
|
Estimated equity market cap
|
|
$
|
5,317
|
|
Fair value of warrant conversions
|
|
|
2,273
|
|
Fair value of preferred share conversions
|
|
|
47
|
|
Fair value of debt conversions
|
|
|
9,047
|
|
Estimated purchase consideration
|
|
$
|
16,684
|
|
Preliminary Allocation of Estimated Purchase Consideration
The following table sets forth a preliminary allocation of the
estimated purchase consideration to the identifiable tangible and intangible assets of Transgenomic, the accounting acquiree, with
the excess recorded as goodwill:
(in thousands)
|
|
|
|
Current and other assets
|
|
$
|
924
|
|
Property and equipment
|
|
|
172
|
|
Goodwill
|
|
|
6,821
|
|
Other intangible assets
|
|
|
28,950
|
|
Total assets
|
|
$
|
36,867
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
10,446
|
|
Deferred tax liability
|
|
|
9,525
|
|
Other liabilities
|
|
|
212
|
|
Total liabilities
|
|
|
20,183
|
|
Net assets acquired
|
|
$
|
16,684
|
|
3. Pro Forma Adjustments
The pro forma adjustments included in the unaudited pro forma
condensed combined financial statements are as follows:
Pro Forma Adjustments – Balance
Sheet
|
a)
|
Reflects goodwill and deferred tax liability resulting from the acquisition method of accounting based on preliminary estimates
of the fair value of the assets and liabilities of Transgenomic. This also includes the elimination of Transgenomic’s historical
stockholders’ deficit accounts because Transgenomic is not considered to be the accounting acquirer.
|
|
b)
|
Reflects newly acquired intangibles resulting from the acquisition method of accounting based on preliminary estimates of the
fair value of the assets and liabilities of Transgenomic.
|
|
c)
|
Elimination of historical intangibles of Transgenomic.
|
|
d)
|
Issuance of New Precipio common stock.
|
|
e)
|
Transgenomic pre-merger preferred stock converted to common stock.
|
|
f)
|
Transgenomic pre-merger debt and accrued interest converted to common stock and $3 million of New Precipio preferred stock
with an 8% annual dividend.
|
|
g)
|
Issuance of New Precipio preferred stock to investors in a private placement.
|
|
h)
|
Precipio pre-merger debt and accrued interest converted to common stock and $3 million of New Precipio preferred stock with
an 8% annual dividend.
|
|
i)
|
Precipio pre-merger preferred shares converted to New Precipio common stock.
|
|
j)
|
Refer to Transgenomic’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the SEC on
April 14, 2016.
|
|
k)
|
Refer to Precipio financial information beginning on page F-1 of this Proxy Statement.
|
|
l)
|
Issuance of common shares for cashless exercise of Transgenomic warrants and elimination of related warrant liability.
|
Pro Forma Adjustments – Statements of Operations
|
a)
|
Eliminate amortization expense related to Transgenomic historical intangibles.
|
|
b)
|
Record amortization expense related to newly acquired intangibles assuming useful lives of 15 years.
|
|
c)
|
Eliminate interest expense for Transgenomic interest bearing debt that is converted to New Precipio common stock and New Precipio
preferred stock.
|
|
d)
|
Elimination of historical dividends.
|
|
e)
|
Refer to Transgenomic’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the SEC on
April 14, 2016.
|
|
f)
|
Refer to Transgenomic’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, filed with the SEC on
November 14, 2016.
|
|
g)
|
Refer to Precipio financial information beginning on page F-1 of this Proxy Statement.
|
|
h)
|
Elimination of warrant revaluation related to exercised warrants.
|
4. Preliminary estimate of
New Precipio Common Shares and Preferred Shares
New Precipio Common Shares:
|
|
|
|
|
|
Shares
|
|
Transgenomic:
|
|
|
|
|
Outstanding common shares
|
|
|
24,166,410
|
|
Conversion of preferred stock, debt and warrants
|
|
|
14,280,928
|
|
|
|
|
|
|
Precipio:
|
|
|
|
|
Conversion of common units, preferred units and debt
|
|
|
153,789,352
|
|
|
|
|
|
|
Total New Precipio common shares, par value $0.01
|
|
|
192,236,690
|
|
|
|
|
|
|
New Precipio Preferred Shares:
|
|
|
|
|
Total New Precipio preferred shares, par value $0.01
|
|
|
99,963,079
|
|
DESCRIPTION
OF TRANSGENOMIC CAPITAL STOCK
General
Under Transgenomic’s Third Amended and Restated Certificate
of Incorporation, as amended from time to time (the “Certificate of Incorporation”), Transgenomic is authorized to
issue up to 150,000,000 shares of Transgenomic common stock, from time to time, as provided in a resolution or resolutions adopted
by the Transgenomic Board.
Common Stock
As of January 17, 2017, 26,446,927 shares of Transgenomic common
stock, par value $0.01 per share, were issued and outstanding, held by approximately 77 stockholders of record, not including beneficial
holders whose shares are held in names other than their own.
Dividends, Voting Rights and Liquidation
Holders of Transgenomic common stock are entitled to one vote
for each share held of record on all matters submitted to a vote of the stockholders and do not have cumulative voting rights.
Holders of Transgenomic common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time
by the Transgenomic Board out of funds legally available for dividend payments. All outstanding shares of Transgenomic common stock
are fully paid and non-assessable. The holders of Transgenomic common stock have no preferences or rights of conversion, exchange,
pre-emption or other subscription rights. There are no redemption or sinking fund provisions applicable to the Transgenomic common
stock. In the event of any liquidation, dissolution or winding-up of Transgenomic’s affairs, holders of Transgenomic common
stock will be entitled to share ratably in Transgenomic’s assets that are remaining after payment or provision for payment
of all of Transgenomic’s debts and obligations. The rights, preferences and privileges of the Transgenomic common stock are
subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock currently outstanding
or which Transgenomic may designate and issue in the future.
Preferred Stock
General Matters
Under the Certificate of Incorporation, Transgenomic has the
authority to issue up to 15,000,000 shares of preferred stock, $0.01 par value per share (the “Preferred Stock”), issuable
in specified series and having specified voting, dividend, conversion, liquidation and other rights and preferences as Transgenomic’s
board of directors may determine, subject to limitations set forth in the Certificate of Incorporation. The Preferred Stock may
be issued for any lawful corporate purpose without further action by Transgenomic’s stockholders. The issuance of any Preferred
Stock having conversion rights might have the effect of diluting the interests of Transgenomic’s other stockholders. In addition,
shares of Preferred Stock could be issued with rights, privileges and preferences which would deter a tender or exchange offer
or discourage the acquisition of control of Transgenomic.
Of the number of shares of Preferred Stock authorized by Transgenomic’s
Certificate of Incorporation, as of January 17, 2017, 2,365,243 shares had been designated Series A-1 Preferred with such rights,
privileges and preferences as set forth in the Certificate of Designation of Series A-1 Convertible Preferred Stock filed with
the Secretary of State of the State of Delaware on January 8, 2016. As of January 17, 2017, 214,705
shares of Series A-1
Preferred were issued and outstanding.
Series A-1 Convertible Preferred Stock
Certain rights of the holders of the Series A-1 Preferred are
senior to the rights of the holders of Transgenomic’s Transgenomic common stock. The Series A-1 Preferred has a liquidation
preference equal to its original price per share, plus any accrued and unpaid dividends thereon.
All outstanding shares of Series A-1 Preferred will be automatically
converted into Transgenomic common stock, at an initial conversion rate of 1:1, at the election of the holders of a majority of
the then-outstanding shares of Series A-1 Preferred, voting as a single class on an as-converted basis. The initial conversion
rate for the Series A-1 Preferred is subject to adjustment in the event of certain stock splits, stock dividends, mergers, reorganizations
and reclassifications.
Generally, the holders of the Series A-1 Preferred are entitled
to vote as a single voting group with the holders of the Transgenomic common stock, and the holders of the Series A-1 Preferred
are generally entitled to that number of votes as is equal to the product obtained by multiplying: (i) the number of whole shares
of Transgenomic common stock into which the Series A-1 Preferred may be converted as of the record date of such vote or consent,
by (ii) 0.93, rounded down to the nearest whole number.
Anti-Takeover Effects
Under
Section 203 of the General Corporation Law of the State of Delaware
Transgenomic is subject to Section 203 of the General Corporation
Law of the State of Delaware (the “DGCL”), which prohibits a Delaware corporation from engaging in any business combination
with any interested stockholder for a period of three years after the date that such stockholder became an interested stockholder,
with the following exceptions:
|
·
|
before such date, the board of directors of the corporation approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder;
|
|
·
|
upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the time the transaction began, excluding for purposes
of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares
owned (i) by persons who are directors and also officers and (ii) employee stock plans in which employee participants
do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or an exchange
offer; or
|
|
·
|
on or after such date, the business combination is approved by the board of directors and authorized at an annual or a special
meeting of the stockholders, and not by written consent, by the affirmative vote of at least 66
2
/3% of the outstanding
voting stock that is not owned by the interested stockholder.
|
In general, Section 203 of the DGCL defines “business
combination” to include the following:
|
·
|
any merger or consolidation involving the corporation or any direct or indirect majority owned subsidiary of the corporation
and the interested stockholder or any other corporation, partnership, unincorporated association, or other entity if the merger
or consolidation is caused by the interested stockholder and as a result of such merger or consolidation the transaction is not
excepted as described above;
|
|
·
|
any sale, transfer, pledge, or other disposition (in one transaction or a series) of 10% or more of the assets of the corporation
involving the interested stockholder;
|
|
·
|
subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of
the corporation to the interested stockholder;
|
|
·
|
any transaction involving the corporation that has the effect of increasing the proportionate share of the stock or any class
or series of the corporation beneficially owned by the interested stockholder; or
|
|
·
|
the receipt by the interested stockholder of the benefit of any loss, advances, guarantees, pledges, or other financial benefits
by or through the corporation.
|
In general, Section 203 of the DGCL defines an “interested
stockholder” as an entity or a person who, together with the person’s affiliates and associates, beneficially owns,
or within three years prior to the time of determination of interested stockholder status did own, 15% or more of the outstanding
voting stock of the corporation.
A Delaware corporation may “opt out” of these provisions
with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation
or bylaws resulting from a stockholders’ amendment approved by at least a majority of the outstanding voting shares. Transgenomic
has not opted out of these provisions. As a result, mergers or other takeover or change in control attempts of Transgenomic may
be discouraged or prevented.
Anti-Takeover Effects Under Certain
Provisions of Transgenomic’s Certificate of Incorporation and Bylaws
Transgenomic’s Certificate of Incorporation and Transgenomic’s
Amended and Restated Bylaws (the “Bylaws”) include a number of provisions that may have the effect of deterring hostile
takeovers or delaying or preventing changes in control of the management of Transgenomic.
First, Transgenomic’s Certificate of Incorporation provides
that all stockholder actions must be effected at a duly called meeting of holders and not by a consent in writing.
Second, Transgenomic’s Bylaws provide that special meetings
of the holders may be called only by the chairman of the board of directors, the Chief Executive Officer or Transgenomic’s
board of directors pursuant to a resolution adopted by a majority of the total number of authorized directors.
Third, Transgenomic’s Certificate of Incorporation provides
that Transgenomic’s board of directors can issue up to 15,000,000 shares of Preferred Stock without further action by Transgenomic’s
stockholders, as described above.
Fourth, Transgenomic’s Certificate of Incorporation and
Bylaws provide for a classified board of directors in which approximately one-third of the directors are elected each year. Consequently,
any potential acquirer would need to successfully complete two proxy contests in order to take control of Transgenomic’s
board of directors. As a result of the provisions of the Certificate of Incorporation and Delaware law, stockholders will not be
able to cumulate votes for directors.
Fifth, Transgenomic’s Certificate of Incorporation prohibits
a business combination with an interested stockholder without the approval of the holders of 75% of all voting shares and the vote
of a majority of the voting shares held by disinterested stockholders, unless it has been approved by a majority of the disinterested
directors.
Finally, Transgenomic’s Bylaws establish procedures, including
advance notice procedures, with regard to the nomination of candidates for election as directors and stockholder proposals. These
provisions of Transgenomic’s Certificate of Incorporation and Bylaws could discourage potential acquisition proposals and
could delay or prevent a change in control of the management of Transgenomic.
Existing Warrants
As of January 17, 2017, warrants to purchase 7,302,771 shares
of Transgenomic common stock with a weighted-average exercise price of $3.59 per share were outstanding. Series A Warrants to purchase
an aggregate of 15,400 shares of Transgenomic common stock (the “Series A Warrants”) and warrants to purchase 1,929,482
shares of Transgenomic common stock (the “Exchangeable Warrants”), are subject to a blocker provision (the “Warrant
Blocker”), which restricts the exercise of the warrants if, as a result of such exercise, the warrant holder, together with
its affiliates and any other person whose beneficial ownership of Transgenomic common stock would be aggregated with the warrant
holder’s for purposes of Section 13(d) of the Exchange Act, would beneficially own in excess of 9.99% of Transgenomic’s
then issued and outstanding shares of Transgenomic common stock (including the shares of Transgenomic common stock issuable upon
such exercise), as such percentage ownership is determined in accordance with the terms of the Series A Warrants. The Series A
Warrants and the Exchangeable Warrants are currently exercisable, in each case except to the extent such exercise is restricted
by the Warrant Blocker and with respect to the Exchangeable Warrants, Transgenomic stockholder approval. The Warrant Blocker for
the Series A Warrants will automatically expire 61 calendar days prior to January 7, 2021, the expiration date of the Series A
Warrants and the Warrant Blocker for the Exchangeable Warrants will automatically expire 61 calendar days prior to January 8, 2021,
the expiration date of the Exchangeable Warrants. The Exchangeable Warrants may be exchanged for shares of Transgenomic common
stock, subject to certain exceptions and limitations. All of Transgenomic’s other outstanding warrants are currently exercisable,
except for an Exchangeable Warrant to purchase 1,900,000 shares of Transgenomic common stock, which may not be exercised or exchanged
until Transgenomic obtains stockholder approval or approval from Nasdaq to issue shares of Transgenomic common stock upon exercise
or exchange. All of Transgenomic’s outstanding warrants contain provisions for the adjustment of the exercise price in the
event of stock dividends, stock splits, reorganizations, reclassifications or mergers. In addition, certain of the warrants contain
a “cashless exercise” feature that allows the holders thereof to exercise the warrants without a cash payment to Transgenomic
under certain circumstances.
Unsecured Convertible Promissory
Notes
On December 31, 2014, Transgenomic entered into an Unsecured
Convertible Promissory Note Purchase Agreement (the “Note Purchase Agreement”) with an accredited investor (the “Investor”),
pursuant to which Transgenomic agreed to issue and sell to the Investor in a private placement an unsecured convertible promissory
note (the “Initial Note”). Transgenomic issued the Initial Note in the aggregate principal amount of $750,000 to the
Investor on December 31, 2014. Pursuant to the terms of the Initial Note, interest accrued at a rate of 6% per year and the Initial
Note was set to mature on December 31, 2016. Under the Initial Note, the outstanding principal and unpaid interest accrued was
convertible into shares of Transgenomic common stock as follows: (i) commencing upon the date of issuance of the Initial Note (but
no earlier than January 1, 2015), the Investor was entitled to convert, on a one-time basis, up to 50% of the outstanding principal
and unpaid interest accrued under the Initial Note, into shares of Transgenomic common stock at a conversion price equal to the
lesser of (a) the average closing price of the Transgenomic common stock on the principal securities exchange or securities market
on which the Transgenomic common stock is then traded (the “Market”) for the 20 consecutive trading days immediately
preceding the date of conversion, and (b) $2.20 (subject to adjustment for stock splits, stock dividends, other distributions,
recapitalizations and the like); and (ii) commencing February 15, 2015, the Investor was entitled to convert, on a one-time basis,
any or all of the remaining outstanding principal and unpaid interest accrued under the Initial Note, into shares of Transgenomic
common stock at a conversion price equal to 85% of the average closing price of Transgenomic common stock on the Market for the
15 consecutive trading days immediately preceding the date of conversion. The Initial Note has been converted in full into 502,786
shares of Transgenomic common stock, in accordance with the terms of the Initial Note.
On January 15, 2015, Transgenomic entered into the Note Purchase
Agreement with seven accredited investors (the “Additional Investors”) and, on January 20, 2015, issued and sold to
the Additional Investors, in a private placement, notes (the “Additional Notes”) in an aggregate principal amount of
$925,000. The Additional Notes have the same terms and conditions as the Initial Note (except with respect to the Remaining Note
as described below). As of January 19, 2017, $800,000 of the aggregate principal amount of the Additional Notes, and accrued interest
thereon, has been converted into an aggregate of 654,029 shares of Transgenomic common stock. Craig-Hallum acted as the sole placement
agent for the Additional Notes and Transgenomic issued to Craig-Hallum a convertible promissory note, upon the same terms and conditions
as the Additional Notes, in an aggregate principal amount equal to 5% of the proceeds received by Transgenomic, or $46,250. On
January 19, 2017, Craig-Hallum converted the principal amount and accrued interest on its convertible promissory note into an aggregate
of 43,129 shares of Transgenomic common stock.
As of January 17, 2017, one Additional Note remains outstanding
with an aggregate amount due on such Note of $139,876 ($125,000 in principal amount and $14,876 of accrued interest) (the “Remaining
Note”). The Additional Investor holding the Remaining Note (the “Remaining Investor”) agreed to extend the Maturity
Date of the Remaining Note pursuant to a January 17, 2017 amendment to the Remaining Note between Transgenomic and the Remaining
Investor (the “Amendment”). The Amendment provides that two-thirds of the outstanding principal amount of the Remaining
Note must be paid upon the earlier to occur of the closing of the merger between Merger Sub and Precipio as contemplated by the
Merger Agreement or June 16, 2017 (such applicable date, the “Deferred Maturity Date”). The remaining one-third of
the principal amount outstanding on the Remaining Note must be paid on the six month anniversary of the Deferred Maturity Date
(the “Extended Maturity Date”). On the applicable Deferred Maturity Date, all accrued and unpaid interest on the Remaining
Note as of the Deferred Maturity Date will be converted into shares of Transgenomic’s common stock at a conversion price
based on the average closing price of Transgenomic common stock on the Market for the 20 consecutive trading days immediately preceding
the date of conversion, but in no event will the conversion price be less than $0.25 per share. Interest that accrues on the remaining
principal amount of the Remaining Note from the Deferred Maturity Date will be payable on the Extended Maturity Date, unless the
Remaining Note is converted in which case such interest will be payable in shares of Transgenomic’s common stock as part
of the conversion.
In exchange for extending the Maturity Date of the Remaining
Note, Transgenomic will issue to the Remaining Investor on the applicable Deferred Maturity Date a warrant to purchase shares of
Transgenomic’s common stock having an aggregate value of $6,250 with an exercise price to be determined as of the date of
issuance of the warrant based on the average closing price of Transgenomic common stock on the Market for the 20 consecutive trading
days immediately preceding the date of issuance of the warrant, subject to the approval of the Market if necessary. The warrant
will expire two years from the date of issuance.
Listing
The Transgenomic common stock is listed on the Nasdaq Capital
Market under the symbol “TBIO”.
Transfer Agent and Registrar
The transfer agent and registrar for the Transgenomic common
stock is Wells Fargo Shareowner Services. Its address is 1110 Centre Pointe Curve, Suite 101, Mendota Heights, MN 55120 and its
telephone number is 1-855-217-6361.
SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF TRANSGENOMIC
The following table provides information
known to Transgenomic with respect to beneficial ownership of Transgenomic’s common stock by its directors, by its named
executive officers, by all of its current executive officers and directors as a group, and by each person Transgenomic believes
beneficially owns more than 5% of its outstanding common stock as of January 17, 2017. Except as indicated in the footnotes to
this table, to Transgenomic’s knowledge the persons named in the table below have sole voting and investment power with respect
to all Transgenomic common stock beneficially owned and such shares are owned directly by such person. The number of shares beneficially
owned by each person or group as of January 17, 2017 includes shares of Transgenomic common stock that such person or group had
the right to acquire on or within 60 days after January 17, 2017, including, but not limited to, upon the exercise of options,
stock appreciation rights or warrants to purchase common stock or the conversion of securities into common stock. Beneficial ownership
information of persons other than Transgenomic’s current executive officers and directors is based on available information
including, but not limited to, Schedules 13D, 13F or 13G filed with the Securities and Exchange Commission (the “SEC”)
or information supplied by these persons.
Name and Address of Beneficial Owner
(1)
|
|
Number of Shares
Beneficially Owned
|
|
|
Percent of
Class
|
|
|
|
|
|
|
|
|
Directors and Executive Officers
|
|
|
|
|
|
|
|
|
Paul Kinnon, President, Chief Executive Officer, Interim Chief Financial Officer and Director
|
|
|
307,499
|
(2)
|
|
|
1.1
|
%
|
Doit L. Koppler, II, Director
|
|
|
24,823
|
(3)
|
|
|
*
|
|
Robert M. Patzig, Director
|
|
|
72,515
|
(4)
|
|
|
*
|
|
Michael A. Luther, Director
|
|
|
10,000
|
(5)
|
|
|
*
|
|
Mya Thomae, Director
|
|
|
5,000
|
(6)
|
|
|
*
|
|
All directors and executive officers as a group (6 persons)
|
|
|
419,837
|
(7)
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
Other Stockholders
|
|
|
|
|
|
|
|
|
Randal J. Kirk
|
|
|
8,458,607
|
(8)
|
|
|
30.9
|
%
|
Kevin Douglas
|
|
|
1,400,737
|
(10)
|
|
|
5.2
|
%
|
*
Represents less than 1% of Transgenomic’s
outstanding common stock.
|
(1)
|
The address for all of Transgenomic’s directors and executive officers is the address of
its principal executive offices located at 12325 Emmet Street, Omaha, Nebraska 68164.
|
|
(2)
|
Includes 307,499 shares issuable upon the exercise of stock options and stock appreciation rights
that are exercisable or will become exercisable within 60 days after January 17, 2017.
|
|
(3)
|
Includes (i) 4,166 shares owned by Mr. Koppler, (ii) 15,499 shares issuable upon the exercise
of stock options that are exercisable or will become exercisable within 60 days after January 17, 2017, and (iii) 5,158 shares
issuable upon the exercise of warrants that are exercisable or will become exercisable within 60 days after January 17, 2017.
|
|
(4)
|
Includes (i) 3,333 shares owned by Mr. Patzig, (ii) 65,499 shares issuable upon the exercise
of stock options that are exercisable or will become exercisable within 60 days after January 17, 2017, and (iii) 3,683 shares
issuable upon the exercise of warrants that are exercisable or will become exercisable within 60 days after January 17, 2017.
|
|
(5)
|
Includes 10,000 shares issuable upon the exercise of stock options that are exercisable or will
become exercisable within 60 days after January 17, 2017.
|
|
(6)
|
Includes 5,000 shares issuable upon the exercise of stock options that are exercisable or will
become exercisable within 60 days after January 17, 2017.
|
|
(7)
|
Includes shares which may be acquired by executive officers and directors as a group within 60
days after January 17, 2017 through the exercise of stock options, stock appreciation rights or warrants.
|
|
(8)
|
Consists of (i) 7,550,669 shares of common stock, (ii) 693,233 shares of common stock issuable
upon exercise of warrants to purchase shares of common stock that are currently exercisable, and (iii) 214,705 shares of common
stock issuable upon conversion of 214,705 shares of Series A-1 Convertible Preferred Stock. Excludes 161,026 shares of common stock
issuable upon exercise or exchange of warrants to purchase shares of common stock (the “Placement Warrants”) that are
not currently exercisable as the exercise thereof is restricted by a blocker provision (the “Warrant Blocker”) that
restricts the exercise of each Placement Warrant if, as a result of such exercise, the holder of the Placement Warrant, together
with its affiliates and any other person whose beneficial ownership of common stock would be aggregated with such holder’s
for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, would beneficially own in excess of 9.99% of
the Company’s then issued and outstanding shares of common stock (including the shares of common stock issuable upon such
exercise), as such percentage ownership is determined in accordance with the terms of the Placement Warrants. The Warrant Blocker
will automatically expire 61 calendar days prior to the expiration date of the Placement Warrants. In addition, if certain
approvals from the Company’s stockholders and The Nasdaq Stock Market LLC to issue any additional shares of common stock
pursuant to the exchange right under the Placement Warrants are obtained (the “Placement Warrants Required Approvals”),
an additional 100,000 shares of common stock may be issued upon exercise of an exchange right under the Placement Warrants
for an aggregate of up to 260,862 shares of common stock issuable upon exchange of the Placement Warrants. The total of the
shares of common stock, the warrants to purchase shares of common stock and the shares of Series A-1 Convertible Preferred Stock
are held by the following companies, which are managed by Third Security, LLC (“Third Security”), which is managed
by Randal J. Kirk. Mr. Randal J. Kirk could be deemed to have indirect beneficial ownership of these shares: Third Security
Senior Staff 2008 LLC beneficially owns 3,383,444 shares of common stock, which consist of (a) 3,020,267 shares of common stock,
(b) 85,882 shares of common stock issuable upon conversion of 85,882 shares of Series A-1 Convertible Preferred Stock, and (c)
277,295 shares of common stock issuable upon exercise of warrants to purchase shares of common stock that are not Placement Warrants
and are currently exercisable; Third Security Staff 2010 LLC beneficially owns 2,445,890 shares of common stock, which consist
of (x) 2,125,654 shares of common stock, (y) 42,941 shares of common stock issuable upon conversion of 42,941 shares of Series
A-1 Convertible Preferred Stock, and (z) 277,295 shares of common stock issuable upon exercise of warrants to purchase shares of
common stock that are not Placement Warrants and are currently exercisable; Third Security Incentive 2010 LLC beneficially owns
1,691,719 shares of common stock, which consist of (1) 1,510,135 shares of common stock, (2) 42,941 shares of common stock issuable
upon conversion of 42,941 shares of Series A-1 Convertible Preferred Stock, and (3) 138,643 shares of common stock issuable upon
exercise of warrants to purchase shares of common stock that are not Placement Warrants and are currently exercisable; Third Security
Staff 2014 LLC beneficially owns 937,554 shares of common stock, which consist of (A) 894,613 shares of common stock, and (B) 42,941
shares of common stock issuable upon conversion of 42,941 shares of Series A-1 Convertible Preferred Stock. The business address
of these beneficial owners is 1881 Grove Avenue, Radford, Virginia 24141.
|
|
(9)
|
Based solely on Transgenomic’s review of a Schedule 13G/A filed with the SEC on February
13, 2015, Mr. Douglas has dispositive power over all of the shares owned by the Douglas affiliates. The Douglas affiliates include
shares owned directly by James E. Douglas, III as well as shares held in the following trusts: K&M Douglas Trust, Douglas Family
Trust and the James Douglas and Jean Douglas Irrevocable Descendants’ Trust. The business address of this beneficial owner
is 125 East Sir Francis Drake Boulevard, Suite 400, Larkspur, California 94939.
|
FUTURE TRANSGENOMIC
STOCKHOLDER PROPOSALS
Whether or not the merger with Precipio
is completed, Transgenomic will hold its regular annual meeting of stockholders in 2017. Pursuant to Transgenomic’s Bylaws,
stockholder proposals submitted for presentation at Transgenomic’s 2017 annual meeting of stockholders, including nominations
for common stock directors, must be received by the Corporate Secretary at c/o Transgenomic, Inc., 12325 Emmet Street, Omaha, NE
68164 no later than 35 days prior to the date of Transgenomic’s 2017 annual meeting of stockholders. If less than 35 days’
notice of the 2017 annual meeting of stockholders is given, then stockholder proposals must be received by Transgenomic’s
Corporate Secretary no later than seven days after the mailing date of the notice of the 2017 annual meeting of stockholders, and
in the case of a special meeting of stockholders, received not later than the close of business on the 10th day following the day
on which notice of the date of the meeting was mailed. Any stockholder nomination for a director, who is not an incumbent director,
must set forth the name, age, address and principal occupation of the person nominated, the number of shares of Transgenomic’s
common stock owned by the nominee and the nominating stockholder and other information required to be disclosed about the nominee
under federal proxy solicitation rules.
In order to be included in Transgenomic’s
proxy statement relating to the 2017 annual meeting of stockholders, stockholder proposals must have been submitted in writing
by December 30, 2016 to Transgenomic’s Corporate Secretary at c/o Transgenomic, Inc., 12325 Emmet Street, Omaha, NE 68164.
The inclusion of any such proposal in Transgenomic’s proxy materials will be subject to the requirements of the proxy rules
adopted under the Exchange Act.
IMPORTANT
NOTICE REGARDING DELIVERY
OF STOCKHOLDER DOCUMENTS
Transgenomic is sending only one proxy
statement to “street name” stockholders who share a single address unless it received contrary instructions from any
stockholder at that address. This practice, known as “householding,” is designed to reduce printing and postage costs.
However, if a stockholder is residing at such an address and wishes to receive a separate proxy statement in the future, such stockholder
may request them by calling Transgenomic’s Corporate Secretary at (402) 452-5400 , or by submitting a request in
writing to Transgenomic’s Corporate Secretary, c/o Transgenomic, Inc., 12325 Emmet Street, Omaha, NE 68164. If a stockholder
is receiving multiple copies of the proxy statement, such stockholder can request householding by contacting the Corporate Secretary
in the same manner described above. In addition, Transgenomic will promptly deliver, upon written or oral request to the address
or telephone number above, a separate copy of the proxy statement to a stockholder at a shared address to which a single copy of
the documents was delivered.
WHERE YOU
CAN FIND ADDITIONAL INFORMATION
Transgenomic is
subject to the informational requirements of the Exchange Act. Accordingly, Transgenomic files annual, quarterly and current reports,
proxy statements and other information with the SEC. Transgenomic also furnishes to its stockholders annual reports, which include
financial statements audited by independent certified public accountants and other reports which the law requires to be sent to
stockholders. The public may read and copy any reports, proxy statements or other information that Transgenomic files at the SEC’s
public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information at the public
reference room by calling the SEC at 1-800-SEC-0330. Transgenomic’s SEC filings are also available to the public from commercial
document retrieval services and at the web site maintained by the SEC at www.sec.gov. You may obtain a copy of any of these documents,
at no cost, by writing or telephoning at the following address:
Transgenomic, Inc.
12325 Emmet Street
Omaha, Nebraska
Attention: Corporate Secretary
(402)-452-5400
Transgenomic’s
common stock is listed on Nasdaq under the symbol “TBIO.” You can read and copy reports, proxy statements and other
information about Transgenomic at Nasdaq’s offices at One Liberty Plaza, 165 Broadway, New York, N.Y. 10006.
INFORMATION
INCORPORATED BY REFERENCE
Certain information has been “incorporated by reference”
information into this proxy statement, which means that Transgenomic has disclosed important information to you by referring you
to another document filed separately with the SEC. The documents incorporated by reference into this proxy statement contain important
information that you should read about Transgenomic.
The following documents are incorporated by reference into this
proxy statement:
(a)
|
Transgenomic’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the SEC on April 14, 2016; and
|
(b)
|
Transgenomic’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, filed with the SEC on November 14, 2016.
|
Transgenomic is delivering to its stockholders with this proxy
statement the aforementioned annual and quarterly reports in accordance with Item 13(b)(2) of Schedule 14A. Any statement contained
in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes
hereof to the extent that a statement contained herein modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to constitute a part of this proxy statement.
Documents incorporated by reference are also available, without
charge. You may obtain documents incorporated by reference in this proxy statement by requesting them in writing or by telephone
at the following address:
Transgenomic, Inc.
Attn: Investor Relations
12325 Emmet Street
Omaha, Nebraska 68164
Phone: (402) 452-5400
Fax: (402) 452-5461
E-mail: investorrelations@transgenomic.com
INDEX TO PRECIPIO
DIAGNOSTICS, LLC FINANCIAL STATEMENTS
INDEPENDENT AUDITORS’ REPORT
To the Members
Precipio Diagnostics, LLC
We have audited the accompanying balance sheets of Precipio
Diagnostics, LLC (the Company) as of December 31, 2015 and 2014, and the related statements of operations, changes in members’
deficit and cash flows for the years then ended.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation
of these financial statements in accordance with accounting principles generally accepted in the United States of America; this
includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial
statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on this financial
statement based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States
of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment,
including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation
of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting
estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Precipio Diagnostics, LLC as of December 31, 2015 and 2014, and the
results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted
in the United States of America.
Emphasis of Matter
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered
recurring losses from operations and has a net member deficiency that raises substantial doubt about its ability to continue as
a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do
not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to
this matter.
As discussed in Note 1, the Company has restated the financial
statements for the years ended December 31, 2015 and 2014 to correct certain misstatements. Our opinion is not modified with respect
to this matter.
As discussed in Note 1 to the financial statements effective
January 1, 2015, the Company early adopted Financial Accounting Standard Board issued ASU 2015-03, S
implifying the Presentation
of Debt Issuance Costs.
/s/ Marcum
Hartford, CT
February 3, 2017
PRECIPIO DIAGNOSTICS, LLC
|
|
BALANCE SHEETS
|
|
DECEMBER 31, 2015 AND 2014
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
234,688
|
|
|
$
|
573,317
|
|
Accounts receivable - net
|
|
|
455,744
|
|
|
|
197,366
|
|
Inventory
|
|
|
83,411
|
|
|
|
86,711
|
|
Prepaids and other current assets
|
|
|
4,910
|
|
|
|
5,971
|
|
Total Current Assets
|
|
|
778,753
|
|
|
|
863,365
|
|
Property and Equipment - net
|
|
|
343,214
|
|
|
|
308,122
|
|
Security Deposit
|
|
|
10,000
|
|
|
|
10,000
|
|
Total Assets
|
|
$
|
1,131,967
|
|
|
$
|
1,181,487
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Members' Deficit
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
739,719
|
|
|
$
|
546,460
|
|
Accrued expenses
|
|
|
123,386
|
|
|
|
82,420
|
|
Current maturities of long-term debt, less discounts
|
|
|
575,157
|
|
|
|
189,751
|
|
Current maturities of capital leases
|
|
|
36,440
|
|
|
|
10,914
|
|
Deferred rent
|
|
|
28,107
|
|
|
|
50,621
|
|
Convertible bridge notes, less debt issuance costs
|
|
|
1,351,073
|
|
|
|
—
|
|
Total Current Liabilities
|
|
|
2,853,882
|
|
|
|
880,166
|
|
Capital Leases,
less current maturities
|
|
|
164,185
|
|
|
|
82,090
|
|
Long-Term Debt
, less current
maturities and discounts
|
|
|
210,639
|
|
|
|
646,612
|
|
Total Liabilities
|
|
|
3,228,706
|
|
|
|
1,608,868
|
|
Members' Deficit
|
|
|
(2,096,739
|
)
|
|
|
(427,381
|
)
|
Total Liabilities and Members' Deficit
|
|
$
|
1,131,967
|
|
|
$
|
1,181,487
|
|
The accompanying notes are an integral
part of these financial statements.
PRECIPIO DIAGNOSTICS, LLC
|
|
STATEMENTS OF OPERATIONS
|
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
Revenue
|
|
|
|
|
|
|
|
|
Patient service revenue, less contractual allowance
|
|
$
|
1,804,828
|
|
|
$
|
1,833,060
|
|
Less allowance for doubtful accounts
|
|
|
(324,869
|
)
|
|
|
(107,561
|
)
|
|
|
|
1,479,959
|
|
|
|
1,725,499
|
|
Less: Cost of Diagnostic Services
|
|
|
814,660
|
|
|
|
1,063,118
|
|
Gross Profit
|
|
|
665,299
|
|
|
|
662,381
|
|
Operating Expenses
|
|
|
2,168,655
|
|
|
|
2,251,938
|
|
Operating Loss before Other Income (Expense)
|
|
|
(1,503,356
|
)
|
|
|
(1,589,557
|
)
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(188,240
|
)
|
|
|
(44,937
|
)
|
Other income
|
|
|
11,838
|
|
|
|
(903
|
)
|
Total Other Expenses
|
|
|
(176,402
|
)
|
|
|
(45,840
|
)
|
Net Loss
|
|
$
|
(1,679,758
|
)
|
|
$
|
(1,635,397
|
)
|
The accompanying notes are an integral
part of these financial statements.
PRECIPIO DIAGNOSTICS, LLC
|
|
STATEMENTS OF CHANGES IN MEMBERS’ DEFICIT
|
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
|
Balance
- January 1, 2014, as previously reported
|
|
$
|
438,790
|
|
|
|
|
|
|
Prior period adjustments, net
|
|
|
4,380
|
|
|
|
|
|
|
Balance
- January 1, 2014, as restated
|
|
|
443,170
|
|
|
|
|
|
|
Net loss
|
|
|
(1,635,397
|
)
|
Issuances of warrants
|
|
|
11,898
|
|
Unit-based compensation expense
|
|
|
6,620
|
|
Issuance of Series B as compensation to management
|
|
|
15,004
|
|
Issuance of Series B units, net of origination costs
|
|
|
731,324
|
|
|
|
|
|
|
Balance
- December 31, 2014 (as restated)
|
|
|
(427,381
|
)
|
|
|
|
|
|
Net loss
|
|
|
(1,679,758
|
)
|
Unit-based compensation expense
|
|
|
10,400
|
|
|
|
|
|
|
Balance
- December 31, 2015 (as restated)
|
|
$
|
(2,096,739
|
)
|
The accompanying notes are an integral
part of these financial statements.
PRECIPIO DIAGNOSTICS, LLC
|
|
STATEMENTS OF CASH FLOWS
|
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
Cash Flow from Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,679,758
|
)
|
|
$
|
(1,635,397
|
)
|
Adjustment to reconcile net loss to cash used in
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for allowance of doubtful accounts
|
|
|
432,430
|
|
|
|
261,715
|
|
Depreciation and amortization
|
|
|
111,571
|
|
|
|
110,989
|
|
Amortization of deferred financing and debt discount
|
|
|
33,437
|
|
|
|
9,329
|
|
Accrual of interest
|
|
|
87,818
|
|
|
|
—
|
|
Unit-based compensation expense
|
|
|
10,400
|
|
|
|
21,624
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(690,808
|
)
|
|
|
(97,775
|
)
|
Inventory
|
|
|
3,300
|
|
|
|
(19,851
|
)
|
Prepaids and other current assets
|
|
|
1,061
|
|
|
|
1,389
|
|
Accounts payable
|
|
|
193,259
|
|
|
|
(52,582
|
)
|
Accrued expenses
|
|
|
40,966
|
|
|
|
19,248
|
|
Deferred rent
|
|
|
(22,514
|
)
|
|
|
(18,907
|
)
|
Net Cash Used in Operating Activities
|
|
|
(1,478,838
|
)
|
|
|
(1,400,218
|
)
|
Cash Flow from Investing Activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(10,734
|
)
|
|
|
(55,894
|
)
|
Net Cash Used in Investing Activities
|
|
|
(10,734
|
)
|
|
|
(55,894
|
)
|
Cash Flow from Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from convertible bridge notes
|
|
|
1,263,275
|
|
|
|
—
|
|
Proceeds from member contributions
|
|
|
—
|
|
|
|
738,705
|
|
Origination costs on member contributions
|
|
|
—
|
|
|
|
(7,381
|
)
|
Payments on capital leases payable
|
|
|
(28,308
|
)
|
|
|
(18,895
|
)
|
Proceeds from note payable
|
|
|
—
|
|
|
|
488,102
|
|
Payments of notes payable
|
|
|
(63,106
|
)
|
|
|
(54,815
|
)
|
Payments for deferred financing costs
|
|
|
(20,918
|
)
|
|
|
(47,318
|
)
|
Net Cash Provided by Financing Activities
|
|
|
1,150,943
|
|
|
|
1,098,398
|
|
Net Change in Cash and Cash Equivalents
|
|
|
(338,629
|
)
|
|
|
(357,714
|
)
|
Cash and Cash Equivalents
- Beginning
|
|
|
573,317
|
|
|
|
931,031
|
|
Cash and Cash Equivalents
- Ending
|
|
$
|
234,688
|
|
|
$
|
573,317
|
|
The accompanying notes are an integral
part of these financial statements.
PRECIPIO DIAGNOSTICS, LLC
|
|
STATEMENTS OF CASH FLOWS
|
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
|
|
|
2015
|
|
|
2014
|
|
Supplemental Disclosure
of Cash Flow Information
Interest paid
|
|
|
100,422
|
|
|
|
44,937
|
|
Supplemental Disclosure of Non-Cash Investing and Financing Activities
|
|
|
|
|
|
|
|
|
Purchase of equipment financed through capital leases
|
|
$
|
135,929
|
|
|
$
|
34,733
|
|
The Company issued warrants in connection with its financing arrangements.
|
|
$
|
—
|
|
|
$
|
11,898
|
|
The accompanying notes are an integral
part of these financial statements.
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO FINANCIAL STATEMENTS
|
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
|
NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF BUSINESS
Precipio Diagnostics, LLC (the Company) is a Connecticut Limited
Liability Company formed in 2011. The Company is an early-stage diagnostics company that operates a cancer diagnostic laboratory
located in New Haven, Connecticut. The Company collaborates with an academic institution to provide the highest standards of cancer
diagnostics that is delivered to the community and improves patient care.
SIGNIFICANT ACCOUNTING POLICIES
PRIOR PERIOD ADJUSTMENT
The Company restated its financial statements for January 1,
2014, increasing the opening members’ equity by $4,380. The restatement related to information discovered related to improper
billings and recording of additional bad debt expense. This resulted in an overstatement of net patient service revenue in 2014,
understatement of bad debt expense in 2014, understatement of accounts receivable and understatement of allowance for doubtful
accounts as of December 31, 2014. In addition, certain lease agreements found to meet capital lease criteria; as a result, the
lease payments were adjusted to properly reflect depreciation, amortization and interest expense. The accompanying comparative
financial statements as of and for the year ended December 31, 2014 have been restated to correct these errors. The resulting adjustment
to the previously issued financial statements was an increase to net loss and members’ deficit of $157,336.
The effect of the restatements is summarized in the table below
as of and for the year ended December 31, 2014:
|
|
|
|
|
Debit (Credit)
|
|
|
Previously
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Bad debt expense
|
|
$
|
—
|
|
|
$
|
107,561
|
|
|
$
|
107,561
|
|
Patient service revenue
|
|
|
(1,872,274
|
)
|
|
|
39,214
|
|
|
|
(1,833,060
|
)
|
Allowance for doubtful accounts
|
|
|
(98,237
|
)
|
|
|
(163,478
|
)
|
|
|
(261,715
|
)
|
Accounts receivable
|
|
|
442,093
|
|
|
|
16,988
|
|
|
|
459,081
|
|
Capital lease equipment
|
|
|
—
|
|
|
|
111,115
|
|
|
|
111,115
|
|
Accumulated depreciation
|
|
|
(206,656
|
)
|
|
|
(24,577
|
)
|
|
|
(231,233
|
)
|
Capital lease payable
|
|
|
—
|
|
|
|
(93,004
|
)
|
|
|
(93,004
|
)
|
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO FINANCIAL STATEMENTS
|
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
|
NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
|
|
Previously
|
|
|
Debit (Credit)
|
|
|
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Interest
|
|
|
26,431
|
|
|
|
18,506
|
|
|
|
44,937
|
|
Cost of diagnostic services
|
|
|
707,636
|
|
|
|
355,482
|
|
|
|
1,063,118
|
|
Other income - loss on termination of capital lease
|
|
|
(137
|
)
|
|
|
1,040
|
|
|
|
903
|
|
The Company restated its financial statements as of and for
the year ended December 31, 2015. The restatement related to information discovered related to certain lease agreements found
to meet capital lease criteria; as a result, the lease payments were adjusted to properly reflect depreciation, amortization and
interest expense. In addition, as part of the restatement accounts payable and accruals were adjusted to reflect a change in the
calculation of the payroll accrual and reduction of accounts payable due to settlement agreement with a vendor. The accompanying
comparative financial statements as of and for the year ended December 31, 2015 have been restated to correct these errors. The
resulting adjustment to the previously issued financial statements was a decrease to net loss of $106,065.
The effect of the restatements is summarized in the table below
as of and for the year ended December 31, 2015:
|
|
Previously
|
|
|
Debit (Credit)
|
|
|
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Capital lease equipment
|
|
$
|
—
|
|
|
$
|
247,044
|
|
|
$
|
247,044
|
|
Accumulated depreciation
|
|
|
(283,726
|
)
|
|
|
(57,632
|
)
|
|
|
(341,358
|
)
|
Accounts payable
|
|
|
(862,469
|
)
|
|
|
122,750
|
|
|
|
(739,719
|
)
|
Accrued expenses
|
|
|
(98,481
|
)
|
|
|
(24,905
|
)
|
|
|
(123,386
|
)
|
Capital lease payable
|
|
|
—
|
|
|
|
(200,625
|
)
|
|
|
(200,625
|
)
|
Interest
|
|
|
147,970
|
|
|
|
40,270
|
|
|
|
188,240
|
|
Cost of diagnostic services
|
|
|
404,184
|
|
|
|
410,476
|
|
|
|
814,660
|
|
Operating expenses
|
|
|
2,712,499
|
|
|
|
(543,844
|
)
|
|
|
2,168,655
|
|
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO FINANCIAL STATEMENTS
|
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
|
NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and the disclosures of contingent assets and liabilities, at the date of the financial
statements, and the reported revenues and expenses during the reporting period. The most significant estimates with regard to these
financial statements relate to the allowance for doubtful accounts, assumptions used to value the stock based compensation and
potential impairment of long- lived assets. Although management believes the estimates that have been used are reasonable, actual
results could vary from the estimates that were used.
CASH, CASH EQUIVALENTS AND CREDIT
RISK
The Company considers all highly liquid
investments, with maturities of three months or less, when purchased, to be cash equivalents.
Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains its
cash and cash equivalents in bank deposit accounts which, at times, may exceed, Federal Deposit Insurance Corporation (FDIC) insured
limits of $250,000. The Company reduces its exposure to credit risk by maintaining such deposits with high-quality financial institutions.
RISKS AND UNCERTAINTIES
The Company operates in the healthcare industry which is subject
to reimbursement from third-party payors. The Company is still in the early phases of establishing relationships with providers,
however, services have decreased from 1,208 cases in 2014 to 1,136 cases in 2015.
ACCOUNTS RECEIVABLE
Accounts receivable results from the various health care services
provided by the Company and are due within 30 days from the invoice date. The carrying amount of the accounts receivable is reduced
by an allowance for doubtful accounts. In evaluation the collectability of patient accounts receivable, the Company analyzes its
past history and identifies trends for each of its major payor sources of revenue to estimate the appropriate allowance for doubtful
accounts. The Company has recorded an allowance for doubtful accounts of $432,430 and $261,715 as of December 31, 2015 and 2014.
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO FINANCIAL STATEMENTS
|
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
|
NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
INVENTORY
Inventories consist of laboratory supplies and are valued at
cost (determined on the first-in, first-out method) or net realizable value, whichever is lower.
PROPERTY AND EQUIPMENT
Property and equipment, including assets held under capital
leases, are recorded at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are charged to operations.
Depreciation and amortization, including amortization of assets under capital leases, is calculated using the straight-line method
over estimated useful lives of related assets.
Estimated useful lives are as follows:
Asset
|
|
Life
|
|
|
|
Machinery and lab equipment
|
|
5 – 7 years
|
Office equipment and computer
|
|
5 – 7 years
|
Lab software
|
|
3 – 5 years
|
For assets sold or otherwise disposed of, the cost and related
accumulated depreciation and amortization are removed from the accounts, and any related gain or loss is reflected in operations
for the period. Expenditures for major betterments that extend the useful lives of property and equipment are capitalized.
DEBT ISSUANCE COSTS
Debt issuance costs totaling $142,391 at December 31, 2015 and
$121,473 at December 31, 2014 are being amortized over the lives of the related financing on a basis that approximates the effective
interest method. Accumulated amortization related to these debt issuance costs was $47,484 at December 31, 2015 and $14,047 at
December 31, 2014. Related amortization expense was $29,737 in 2015 and $7,687 in 2014.
In April 2015, the FASB issued Accounting Standards Update 2015-03,
Simplifying the Presentation of Debt Issuance Costs
(ASU 2015-03). ASU 2015-03 amends current presentation guidance by requiring
that debt issuance costs related to a recognized debt liability be presented in the balance sheets as a direct deduction from the
carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for interim and annual reporting
periods beginning after December 15, 2015, with early adoption permitted.
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO FINANCIAL STATEMENTS
|
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
|
NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Management elected to early adopt ASU 2015-03 as displayed in
the accompanying balance sheets, and accordingly has presented the debt issuance costs as a debt discount in all periods presented.
The application of this standard had no effect to net loss for the year ended December 31, 2014 or members’ deficit as of
December 31, 2014. The application of this standard resulted in a decrease in total assets and total liabilities of $88,303 due
to the change in presentation in 2014 from an asset to a contra-liability as required by the standard.
NET PATIENT SERVICE REVENUE
The Company primarily recognizes revenue for services rendered
upon completion of the testing process. Net patient service revenue is reported at the estimated net realizable amounts from patients,
third-party payors and others for services rendered, including retroactive adjustment under reimbursement agreements with third-party
payors. Revenue under third-party payor agreements is subject to audit and retroactive adjustment.
Provisions for third-party payor settlements are provided in
the period the related services are rendered and adjusted in the future periods, as final settlements are determined. See Note
7 for additional information relative to net patient service revenue recognition and third-party payor programs.
PRESENTATION OF INSURANCE CLAIMS
AND RELATED INSURANCE RECOVERIES
The Company accounts for its insurance claims and related insurance
recoveries at their gross values as standards for health care entities do not allow the Company to net insurance recoveries against
the related claim liabilities. There were no insurance claims or insurance recoveries recorded during 2015 or 2014.
INCOME TAXES
The Company elected to be treated as a partnership for Federal
and Connecticut State income tax purposes. Accordingly, no provision or credit is made for income taxes. The Company’s operating
results are included by the Company’s members in their respective income tax returns.
There are no uncertain tax positions that would require recognition
in the financial statements. If the Company were to incur an income tax liability in the future, interest on any income tax liability
would be reported as interest expense and penalties on any income tax would be reported as income taxes.
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO FINANCIAL STATEMENTS
|
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
|
NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Management’s conclusions regarding uncertain tax positions
may be subject to review and adjustment at a later date based upon ongoing analysis of or changes in tax laws, regulations and
interpretations thereof as well as other factors. At December 31, 2015 and 2014, there were no amounts that had been accrued for
uncertain tax positions.
RENT EXPENSE
Rental expense is recognized on a straight-line basis over the
terms of the leases.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs
charged to operations totaled $24,249 in 2015 and $39,736 in 2014.
UNIT BASED COMPENSATION
The Company recognizes unit-based compensation expense for the
fair value of the awards on the date granted on a straight-line basis over their vesting term. Compensation expense is recognized
only for unit-based payments expected to vest. The Company estimates forfeitures at the date of grant based on the Company’s
historical experience and future expectations.
Non-Employee Awards: The Company accounts for unit based compensation
issued to non- employees at the fair value of equity instruments given as consideration for services rendered as a non-cash charge
to operations over the shorter of the vesting period or service period. The equity instruments are revalued on each subsequent
reporting date until performance is complete with a cumulative catch-up adjustment recognized for any changes in their fair value.
RECLASSIFICATION
Certain amounts in the 2014 financial statements have been reclassified
to conform to the 2015 presentation.
NOTE 2 – LIQUIDITY
The Company has incurred significant operating losses and has
used cash in its operating activities for the past several years. Operating losses have resulted from inadequate sales levels for
the cost structure. Further, the Company has significant working capital deficit at December 31, 2015 mainly due to the significant
amount of debt coming due during 2016.
The Company is currently in default with the forbearance agreement
with Connecticut Innovations and in default with the Webster Bank covenants. The Company has secured a revision to its Connecticut
Innovations note payable (see Note 5). The Company is in discussion with their lenders for waivers on these defaults but management
cannot assure that they will be able to extend the credit facilities on terms reasonably acceptable to the Company or at all.
If management is unable to extend the credit facilities, obtain
waivers, or both, the financial institutions could request payment on demand which could impair the Company’s ability to
conduct business in the near future. The current forecast projects that, absent additional capital from existing members or new
members, the Company will not be able to meet its obligations over the next 12 months. In response to these circumstances, the
Company is currently in discussions with certain investors to raise additional capital as well as exploring other means of raising
capital. There can be no assurance such capital is available at terms favorable or agreeable to management, if at all. In the near
term, the Company will continue to monitor expenses based on current cash flow.
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO FINANCIAL STATEMENTS
|
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
|
The aforementioned circumstances raise substantial doubt about
the Company’s ability to continue as a going concern. There can be no assurance that the Company will be able to successfully
achieve its initiatives summarized above in order to continue as a going concern. The accompanying financial statements have been
prepared assuming the Company will continue as a going concern and do not include any adjustments that might result should the
Company be unable to continue as a going concern as a result of the outcome of this uncertainty.
NOTE 3 – ACCOUNTS RECEIVABLE
Management has provided an allowance for potential credit losses,
which has been determined based on management’s industry experience. The Company grants credit without collateral to its
patients, most of whom are insured under third-party payer agreements.
The mix of receivables from patients and third-party payers
were as follows:
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
(Restated)
|
|
Medicaid
|
|
$
|
24,078
|
|
|
$
|
9,408
|
|
Medicare
|
|
|
86,644
|
|
|
|
89,454
|
|
Self Pay
|
|
|
4,403
|
|
|
|
5,793
|
|
Third party payers
|
|
|
773,049
|
|
|
|
354,426
|
|
|
|
|
888,174
|
|
|
|
459,081
|
|
Less allowance for doubtful accounts
|
|
|
432,430
|
|
|
|
261,715
|
|
Total accounts receivable
|
|
$
|
455,744
|
|
|
$
|
197,366
|
|
NOTE 4 – PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
|
|
2015
|
|
|
2014
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
Machinery and lab equipment
|
|
$
|
152,738
|
|
|
$
|
152,738
|
|
Capital lease equipment
|
|
|
247,044
|
|
|
|
111,115
|
|
Lab software
|
|
|
218,165
|
|
|
|
218,165
|
|
Computers
|
|
|
57,277
|
|
|
|
48,721
|
|
Office equipment
|
|
|
9,348
|
|
|
|
8,616
|
|
|
|
|
684,572
|
|
|
|
539,355
|
|
Less accumulated depreciation
|
|
|
341,358
|
|
|
|
231,233
|
|
Total property and equipment
|
|
$
|
343,214
|
|
|
$
|
308,122
|
|
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO FINANCIAL STATEMENTS
|
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
|
NOTE 5 – NOTES PAYABLE
CONNECTICUT INNOVATIONS, INC.
The Company entered into a line of credit on April 1, 2012 for
up to $500,000 with interest paid monthly at 8 percent, due on September 1, 2018. The line is secured by substantially all of the
Company’s assets. The Company had $138,422 at December 31, 2015 and 2014 outstanding (which is net of a debt discount of
$2,000 at December 31, 2014).
In connection with the line of credit, the Company issued warrants
to purchase 25,000 Series A Preferred Units of the Company, at an exercise price of $1.00 per unit, subject to adjustments as defined
in the warrant agreement. The warrants were valued at $6,000 at the date of the grant utilizing the Black-Sholes model (volatility
40%, expected life 7 years, and risk free rate .36%). The value of the warrants was treated as a debt discount and will continue
to accrete interest through the maturity date of the line of credit. The Company accreted to interest expense $1,500 in 2015 and
2014 of the debt discount.
The warrant and related Series A Preferred Units have a put
feature that has an immaterial value. The line of credit is subordinate to the Webster Bank term loan.
In November 2014, the Company entered into a forbearance agreement
with Connecticut Innovations to defer the loan payments for up to six months. As of December 31, 2015, the Company is in default
of the forbearance agreement and a balloon payment for the full balance is due June 2016. Subsequent to year end a new forbearance
agreement was entered into
to defer monthly principal payments on the line of credit until
October 2017 (See Note 13). The Company is also restricted from any additional borrowings under the line of credit.
DEPARTMENT OF ECONOMIC AND COMMUNITY
DEVELOPMENT
The Company entered into a 10-year term loan with the Department
of Economic and Community Development (DECD) on May 1, 2013 for $300,000, with interest paid monthly at 3 percent, due on April
23, 2023. The loan is secured by substantially all of the Company’s assets but is subordinate to the term loan with Webster
Bank and the line of credit.
WEBSTER BANK
The Company entered into a 3.5-year term
loan with Webster Bank on December 1, 2014 for $500,000, with interest paid monthly at the one month LIBOR rate plus 500 basis
points (.48% at December 31, 2015), due on May 31, 2018. The line is secured by substantially all of the Company’s assets
and has first priority over all other outstanding debt. As of December 31, 2015 and 2014 the outstanding balance was $448,000 and
$500,000, respectively.
The term loan with Webster Bank is subject to financial covenants
relating to maintaining adequate cash runway, as defined, as of June 30, 2015, September 30, 2015 and December 31, 2015 the Company
is not in compliance with this covenant. As such, the Webster Bank debt has all been presented as current in the accompanying financial
statements.
In connection with the Webster Bank agreement, the Company issued
7 year warrants to purchase $20,000 Series B Preferred Units of the Company. The exercise price is equal to 1) share price of the
next round of equity financing equal to or greater than $1.0 million to be closed prior to September 1, 2015 or 2) the most recent
round prior to the close ($1.5845) should the qualified financing not occur. The warrants were valued at $11,898 at the date of
the grant utilizing the Black-Scholes model (volatility 59.1%, expected life 7 years, and risk free rate 1.93%). The value of the
warrants was treated as a debt discount and will continue to accrete interest through the maturity date of the line of credit.
The Company accreted to interest expense $1,700 in 2015 and $142 in 2014 of the debt discount.
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO FINANCIAL STATEMENTS
|
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
|
The following represents the aggregate future maturities required
on long-term debt for the years ending December 31:
|
|
Connecticut
Innovations
|
|
|
DECD
|
|
|
Webster Bank
|
|
|
Total
|
|
2016
|
|
$
|
138,422
|
|
|
$
|
31,463
|
|
|
$
|
448,000
|
|
|
$
|
617,885
|
|
2017
|
|
|
—
|
|
|
|
35,324
|
|
|
|
—
|
|
|
|
35,324
|
|
2018
|
|
|
—
|
|
|
|
36,398
|
|
|
|
—
|
|
|
|
36,398
|
|
2019
|
|
|
—
|
|
|
|
37,505
|
|
|
|
—
|
|
|
|
37,505
|
|
2020
|
|
|
—
|
|
|
|
38,656
|
|
|
|
—
|
|
|
|
38,656
|
|
Thereafter
|
|
|
—
|
|
|
|
98,308
|
|
|
|
—
|
|
|
|
98,308
|
|
|
|
|
138,422
|
|
|
|
277,654
|
|
|
|
448,000
|
|
|
|
864,076
|
|
Less, debt issuance costs
|
|
|
—
|
|
|
|
(35,552
|
)
|
|
|
(32,672
|
)
|
|
|
(68,224
|
)
|
Less, debt discount
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,056
|
)
|
|
|
(10,056
|
)
|
|
|
|
138,422
|
|
|
|
242,102
|
|
|
|
405,272
|
|
|
|
785,796
|
|
Less, current portion
|
|
|
(138,422
|
)
|
|
|
(31,463
|
)
|
|
|
(405,272
|
)
|
|
|
(575,157
|
)
|
Long-term debt
|
|
$
|
—
|
|
|
$
|
210,639
|
|
|
$
|
—
|
|
|
$
|
210,639
|
|
NOTE 6 – CONVERTIBLE BRIDGE NOTES PAYABLE
During 2015, the Company issued eleven convertible bridge notes
for $1,360,000. The notes accrue interest at a rate of 14% and are payable no later than September 30, 2016. As of December 31,
2015, the outstanding balance was $1,360,000 excluding debt issuance costs of $8,927 with accrued interest of $87,818 is included
within accrued expenses on the accompanying balance sheet. Subsequent to year end the maturity date of the convertible bridge notes
payable were extended. In addition, an additional $15,000 of bridge notes were issued. (See Note 13)
NOTE 7 – NET REVENUE FROM PATIENT SERVICES
The following table summarizes net revenues from services to
patients:
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
Gross patient service revenue
|
|
|
2,854,037
|
|
|
|
2,738,117
|
|
Less: contractual allowances and adjustments
|
|
|
(1,049,209
|
)
|
|
|
(905,057
|
)
|
|
|
|
|
|
|
|
|
|
Net patient service revenue
|
|
|
1,804,828
|
|
|
|
1,833,060
|
|
The following summarizes all payers for the years ended December
31:
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
(Restated)
|
|
Medicaid
|
|
$
|
47,254
|
|
|
$
|
39,714
|
|
Medicare
|
|
|
424,347
|
|
|
|
377,601
|
|
Self pay
|
|
|
58,198
|
|
|
|
24,452
|
|
Third party payors
|
|
|
1,275,029
|
|
|
|
1,391,293
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,804,828
|
|
|
|
1,833,060
|
|
Revenue from the Medicare and Medicaid programs account for
a portion of the Company’s net patient service revenue. Laws and regulations governing those programs are extremely complex
and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a
material amount in the near term.
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO FINANCIAL STATEMENTS
|
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
|
NOTE 8 – COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company entered into a sixty-four month operating lease
beginning in September 2011, for their facility in New Haven, Connecticut and during 2012 and 2013, the Company took on additional
square footage. For the years ended December 31, 2015 and 2014, rental payments range from approximately $11,000 to $12,000 per
month.
The Company has also entered into a non-cancelable lease for
equipment through 2016. The terms of the lease require minimum purchase commitments for reagents. The terms of the lease don’t
require a monthly lease expense if the minimum purchase commitment is met. The Company has allocated a portion of the minimum purchase
commitment to equipment rental for the years ended December 31, 2015 and 2014.
The future minimum lease payments for 2016 under these leases
is approximately $153,000. The Company recognizes rent expense on a straight-line basis for all operating leases. Rent expense
was $130,957 in 2015 and $115,633 in 2014.
PURCHASE COMMITMENTS
The Company has entered into purchase commitments for reagents
from suppliers. These agreements started in 2011 and run through 2022. The Company and the suppliers will true up the amounts on
an annual basis. The future minimum purchase commitments under these agreements are as follows:
Years ending December 31,
|
|
|
|
|
|
|
|
2016
|
|
$
|
135,246
|
|
2017
|
|
|
135,246
|
|
2018
|
|
|
135,246
|
|
2019
|
|
|
135,246
|
|
2020
|
|
|
83,964
|
|
Thereafter
|
|
|
59,866
|
|
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO FINANCIAL STATEMENTS
|
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
|
CAPITAL LEASES
The Company has entered into various capital lease agreements
to obtain lab equipment. The terms of the capital leases range from five to ten years with interest rates of 7.25%.
The following is an analysis of the property acquired under
capital leases.
|
|
2015
|
|
|
2014
|
|
|
|
Restated)
|
|
|
(Restated)
|
|
Lab equipment
|
|
$
|
247,044
|
|
|
$
|
111,115
|
|
Less accumulated amortization
|
|
|
57,632
|
|
|
|
24,577
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
189,412
|
|
|
$
|
86,538
|
|
The following is a schedule by years of future minimum lease
payments under capital leases together with the present value of the net minimum lease payments as of December 31, 2016:
2016
|
|
$
|
49,790
|
|
2017
|
|
|
49,790
|
|
2018
|
|
|
49,790
|
|
2019
|
|
|
49,790
|
|
2020
|
|
|
25,422
|
|
Thereafter
|
|
|
14,416
|
|
|
|
|
238,998
|
|
Less, interest
|
|
|
(38,373
|
)
|
|
|
|
200,625
|
|
Less, current portion
|
|
|
(36,440
|
)
|
Long-term debt
|
|
$
|
164,185
|
|
Included in cost of diagnostic services is amortization expense
of Precipio $33,055 in 2015 and $29,270 in 2014 related to equipment acquired under capital leases.
NOTE 9 – LEGAL AND REGULATORY ENVIRONMENT
The healthcare industry is subject to numerous laws and regulations
of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as
licensure, accreditation, government healthcare program participation requirement, reimbursement for patient services and Medicare
and Medicaid fraud and abuse. Government activity has increased with respect to investigations and allegations concerning possible
violations of fraud and abuse statutes and regulations by healthcare providers.
Violations of these laws and regulations could result in expulsion
from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments
for patient services previously billed. Management believes that the Company is in compliance with fraud and abuse regulations,
as well as other applicable government laws and regulations. While no material regulatory inquiries have been made, compliance
with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown
or unasserted at this time.
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO FINANCIAL STATEMENTS
|
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
|
NOTE 10 – MEMBERS’ DEFICIT
On July 3, 2013, the Company entered into an amended and restated
limited liability company operating agreement (the amended operating agreement) authorizing the use of four different classes of
units (i) Series A Convertible Preferred Units (Series A) (ii) Series B Convertible Preferred Units (Series B), (iii) Voting Common
Units and (iv) Non-Voting Common Units.
The Company is authorized to issue 1,905,556 Series A units
(including warrants), 1,882,968 Series B unit (including warrants), 5,288,524 common units, with 3,788,524 common units (including
warrants) reserved for issuance upon conversion of the Series A units and Series B units, and the remaining 954,216 voting common
units and 545,784 non-voting common units issued or reserved for issuance as equity incentives.
VOTING RIGHTS
Each of the Series A and Series B classes of units have protective
provisions providing consent fights for such classes in voting on certain matters. In addition, each holder of Series A and Series
B units shall have the right to the number of votes equal to the number of common units issuable upon conversion of such Series
A and B units, respectively. Each voting common unit shall carry the right of one vote per common unit. Non-voting common units
shall not have any voting rights.
COMMON UNITS
The Company has two classes of common units voting and non-voting.
There are 5,288,524 common units authorized, with 3,788,524 common units reserved for issuance upon conversion of the Series A
units and Series B units (including warrants), and the remaining 954,216 voting commons units, and 545,784 non-voting common units
issued or reserved for issuance as equity incentives. During 2015, the Company issued 90,000 non-voting common units that vest
over a two to three year period. Unit compensation charged to operations totaled $10,400 in 2015 and $6,620 in 2014. There were
no incentive grants in 2014. The fair value of the restricted unit granted to the employees was determined on the grant date. The
Company has issued 954,216 common voting and 371,454 in 2015 and 281,454 in 2014 of common non-voting shares to various employees.
As of December 31, 2015, the Company has outstanding 954,216 common voting shares and 283,233 common non-voting shares. As of December
31, 2014, the Company has outstanding 815,432 common voting shares and 192,447 common non-voting shares.
Information regarding restricted unit awards follows:
|
|
Voting
|
|
|
Non-Voting
|
|
|
Total
|
|
Outstanding at January 1, 2014
|
|
|
377,336
|
|
|
|
157,326
|
|
|
|
534,662
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Released
|
|
|
(238,552
|
)
|
|
|
(68,319
|
)
|
|
|
(306,871
|
)
|
Canceled, forfeited, or expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at December 31, 2014
|
|
|
138,784
|
|
|
|
89,007
|
|
|
|
227,791
|
|
Granted
|
|
|
—
|
|
|
|
90,000
|
|
|
|
90,000
|
|
Released
|
|
|
(138,784
|
)
|
|
|
(90,786
|
)
|
|
|
(229,570
|
)
|
Canceled, forfeited, or expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at December 31, 2015
|
|
|
|
|
|
|
88,221
|
|
|
|
88,221
|
|
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO FINANCIAL STATEMENTS
|
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
|
NOTE 10 – MEMBERS DEFICIT (CONTINUED)
CONVERTIBLE PREFERRED UNITS
The Company has issued and outstanding 1,880,556 Series A Preferred
Units.
In 2014, the Company has issued 466,207 Series B Preferred Units
in exchange for cash of $738,705. Also the Board agreed and issued 9,469 Series B Preferred Units as bonus compensation, to certain
members of management totaling $15,004. The Company incurred costs of $7,381 in 2014 in connection with the Series B Preferred
issuance which have been recorded as origination costs within members’ equity.
The Series A and B Preferred Units have a preferred return of
eight percent per year on the unreturned capital contributions of the respective series. The preferred return accrues quarterly;
unpaid returns accumulate and were $631,717 for Series A and $507,644 for Series B.
In addition in connection with the Company’s finance agreements,
the Company issued warrants to purchase 25,000 units of Series A Preferred Units and $20,000 of Series B Preferred Units. These
warrants are still outstanding as of December 31, 2015.
The Company has 1,880,556 Series A Preferred Units and 1,817,213
Series B Preferred Units outstanding as of December 31, 2015 and 2014.
MANDATORY CONVERSION
The Series A units and Series B units have a mandatory conversion
feature, which states that at either the closing of a qualified public offering or an event that has been specified as a mandatory
conversion time by a vote of the Series A unit and Series B unit members, then all outstanding Series A units and Series B units
(and any declared but unpaid distributions) shall automatically be converted into voting common units at the then effective conversion
rate. No events have occurred as of December 31, 2015 and 2014 that would cause an automatic conversion of these units.
CONVERTIBLE RIGHTS
The Series A Members and Series B Members shall have conversion
rights as follows:
|
a.
|
Each Series B unit shall be converted, at the option of the holder thereof, at any time and from
time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable
voting common units as is determined by dividing the Series B adjusted purchase price by the Series B conversion price (as defined)
in effect at the time of conversion.
|
|
b.
|
Each Series A unit shall be converted, at the option of the holder thereof, at any time and from
time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable
voting common units as is determined by dividing the Series A adjusted purchase price by the Series A conversion price (as defined)
in effect at the time of conversion.
|
NOTE 11 – MAJOR CUSTOMERS
The Company recognized revenue from two
customers in 2015 and 2014 that represented in the aggregate 28 percent and 26 percent (ranging from 11 to 17 percent) of total
revenues, respectively.
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO FINANCIAL STATEMENTS
|
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
|
NOTE 12 – LITIGATION
The Company is involved in legal proceedings related to matters,
which are incidental to its business. In the opinion of management, based on consultation with legal counsel, the outcome of such
proceedings will not materially affect the Company’s financial position or results of operations.
NOTE 13 – SUBSEQUENT EVENTS
The Company restructured equity investments by exchanging Member
Equity comprised of Series A and Series B Convertible Preferred Units in the amount of $1,715,000, plus declared dividends on these
preferred units of $432,716, and convertible bridge notes of $680,000 for new senior notes of $2,243,895 and new junior notes of
$583,821. The senior and junior notes accrue interest at a rate of 12% and 15%, respectively, and have a maturity date of March
9, 2019, or earlier based on certain qualifying events as outlined in the note agreements. The Company also issued $61,073 of new
senior notes to satisfy an accumulated interest obligation on existing member debt.
In March 2016, the Company entered into a redemption and exchange
agreement with certain members’ relating to their 805,556 Preferred A Units and 609,024 Preferred B Units. Under the terms
of the agreement, the unit holders would exchange their units in the Company for the issuance of debt.
The aggregate purchase price per the agreement was the member’s
initial investment of $750,000 for Preferred A Units and $965,000 for Preferred B Units, along with a preferred return of 8%, recorded
as a dividend in the amount of $432,716. In addition to the debt issued as consideration for the member’s preferred units,
the Company also issued common warrant units, which allows the holders to collectively purchase common units of the Company, representing
approximately 60% of the Company at the time of exercise. At the time of issuance, this represented approximately 5,731,217 common
units. The common warrant units have a $0.00 exercise price with a ten year expiration date. The common warrant units were classified
as equity awards and the fair value upon issuance was calculated utilizing a discounted cash flow analysis to value the Company’s
equity and an option pricing method to allocate the value of the equity. The fair value of the warrants was determined directly
utilizing the option pricing method as the exercise price was $0.00. The aggregate value of the common warrant units was $1,421,738,
which was considered a deemed dividend.
The Company issued an additional convertible bridge note for
$15,000. The terms state the note is payable on demand if after September 30, 2016 and accrues interest at a rate of 14% and is
payable no later than December 31, 2016. During January 2017, the holders of the note agreed to defer the maturity date and as
of the date of this report no new maturity date has been set.
The maturity date of the convertible bridge notes payable (Note
6) were extended to December 31, 2016. During January 2017, the holders of the notes agreed to defer the maturity date and as of
the date of this report no new maturity date has been set.
The debt noted above are subordinate to loans outstanding with
Webster Bank as noted in Note 5.
In September 2016, the Company entered into a forbearance agreement
with Connecticut Innovations which deferred monthly principal payments on the line of credit until October 2017, interest and principal
payments through August 1, 2018 and a balloon payment on September 1, 2018. The Company is also restricted from any additional
borrowings under the line of credit.
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO FINANCIAL STATEMENTS
|
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
|
On October 12, 2016, the Company entered into an Agreement and
Plan of Merger with Transgenomic, Inc. and their wholly owned subsidiary New Haven Labs, Inc. At the effective time of the merger,
New Haven Labs, Inc. will merger with the Company and following the merger Transgenomic will change its name to Precipio, Inc.
Subsequent to entering into the Agreement and Plan of Merger
as noted above, the Company raised $615,000 from members through the issuance of senior notes which accrue interest at a rate of
12% and are payable at the closing of a qualified public offering, as outlined in the note agreement, but no later than March 9,
2019.
On February 2, 2017, Precipio agreed to offer a line of credit
to Transgenomic up to $250,000 pursuant to an unsecured promissory note (the “Bridge Loan”). All outstanding amounts
under the Bridge Loan accrue interest at a rate of 10% per annum and are due and payable upon the earlier to occur of (a) the date
that is 90 days following the date of the Bridge Loan or (b) the closing of the merger. The proceeds of the Bridge Loan will be
used by Transgenomic to finance certain general expenses until the effective date of the merger.
The Company evaluated subsequent events through February 3,
2017, which is the date the financial statements were issued. No events, other than previously disclosed, occurred that require
disclosures or adjustments to the financial statements.
PRECIPIO DIAGNOSTICS, LLC
|
|
CONDENSED BALANCE SHEETS
|
|
(Unaudited)
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
67,963
|
|
|
$
|
234,688
|
|
Accounts receivable, net
|
|
|
460,354
|
|
|
|
455,744
|
|
Inventory
|
|
|
95,215
|
|
|
|
83,411
|
|
Prepaids and other current assets
|
|
|
31,732
|
|
|
|
4,910
|
|
Total current assets
|
|
|
655,264
|
|
|
|
778,753
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
293,211
|
|
|
|
343,214
|
|
|
|
|
|
|
|
|
|
|
SECURITY DEPOSIT
|
|
|
10,000
|
|
|
|
10,000
|
|
TOTAL ASSETS
|
|
$
|
958,475
|
|
|
$
|
1,131,967
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt, less discounts
|
|
$
|
3,853,677
|
|
|
$
|
575,157
|
|
Convertible bridge notes, less debt issuance costs
|
|
|
695,000
|
|
|
|
1,351,073
|
|
Accounts payable
|
|
|
797,530
|
|
|
|
739,719
|
|
Accrued expenses
|
|
|
429,412
|
|
|
|
123,386
|
|
Current maturities of capital leases
|
|
|
45,402
|
|
|
|
36,440
|
|
Deferred rent
|
|
|
1,551
|
|
|
|
28,107
|
|
Deferred revenue
|
|
|
92,150
|
|
|
|
—
|
|
Total current liabilities
|
|
|
5,914,722
|
|
|
|
2,853,882
|
|
LONG TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities and discounts
|
|
|
356,335
|
|
|
|
210,639
|
|
Capital leases, less current maturities
|
|
|
174,950
|
|
|
|
164,185
|
|
Total liabilities
|
|
|
6,446,007
|
|
|
|
3,228,706
|
|
|
|
|
|
|
|
|
|
|
MEMBERS’ DEFICIT
|
|
|
(5,487,532
|
)
|
|
|
(2,096,739
|
)
|
TOTAL LIABILITIES AND MEMBERS’ DEFICIT
|
|
$
|
958,475
|
|
|
$
|
1,131,967
|
|
The accompanying notes are an integral
part of these condensed financial statements.
PRECIPIO DIAGNOSTICS, LLC
|
|
CONDENSED STATEMENTS OF OPERATIONS
|
|
(Unaudited)
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
NET REVENUE
|
|
|
|
|
|
|
|
|
Patient service revenue, net
|
|
$
|
1,716,137
|
|
|
$
|
1,265,251
|
|
Less allowance for doubtful accounts
|
|
|
(308,905
|
)
|
|
|
(243,652
|
)
|
|
|
|
1,407,232
|
|
|
|
1,021,599
|
|
LESS: COST OF DIAGNOSTIC SERVICES
|
|
|
709,762
|
|
|
|
570,313
|
|
GROSS PROFIT
|
|
|
697,470
|
|
|
|
451,286
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
1,573,793
|
|
|
|
1,588,150
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS BEFORE OTHER INCOME (EXPENSE)
|
|
|
(876,323
|
)
|
|
|
(1,136,864
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(378,657
|
)
|
|
|
(121,430
|
)
|
Other income
|
|
|
3,000
|
|
|
|
10,338
|
|
|
|
|
(375,657
|
)
|
|
|
(111,092
|
)
|
NET LOSS
|
|
|
(1,251,980
|
)
|
|
|
(1,247,956
|
)
|
Preferred unit dividends
|
|
|
(432,716
|
)
|
|
|
—
|
|
Deemed dividends on exchange of preferred units
|
|
|
(1,421,738
|
)
|
|
|
—
|
|
NET LOSS AVAILABLE TO COMMON UNIT HOLDERS
|
|
$
|
(3,106,434
|
)
|
|
$
|
(1,247,956
|
)
|
The accompanying notes are an integral
part of these condensed financial statements.
PRECIPIO DIAGNOSTICS, LLC
|
|
CONDENSED STATEMENTS OF CASH FLOWS
|
|
(Unaudited)
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
CASH FLOWS USED IN OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,251,980
|
)
|
|
$
|
(1,247,956
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash flows used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
99,012
|
|
|
|
80,608
|
|
Amortization of deferred financing costs and debt discount
|
|
|
31,389
|
|
|
|
27,853
|
|
Unit-based compensation expense
|
|
|
8,905
|
|
|
|
7,800
|
|
Provision for allowance of doubtful accounts
|
|
|
308,905
|
|
|
|
243,652
|
|
Capitalized accrued interest on long-term debt
|
|
|
84,716
|
|
|
|
65,864
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(313,515
|
)
|
|
|
(527,143
|
)
|
Inventory
|
|
|
(11,804
|
)
|
|
|
766
|
|
Prepaids and other current assets
|
|
|
(26,822
|
)
|
|
|
1,062
|
|
Accounts payable
|
|
|
57,811
|
|
|
|
81,411
|
|
Accrued expenses
|
|
|
306,025
|
|
|
|
(53,817
|
)
|
Deferred rent
|
|
|
(26,556
|
)
|
|
|
(16,886
|
)
|
Deferred revenue
|
|
|
92,150
|
|
|
|
—
|
|
Net cash used in operating activities
|
|
|
(641,764
|
)
|
|
|
(1,336,786
|
)
|
CASH FLOWS USED IN INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
—
|
|
|
|
(10,734
|
)
|
Net cash used in investing activities
|
|
|
—
|
|
|
|
(10,734
|
)
|
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from convertible bridge notes
|
|
|
15,000
|
|
|
|
945,000
|
|
Proceeds from long-term debt
|
|
|
615,000
|
|
|
|
—
|
|
Capital lease principal payments
|
|
|
(29,283
|
)
|
|
|
(19,602
|
)
|
Payments of long-term debt
|
|
|
(115,678
|
)
|
|
|
(48,527
|
)
|
Payments of deferred financing costs
|
|
|
(10,000
|
)
|
|
|
(17,056
|
)
|
Net cash flows provided by financing activities
|
|
|
475,039
|
|
|
|
859,815
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
(166,725
|
)
|
|
|
(487,705
|
)
|
CASH AND CASH EQUIVALENTS - BEGINNING
|
|
|
234,688
|
|
|
|
573,317
|
|
CASH AND CASH EQUIVALENTS - ENDING
|
|
$
|
67,963
|
|
|
$
|
85,612
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
48,482
|
|
|
$
|
52,266
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases of equipment financed through capital leases
|
|
$
|
49,010
|
|
|
$
|
135,929
|
|
Preferred unit dividend financed through exchange agreement
|
|
$
|
432,716
|
|
|
$
|
—
|
|
Convertible bridge notes exchanged for long-term debt
|
|
$
|
680,000
|
|
|
$
|
—
|
|
Series A and B Preferred exchanged for long term debt
|
|
$
|
1,715,000
|
|
|
$
|
—
|
|
The accompanying notes are an integral
part of these condensed financial statements.
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
|
|
NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
|
|
NOTE 1 – NATURE OF BUSINESS
NATURE OF BUSINESS
Precipio Diagnostics, LLC (the “Company” or “Precipio”)
is a Connecticut Limited Liability Company formed in 2011. The Company is an early-stage diagnostics company that operates a cancer
diagnostic laboratory located in New Haven, Connecticut. The Company collaborates with an academic institution to provide the highest
standards of cancer diagnostics that are delivered to the community and to improve patient care.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in
accordance with generally accepted accounting principles in the United States (“U.S. GAAP”).
The condensed financial information included herein is unaudited.
In the opinion of the Company, the accompanying condensed financial information contains all adjustments, consisting of normal
and recurring adjustments, necessary for the fair statement of its financial position as of September 30, 2016, and its results
of operations and cash flows for the nine months ended September 30, 2016 and 2015. The condensed balance sheet as of December 31,
2015, was derived from audited annual financial statements but does not contain all of the information and footnote disclosures
required by U.S. GAAP for complete financial statements. Interim results are not necessarily indicative of results for a full year.
The condensed financial statements included herein should be read in conjunction with the financial statements and notes included
in the Company’s financial statements for the year ended December 31, 2015.
GOING CONCERN
The condensed financial statements have been prepared using
U.S. GAAP applicable for a going concern, which assume that we will realize our assets and discharge our liabilities in the ordinary
course of business. We have incurred substantial operating losses and have used cash in our operating activities for the past several
years. As of September 30, 2016, we had negative working capital of $5.3 million due to an increase in accounts payable and accrued
expenses , along with the significant amount of debt we have coming due within the next twelve months. Our ability to continue
as a going concern is dependent upon a combination of achieving our business plan, including generating additional revenue, and
raising additional financing to meet our debt obligations and pay our liabilities arising from normal business operations when
they come due. The Company is currently in discussions with certain investors to raise additional capital as part of a proposed
merger, see Note 12 – Subsequent Events for further discussion on the merger. There can be no assurance such capital is available
at terms favorable or agreeable to management, if at all, or that the Company will successfully complete the proposed merger.
The Company is currently in default with the forbearance agreement
with Connecticut Innovations and in default with the Webster Bank covenants, see Note 5. The Company has secured a revision to
its Connecticut Innovations debt repayment schedule effective September 29, 2016 that approves interest only payments through October
1, 2017, interest and principal payments through August 1, 2018 and a balloon payment on September 1, 2018. The Company is in discussion
with Webster Bank to maintain the loan subject to review of the Company’s December 31, 2016 financial statements and it’s
forward looking business projections. Management cannot assure that they will be able to extend the credit facility on terms reasonably
acceptable to the Company or at all.
If management is unable to extend the credit facilities, obtain
waivers, or both, the financial institutions could request payment on demand which could impair the Company’s ability to
conduct business in the near future.
The aforementioned circumstances raise substantial doubt about
the Company’s ability to continue as a going concern. There can be no assurance that the Company will be able to successfully
achieve its initiatives summarized above in order to continue as a going concern. The accompanying financial statements have been
prepared assuming the Company will continue as a going concern and do not include any adjustments that might result should the
Company be unable to continue as a going concern as a result of the outcome of this uncertainty.
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
|
|
NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
|
|
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and the disclosures of contingent assets and liabilities, at the date of the financial
statements, and the reported revenues and expenses during the reporting period.
The most significant estimates with regard to these condensed
financial statements relate to the allowance for doubtful accounts, assumptions used to value stock based compensation, contractual
allowances, warrant valuations and potential impairment of long-lived assets. Although management believes the estimates that have
been used are reasonable, actual results could vary from the estimates that were used.
CONCENTRATIONS OF RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents. The Company considers all highly liquid investments,
with maturities of three months or less when purchased, to be cash equivalents. The Company maintains its cash and cash equivalents
in bank deposit accounts which, at times, may exceed Federal Deposit Insurance Corporation insured limits of $250,000. The Company
reduces its exposure to credit risk by maintaining such deposits with high-quality financial institutions.
Service companies in the health care industry typically grant
credit without collateral to patients. The majority of these patients are insured under third-party insurance agreements. The services
provided by the Company are routinely billed utilizing the Current Procedural Terminology (CPT) code set designed to communicate
uniform information about medical services and procedures among physicians, coders, patients, accreditation organizations, and
payers for administrative, financial, and analytical purposes. CPT codes are currently identified by the Centers for Medicare and
Medicaid Services and third-party payors. The Company utilizes CPT codes for Pathology and Laboratory Services contained within
codes 80000-89398.
RISKS AND UNCERTAINTIES
The Company operates in the healthcare industry which is subject
to reimbursement from third-party payors. The Company is still in the early phases of establishing relationships with referring
physicians, third-party payors and medical facilities.
ACCOUNTS RECEIVABLE
Accounts receivable results from the various health care services
provided by the Company and are due within 30 days from the invoice date. The carrying amount of the accounts receivable is reduced
by an allowance for doubtful accounts. In evaluating the collectability of patient accounts receivable, the Company analyzes its
past history and identifies trends for each of its major payor sources of revenue to estimate the appropriate allowance for doubtful
accounts. Receivables deemed to be uncollectible are charged against the allowance for doubtful accounts at the time such receivables
are written-off. Recoveries of receivables previously written-off are recorded as credits to the allowance for doubtful accounts.
INVENTORY
Inventory consists of laboratory supplies and is valued at cost
(determined on the first-in, first-out method) or net realizable value, whichever is lower. We evaluate inventory for items that
are slow moving or obsolete and record an appropriate allowance for obsolescence if needed. At both September 30, 2016 and December
31, 2015, we determined that no allowance for slow moving or obsolete inventory was necessary.
PROPERTY AND EQUIPMENT
Property and equipment, including assets held under capital
lease, are stated at cost, net of accumulated depreciation and amortization. Expenditures for maintenance and repairs are expensed
as incurred. Depreciation and amortization, including amortization of assets under capital leases, are calculated using the straight-line
method over estimated useful lives of related assets.
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
|
|
NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
|
|
Estimated useful lives are as follows:
Asset
|
|
Life
|
Machinery and lab equipment
|
|
5 – 7 years
|
Office equipment and computer
|
|
5 – 7 years
|
Lab Software
|
|
3 – 5 years
|
For assets sold or otherwise disposed of, the cost and related
accumulated depreciation and amortization are removed from the accounts, and any related gain or loss is reflected in operations
for the period. Expenditures for major betterments that extend the useful lives of property and equipment are capitalized.
DEBT ISSUANCE COSTS AND DEBT DISCOUNTS
Debt issuance costs and debt discounts are being amortized over
the lives of the related financings on a basis that approximates the effective interest method. Net debt issuance costs and debt
discounts were $65,819 and $87,207 at September 30, 2016 and December 31, 2015, respectively (net of accumulated amortization of
$86,573 and $55,184, respectively). Related amortization expense was $31,389 and $27,853 for the nine months ended September 30,
2016 and 2015, respectively.
In April 2015, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU) 2015-03,
Simplifying the Presentation of Debt Issuance Costs
(ASU 2015-03). ASU
2015-03 amends current presentation guidance by requiring that debt issuance costs related to a recognized debt liability be presented
in the balance sheets as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU
2015-03 is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted.
As of December 31, 2015, management elected to early adopt ASU
2015-03 as displayed in the accompanying condensed balance sheets, and accordingly, has presented the debt issuance costs as a
debt discount in all periods presented.
NET PATIENT SERVICE REVENUE
The Company primarily recognizes revenue for services rendered
upon completion of the testing process. Net patient service revenue is reported at the estimated net realizable amounts from patients,
third-party payors and others for services rendered, including retroactive adjustment under reimbursement agreements with third-party
payors. Revenue under third-party payor agreements is subject to audit and retroactive adjustment.
Provisions for third-party payor settlements are provided in
the period the related services are rendered and adjusted in the future periods, as final settlements are determined. See Note
7 – Net Revenue From Patient Services for additional information relative to net patient service revenue recognition and
third-party payor programs.
PRESENTATION OF INSURANCE CLAIMS AND RELATED INSURANCE
RECOVERIES
The Company accounts for its insurance claims and related insurance
recoveries at their gross values as standards for health care entities do not allow the Company to net insurance recoveries against
the related claim liabilities. There were no insurance claims or insurance recoveries recorded during the nine months ended September
30, 2016 and 2015.
INCOME TAXES
The Company elected to be treated as a partnership for Federal
and Connecticut State income tax purposes. Accordingly, no provision or credit is made for income taxes. The Company’s operating
results are included by the Company’s members in their respective income tax returns.
There are no uncertain tax positions that would require recognition
in the financial statements. If the Company were to incur an income tax liability in the future, interest on any income tax liability
would be reported as interest expense and penalties on any income tax would be reported as income taxes.
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
|
|
NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
|
|
Management’s conclusions regarding uncertain tax positions
may be subject to review and adjusted at a later date based upon ongoing analysis of or changes in tax laws, regulations and interpretations
thereof as well as other factors.
RENT EXPENSE
Rental expenses are recognized on a straight-line basis over
the terms of the leases.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs
charged to operations totaled
$12,426 and $14,210 for the nine months ended September 30,
2016 and 2015, respectively.
UNIT BASED COMPENSATION
The Company calculates the fair value of unit awards on the
date granted and recognizes unit-based compensation expense over their vesting term. Compensation expense is recognized only for
unit-based awards expected to vest. The Company estimates forfeitures at the date of grant based on the Company’s historical
experience and future expectations.
Non-Employee Awards: The Company accounts for unit based compensation
issued to non- employees at the fair value of equity instruments given as consideration for services rendered as a non-cash charge
to operations over the shorter of the vesting period or service period. The equity instruments are revalued on each subsequent
reporting date until performance is complete with a cumulative catch-up adjustment recognized for any changes in their fair value.
COMMON WARRANT UNITS
The Company accounts for the issuance of common warrant units
issued in accordance with the provisions of Accounting Standards Codification (ASC) Topic 815,
Derivatives and Hedging.
The Company classifies as equity any contracts that (i) require physical settlement or net-unit settlement or (ii) gives the Company
a choice of net-cash settlement or settlement in its own units (physical settlement or net-unit settlement). The Company classifies
as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract
if an event occurs and if that event is outside of the company’s control), or (ii) give the counterparty a choice of net-cash
settlement or settlement in units (physical settlement or net-unit settlement).
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from
Contracts with Customers
(“ASU No. 2014-09”). This guidance requires an entity to recognize the amount of revenue
to which it expects to be entitled for the transfer of promised goods or services to a customer. ASU No. 2014-09 will replace most
existing revenue recognition guidance in GAAP when it becomes effective. In July 2015, the FASB decided to defer the effective
date of this new accounting guidance by one year. As a result, ASU No. 2014-09 will be effective for the Company for all annual
and interim reporting periods beginning after December 15, 2017 and early adoption would be permitted as of the original effective
date. The new standard permits the use of either the retrospective or cumulative effect transition method. The Company does not
expect to early adopt this guidance and it has not selected a transition method. The Company is currently evaluating the impact
this guidance will have on its financial condition, results of operations and cash flows.
In August 2014, the FASB issued ASU No. 2014-15,
Presentation
of Financial Statements - Going Concern (Subtopic 205-40).
The new guidance addresses management’s responsibility to
evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related
footnote disclosures. The standard will be effective for the first interim period within annual reporting periods beginning after
December 15, 2016. Early adoption is permitted. The Company does not expect to early adopt this guidance and does not believe
that the adoption of this guidance will have a material impact on its financial statements.
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
|
|
NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
|
|
In February 2016, the FASB issued ASU No. 2016-02,
Leases
.
The new standard amends the recognition of lease assets and lease liabilities by lessees for those leases currently classified
as operating leases and amends disclosure requirements associated with leasing arrangements. The new standard is effective for
fiscal years and interim periods within those fiscal years beginning after December 15, 2018. Early adoption is permitted. The
new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition
will require application of the new guidance at the beginning of the earliest comparative period presented. The Company is currently
assessing the impact that the adoption of this ASU will have on its financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation
- Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. The new standard simplifies several
aspects related to the accounting for share-based payment transactions, including the accounting for income taxes, statutory tax
withholding requirements, forfeitures and classification on the statement of cash flows. This guidance is effective for fiscal
years and interim periods within those fiscal years beginning after December 15, 2016; however, early adoption is permitted. The
Company does not expect to early adopt this guidance and is currently evaluating the impact this guidance will have on its financial
condition, results of operations and cash flows.
In August 2016, the FASB issued ASU 2016-15,
Statement of
Cash Flow - Classification of Certain Cash Receipts and Cash Payments (Topic 230)
("ASU 2016-15"), which addresses
a few specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts
and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning
after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in
an interim period. The Company is currently evaluating the impact of this new pronouncement on its statements of cash flows.
NOTE 3 – ACCOUNTS RECEIVABLE
The mix of receivables from patients and third-party payors
were as follows:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Medicaid
|
|
$
|
25,009
|
|
|
$
|
24,078
|
|
Medicare
|
|
|
361,543
|
|
|
|
86,644
|
|
Self Pay
|
|
|
84,097
|
|
|
|
4,403
|
|
Third party payors
|
|
|
729,999
|
|
|
|
773,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,200,648
|
|
|
|
888,174
|
|
Less allowance for doubtful accounts
|
|
|
740,294
|
|
|
|
432,430
|
|
Accounts receivable, net
|
|
$
|
460,354
|
|
|
$
|
455,744
|
|
NOTE 4 – PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Machinery and lab equipment
|
|
$
|
152,738
|
|
|
$
|
152,738
|
|
Lab equipment under capital leases
|
|
|
296,053
|
|
|
|
247,044
|
|
Lab software
|
|
|
218,165
|
|
|
|
218,165
|
|
Computers
|
|
|
57,277
|
|
|
|
57,277
|
|
Office equipment
|
|
|
9,348
|
|
|
|
9,348
|
|
|
|
|
733,581
|
|
|
|
684,572
|
|
Less accumulated depreciation and amortization
|
|
|
440,370
|
|
|
|
341,358
|
|
Total property and equipment
|
|
$
|
293,211
|
|
|
$
|
343,214
|
|
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
|
|
NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
|
|
NOTE 5 – NOTES PAYABLE
Long-term debt consists of the following:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Connecticut Innovations – line of credit
|
|
$
|
162,066
|
|
|
$
|
138,422
|
|
Department of Economic and Community Development (DECD)
|
|
|
251,975
|
|
|
|
277,654
|
|
|
|
|
|
|
|
|
|
|
DECD debt issuance costs
|
|
|
(25,508
|
)
|
|
|
(35,552
|
)
|
|
|
|
|
|
|
|
|
|
Webster Bank
|
|
|
358,000
|
|
|
|
448,000
|
|
|
|
|
|
|
|
|
|
|
Webster Bank debt discounts and debt issuance costs
|
|
|
(31,310
|
)
|
|
|
(42,728
|
)
|
Junior Notes
|
|
|
583,821
|
|
|
|
—
|
|
Senior Notes
|
|
|
2,919,968
|
|
|
|
—
|
|
Senior Notes debt issuance costs
|
|
|
(9,000
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
4,210,012
|
|
|
|
785,796
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
(3,853,677
|
)
|
|
|
(575,157
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current maturities
|
|
$
|
356,335
|
|
|
$
|
210,639
|
|
CONNECTICUT INNOVATIONS, INC.
The Company entered into a line of credit on April 1, 2012 with
Connecticut Innovations (Connecticut Innovations Line of Credit) for up to $500,000 with interest paid monthly at 8 percent, due
on September 1, 2018. Principal and interest payments began February 1, 2013 and ranged from $7,436 to $12,206 until September
2016, when the Company entered into a forbearance agreement to defer monthly principal payments until October 2017. Beginning October
1, 2017, principal payments of $11,467 are due including interest at 9% through September 2018. Pursuant to the forbearance agreement,
the Company is also restricted from any additional borrowings under the line of credit. The line is secured by substantially all
of the Company’s assets.
In connection with the line of credit, the Company issued warrants
to purchase 25,000 Series A Preferred Units of the Company, at an exercise price of $1.00 per unit, subject to adjustments as defined
in the warrant agreement. The warrants were valued at $6,000 at the date of the grant utilizing the Black-Sholes model (volatility
40%, expected life seven years, and risk free rate .36%). The value of the warrants was treated as a debt discount and will continue
to accrete interest through the maturity date of the line of credit. The Company accreted to interest expense $1,500 in 2015 of
the debt discount. There was no accretion of the debt discount during the nine months ended September 30, 2016.
The warrant and related Series A Preferred Units have a put
feature that has an immaterial value. The line of credit is subordinate to the Webster Bank term loan.
DEPARTMENT OF ECONOMIC AND COMMUNITY DEVELOPMENT
The Company entered into a 10-year term loan with the Department
of Economic and Community Development (DECD) on May 1, 2013 for $300,000, with monthly payments of $3,519, which includes interest
at 3 percent, due on April 23, 2023. The loan is secured by substantially all of the Company’s assets but is subordinate
to the term loan with Webster Bank and the Connecticut Innovations line of credit.
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
|
|
NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
|
|
WEBSTER BANK
The Company entered into a 3.5-year term loan with Webster Bank
on December 1, 2014 for $500,000, with principal payments ranging from $5,500 to $15,000 per month, including interest at the one
month LIBOR rate (.53% at September 30, 2016) plus 500 basis points, due on May 31, 2018. The loan is secured by substantially
all of the Company’s assets and has first priority over all other outstanding debt.
The term loan with Webster Bank is subject to financial covenants
relating to maintaining adequate cash runway, as defined. As of September 30, 2016 and December 31, 2015 the Company was not in
compliance with these covenants and, as such, the Webster Bank debt has all been presented as current in the accompanying financial
statements.
In connection with the Webster Bank agreement, the Company issued
seven year warrants to purchase $20,000 Series B Preferred Units of the Company. The exercise price is equal to 1) share price
of the next round of equity financing equal to or greater than $1.0 million to be closed prior to September 1, 2015 or 2) the most
recent round prior to the close ($1.5845) should the qualified financing not occur. The warrants were valued at $11,898 at the
date of the grant utilizing the Black-Scholes model (volatility 59.1%, expected life seven years, and risk free rate 1.93%). The
value of the warrants was treated as a debt discount and will continue to accrete interest through the maturity date of the line
of credit. The Company accreted to interest expense $1,275 of the debt discount for both the nine months ending September 30, 2016
and 2015.
SENIOR AND JUNIOR NOTES
Prior to the redemption and exchange agreement discussed below,
the Company raised $440,000 from members through the issuance of convertible bridge notes payable, which were then converted to
long-term debt (Senior Notes) in connection with the redemption and exchange agreement. In addition, the Company raised an additional
$175,000 of Senior Notes during the nine months ended September 30, 2016. The Senior Notes accrue interest at a rate of 12% and
are payable at the closing of a qualified public offering, as outlined in the note agreement, or five years from date of issuance,
with dates ranging from March 9, 2021 through September 1, 2021.
During March 2016, the Company restructured equity through a
redemption and exchange agreement by exchanging Member Equity comprised of Series A and Series B Convertible Preferred Units in
the amount of $1,715,000, plus declared dividends on these preferred units of $432,716, and Convertible Bridge Notes of $1,120,000(inclusive
of the $440,000 noted above) (Note 6) for new Senior Notes of $2,683,895 and new Junior Notes of $583,821. The Senior and Junior
Notes accrue interest at a rate of 12% and 15%, respectively, and have maturity dates ranging from March 2021 to September 2021,
or earlier based on certain qualifying events as outlined in the note agreements.
During the nine months ended September 30, 2016, the Company
also issued $61,072 of new Senior Notes to satisfy an accumulated interest obligation on existing member debt, under the same terms
as the Senior Notes.
As of September 30, 2016, accrued interest on Senior and Junior
Notes is included within accrued expenses on the accompanying condensed balance sheet of $187,017 and $49,186, respectively.
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
|
|
NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
|
|
The following is a schedule by years of future maturities required
on long-term debt as of September 30, 2016.
|
|
Connecticut
Innovations
|
|
|
DECD
|
|
|
Webster Bank
|
|
|
Senior Notes
|
|
|
Junior Notes
|
|
|
Total
|
|
Remaining three months of 2016
|
|
$
|
—
|
|
|
$
|
5,785
|
|
|
$
|
358,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
363,785
|
|
Year ended December 31, 2017
|
|
|
31,514
|
|
|
|
35,324
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66,838
|
|
Year ended December 31, 2018
|
|
|
130,552
|
|
|
|
36,398
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
166,950
|
|
Year ended December 31, 2019
|
|
|
—
|
|
|
|
37,505
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
37,505
|
|
Year ended December 31, 2020
|
|
|
—
|
|
|
|
38,646
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
38,646
|
|
Year ended December 31, 2021
|
|
|
—
|
|
|
|
39,821
|
|
|
|
—
|
|
|
|
2,919,968
|
|
|
|
583,821
|
|
|
|
3,543,610
|
|
Thereafter
|
|
|
—
|
|
|
|
58,496
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
58,496
|
|
|
|
|
162,066
|
|
|
|
251,975
|
|
|
|
358,000
|
|
|
|
2,919,968
|
|
|
|
583,821
|
|
|
|
4,275,830
|
|
Less, debt discount and debt issuance costs
|
|
|
—
|
|
|
|
(25,508
|
)
|
|
|
(31,310
|
)
|
|
|
(9,000
|
)
|
|
|
—
|
|
|
|
(65,818
|
)
|
|
|
$
|
162,066
|
|
|
$
|
226,467
|
|
|
$
|
326,690
|
|
|
$
|
2,910,968
|
|
|
$
|
583,821
|
|
|
$
|
4,210,012
|
|
NOTE 6 – CONVERTIBLE BRIDGE NOTES PAYABLE
During the year ended December 31, 2015, the Company issued
eleven convertible bridge notes for $1,360,000. The notes accrue interest at a rate of 14% and were payable no later than September
30, 2016. As of December 31, 2015, the outstanding balance was $1,360,000, excluding debt issuance costs of $8,927, with accrued
interest of $87,818 included within accrued expenses on the accompanying condensed balance sheet. During 2016, the maturity date
of these convertible bridge notes was extended to December 31, 2016.
During 2016, prior to entering into the redemption and exchange
agreement, the Company issued additional convertible bridge notes for $440,000. Pursuant to the redemption and exchange agreement,
the Company exchanged $1,120,000 of convertible bridge notes for long-term debt (Senior Notes) (Note 5).
The Company issued additional convertible bridge notes for $15,000.
The notes accrue interest at a rate of 14% and are payable no later than December 31, 2016.
During January 2017, the holders of the notes agreed to waive
the maturity date and the notes are payable on demand and accrue interest until paid. As of September 30, 2016, debt issuance costs
were fully amortized and the outstanding convertible notes balance was $695,000, with accrued interest of $119,457 which is included
within accrued expenses on the accompanying condensed balance sheet.
NOTE 7 – NET REVENUE FROM PATIENT SERVICES
The following table summarizes net revenues from patient services
for the nine months ended September 30:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
Gross patient service revenue
|
|
$
|
2,747,332
|
|
|
$
|
1,967,188
|
|
Less: contractual allowances and adjustments
|
|
|
(1,031,195
|
)
|
|
|
(701,937
|
)
|
Patient service revenue, net
|
|
$
|
1,716,137
|
|
|
$
|
1,265,251
|
|
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
|
|
NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
|
|
The following table summarizes patient services revenue less
contractual allowances by payor for the nine months ended September 30:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Medicaid
|
|
$
|
27,544
|
|
|
$
|
55,841
|
|
Medicare
|
|
|
546,704
|
|
|
|
483,772
|
|
Self Pay
|
|
|
223,853
|
|
|
|
166,363
|
|
Third party payors
|
|
|
918,036
|
|
|
|
559,275
|
|
Patient service revenue, net
|
|
$
|
1,716,137
|
|
|
$
|
1,265,251
|
|
Revenue from the Medicare and Medicaid programs account for
a portion of the Company’s net patient service revenue. Laws and regulations governing those programs are extremely complex
and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a
material amount in the near term.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
The Company is involved in legal proceedings related to matters
which are incidental to its business. In the opinion of management, based on consultation with legal counsel, the outcome of such
proceedings will not materially affect the Company’s financial position or results of operations.
OPERATING LEASES
The Company entered into a sixty-four month operating lease
beginning in September 2011 for its facility in New Haven, Connecticut and during 2012 and 2013, the Company took on additional
square footage. For the nine months ended September 30, 2016 and 2015, rental payments were approximately $11,000 to $12,000 per
month. The future minimum lease payments required under this lease are approximately $36,000 for the remainder of 2016. As of January
2017, this lease is month to month and the Company is negotiating a new long-term lease for its facility.
The Company also had a non-cancelable lease for equipment that
expired in June 2016. The terms of the lease required minimum purchase commitments for reagents. The terms of the lease did not
require a monthly lease expense if the minimum purchase commitments were met. The Company has allocated a portion of the purchase
commitment to equipment rental for the nine months ended September 30, 2016 and 2015.
The Company recognizes rent expense on a straight-line basis
for all operating leases. Rent expense was $97,149 and $96,464 for the nine months ended September 30, 2016 and 2015, respectively.
CAPITAL LEASES
The Company has entered into various capital lease agreements
to obtain lab equipment. The terms of the capital leases are typically five to ten years with interest rates of 7.25%.
The following is an analysis of the property acquired under
capital leases.
|
|
Asset Balances at
|
|
Classes of Property
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Lab Equipment
|
|
$
|
296,054
|
|
|
$
|
247,044
|
|
Less: Accumulated amortization
|
|
|
(90,243
|
)
|
|
|
(57,632
|
)
|
Total
|
|
$
|
205,811
|
|
|
$
|
189,412
|
|
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
|
|
NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
|
|
The following is a schedule by years of future minimum lease
payments under capital leases together with the present value of the net minimum lease payments as of September 30, 2016.
Remaining three months of 2016
|
|
$
|
14,972
|
|
Year ended December 31, 2017
|
|
|
59,889
|
|
Year ended December 31, 2018
|
|
|
59,888
|
|
Year ended December 31, 2019
|
|
|
59,888
|
|
Year ended December 31, 2020
|
|
|
35,520
|
|
Year ended December 31, 2021
|
|
|
24,514
|
|
Thereafter
|
|
|
4,207
|
|
Total capital lease obligations
|
|
|
258,878
|
|
Less: Amount representing interest
|
|
|
(38,526
|
)
|
Present value of net minimum lease obligations
|
|
|
220,352
|
|
Less, current maturities of capital leases
|
|
|
(45,402
|
)
|
Capital leases, less current maturities
|
|
$
|
174,950
|
|
Included in cost of diagnostic services is amortization expense
for the nine months ended September 30, 2016 and 2015 of $32,611 and $23,093, respectively, related to equipment acquired
under capital leases.
PURCHASE COMMITMENTS
The Company has entered into purchase commitments for reagents
from suppliers. These agreements run through 2022. The Company and the suppliers will true up the amounts on an annual basis. The
future minimum purchase commitments under these agreements are as follows:
Remaining three months of 2016
|
|
$
|
28,084
|
|
Year ended December 31, 2017
|
|
|
148,664
|
|
Year ended December 31, 2018
|
|
|
148,664
|
|
Year ended December 31, 2019
|
|
|
148,664
|
|
Year ended December 31, 2020
|
|
|
97,382
|
|
Year ended December 31, 2021
|
|
|
73,284
|
|
Thereafter
|
|
|
4,473
|
|
NOTE 9 – LEGAL AND REGULATORY ENVIRONMENT
The healthcare industry is subject to numerous laws and regulations
of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as
licensure, accreditation, government healthcare program participation requirement, reimbursement for patient services and Medicare
and Medicaid fraud and abuse. Government activity has increased with respect to investigations and allegations concerning possible
violations of fraud and abuse statutes and regulations by healthcare providers.
Violations of these laws and regulations could result in expulsion
from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments
for patient services previously billed. Management believes that the Company is in compliance with fraud and abuse regulations,
as well as other applicable government laws and regulations. While no material regulatory inquiries have been made, compliance
with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown
or unasserted at this time.
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
|
|
NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
|
|
NOTE 10 – MEMBERS’ DEFICIT
On July 3, 2013, the Company entered into an amended and restated
limited liability company operating agreement (the amended operating agreement) authorizing the use of four different classes of
units (i) Series A Convertible Preferred Units (Series A) (ii) Series B Convertible Preferred Units (Series B), (iii) Voting Common
Units and (iv) Non-Voting Common Units.
The Company is authorized to issue 1,905,556 Series A units
(including warrants), 1,882,968 Series B units (including warrants) and 5,288,524 common units. The common units include 3,788,524
common units (including warrants) reserved for issuance upon conversion of the Series A units and Series B units, 954,216 voting
common units issued or reserved for issuance as equity incentives and 545,784 non-voting common units issued or reserved for issuance
as equity incentives. The Company’s board of directors will need to authorize an additional 5,468,222 voting common units
to cover new common warrants issued in 2016.
VOTING RIGHTS
Each of the Series A and Series B classes of units have protective
provisions providing consent rights for such classes in voting on certain matters. In addition, each holder of Series A and Series
B units shall have the right to the number of votes equal to the number of common units issuable upon conversion of such Series
A and B units, respectively. Each voting common unit shall carry the right of one vote per common unit. Non-voting common units
shall not have any voting rights.
COMMON UNITS
Common Units
The Company has two classes of common units, voting and non-voting.
There are 5,288,524 common units authorized. The Company has issued 954,216 common voting and 371,454 common non-voting shares
to various employees as of both September 30, 2016 and December 31, 2015. As of September 30, 2016, the Company had 1,288,796 common
units outstanding, of which, 954,216 were voting shares and 334,580 were non-voting shares.
Restricted Unit Awards
The fair value of restricted units granted to employees is determined
on the grant date. Incentive units granted during the nine months ended September 30, 2016 and 2015 were zero and 90,000, respectively.
Unit-based compensation expense charged to operations was $8,905 and $7,800 for the nine months ended September 30, 2016 and 2015,
respectively.
Information regarding outstanding restricted unit awards follows:
|
|
Voting
|
|
|
Non-voting
|
|
|
Total
|
|
Outstanding at December 31, 2015
|
|
|
—
|
|
|
|
88,221
|
|
|
|
88,221
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Released
|
|
|
—
|
|
|
|
(52,347
|
)
|
|
|
(52,347
|
)
|
Canceled, forfeited, or expired
|
|
|
—
|
|
|
|
(1,000
|
)
|
|
|
(1,000
|
)
|
Outstanding at September 30, 2016
|
|
|
—
|
|
|
|
34,874
|
|
|
|
34,874
|
|
CONVERTIBLE PREFERRED UNITS
As of December 31, 2015, the Company had 1,880,556 Series A
and 1,817,213 Series B units outstanding. During the nine months ended September 30, 2016, the Company restructured some equity
investments, including the exchange of 805,556 Series A and 609,024 Series B units for new Senior and Junior Notes (Note 5) and
common warrant units resulting in outstanding units as of September 30, 2016 of 1,075,000 for Series A and 1,208,189 for Series
B.
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
|
|
NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
|
|
The Series A and Series B units have a preferred return of eight
percent per year on the unreturned capital contributions of the respective series. The preferred return accrues quarterly; unpaid
returns accumulate and were $631,717 and $507,644, as of December 31, 2015, for Series A and Series B, respectively. The accumulated
amounts as of September 30, 2016 were $410,352 and $442,904 on Series A and Series B units, respectively.
In addition, in connection with the Company’s finance
agreements, the Company issued warrants to purchase 25,000 units of Series A and $20,000 of Series B. These warrants were outstanding
as of September 30, 2016 and December 31, 2015.
MANDATORY CONVERSION
The Series A units and Series B units have a mandatory conversion
feature, which states that at either the closing of a qualified public offering or an event that has been specified as a mandatory
conversion time by a vote of the Series A and Series B unit members, then all outstanding Series A and Series B units (and any
declared but unpaid distributions) shall automatically be converted into voting common units at the then effective conversion rate.
As of September 30, 2016 and December 31, 2015, no events have occurred that would cause an automatic conversion of these units.
CONVERTIBLE RIGHTS
The Series A Members and Series B Members shall have conversion
rights as follows:
Each Series A unit shall be converted, at the option of the
holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into
such number of fully paid and nonassessable voting common units as is determined by dividing the Series A adjusted purchase price
by the Series A conversion price (as defined) in effect at the time of conversion.
Each Series B unit shall be converted, at the option of the
holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into
such number of fully paid and nonassessable voting common units as is determined by dividing the Series B adjusted purchase price
by the Series B conversion price (as defined) in effect at the time of conversion.
COMMON WARRANT UNITS
In March 2016, the Company entered into a redemption and exchange
agreement with certain Members relating to their 805,556 Preferred A Units and 609,024 Preferred B Units. Under the terms of the
agreement, the unit holders would exchange their units in the Company for the issuance of debt (see Note 5 Notes Payable). The
aggregate purchase price per the agreement was the member's initial investment of $750,000 for Preferred A Units and $965,000 for
Preferred B Units, along with a preferred return of 8%, recorded as a dividend in the amount of $432,716. In addition to the debt
issued as consideration for the member's preferred units, the Company also issued common warrant units, which allows the holders
to collectively purchase common units of the Company, representing approximately 60% of the Company at the time of exercise. At
the time of issuance, this represented approximately 5,731,217 common units. The common warrant units have a $0.00 exercise price
with a ten year expiration date. The common warrant units were classified as equity awards and the fair value upon issuance was
calculated utilizing a discounted cash flow analysis to value the Company's equity and an option pricing method to allocate the
value of the equity. The fair value of the warrants was determined directly utilizing the option pricing method as the exercise
price was $0.00. The aggregate value of the common warrant units was $1,421,738, which was considered a deemed dividend.
NOTE 11 – MAJOR CUSTOMERS
The Company recognized revenue from two customers during the
nine months ended September 30, 2016 and 2015 that represented in the aggregate 21 percent and 24 percent (ranging from 6 to 18
percent) of total revenues, respectively.
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
|
|
NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
|
|
NOTE 12 – SUBSEQUENT EVENTS
Merger Agreement
On October 12, 2016, Precipio, Transgenomic, Inc. (“Transgenomic”)
and New Haven Labs Inc., a wholly owned subsidiary of Transgenomic (“Merger Sub” and, together with Transgenomic, the
“Transgenomic Parties”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant
to which Precipio will become a wholly owned subsidiary of Transgenomic (the “Merger”), on the terms and subject to
the conditions set forth in the Merger Agreement. Following the Merger, Transgenomic will change its name to Precipio, Inc. (“New
Precipio”). The parties expect the Merger to close during the first quarter of 2017.
When the merger is completed, (i) the outstanding common
units of Precipio will be converted into the right to receive approximately 160.6 million shares of New Precipio common stock,
together with cash in lieu of fractional units, which will result in Precipio common unit holders owning approximately 53% of the
fully diluted New Precipio common stock and (ii) the outstanding preferred units of Precipio will be converted into the right
to receive approximately 24.1 million shares of New Precipio preferred stock with an aggregate face amount equal to $3 million,
which will result in the Precipio preferred unit holders owning approximately 8% of the fully diluted New Precipio common stock.
In connection with the merger, at the effective time, in addition
to the New Precipio preferred stock to be issued to holders of preferred units of Precipio, New Precipio also will issue shares
of New Precipio preferred stock and New Precipio common stock in a related private placement, whereby:
|
·
|
Holders of certain secured indebtedness of Transgenomic will receive in exchange for such indebtedness approximately 24.1 million
shares of New Precipio preferred stock in an amount equal to $3 million, which represents approximately 8% of the fully diluted
New Precipio common stock, and approximately 9.8 million shares of New Precipio common stock, which represents approximately 3%
of the fully diluted New Precipio common stock; and
|
|
·
|
New Precipio will issue for cash up to approximately 56.2 million shares of New Precipio preferred stock for $7 million to
investors in a private placement, which represents approximately 18% of the fully diluted New Precipio common stock.
|
New Precipio preferred stock will be issued based on a pre-money
valuation of New Precipio of $25 million and will represent, in the aggregate, approximately 34% of the outstanding shares of New
Precipio common stock on an as-converted basis, including New Precipio preferred stock issued in the Merger and the private placement.
The board of managers of Precipio and the boards of directors
of Transgenomic and Merger Sub, and Transgenomic, in its capacity as the sole stockholder of Merger Sub, have each approved the
Merger Agreement and the board of managers of Precipio and the board of directors of Transgenomic have each recommended that their
respective equity holders approve the transactions contemplated by the Merger Agreement. Transgenomic will hold a special meeting
of its stockholders to approve the issuance of shares of Transgenomic common stock pursuant to the Merger, as required by Nasdaq
Listing Rules, as well as certain other matters (the “Special Meeting”).
The Merger Agreement contains various representations, warranties
and covenants of Precipio and the Transgenomic Parties, including, among others, covenants (i) by each of Precipio and Transgenomic
to operate its business in the ordinary course, (ii) by each of Precipio and Transgenomic not to engage in certain kinds of transactions
during the period between the execution of the Merger Agreement and the completion of the Merger, (iii) by Precipio to have its
members approve the Merger and (iv) by Transgenomic to hold the Special Meeting.
Under the Merger Agreement, Precipio and Transgenomic are subject
to customary “no shop” provisions that limit their respective abilities to solicit alternative acquisition proposals
from third parties or to provide confidential information to third parties, subject to a “fiduciary out” provision
that allows Precipio and Transgenomic to provide information and participate in discussions with respect to certain unsolicited
written proposals and to terminate the Merger Agreement and enter into an acquisition agreement with respect to a superior proposal
in compliance with the terms of the Merger Agreement (a “Superior Proposal”).
PRECIPIO DIAGNOSTICS, LLC
|
|
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
|
|
NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
|
|
Completion of the Merger is subject to various conditions, including,
among others: (i) approval of the holders of a majority of Transgenomic’s shares of outstanding common stock, (ii) approval
of the requisite amount of the members of Precipio, (iii) approval of an amendment to the Certificate of Incorporation of Transgenomic
contemplating the New Preferred Stock Financing (described below) and changing the name of Transgenomic to Precipio, Inc. or such
other name as determined by Precipio, (iv) obtaining certain third party consents, (v) the absence of any judgment, injunction,
order or decree prohibiting or enjoining the completion of the Merger, (vi) consummation of the New Preferred Stock Financing,
(vii) approval of listing of the Parent Common Stock on NASDAQ, (viii) completion of the Common Unit Recapitalization (described
above), (ix) increase in the size of the Transgenomic board by two members and the appointment of designees in accordance with
the Merger Agreement and (x) the lock-up of certain Transgenomic stockholders and Precipio members.
In addition, the obligation of the parties to complete the Merger
is subject to certain other conditions, including (i) subject to the standards set forth in the Merger Agreement, the accuracy
of the representations and warranties of the other party, (ii) compliance of each party with its covenants in all material
respects and (iii) no material adverse effect of either party.
The Merger Agreement contains certain termination rights for
both the Transgenomic Parties and Precipio. Either may terminate the Merger Agreement if the Merger is not completed on or before
June 30, 2017. Moreover, either party may terminate the Merger Agreement if the other party changes its recommendation to its security
holders to approve the Merger and the related transactions or enter into an agreement with a third party regarding a Superior Proposal
(as defined in the Merger Agreement).
The Merger Agreement also provides that, upon termination of
the Merger Agreement under certain circumstances, Transgenomic will be required to pay to Precipio a termination payment of $256,500.
If the Merger Agreement is terminated for certain other reasons, Precipio will be required to pay Transgenomic a termination payment
of $256,500.
The foregoing description of the Merger Agreement does not purport
to be complete. The Merger Agreement was filed by Transgenomic with the Securities and Exchange Commission as Exhibit 2.1 to Transgenomic’s
Current Report on Form 8-K filed on October 13, 2016. The Merger Agreement was provided solely to investors and security holders
with information regarding its terms. It is not intended to be a source of financial, business or operational information about
Transgenomic, Precipio or their respective subsidiaries or affiliates. The representations, warranties and covenants contained
in the Merger Agreement are made only for purposes of the Merger Agreement and are made as of specific dates; are solely for the
benefit of the parties; may be subject to qualifications and limitations agreed upon by the parties in connection with negotiating
the terms of the Merger Agreement, including being qualified by confidential disclosures made for the purpose of allocating contractual
risk between the parties rather than establishing matters as facts; and may be subject to standards of materiality applicable to
the contracting parties that differ from those applicable to investors or security holders. Investors and security holders should
not rely on the representations, warranties and covenants or any description thereof as characterizations of the actual state of
facts or condition of Transgenomic, Precipio or their respective subsidiaries or affiliates. Moreover, information concerning the
subject matter of the representations, warranties and covenants may change after the date of the Merger Agreement, which subsequent
information may or may not be fully reflected in public disclosures.
In connection with the Merger, the Supporting Stockholders and
Supporting Members (as defined in the Merger Agreement) are obligated to enter into a lock-up agreement with the combined company
at the Effective Time pursuant to which the Supporting Stockholders will agree, among other things, not to sell shares of Transgenomic
common stock for the six month period beginning at the Effective Time.
The Merger Agreement also provides that the combined company
will enter into employment agreements with certain employees of Precipio at the Effective Time and that the officers of the combined
company will be agreed to by the parties prior to the Effective Time.
On February 2, 2017, Precipio agreed to offer a line of credit
to Transgenomic up to $250,000 pursuant to an unsecured promissory note (the “Bridge Loan”). All outstanding amounts
under the Bridge Loan accrue interest at a rate of 10% per annum and are due and payable upon the earlier to occur of (a) the date
that is 90 days following the date of the Bridge Loan or (b) the closing of the merger. The proceeds of the Bridge Loan will be
used by Transgenomic to finance certain general expenses until the effective date of the merger.
The Company evaluated subsequent events through February 3,
2017, which is the date the financial statements were issued. No events, other than previously disclosed, occurred that require
disclosures or adjustments to the financial statements.
Annex A
Execution Version
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
TRANSGENOMIC, INC.,
NEW HAVEN LABS INC.
AND
PRECIPIO DIAGNOSTICS, LLC
DATED AS OF October 12, 2016
Table
of Contents
COMPANY DISCLOSURE SCHEDULE
PARENT DISCLOSURE SCHEDULE
EXHIBITS
|
|
|
|
|
|
Exhibit A
|
-
|
Company Employees
|
Exhibit B
|
-
|
New Preferred Stock Term Sheet
|
|
|
|
SCHEDULES
|
|
|
|
|
|
Schedule I
|
-
|
Outstanding Parent Common Stock
|
Schedule II
|
-
|
Financial Statements of the Company
|
Schedule III
|
-
|
Director Designees
|
Schedule IV
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Officer Designees
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN
OF MERGER (this “
Agreement
”), dated as of October 12, 2016, is entered into by and among Transgenomic, Inc.
(“
Parent
”), a Delaware corporation, New Haven Labs Inc., a Delaware corporation and a wholly owned subsidiary
of Parent (“
Merger Sub
”), and Precipio Diagnostics, LLC, a Delaware limited liability company (the “
Company
”).
Capitalized terms used but not otherwise defined herein have the meanings ascribed to such terms in
Article I
.
RECITALS
WHEREAS, subject to the
terms and conditions set forth herein, and in accordance with the Delaware General Corporation Law (the “
DGCL
”)
and the Delaware Limited Liability Company Act (the “
DLLCA
”), the parties hereto intend to effect a merger of
Merger Sub with and into the Company, with the Company as the surviving limited liability company and as a wholly owned subsidiary
of Parent;
WHEREAS, the board of
managers of the Company (the “
Company Board
”) has, upon the terms and subject to the conditions set forth in
this Agreement, (a) determined that the transactions contemplated by this Agreement, the Merger (as defined herein) and other
Transactions are in the best interests of the Company and its members, (b) approved this Agreement, the Merger and other Transactions
and (c) resolved to recommend the adoption of this Agreement by the Company’s members;
WHEREAS, (a) the board
of directors of Parent (the “
Parent Board
”) and the board of directors of Merger Sub, and Parent, in its capacity
as the sole equityholder of Merger Sub, have each, upon the terms and subject to the conditions set forth herein, approved and
consented to the Merger, the execution by Parent and Merger Sub of this Agreement and the consummation of the Transactions, and
(b) the Parent Board has, upon the terms and subject to the conditions set forth in this Agreement, determined that the transactions
contemplated by this Agreement, the Merger and the other Transactions are in the best interest of the Company and its stockholders,
and resolved to recommend the adoption of this Agreement by Parent’s stockholders;
WHEREAS, in connection
with and contingent upon the consummation of the Merger, and in order to facilitate the Transactions, the Parent Board believes
that it is in the best interests of Parent and its stockholders to (a) increase the size of the Parent Board to seven (7) directors
and (b) appoint the director designees in accordance with
Section 5.11
;
WHEREAS, concurrently
with the execution of this Agreement, and as a condition and inducement to the willingness of Parent and Merger Sub to enter into
this Agreement, certain members of the Company have executed and delivered a voting agreement with Parent pursuant to which, among
other things, such members have agreed, subject to the terms thereof, to authorize and approve this Agreement, the Merger and the
other transactions contemplated hereby;
WHEREAS, concurrently
with the execution of this Agreement, and as a condition and inducement to the willingness of the Company to enter into this Agreement,
certain stockholders of Parent have executed and delivered a voting agreement with the Company pursuant to which, among other things,
such stockholders have agreed, subject to the terms thereof, to authorize and approve this Agreement, the Merger and the other
transactions contemplated hereby;
WHEREAS, in connection
with and contingent on the consummation of the Transactions, Parent intends to enter into new employment agreements with the employees
of the Company listed on
Exhibit A
hereto, in a form mutually agreed between Parent and the respective employees listed
on
Exhibit A
hereto (the “
Employment Agreements
”);
WHEREAS, for U.S. federal
income tax purposes, it is intended that the Merger (as defined below) qualify as a “reorganization” within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “
Code
”), and that this Agreement will
be, and hereby is, adopted as a plan of reorganization; and
WHEREAS, the parties
hereto desire to make certain representations, warranties, covenants and agreements in connection with the Merger and prescribe
various conditions to the Merger, in each case as set forth in this Agreement.
NOW, THEREFORE, in consideration
of the foregoing and the respective promises contained herein and for other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto hereby agree as follows:
Article I
CERTAIN DEFINITIONS
Section 1.01
Certain
Definitions
. As used in this Agreement, the following terms have the respective meanings set forth below.
“
2015 Financial Statements
”
has the meaning set forth in
Section 3.06
.
“
2014 Financial Statements
”
has the meaning set forth in
Section 3.06
.
“
2013 Financial Statements
”
has the meaning set forth in
Section 3.06
.
“
Acquisition
Proposal
” means any
bona fide
inquiry, proposal or offer (whether or not in writing) from any Person (other than
any party to this Agreement or any of their Affiliates) to purchase or otherwise acquire, directly or indirectly, in a single transaction
or series of related transactions, including by way of any merger, consolidation, exchange offer, stock acquisition, asset acquisition,
share exchange, reorganization, recapitalization, liquidation, business combination, dissolution, joint venture, license or similar
transaction, (a) assets of a party to this Agreement that account for 15% or more of such party’s assets or from which 15%
or more of such party’s revenues or earnings are derived, (b) 15% or more of the outstanding capital stock of a party to
this Agreement or any other equity or voting interests in, such party or (c) any combination of the foregoing or
any
other transaction the consummation of which would reasonably be expected to interfere with or prevent the Merger;
provided
,
however
, that the term “Acquisition Proposal” shall not include the Merger or the other transactions contemplated
by this Agreement.
“
Accounting
Firm
” means a nationally recognized accounting firm reasonably acceptable to Parent and the Company that has not otherwise
provided services to any party or its Affiliates within the last two (2) years.
“
Action
”
means any claim, action, suit, arbitration, inquiry, proceeding or investigation by or before any Governmental Entity.
“
Affiliate
”
means, with respect to any Person, any other Person who directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, such Person. The term “control” means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise, and the terms “controlled” and “controlling” have meanings correlative
thereto.
“
Agreement
”
has the meaning set forth in the preamble.
“
Bankruptcy
and Equity Exception
” has the meaning set forth in
Section 3.04(a)
.
“
Business
Day
” means a day, other than a Saturday or Sunday, on which commercial banks in New York City, New York are open for
the general transaction of business.
“
Certificate
of Merger
” has the meaning set forth in
Section 2.03
.
“
Certifications
”
has the meaning set forth in
Section 4.05(a)
.
“
Charter Amendment
”
means an amendment to the certificate of incorporation of Parent, as in effect on the date hereof, contemplating the New Preferred
Stock Financing and changing the name of Parent to “Precipio Diagnostics, Inc.” (or such other name as determined by
the Company), in form and substance to be mutually agreed between Parent and the Company.
“
Check the
Box Election
” has the meaning set forth in
Section 3.20(f)
.
“
Claims
”
means any and all administrative, regulatory or judicial actions, suits, petitions, appeals, demands, demand letters, claims, liens,
notices of noncompliance or violation, investigations, proceedings, consent orders or consent agreements.
“
Closing
”
has the meaning set forth in
Section 2.02
.
“
Closing Date
”
has the meaning set forth in
Section 2.02
.
“
Code
”
has the meaning set forth in the recitals.
“
Company
”
has the meaning set forth in the preamble.
“
Company Board
”
has the meaning set forth in the recitals.
“
Company Change
of Recommendation
” has the meaning set forth in
Section 5.06(a)(ii)
.
“
Company Designated
Directors
” has the meaning set forth in the recitals.
“
Company Director
Designees
” has the meaning set forth in
Section 5.11(b)(i)
.
“
Company Financial
Statements
” has the meaning set forth in
Section 3.06
.
“
Company Intellectual
Property
” means Intellectual Property owned by or licensed to the Company.
“
Company IP
Agreements
” has the meaning set forth in
Section 3.14(f).
“
Company Lookback
Date
” means June 30, 2012.
“
Company Material
Adverse Effect
” means a Material Adverse Effect with respect to the Company.
“
Company Material
Licensed IP
” means all Company Intellectual Property that is licensed to the Company, excluding (a) Off-the-Shelf Software
and software that is generally available for license on a mass market commercial basis pursuant to a standard form agreement that
is not subject to negotiation for annual fees that do not exceed $5,000, and (b) other software that is not material to the
conduct of the business of the Company and can be readily replaced with software that provides substantially the same features,
functionalities and overall performance.
“
Company Material
Contracts
” has the meaning set forth in
Section 3.13(a)
.
“
Company Member
Approval
” means the written consent of the members of the Company holding the requisite number of outstanding Company
Units in accordance with the Company’s Limited Liability Company Agreement in effect as of the Effective Time and the DLLCA,
approving the (i) Merger, (ii) execution of this Agreement and (iii) consummation of the Transactions.
“
Company Notice
Period
” has the meaning set forth in
Section 5.06(a)(iii)
.
“
Company Permits
”
has the meaning set forth in
Section 3.10(b)
.
“
Company Plan
”
has the meaning set forth in
Section 3.17(a)
.
“
Company Qualified
Bidder
” has the meaning set forth in
Section 5.06(a)(i)
.
“
Company Required
Consents
” has the meaning set forth in
Section 5.07
.
“
Company Securities
”
has the meaning set forth in
Section 3.02(a)
.
A “
Company
Triggering Event
” shall be deemed to have occurred if: (i) the Company Board shall have failed to recommend that the
Company’s members vote or act by written consent to approve the Merger; (ii) a Company Change of Recommendation shall
have occurred; or (iii) the Company shall have entered into any letter of intent or similar document or any Contract relating to
any Acquisition Proposal.
“
Company Unit
”
means an outstanding common unit of the Company immediately prior to the Effective Time.
“
Company Unit
Consideration
” has the meaning set forth in
Section 2.08(c)
.
“
Company Unit
Recapitalization
” means the conversion of (i) all outstanding warrants and membership interests of the Company, including
the Series A Convertible Preferred Units, Series B Convertible Preferred Units, Voting Common Units, Non-Voting Common Units, Series
A Warrant and Series B Warrant (as each term is defined in the Company’s Limited Liability Company Agreement as of the date
of this Agreement), and any other warrants to acquire any of the foregoing, into Common Units (as defined in the Company’s
Limited Liability Company Agreement, as in effect immediately prior to the Effective Time), (ii) all outstanding promissory notes
of the Company issued to members of the Company into either Common Units or Preferred Units (as defined in the Company’s
Limited Liability Company Agreement, as in effect immediately prior to the Effective Time) and (iii) the termination of all such
warrants and promissory notes.
“
Confidentiality
Agreement
” has the meaning set forth in
Section 5.03
.
“
Contingent
Worker
” means, with respect to any Person, any independent contractor, consultant, temporary employee, leased employee
or other service or agent employed or used by such Person with respect to the operation of such Person’s business and classified
by such Person
as other than an employee or compensated other than through wages paid by
such Person through its respective payroll department.
“
Continuing
Employees
” has the meaning set forth in
Section 5.09(b)
.
“
Contract
”
means any written or oral agreement, contract, subcontract, indenture, deed of trust, note, bond, mortgage, lease, sublease, concession,
franchise, license, commitment, guarantee, sale or purchase order, undertaking or other instrument, arrangement or understanding
of any kind.
“
D&O Indemnified
Parties
” has the meaning set forth in
Section 5.12(a)
.
“
D&O Tail
Policy
” has the meaning set forth in
Section 5.12(c)
.
“
Damages
”
means any loss, damage, claim or liability (joint or several) to which a party hereto may become subject under the Securities Act,
the Exchange Act, or other federal or state law, insofar as such loss, damage, claim or liability (or any action in respect thereof)
arises out of or is based upon: (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration
Statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto;
(ii) an omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements
therein not misleading; or (iii) any violation or alleged violation by the indemnifying
party (or any of its agents or Affiliates)
of the Securities Act, the Exchange Act, any state securities law, or any rule or regulation promulgated under the Securities
Act, the Exchange Act, or any state securities law.
“
DGCL
”
has the meaning set forth in the recitals.
“
DLLCA
”
has the meaning set forth in the recitals.
“
Effective
Time
” has the meaning set forth in
Section 2.03
.
“
Employment
Agreements
” has the meaning set forth in the recitals.
“
Encumbrance
”
means any security interest, pledge, hypothecation, mortgage, lien (including environmental and Tax liens), violation, charge,
lease, license, encumbrance, servient easement, adverse claim, reversion, reverter, preferential arrangement, restrictive covenant,
condition or restriction of any kind, including any restriction on the use, voting, transfer, receipt of income or other exercise
of any attributes of ownership.
“
Environment
”
means surface waters, groundwaters, soil, subsurface strata and ambient air.
“
Environmental
Laws
” means all Laws, now or hereafter in effect and as amended, and any judicial or administrative interpretation thereof,
including any judicial or administrative order, consent decree or judgment, relating to the environment, health, safety, natural
resources or Hazardous Materials.
“
ERISA
”
means the Employee Retirement Income Security Act of 1974, as amended.
“
Exchange
Act
” has the meaning set forth in
Section 4.04
.
“
Exchange
Agent
” has the meaning set forth in
Section 2.11(a)
.
“
Exchange
Fund
” has the meaning set forth in
Section 2.11(a)
.
“
Exchange
Ratio
” means the quotient of (a) the total number of Merger Shares
divided by
(b) the Company Units outstanding
as of the Closing Date.
“
Dispute
”
has the meaning set forth in
Section 2.09(b)(vi)
.
“
GAAP
”
means United States generally accepted accounting principles.
“
Governing
Documents
” means the legal document(s) by which any Person (other than an individual) establishes its legal existence
or which govern its internal affairs. For example, the “Governing Documents” of a corporation are its certificate of
incorporation and bylaws, the “Governing Documents” of a limited partnership are its limited partnership agreement
and certificate of limited partnership and the “Governing Documents” of a limited liability company are its operating
agreement and certificate of formation.
“
Governmental
Entity
” means any (a) federal, state, local, municipal, or other government, (b) governmental or quasi-governmental
entity of any nature (including any governmental agency, branch, department, official, or entity and any court or other tribunal)
or (c) body exercising, or entitled to exercise any administrative, executive, judicial, legislative, police, regulatory,
or taxing authority or power of any nature, including any arbitral tribunal.
“
Governmental
Order
” shall mean any outstanding order, writ, judgment, citation, injunction, decree, ruling, charge or award entered
by any Governmental Entity.
“
Hazardous
Materials
” means any (a) substances defined in or regulated as hazardous or toxic substances, materials or wastes under
the following United States federal statutes and their state counterparts, as each may be amended from time to time, and all regulations
thereunder: the Hazardous Materials Transportation Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental
Response, Compensation and Liability Act, the Clean Water Act, the Safe Drinking Water Act, the Atomic Energy Act, the Federal
Insecticide, Fungicide, and Rodenticide Act and the Clean Air Act, and (b) material, pollutant, substance or waste that is regulated
under any Environmental Law because of its hazardous or dangerous properties or characteristics or because it can cause harm to
living organisms, human welfare or the environment.
“
Health Care
Law
” means any Law relating to health care regulatory matters, including, without limitation (a) 42 U.S.C. §§
1320a-7, 7a and 7b, which are commonly referred to as the “Medicare-Medicaid Anti-Fraud and Abuse Amendments,” (b)
42 U.S.C. § 1395nn and all regulations promulgated thereunder, which are commonly referred to as the “Stark Law,”
(c) 31 U.S.C. §§ 3729-3733, which is commonly referred to as the “Federal False Claims Act,” (d) HIPAA, (e)
the Occupational Safety and Health Act and all regulations promulgated under such legislation, (f) the Clinical Laboratory Improvement
Amendments, and all regulations promulgated thereunder, including 42 C.F.R. Part 493, (g) applicable state anti-kickback, fee-splitting
and patient brokering laws, (h) state information privacy and security laws, and (i) state laws governing the licensure and operation
of clinical laboratories.
“
HIPAA
”
means the Health Insurance Portability and Accountability Act of 1996, and its implementing regulations including the Standards
for Privacy of Individually Identifiable Health Information, Security Standards for the Protection of Electronic PHI and the Breach
Notification Rule, 45 C.F.R. Parts 160-164 as of the effective dates of such laws.
“
Indebtedness
”
means any (a) indebtedness for borrowed money, (b) indebtedness evidenced by any bond, debenture, mortgage, indenture or other
debt instrument or debt security, (c) accounts payable to trade creditors and accrued expenses not arising in the ordinary course
of business, (d) amounts owing as deferred purchase price for the purchase of any property, (e) capital lease obligations,
(f) obligations under letters of credit and (g) guarantee of any such indebtedness, obligations or debt securities of a type described
in
clauses (a)
through
(f)
above of any other Person.
“
Intellectual
Property
” means (a) Patents and inventions, inventions disclosures, designs, discoveries and improvements, whether or
not patentable, (b) copyrights and copyrightable works, moral rights and economic rights of authors and inventors, rights of privacy
and publicity, software, databases, compilations, and data collections, (c) trademarks, service marks, domain names and uniform
resource locaters (URLs), business names, brand names, trade names, trade dress, and any other names, marks or indicators of origin
together with all goodwill associated with any of the foregoing, (d) trade secrets (including, those trade secrets defined in the
Uniform Trade Secrets Act or under corresponding foreign statutory law or common law), confidential, proprietary and non-public
information, marketing and technical information, product specifications, compositions, formulae, proprietary processes, models,
drawings, know-how, methods and techniques, and (e) any other intellectual property or proprietary rights, in any jurisdiction,
including, for each of the foregoing (a) through (e), all rights thereto and any applications or registrations therefor.
“
Intended
Tax Treatment
” has the meaning set forth in
Section 2.13
.
“
Interim Financial
Statements
” has the meaning set forth in
Section 3.06
.
“
IRS
”
means the United States Internal Revenue Service.
“
Independent
Director Designees
” has the meaning set forth in
Section 5.11(b)(i)
.
“
Investor
Director Designees
” has the meaning set forth in
Section 5.11(b)(i)
.
“
Judgment
”
means any judgment, ruling, order, writ, injunction or decree of any Governmental Entity or arbitrator.
“
Knowledge
”
means, (a) in the case of the Company, the actual knowledge, as of the date of this Agreement, of Ilan Danieli, after reasonable
inquiry and (b) in the case of Parent and Merger Sub, the actual knowledge, as of the date of this Agreement, of Paul Kinnon, after
reasonable inquiry.
“
Law
”
means any federal, national, foreign, supranational, state, provincial or local statute, law, ordinance, regulation, rule, code,
order, requirement or rule of law.
“
Lease Agreements
”
has the meaning set forth in
Section 3.15(b)
.
“
Leased Real
Property
” has the meaning set forth in
Section 3.15(a)
.
“
Legal Proceedings
”
has the meaning set forth in
Section 3.09
.
“
Letter of
Transmittal
” has the meaning set forth in
Section 2.11(a)
.
“
Liabilities
”
means any and all Indebtedness, current liabilities (including accounts payable and accrued expenses), any other liabilities and
obligations, whether accrued or fixed, absolute or contingent, matured or unmatured or determined or determinable, including those
arising under any Law, Action or Governmental Order and those arising under any contract, agreement, arrangement, commitment or
undertaking.
“
Lock-Up Agreement
”
means a lock-up agreement in a form to be mutually agreed between the Company and Parent.
“
Material
Adverse Effect
” means any condition, change, event, occurrence or effect that, individually or in the aggregate with
all other conditions, changes, events, occurrences or effects, is or would reasonably be expected to (a) be materially adverse
to the business, assets, liabilities (contingent or otherwise), results of operations or financial condition of a Person; other
than any condition, change, event, occurrence or effect, directly or indirectly, arising out of, resulting from or relating to
the following: (i) any condition, change, event, occurrence or effect in any of the industries or markets in which such Person
operates; (ii) any enactment of, change in, or change in interpretation of, any Law or GAAP or governmental policy (it being understood
that this
clause (ii)
shall not apply with respect to a representation or warranty contained in this Agreement to the extent
that the purpose of such representation or warranty is to address compliance with applicable Law or GAAP); (iii) general economic,
regulatory or political conditions (or changes therein) or conditions (or changes therein) in the financial, credit or securities
markets (including changes in interest or currency exchange rates) in any country or region in which such Person conducts business;
(iv) any acts of God, natural disasters, terrorism, armed hostilities, sabotage, war or any escalation or worsening of acts of
terrorism, armed hostilities or war; (v) the announcement, pendency of or performance of the Transactions, including the impact
of any of the foregoing on any relationships, contractual or otherwise, with customers, suppliers, distributors, collaboration
partners, employees or regulators (it being understood that this
clause (v)
shall not apply with respect to a representation
or warranty contained in this Agreement to the extent that the purpose of such representation or warranty is to address the consequences
arising from the execution and delivery of this Agreement or the consummation of the Transactions or the performance of obligations
under this Agreement); (vi) any action taken by such Person that is expressly required by the terms of this Agreement (it
being understood that this
clause (vi)
shall not apply with respect to a representation or warranty contained in this Agreement
to the extent that the purpose of such representation or warranty is to address the consequences arising from the execution and
delivery of this Agreement or the consummation of the Transactions or the performance of obligations under this Agreement); (vii)
any failure, in and of itself, by such Person to meet any internal or third party estimates, projections or forecasts of revenue,
earnings or other financial performance for any period (or for which revenues, earnings or other financial results are released);
or (viii) any change in the trading price or trading volume of the Parent Common Stock,
provided
that the underlying causes
of such change may be taken into account; to the extent, in each of
clauses (i)
through
(iv)
, that such condition,
change, event, occurrence or effect does not affect such Person in a disproportionate manner relative to other participants in
the business and industries in which such Person operates; or (b) to prevent or materially impede, interfere with, hinder or delay
the consummation by the Person of the Transactions.
“
Merger
”
has the meaning set forth in
Section 2.01
.
“
Merger Consideration
”
has the meaning set forth in
Section 2.08(c)
.
“
Merger Sub
”
has the meaning set forth in the preamble.
“
NASDAQ
”
means the NASDAQ Stock Market LLC.
“
New Preferred
Stock
” means shares of preferred stock of Parent in accordance with the New Preferred Stock Term Sheet.
“
New Preferred
Stock Consideration
” means a number of shares of New Preferred Stock with an aggregate value equal to $3,000,000.
“
New Preferred
Stock Financing
” means the purchase and sale of shares of New Preferred Stock on the terms set forth on the New Preferred
Stock Term Sheet.
“
New Preferred
Stock Term Sheet
” means the term sheet setting forth the terms of the New Preferred Stock Financing in the form attached
hereto as
Exhibit B
.
“
OFAC Sanctioned
Person
” means any government, country, corporation or other entity, group or individual with whom or which the OFAC Sanctions
prohibit a U.S. Person from engaging in transactions, and includes without limitation any individual or corporation or other entity
that appears on the current OFAC list of Specially Designated Nationals and Blocked Persons.
“
OFAC Sanctions
”
means any sanctions program administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury (“
OFAC
”)
under authority delegated to the Secretary of the Treasury by the President of the United States.
“
Off-the-Shelf
Software
” means software that is generally commercially available for no more than a nominal fee and is mass marketed
and licensed pursuant to a standard form click-wrap or shrink-wrap agreement that is not subject to any negotiation and does not
include any handwritten signatures of the parties to such agreement.
“
Parent
”
has the meaning set forth in the preamble.
“
Parent Board
”
has the meaning set forth in the recitals.
“
Parent Change
of Recommendation
” has the meaning set forth in
Section 5.06(b)(ii)
.
“
Parent Common
Stock
” means each share of common stock of Parent, par value $0.01 per share.
“
Parent Contingent
Workers
” has the meaning set forth in
Section 4.20(c)
.
“
Parent Closing
Indebtedness
” means all Indebtedness of Parent except for (i) accounts payable to trade creditors and accrued expenses
in the ordinary course of business and (ii) the Parent Stockholder Indebtedness.
“
Parent Director
Designees
” has the meaning set forth in
Section 5.11(b)(i)
.
“
Parent Employees
”
has the meaning set forth in
Section 4.20(c)
.
“
Parent Financial
Statements
” has the meaning set forth in
Section 4.05(b)
.
“
Parent Intellectual
Property
” means Intellectual Property owned by or licensed to either Parent or a Parent Subsidiary.
“
Parent IP
Agreement
” has the meaning set forth in
Section 4.18(f)
.
“
Parent Leased
Real Property
” has the meaning set forth in
Section 4.02(a)
.
“
Parent Lookback
Date
” means June 30, 2012.
“
Parent Material
Adverse Effect
” means a Material Adverse Effect with respect to Parent and/or Merger Sub.
“
Parent Material
Contracts
” has the meaning set forth in
Section 4.17(a)
.
“
Parent Material
Licensed IP
” means all Parent Intellectual Property that is licensed to Parent, excluding (a) Off-the-Shelf Software
and software that is generally available for license on a mass market commercial basis pursuant to a standard form agreement that
is not subject to negotiation for annual fees that do not exceed $5,000, and (b) other software that is not material to the
conduct of the business of Parent and can be readily replaced with software that provides substantially the same features, functionalities
and overall performance.
“
Parent Notice
Period
” has the meaning set forth in
Section 5.06(b)(iii)
.
“
Parent Option
”
means any option to purchase one or more shares of Parent Common Stock.
“
Parent Permits
”
has the meaning set forth in
Section 4.09(b)
.
“
Parent Plan
”
has the meaning set forth in
Section 4.19(a)
.
“
Parent Products
”
any and all products or product candidates designed, developed, licensed, manufactured, sold, promoted, labeled or distributed
by, or on behalf of, Parent or any Parent Subsidiary, including, but not limited to, any proposed products which have previously
been or are currently under active pre-clinical or clinical development as of the date of this Agreement.
“
Parent Qualified
Bidder
” has the meaning set forth in
Section 5.06(b)(i)
.
“
Parent Required
Consents
” has the meaning set forth in
Section 5.07
.
“
Parent Securities
”
has the meaning set forth in
Section 4.02(a)
.
“
Parent Stock
”
means shares of Parent Common Stock and New Preferred Stock.
“
Parent Stock
Plan
” means the Transgenomic, Inc. 2006 Equity Incentive Plan.
“
Parent Stockholder
Indebtedness
” means the Indebtedness of Parent owed to the stockholders of Parent, in an aggregate amount not to exceed
$3 million, all of which will be converted into New Preferred Stock in connection with the closing of the Transaction.
“
Parent SEC
Documents
” has the meaning set forth in Section 4.05(a).
“
Parent Stockholder
Approval
” means the adoption of the Parent Stockholder Matters by the affirmative vote (in person or by proxy) of the
holders of a majority of the outstanding shares of Parent Common Stock entitled to vote at the Parent Stockholders Meeting.
“
Parent Stockholder
Matters
” has the meaning set forth in
Section 5.05(c)
.
“
Parent Stockholders
Meeting
” has the meaning set forth in
Section 5.05(c)
.
“
Parent Subsidiary
Securities
” has the meaning set forth in
Section 4.02(a)
.
A “
Parent
Triggering Event
” shall be deemed to have occurred if: (i) the Parent Board shall have failed to recommend that Parent’s
stockholders vote to approve the issuance of the Parent Common Stock in the Merger; (ii) Parent shall have failed to include in
the Proxy Statement a recommendation by the Parent Board to vote in favor of the Parent Stockholder Matters; (iii) a Parent
Change of Recommendation shall have occurred; or (iv) Parent shall have entered into any letter of intent or similar document or
any Contract relating to any Acquisition Proposal.
“
Patents
”
means all issued patents and pending patent applications in any country, including all provisionals, divisionals, continuations,
renewals, continuations-in-part, patents of addition, re-examination, supplementary protection certificates, extensions, registrations
or confirmation patents, restoration of patent terms, letters of patent, and reissues thereof.
“
Permitted
Encumbrances”
means (a) any Encumbrance that arises out of Taxes, assessments or other charges by any Governmental Entity
not yet due and payable or the amount or validity of which is being contested in good faith and by appropriate proceedings, with
appropriate reserves therefor established in the books and records of any Person in accordance with GAAP, (b) mechanics’,
materialmen’s, carriers’, workmen’s, warehouseman’s, repairmen’s, landlords’ and similar Encumbrances
granted or which arise in the ordinary course of business consistent with past practice and that do not interfere in any material
respect with the use of properties or assets encumbered thereby, (c) Encumbrances arising under or in connection with zoning, building
codes and other land use Laws regulating the use or occupancy of such real property or the activities conducted thereon which are
imposed by any Governmental Entity having jurisdiction over such real property, and (d) easements, rights-of-way, encroachments,
restrictions, covenants, conditions and other similar Encumbrances that (i) are disclosed in the public records, (ii) would be
set forth in a title policy, title report or survey with respect to the applicable real property or (iii) individually or in the
aggregate, (A) are not substantial in character, amount or extent in relation to the applicable real property and (B) do not materially
and adversely impact such Person’s current or contemplated use, utility or value of the applicable real property or otherwise
materially and adversely impair such Person’s present or contemplated business operations at such location.
“
Person
”
means any individual, partnership, firm, corporation, limited liability company, association, trust, estate, Governmental Entity,
unincorporated organization or other entity, as well as any syndicate or group that would be deemed to be a person under Section 13(d)(3)
of the Securities Exchange Act of 1934, as amended.
“
Preferred
Unit
” means an outstanding preferred unit of the Company immediately prior to the Effective Time.
“
Qualified
Plan
” has the meaning set forth in
Section 3.17(b)
.
“
Registrable
Securities
” means the Merger Shares and the shares of Parent Common Stock issued or issuable upon the conversion of the
shares of New Preferred Stock,
provided
that Registrable Securities will cease to be Registrable Securities as soon as (i)
a registration statement covering such Registrable Securities has been declared effective under the Securities Act by the SEC and
such Registrable Securities have been disposed of pursuant to such effective registration statement or (ii) the entire amount of
Registrable Securities proposed to be sold by a holder of such Registrable Securities, in the opinion of counsel satisfactory to
Parent and such holder, each in their reasonable judgment, may be distributed to the public without limitation as to volume or
manner of sale under Rule 144 under the Securities Act.
“
Registration
Statement
” has the meaning set forth in
Section 5.16(a)
.
“
Release
”
means disposing, discharging, injecting, spilling, leaking, leaching, dumping, emitting, escaping, emptying, seeping, placing and
the like into or upon any land or water or air or otherwise entering into the Environment.
“
Representatives
”
means, with respect to any Person, the advisors, attorneys, accountants, consultants, agents or other representatives (acting in
such capacity) retained by such Person or any of its controlled Affiliates, together with directors, officers and employees of
such Person and its Subsidiaries.
“
Response
Date
” has the meaning set forth in
Section 2.09(b)(ii)
.
“
Restricted
Nations
” means the Balkans, Belarus, Burma (Myanmar), Cote d’Ivoire (Ivory Coast), Cuba, Democratic Republic of
the Congo, Iran, Iraq, Lebanon, Liberia, Libya, North Korea, Somalia, Sudan, Syria, Ukraine/Russia, Venezuela, Yemen or Zimbabwe.
“
SEC
”
means the U.S. Securities and Exchange Commission.
“
Securities
Act
” means the Securities Act of 1933, as amended.
“
Sellers
”
means all of the holders of the Company Securities.
“
Subsidiary
”
when used with respect to any party, means any Person of which such party (or one or more Subsidiaries of such party) owns, directly
or indirectly, securities or other ownership interests representing (a) more than 50% of the equity or (b) sufficient voting power
to elect a majority of the board of directors or other Persons performing similar functions.
“
Superior
Proposal
” means an unsolicited
bona fide
Acquisition Proposal (with all references to “fifteen percent 15%”
in the definition of Acquisition Proposal being treated as references to “seventy-five percent 75%” for these purposes)
made by a third party that the Parent Board or Company Board, as applicable, determines in good faith, after consultation with
its outside legal counsel and financial advisor, and after taking into account all financial, legal, regulatory, and other aspects
of such Acquisition Proposal (including the financing terms and the ability of such third party to finance such Acquisition Proposal),
(1) is more favorable from a financial point of view to its stockholders or members, as applicable, than as provided hereunder
(including any changes to the terms of this Agreement proposed by the other party in response to such Superior Proposal pursuant
to and in accordance with
Section 5.06(a)(iii)
or
Section 5.06(b)(iii)
, as applicable, or otherwise), and
(2) is reasonably capable of being completed on the terms proposed without unreasonable delay.
“
Surviving
Entity
” has the meaning set forth in
Section 2.01
.
“
Taxes
”
means any and all taxes or other charges in the nature of a tax including taxes or other charges on or with respect to income,
franchises, windfall or other profits, gross receipts, property, sales, use, capital stock, payroll, employment, social security,
workers’ compensation, unemployment compensation, or net worth; taxes or other charges in the nature of excise, withholding,
ad valorem, stamp, transfer, value added, or gains taxes; license, registration and documentation fees; and customs’ duties,
tariffs, and similar charges (together with any and all interest, penalties, additions to tax and additional amounts imposed with
respect thereto) imposed by any Governmental Entity.
“
Tax Return
”
means any return, declaration, report, election, claim for refund or information return or other statement or form relating to
Taxes filed or required to be filed with any Taxing Authority, including any schedule or attachment thereto or any amendment thereof.
“
Taxing Authority
”
means any domestic, foreign, federal, national, provincial, state, county or municipal or other local government or court, any
subdivision, agency, commission or authority thereof, or any quasi-governmental body exercising regulatory authority over or with
respect to any Taxes.
“
Termination
Date
” has the meaning set forth in
Section 7.01(b)
.
“
Transactions
”
refers collectively to this Agreement and the transactions contemplated hereby, including the Merger.
“
Treasury
Regulations
” means the regulations promulgated under the Code by the United States Department of the Treasury.
“
WARN Act
”
has the meaning set forth in
Section 3.18(b)
.
“
Working Capital
Calculation
” has the meaning set forth in
Section 2.09(b)(i)
.
“
Working Capital
Schedule
” has the meaning set forth in
Section 2.09(b)(i)
.
Article II
THE MERGER
Section 2.01
Merger
.
Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the DGCL and DLLCA, Merger Sub
shall be merged with and into the Company (the “
Merger
”) at the Effective Time. Following the Effective Time,
the separate existence of Merger Sub shall cease and the Company shall continue as the surviving entity of the Merger (the “
Surviving
Entity
”) and shall succeed to and assume all the rights and obligations of Merger Sub in accordance with the DGCL and
DLLCA.
Section 2.02
Closing
of the Merger
. The closing of the Merger (the “
Closing
”) shall take place remotely via the exchange of final
documents and signature pages thereto, at 10:00 a.m., ET, as promptly as practicable (but in no event later than the date that
is the second Business Day after the satisfaction or waiver (to the extent permitted by applicable Law) of the conditions set forth
in
Article VII
(other than those conditions that by their nature are to be satisfied by action taken at the Closing,
but subject to the satisfaction or waiver of such conditions)), or at such other place, date and time as the Company and Parent
may agree in writing (such date, the “
Closing Date
”).
Section 2.03
Effective
Time
. On the Closing Date, the Company and Merger Sub shall file a certificate of merger (the “
Certificate of Merger
”)
executed in accordance with, and containing such information as is required by, the relevant provisions of the DGCL and DLLCA with
the Secretary of State of the State of Delaware. The Merger shall become effective at the time that the Certificate of Merger is
duly filed with the Secretary of State of the State of Delaware or at such later date and time as is agreed by the parties hereto
and specified in the Certificate of Merger in accordance with the relevant provisions of the DGCL and DLLCA (such date and time
the Merger becomes effective being referred to herein as the “
Effective Time
”).
Section 2.04
Effects
of the Merger
. The Merger shall have the effects set forth in this Agreement, the Certificate of Merger and the applicable
provisions of the DGCL and the DLLCA. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time,
all of the property, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Entity,
and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving
Entity, all as provided under the DGCL and DLLCA.
Section 2.05
Certificate
of Formation; Limited Liability Company Agreement
. At the Effective Time, the Company’s Certificate of Formation and
the Company’s Limited Liability Company Agreement, as in effect immediately prior to the Effective Time, shall be the certificate
of formation and limited liability company agreement of the Surviving Entity until thereafter amended as provided therein or by
applicable Law.
Section 2.06
Managers
.
The managers of the Company immediately prior to the Effective Time shall, at the Effective Time, be the managers of the Surviving
Entity, each to hold office in accordance with the certificate of formation and limited liability company agreement of the Surviving
Entity until such manager’s successor is duly elected or appointed and qualified.
Section 2.07
Officers
.
The officers of the Company immediately prior to the Effective Time shall, at the Effective Time, be the officers of the Surviving
Entity, each to hold office in accordance with the certificate of formation and limited liability company agreement of the Surviving
Entity until such officer’s successor is duly elected or appointed and qualified.
Section 2.08
Effect
on Equity Securities
. At the Effective Time, by virtue of the Merger and without any further action on the part of the Company,
Merger Sub or the holders of any securities of the Company or Merger Sub:
(a)
Conversion
of Merger Sub Shares
. Each share of common stock, par value $0.001 per share, of Merger Sub issued and outstanding immediately
prior to the Effective Time shall be converted into one validly issued, fully paid and nonassessable membership interest of the
Surviving Entity and shall constitute the only outstanding equity securities of the Surviving Entity. From and after the Effective
Time, all certificates representing the common stock of Merger Sub shall be deemed for all purposes to represent the number of
membership interests of the Surviving Entity into which they were converted in accordance with the immediately preceding sentence.
(b)
Conversion
of Preferred Units into Preferred Stock
. Subject to
Section 2.11(e)
, each Preferred Unit issued and outstanding
immediately prior to the Effective Time, shall at the Effective Time automatically be converted into the right to receive a number
of shares of New Preferred Stock such that the aggregate amount of New Preferred Stock exchanged for the Preferred Units shall
equal the New Preferred Stock Consideration. The number of shares of New Preferred Stock shall be aggregated for each holder of
Preferred Units, such that the payment for any fractional shares in accordance with
Section 2.11(e)
shall only be made
after aggregating the number of shares of New Preferred Stock to which each holder of Preferred Units is entitled pursuant to this
Section 2.08(b)
. From and after the Effective Time, the holders of Preferred Units outstanding immediately prior to
the Effective Time shall cease to have any rights with respect to such Preferred Units, except as otherwise provided for herein
or under applicable Law
(c)
Conversion
of Company Units
. Subject to
Section 2.11(e)
, each Company Unit issued and outstanding immediately prior to the
Effective Time, shall at the Effective Time automatically be converted into the right to receive a number of validly issued, fully
paid and nonassessable Merger Shares equal to such Company Unit multiplied by the Exchange Ratio (the “
Company Unit Consideration
”,
together with the New Preferred Stock Consideration, the “
Merger Consideration
”). The number of Merger Shares
shall be aggregated for each holder of Company Units, such that the payment for any fractional shares in accordance with
Section 2.11(e)
shall only be made after aggregating the number of Merger Shares to which each holder of Company Units is entitled pursuant to
this
Section 2.08(c)
. From and after the Effective Time, the holders of Company Units outstanding immediately prior
to the Effective Time shall cease to have any rights with respect to such Company Units, except as otherwise provided for herein
or under applicable Law.
Section 2.09
Determination
of Exchange Ratio
.
(a)
Definitions
.
(i) “
Company
Percentage
” means sixty-two percent (62%) (i)
plus
the Working Capital Adjustment and (ii)
minus
the Parent
Customer Acquisition Adjustment (if any).
(ii) “
Company
Working Capital Deficit
” means the difference, which may be a positive or negative number, of the Maximum Company WC
Deficit
minus
the aggregate amount of all Liabilities of the Company as of immediately prior to the Effective Time.
(iii)
“
Company Working Capital Adjustment
” means the quotient obtained by
dividing
(x) the Company Working
Capital Deficit by (y) the WC Increment.
(iv)
“
Determination Date
” will be the date that is seven (7) Business Days prior to the Parent Stockholder Meeting.
(v) “
Maximum
Company WC Deficit
” means one million eight hundred thousand dollars ($3,200,000).
(vi) “
Maximum
Parent WC Deficit
” means six million dollars ($6,000,000).
(vii) “
Merger
Shares
” means the total number of shares of Parent Common Stock to be issued in the Merger pursuant to
Section 2.08(c)
,
equal to (A) the quotient obtained by dividing (1) the Outstanding Parent Capital Stock by (2) 1
minus
the Company Percentage
less
(B) the Outstanding Parent Capital Stock.
(viii) “
Outstanding
Parent Capital Stock
” means the total number of outstanding shares of capital stock of Parent, on a fully diluted basis,
immediately prior to the Effective Time, taking into account the reverse stock split which shall occur prior to the Effective Time,
and assuming the conversion of and/or exercise of all options, warrants or other convertible securities, but excluding the issuance
of the New Preferred Stock, determined as set forth on
Schedule I
.
(ix) “
Qualified
Customer Agreement
” means (x) a written agreement entered into by a customer of Parent for the ICE Cold PCR Product,
which contractually provides for annual recurring revenue to Parent of at least $250,000 for each of the next three (3) calendar
years following the date of such agreement or (y) a customer’s integration or acceptance of the ICP technology into such
customer’s laboratory processes which the parties hereto reasonably agree is likely to provide annual recurring revenue to
Parent of at least $250,000 for the next three (3) calendar years.
(x) “
Parent
Customer Acquisition Adjustment
” means an amount, which shall be no greater than two percent (2%), equal to one percent
(1%) for each Qualified Customer Agreement closed by Parent prior to the Effective Time.
(xi)
“
Parent Working Capital Deficit
” means the difference, which may be a positive or negative number, of the Maximum
Parent WC Deficit
plus
(i) $50,000
minus
(ii) the aggregate amount of all Liabilities of Parent and the Parent Subsidiaries,
on a consolidated basis, other than the common stock warrant liabilities of Parent, as of immediately prior to the Effective Time.
(xii) “
Parent
Working Capital Adjustment
” means the quotient obtained by
dividing
(x) the Parent Working Capital Deficit by
(y) the WC Increment.
(xiii) “
WC
Increment
” means four hundred thousand dollars ($400,000).
(xiv) “
Working
Capital Adjustment
” means (x)(1) the Company Working Capital Adjustment
minus
(2) the Parent Working Capital Adjustment
divided
by (y) one hundred (100).
(b)
Determination
of Working Capital Deficit
.
(i) Within
one (1) Business Day following the Determination Date, (A) Parent will deliver to the Company a schedule (a “
Working
Capital Schedule
”) setting forth, in reasonable detail, Parent’s calculation of (I) the Parent Working Capital
Deficit (as determined in accordance with the definitions set forth above) and (II) the Parent Customer Acquisition Adjustment
and (B) the Company will deliver to Parent a Working Capital Schedule setting forth, in reasonable detail, the Company’s
calculation of the Company Working Capital Deficit (as determined in accordance with the definitions set forth above, the calculations
in
clause (A)
and
(B)
, each a “
Working Capital Calculation
”), in each case, as of as of such Determination
Date prepared by the Chief Financial Officer of the party delivering such calculation, together with the work papers and back-up
materials used in preparing the applicable Working Capital Schedule.
(ii) Within
two (2) Business Days after the delivery of a Working Capital Schedule (the “
Response Date
”), the receiving
party will have the right to dispute any part of such Working Capital Schedule by delivering a written notice to that effect to
the other party (a “
Dispute Notice
”). Any Dispute Notice will identify in reasonable detail the nature of any
proposed revisions to such Working Capital Calculation and will be accompanied by reasonably detailed materials supporting the
basis for such proposed revisions.
(iii)
If on or prior to the Response Date, (A) a receiving party notifies the other party in writing that it has no objections to
a Working Capital Calculation set forth in the Working Capital Schedule or (ii) a receiving party fails to deliver a Dispute
Notice as set forth above, then the Working Capital Calculation as set forth in such Working Capital Schedule will be deemed to
have been finally determined for purposes of this Agreement and to represent the Parent Working Capital Deficit or Company Working
Capital Deficit, as applicable, at the Determination Date for purposes of this Agreement, except in the case of intentional or
willful misrepresentation.
(iv) If
a receiving party delivers a Dispute Notice on or prior to the Response Date as provided above, then representatives of the Company
and Parent will promptly meet and attempt in good faith to promptly resolve the disputed item(s) and negotiate an agreed-upon
determination of such Working Capital Deficit within two (2) Business Days after the Response Date, which agreed upon Working
Capital Deficit amount will be deemed to have been finally determined for purposes of this Agreement and to represent the Parent
Working Capital Deficit or Company Working Capital Deficit, as applicable, at the Determination Date for purposes of this Agreement.
(v) In
the event no agreement is reached within two (2) Business Days after the Response Date and the disagreements would result
in at least a four hundred thousand dollar ($400,000) adjustment to the Working Capital Adjustment or a party reasonably believes
a Working Capital Deficit is greater than the applicable Maximum Working Capital Deficit, then the Parties agree to postpone the
Parent Stockholder Meeting to a date mutually agreed upon so that such disagreement can be resolved in accordance with the terms
of
clause (vi)
below.
(vi) If
the Company and Parent are unable to resolve any disagreement between them concerning a Working Capital Calculation or any component
thereof (the “
Dispute
”) within two (2) Business Days, then the Dispute may be referred by the Company or
Parent for determination to the Accounting Firm. Each of the Company and Parent will provide the Accounting Firm and the
other party with a statement of its position as to the amount for each Dispute within five (5) Business Days from the date
of the referral. The Accounting Firm will make a written determination as promptly as practicable, but in any event within
fifteen (15) calendar days after the date on which the Dispute is referred to the Accounting Firm, by determining the actual Working
Capital Deficit and the applicable Exchange Ratio. If at any time the Company and Parent resolve their dispute, then notwithstanding
the preceding provisions of this
clause (vi)
, the Accounting Firm’s involvement promptly will be discontinued and
the Working Capital Calculation will be revised, if necessary, to reflect such resolution and thereupon will be final and binding
for all purposes under this Agreement, except in the case of intentional or willful misrepresentation or manifest error.
The Parties will make readily available to the Accounting Firm all relevant books and records relating to the Working Capital Calculation
and the calculation set forth in the applicable Working Capital Schedule and all other items reasonably requested by the Accounting
Firm in connection with resolving the Dispute. The costs and expenses of the Accounting Firm will be borne 50% by the Company
and 50% by Parent.
Section 2.10
Adjustment
of Merger Consideration
.
The Merger Consideration shall be appropriately adjusted to reflect
the effect of any stock split, reverse stock split, stock dividend (including any dividend or distribution of securities convertible
into Parent Common Stock), reorganization, recapitalization, reclassification or other like change with respect to Parent Stock
occurring on or after the date hereof and prior to the Effective Time to the extent not otherwise contemplated by this Agreement.
Section 2.11
Exchange
Agent Matters
.
(a)
Exchange
Agent
. Prior to the Effective Time, Parent and the Company shall agree upon and appoint a bank or trust company
to act as exchange agent (the “
Exchange Agent
”) for the payment of the Merger Consideration. At or
prior to the Effective Time, Parent shall deposit on behalf of Merger Sub, or shall cause Merger Sub to deposit, with the Exchange
Agent, for the benefit of the holders of Company Securities, for exchange in accordance with this
Section 2.11
through
the Exchange Agent, certificates representing the shares of Parent Stock to be issued as Merger Consideration and cash sufficient
to make payments in lieu of fractional shares pursuant to
Section 2.11(e)
. All such Parent Stock and cash deposited
with the Exchange Agent is hereinafter referred to as the “
Exchange Fund
”. As promptly as practicable
after the Effective Time, and in any event not later than the third Business Day thereafter, Parent shall cause the Exchange Agent
to mail to each holder of record of Company Securities a letter of transmittal in a form mutually agreed between the Company and
Parent (the “
Letter of Transmittal
”).
(b)
Merger
Consideration Received in Connection with Exchange
. Upon the receipt of the Letter of Transmittal, duly, completely
and validly executed in accordance with the instructions thereto, the holder of such Company Securities shall be entitled to receive
in exchange therefor (x) the Merger Consideration into which the Company Securities have been converted pursuant to
Section 2.08
and (y) any cash in lieu of fractional units that the holder has the right to receive pursuant to
Section 2.11(e)
and
in respect of any dividends or other distributions that the holder has the right to receive pursuant to
Section 2.11(c)
. In
the event of a transfer of ownership of Company Securities that is not registered in the transfer records of the Company, a certificate
representing the proper number of shares of Parent Stock pursuant to
Section 2.08
and cash in lieu of fractional shares
that the holder has the right to receive pursuant to
Section 2.11(e)
and in respect of any dividends or other distributions
that the holder has the right to receive pursuant to
Section 2.11(c)
may be issued to a transferee if proper evidence
of such transfer is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer
and by evidence that any applicable stock transfer Taxes have been paid. Until receipt by the Exchange Agent of the
Letter of Transmittal, each Company Unit shall be deemed at any time after the Effective Time to represent only the right to receive
upon such surrender the Merger Consideration that the holders of such Company Securities were entitled to receive in respect of
such shares pursuant to
Section 2.08
(and cash in lieu of fractional securities pursuant to
Section 2.11(e)
and in respect of any dividends or other distributions pursuant to
Section 2.11(c))
.
(c)
Treatment
of Unexchanged Company Units
. No dividends or other distributions declared or made with respect to Parent Stock
with a record date after the Effective Time shall be paid to the holder of any Company Securities for which a proper Letter of
Transmittal has not been submitted with respect to the shares of Parent Stock, as applicable, issuable upon submission thereof,
and no cash payment in lieu of fractional units shall be paid to any such holder pursuant to
Section 2.11(e)
, until
the submission of such Letter of Transmittal in accordance with this
Section 2.11
. Subject to escheat, Tax
or other applicable Law, following the exchange of any such Company Units, there shall be paid to the holder of the certificate
representing whole shares of Parent Stock issued in exchange therefor, without interest, (i) at the time of such surrender,
the amount of any cash payable in lieu of a fractional share of Parent Stock to which such holder is entitled pursuant to
Section 2.11(e)
and the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to
such whole shares of Parent Stock and (ii) at the appropriate payment date, the amount of dividends or other distributions
with a record date after the Effective Time but prior to such surrender and a payment date subsequent to such surrender payable
with respect to such whole shares of Parent Stock.
(d)
No
Further Ownership Rights in Company Securities
. The shares of Parent Stock issued and cash paid in accordance with
the terms of this
Section 2.11
upon conversion of any Company Securities (including any cash paid pursuant to
Section 2.11(e)
)
shall be deemed to have been issued and paid in full satisfaction of all rights pertaining to such Company Securities. From
and after the Effective Time, there shall be no further registration of transfers on the transfer books of the Surviving Entity
of Company Securities that were outstanding immediately prior to the Effective Time.
(e)
No
Fractional Shares
. No certificates or scrip representing fractional shares of Parent Stock shall be issued upon
the conversion of Company Securities pursuant to
Section 2.08
, and such fractional share interests shall not entitle
the owner thereof to vote or to any rights of a holder of Parent Stock. Notwithstanding any other provision of this
Agreement, each holder of Company Securities converted pursuant to the Merger who would otherwise have been entitled to receive
a fraction of a share of Parent Stock (after taking into account all Company Securities exchanged by such holder) shall receive,
in lieu thereof, cash (without interest) in an amount equal to such fractional amount multiplied by the average of the volume weighted
average price per share of Parent Stock on NASDAQ (as reported by Bloomberg L.P. or, if not reported therein, in another authoritative
source mutually selected by Parent and the Company) on each of the 10 consecutive trading days ending with the second complete
trading day prior to the date of the Effective Time, weighted by the total volume of trading in Parent Common Stock on each such
trading day. The payment of cash in lieu of fractional share interests pursuant to this
Section 2.11(e)
is not a separately bargained-for consideration.
(f)
Termination
of Exchange Fund
. Any portion of the Exchange Fund that remains undistributed to the holders of Company Securities
for 360 days after the Effective Time shall be delivered to the Surviving Entity, upon demand, and any holder of Company Securities
who has not theretofore complied with this
Section 2.11
shall thereafter look only to Parent for payment of its claim
for Merger Consideration, any cash in lieu of fractional shares and any dividends and distributions to which such holder is entitled
pursuant to this
Section 2.11
.
(g)
No
Liability
. None of the Company, Parent, Merger Sub or the Exchange Agent shall be liable to any Person in respect
of any portion of the Exchange Fund delivered to a public official pursuant to any applicable abandoned property, escheat or similar
Law. Any portion of the Exchange Fund that remains undistributed to the holders of Company Units for two years after
the Effective Time (or immediately prior to such earlier date on which the Exchange Fund would otherwise escheat to, or become
the property of, any Governmental Entity) shall, to the extent permitted by applicable Law, become the property of the Surviving
Entity, free and clear of all claims or interest of any Person previously entitled thereto.
(h)
Investment
of Exchange Fund
. The Exchange Agent shall invest any cash in the Exchange Fund as directed by Parent. Any
interest and other income resulting from such investments shall be paid to the Surviving Entity.
Section 2.12
Additional
Actions
.
If, at any time after the Effective Time, the Surviving Entity shall consider
or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things are reasonably necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving Entity its right, title or interest in, to or under
any of the rights, properties or assets of Merger Sub or the Company or otherwise to carry out this Agreement, the officers of
the Surviving Entity shall be authorized to execute and deliver, in the name and on behalf of Merger Sub or the Company, all such
deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of Merger Sub or the Company, all
such other actions and things as may be reasonably necessary or desirable to vest, perfect or confirm any and all right, title
and interest in, to and under such rights, properties or assets in the Surviving Entity or otherwise to carry out this Agreement.
Section 2.13
Income
Tax Treatment
.
It is intended by the parties to this Agreement that the Merger constitute
a “reorganization” within the meaning of Section 368(a) of the Code (the “
Intended Tax Treatment
”).
Each of the parties hereto adopts this Agreement as a “plan of reorganization” within the meaning of Treasury Regulations
Sections 1.368-2(g) and 1.368-3(a). Unless the parties agree that the Merger does not qualify for the Intended Tax Treatment,
all of the parties hereto agree to (i) file all Tax Returns on the basis of treating the Merger as a “reorganization”
within the meaning of Section 368(a) of the Code, (ii) otherwise report the Merger for federal, state and local income Tax purposes
in a manner consistent with such characterization and (iii) not take a reporting position that is inconsistent with such characterization.
If the parties agree that the Merger does not qualify for the Intended Tax Treatment, but that the Merger, taken together with
any contemporaneous contributions of cash and debt to Parent constitutes a tax-deferred transaction under Section 351 of the Code,
then all of the parties hereto agree to (i) file all Tax Returns on the basis of treating the Merger as a Section 351 tax-deferred
contribution, (ii) otherwise report the Merger for federal, state and local income Tax purposes in a manner consistent with such
characterization and (iii) not take a reporting position that is inconsistent with such characterization.
Article III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in
the Company Disclosure Schedule, (it being understood and agreed that information disclosed in any section of the Company Disclosure
Schedule shall be deemed to be disclosed with respect to any representation or warrant in any other section of the Company Disclosure
Schedule only to the extent that (a) cross references to other sections are set forth in the Company Disclosure Schedule or (b)
its relevance to such representation and warranty in such other section is reasonably and readily apparent solely from the text
of such disclosure made without review of any referenced material), the Company hereby represents and warrants to Parent and Merger
Sub that the statements contained in this
Article III
are true, correct and complete as of the date of this Agreement,
as follows:
Section 3.01
Organization,
Authority and Qualification
.
(a) The
Company is a limited liability company duly organized, validly existing and in good standing under the Laws of the State of Delaware
and has all requisite limited liability company power and authority necessary to own or lease and operate all of its properties
and assets and to carry on its business as it is being conducted. The Company is duly qualified or licensed to do business and
is in good standing in each jurisdiction in which the nature of the business conducted by it or the character or location of the
properties and assets owned, leased or operated by it makes such qualification necessary, except where the failure to be so qualified,
licensed or in good standing does not currently have, and would not reasonably be expected to have, individually or in the aggregate,
a Company Material Adverse Effect.
(b) The
Company Board, by resolutions duly adopted by unanimous vote at a meeting of all members of the Company Board duly called and held
has (i) determined that this Agreement and the Transactions, including the Merger, are in the best interests of, the holders of
the Company Units, (ii) approved and declared advisable the Transactions, including the Merger, in accordance with the DLLCA, (iii)
directed that this Agreement and the Transactions, including the Merger, be submitted to the members of the Company for adoption,
and (iv) resolved to recommend that the holders of the Company Units adopt this Agreement and the Transactions, including the Merger,
and directed that such matter be submitted for consideration of the holders of the Company Units either by written consent or at
a meeting of the members of the Company.
(c) The
only votes of the holders of any class or series of membership interests of the Company necessary to adopt this Agreement is the
Company Member Approval.
(d) The
Company does not have, nor has it had since the Company Lookback Date, any Subsidiaries.
Section 3.02
Capitalization
.
(a) The
capitalization of the Company as of the date of this Agreement and, after giving effect to the Company Unit Recapitalization, as
of immediately prior to the Effective Time is set forth on
Section 3.02(a)(i)
of the Company Disclosure Schedule. Except
as disclosed on
Section 3.02(a)(ii)
of the Company Disclosure Schedule, there are no authorized or outstanding (a)
Company Units, equity interests or other securities of the Company, (b) securities of the Company convertible into, exchangeable
or exercisable for Company Units, equity interests, or other securities of the Company, (c) subscription, calls, commitments, Contracts,
options, warrants, or other rights to purchase or acquire from the Company, or obligations of the Company to issue, any Company
Units, equity interests, or other securities, including securities convertible into, exchangeable or exercisable for shares of
capital stock, equity interests, or other securities of the Company, or (d) bonds, debentures, notes, or other indebtedness held
by members of the Company as of immediately prior to the Effective Time (the items in
clauses (a)
,
(b)
,
(c)
and
(d)
being referred to collectively as the “
Company Securities
”). There are no outstanding obligations
of the Company to repurchase, redeem, or otherwise acquire the Company Securities. The Company Units are duly authorized and validly
issued. The Company Units are uncertificated.
(b)
Section 3.02(b)
of the Company Disclosure Schedule sets forth an accurate and complete list of the holders of all Company Securities and the type
and number of Company Securities owned by each such holder.
(c) The
Company does not own, directly or indirectly, any capital stock or other voting securities of, or ownership interests in, any Person.
Section 3.03
Books
and Records
.
The minute books of the Company contain, in all material respects, accurate
records of all meetings and accurately reflect, in all material respects, all other actions taken by the members, the board of
managers and all committees of the Company Board.
Section 3.04
Authority
and Noncontravention
.
(a) The
Company has all necessary limited liability company power and authority to execute and deliver this Agreement and, subject to obtaining
the Company Member Approval, to perform its obligations hereunder and the Transactions. The execution and delivery of and performance
by the Company under this Agreement and the Transactions have been duly authorized and approved by the Company Board, and except
for obtaining the Company Member Approval, no other limited liability company action on the part of the Company is necessary to
authorize the execution and delivery of and performance by the Company under this Agreement and the consummation by it of the Transactions.
This Agreement has been duly executed and delivered by the Company and, assuming due authorization, execution and delivery hereof
by the other parties hereto, constitutes a legal, valid and binding obligation of the Company, enforceable against the Company
in accordance with its terms, except that such enforceability (i) may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and other similar laws of general application affecting or relating to the enforcement of creditors’
rights generally and (ii) is subject to general principles of equity, whether considered in a proceeding at law or in equity (the
“
Bankruptcy and Equity Exception
”).
(b) Neither
the execution and delivery of this Agreement by the Company, nor the consummation by the Company of the Transactions, nor compliance
by the Company with any of the terms or provisions hereof, will (i) assuming the Company Member Approval is obtained, conflict
with or violate any provision of the Governing Documents of the Company, (ii) assuming that each of the consents, authorizations
and approvals referred to in
Section 3.05
and the Company Member Approval are obtained (and any condition precedent
to any such consent, authorization or approval has been satisfied) and each of the filings referred to in
Section 3.05
are made and any applicable waiting periods referred to therein have expired, violate any Law or Judgment applicable to the Company
or (iii) require any consent or other action by any Person under, result in any violation or breach of, result in the loss of a
benefit under, conflict with any provision of, or constitute a default (with or without notice or lapse of time, or both) under,
or give rise to any right of termination, amendment, acceleration or cancellation of, any of the terms, conditions or provisions
of any Company Permit or any Contract to which the Company is a party, or result in the creation of an Encumbrance, other than
any Permitted Encumbrance, upon any of the properties or assets of the Company.
Section 3.05
Governmental
Consents and Approvals
.
Except for (a) the filing of the Certificate of Merger with the
Secretary of State of the State of Delaware pursuant to the DGCL and DLLCA and (b) the notices, consents and approvals set forth
on
Section 3.05
of the Company Disclosure Schedules, no consents or approvals of, or filings, declarations or registrations
with, any Governmental Entity are necessary for the execution and delivery of this Agreement by the Company and the consummation
by the Company of the Transactions, other than as do not currently have, and would not reasonably be expected to have, individually
or in the aggregate, a Company Material Adverse Effect
Section 3.06
Financial
Information; Books and Records
.
The
Company has provided Parent with true, correct and complete copies of (a) the audited balance sheet of the Company for the fiscal
year ended December 31, 2015, and the related income statement for the period then ended (the “
2015 Financial Statements
”),
(b) the audited balance sheet of the Company for the fiscal year ended December 31, 2014, and the related income statement for
the period then ended (the “
2014 Financial Statements
”), (c) the audited balance sheet of the Company for the
fiscal year ended December 31, 2013, and the related income statement for the period then ended (the “
2013 Financial
Statements
”) and (d) the unaudited balance sheet of the Company as of June 30, 2016 (the “
Balance Sheet Date
”),
and the related income statement for the six-month period then ended (the “
Interim Financial Statements
”, together
with the 2015 Financial Statements, 2014 Financial Statements and 2013 Financial Statements, the “
Company Financial Statements
”).
The Company Financial Statements (i) were prepared in accordance with the books of account and other financial records of
the Company, (ii) present fairly the financial condition, results of operations and cash flows of the Company as of the date
thereof and for the periods covered thereby (subject to the absence of footnotes and normal year-end adjustments), and (iii) have
been prepared in accordance with GAAP. The Company Financial Statements include all adjustments (consisting only of normal recurring
accruals) that are necessary for a fair presentation of the financial condition of the Company and the results of the operations
of the Company as of the date thereof and for the period covered thereby.
(b) The
Company maintains internal controls that are customary and adequate for a private company at the same stage of development as the
Company that provide reasonable assurance that (i) records are maintained in reasonable detail and accurately and fairly reflect
the transactions and dispositions of the Company’s assets, (ii) transactions are executed with management’s authorization
and (iii) transactions are recorded as necessary to permit preparation of the Company Financial Statements and to maintain accountability
for the Company’s assets.
Section 3.07
Absence
of Undisclosed Liabilities
.
There are no material Liabilities of the Company, other than
Liabilities (a) reflected or reserved against on the Company Financial Statements, or (b) set forth in
Section 3.07
of the Company Disclosure Schedule. As of the date of this Agreement, the Company does not have any material Indebtedness
for borrowed money.
Section 3.08
Conduct
in the Ordinary Course; Absence of Certain Changes, Events and Conditions
.
Since December
31, 2015, the Company has conducted its operations in the ordinary course and consistent with past practice and there has not
been or occurred (a) any condition, change, event, occurrence or effect that has, or would reasonably be expected to have, individually
or in the aggregate, a Company Material Adverse Effect, or (b) any condition, action, event, occurrence or effect that, if taken
during the period from the date of this Agreement through the Effective Time without Parent’s consent, would constitute
a breach of
Section 5.01(a)
.
Section 3.09
Legal
Proceedings
.
As of the date hereof, there is no pending or, to the Knowledge of the Company,
threatened, legal, administrative or arbitral proceeding, claim, suit, arbitration, mediation, demand, or action (a “
Legal
Proceeding
”) against or, to the Knowledge of the Company, any investigation, informal inquiry or request for documents
specifically relating to, the Company or any of the assets or operations of the Company or, to the Knowledge of the Company, any
of its present or former managers, officer or employees (in each case, in their capacity as such), nor is there any Judgment imposed
or binding upon the Company, in each case, by or before any Governmental Entity or arbitrator, that has or would reasonably be
expected to have, individually or in the aggregate, a Company Material Adverse Effect or that in any manner seeks to prevent,
enjoin, alter or materially delay the Transactions. There are no material internal investigations or internal inquiries that,
since the Company Lookback Date, have been conducted by or at the direction of the Company Board (or any committee thereof) concerning
any financial, accounting or other misfeasance or malfeasance issues.
Section 3.10
Compliance
with Laws
.
(a) The
Company is, and since the Company Lookback Date has been, in compliance in all material respects with all Laws applicable to the
Company, any of its properties or other assets or any of its businesses or operations (other than Environmental Laws which are
governed exclusively by
Section 3.11
and Health Care Laws which are governed exclusively by
Section 3.12
).
(b) The
Company holds, and is in compliance with, in all material respects all licenses, franchises, permits, certificates, approvals,
orders and authorizations from Governmental Entities required by Law for the conduct of its business as it is now being conducted
(collectively, “
Company Permits
”). All such Company Permits are in full force and effect and, since the Company
Lookback Date, the Company has not received written notice to the effect that a Governmental Entity was considering the amendment,
termination, revocation or cancellation of any Company Permit, which amendment, termination, revocation or cancellation would reasonably
be expected to have, individually or in the aggregate, a Company Material Adverse Effect. The execution and delivery of this Agreement
and the consummation of the Transactions will not cause the revocation or cancellation of any Company Permit, the revocation or
cancellation of which would have a Company Material Adverse Effect.
(c) Since
the Company Lookback Date, the Company has not (i) received any written notice from any Governmental Entity regarding any material
violation by the Company of any Law or Company Permit, except for notices of violations that have been cured, and notices that
have been withdrawn or are no longer pending or (ii) filed with or otherwise provided to any Governmental Entity any written notice
regarding any material violation by the Company of any Law or Company Permit, except for notices of violations that have been cured,
or notices that have been withdrawn or are no longer pending.
(d) Since
the Company Lookback Date, neither the Company nor, to the Knowledge of the Company, any of its managers, members, officers, agents
or employees have: (i) used any funds for unlawful contributions, gifts or entertainment, or for other unlawful expenses, related
to political activity; (ii) made any unlawful payment to foreign or domestic government officials or employees or to foreign or
domestic political parties or campaigns; (iii) violated any provision of the Foreign Corrupt Practices Act of 1977 or (iv) engaged
in any business or effected any transactions with any Person (A) located in a Restricted Nation; (B) that is owned, controlled
by or acting on behalf of an individual, business or organization in of a Restricted Nation; (C) that is a government of a Restricted
Nation; (D) that is owned, controlled by or acting on behalf of a government of a Restricted Nation; or (E) that is an OFAC Sanctioned
Person. None of (1) the execution, delivery and performance of this Agreement or (2) the consummation of the Transactions, will
result in a violation by the Company of any of the OFAC Sanctions or of any anti-money laundering laws of the United States or
any other applicable jurisdiction.
Section 3.11
Environmental
Matters
.
(a) The Company is, and since the Company Lookback Date, has been in compliance
in all material respects with all applicable Environmental Laws, which compliance includes obtaining, maintaining and complying
with all Company Permits required under Environmental Laws for the operation of its business; (b) there is no enforcement
proceeding or Legal Proceeding relating to or arising from any noncompliance with, or Liability under, Environmental Laws (including,
without limitation, relating to or arising from the Release or threatened Release of, or exposure of any Person to, any Hazardous
Materials) that is pending or, to the Knowledge of the Company, threatened against the Company relating to any real property owned,
operated or leased by the Company; (c) since the Company Date, the Company has not received any written notice of, or entered
into, any Judgment involving uncompleted, outstanding or unresolved Liabilities or corrective or remedial obligations relating
to or arising under Environmental Laws (including, without limitation, relating to or arising from the Release or threatened Release
of, or exposure of any Person to, any Hazardous Materials); (d) there has been no Release of Hazardous Materials with respect
to the business or assets of the Company or any real property currently or formerly owned, operated or leased by the Company;
(e) the Company has never owned or operated active or abandoned aboveground or underground storage tanks; (f) the Company has
not retained or assumed, by contract or operation of Law, any liabilities or obligations of third parties under Environmental
Law; and (g) neither the execution of this Agreement by the Company nor the consummation of the Transactions will require any
investigation, remediation or other action with respect to Hazardous Materials, or any notice to or consent of Governmental Entities,
pursuant to any applicable Environmental Law. This
Section 3.11
constitutes the sole and exclusive representation
and warranty of the Company regarding environmental, health and safety matters, including, without limitation, all matters arising
under Environmental Laws.
Section 3.12
Regulatory
Matters
.
(a) The
Company has not, nor to the Knowledge of the Company has, any current officer, employee or agent of the Company, made an untrue
statement of a material fact or fraudulent statement to any Governmental Entity, or failed to disclose a material fact required
to be disclosed to any Governmental Entity. The Company is not the subject of any pending or, to the Knowledge of the Company,
threatened investigation in respect of the business of the Company or any Company employee, officer or agent by any Governmental
Entity. The Company is, and to the Knowledge of the Company, all officers, directors, employees and agents of the Company are,
and since the Company Lookback Date have been, in compliance with all Health Care Laws. The Company is not the subject of any pending
or, to the Knowledge of the Company threatened, investigation in respect of the business of the Company or any Company employee,
officer or agent by any Governmental Entity for any violation of any Health Care Law or any other applicable Law. There is no act,
omission, event or circumstance that would reasonably be expected to give rise to any such action, suit, demand, claim, complaint,
hearing, investigation, notice, demand letter, warning letter, proceeding or request for information or any liability for failure
to comply with any Health Care Laws.
(b) Neither
the Company nor any individual currently employed by, or under contract with, the Company to perform functions for the Company
has been excluded from participating in, debarred, suspended, or otherwise made ineligible to participate in, any federal health
care program (as defined in 42 U.S.C. § 1320a-7b(f)) or been subject to sanction pursuant to 42 U.S.C. § 1320a-7a or
1320a-8, been convicted of a crime described at 42 U.S.C. § 1320a-7b, or charged with or under investigation for any offense
that may lead to such exclusion, debarment, suspension, or ineligibility. Neither the Company, nor any of its employees, officers,
directors, or controlling members or owners have committed a violation of any Law, specifically including, but not limited to,
the Health Care Laws. The Company has, and since the Company Lookback Date has had, a qualified medical director.
(c) The
Company has not experienced any Breach of Unsecured Protected Health Information (as defined by HIPAA) that would be required to
be externally reported, with respect to Protected Health Information (as defined by HIPAA) within its possession, control, or custody
that would be material to the business of the Company.
Section 3.13
Material
Contracts
.
(a)
Section 3.13(a)
of the Company Disclosure Schedule contains
a true, correct and complete list of the following Contracts to which the Company is a party or by which it is bound as of the
date hereof (such Contracts being “
Company Material Contracts
”):
(i) (A)
each employment agreement and Contracts with independent contractors entered into by the Company and (B) each Contract the terms
of which obligate or may in the future obligate the Company to make any change of control, severance or other similar payment to
any current or former employee or independent contractor;
(ii) each
Contract (A) containing any “most favored nations” terms and conditions (including with respect to pricing) or
exclusivity obligations (other than any non-disclosure, confidentiality or other similar agreement), (B) granting any right of
first refusal, right of first offer or similar right or (C) containing any other term, condition or clause that, individually or
in the aggregate, limits or purports to limit in any material respect the ability of the Company to own, operate, manufacture,
sell, distribute, transfer, pledge or otherwise dispose of any material assets or business of the Company (or, after the Effective
Time, Parent or its Affiliates);
(iii) each
Contract reasonably expected to require payments to or from the Company in excess of $25,000 per year or in excess of $50,000 during
the term of the Contract;
(iv) all
material broker, distributor, dealer, manufacturer’s representative, franchise, agency, sales promotion, market research,
marketing, consulting and advertising Contracts;
(v) each
Contract relating to Indebtedness of the Company or under which the Company has had advanced or loaned any funds to any other Person;
(vi)
each Contract under which the Company leases, subleases or licenses any real property;
(vii) each
Contract under which the Company leases personal property (not relating primarily to real property), pursuant to which the Company
is required to make rental payments in excess of $25,000 per year;
(viii) each
Contract with any Governmental Entity;
(ix) each
Contract for the disposition of any portion of the assets or business of the Company or any agreement for the acquisition, directly
or indirectly, of a portion of the assets or business of any other Person (whether by merger, sale of stock or assets or otherwise);
(x) each
Contract that limits or purports to limit the ability of the Company to compete in any line of business or with any Person or in
any geographic area or during any period of time;
(xi) each
Contract that is related to Company Intellectual Property and with respect to Company Material Licensed IP, each Contract relating
to the license, sublicense, agreement, covenant not to sue or permission covering each item;
(xii) any
distribution, license, marketing, promotion, manufacturing, supply, or development Contract or other Contract concerning the use,
development, commercialization, or distribution of the Company Intellectual Property or current, proposed, or intended products,
technology or services;
(xiii) each
Contract in which the Company has agreed to purchase a minimum quantity of goods relating to the inventory or services provided
by the Company;
(xiv) each
Contract providing for benefits under any Company Plan;
(xv) each
Contract establishing or governing the material terms of any joint venture, partnership, strategic alliance, collaboration, research
and development project or similar arrangement;
(xvi) all
Contracts that provide for the indemnification by the Company of any Person or the assumption of any Tax (other than commercial
agreements entered into in the ordinary course of business, the principal purpose of which is not related to Taxes), environmental
or other Liability of any Person;
(xvii) each
Contract that contains any “single-trigger,” “double-trigger” or other vesting acceleration provisions
subject to acceleration (in whole or in part) as a result of the Merger or any of the other transactions contemplated by this Agreement
(whether alone or in combination with any termination of employment or other event);
(xviii) all
other Contracts, whether or not made in the ordinary course of business, which are material to the Company, or the absence of which
would have a Company Material Adverse Effect.
(b) (i)
Each Company Material Contract is legally valid and binding on the Company to the extent the Company is a party thereto, as applicable,
and to the Knowledge of the Company, each other party thereto, and is in full force and effect and enforceable in accordance with
its terms (subject to the Bankruptcy and Equity Exception); (ii) the Company, and, to the Knowledge of the Company, any other party
thereto, has performed all material obligations required to be performed by it under each Company Material Contract; (iii) the
Company is not in material default under any Company Material Contract, nor, to the Knowledge of the Company, does any condition
exist that, with notice or lapse of time or both, would constitute a material default under any Company Material Contract of the
Company that is party thereto; (iv) to the Knowledge of the Company, no other party to a Company Material Contract is in material
default thereunder, nor does any condition exist that, with notice or lapse of time or both, would constitute a material default
of such other party under any Company Material Contract; and (v) the Company has not received any written notice of termination
or cancellation under any Company Material Contract or received any written notice of breach or of default in any material respect
under any Company Material Contract, which breach has not been cured. Prior to the date hereof, the Company has made available
to Parent true, correct and complete copies of all Company Material Contracts required to be set forth on
Section 3.13(a)
of the Company Disclosure Schedule, and will make available to Parent copies of all Company Material Contracts entered into after
the date hereof, in each case including amendments thereto.
Section 3.14
Intellectual
Property
.
(a)
Section 3.14(a)
of the Company Disclosure Schedule sets forth a true, correct and complete list of all (i) issued and pending Patents, (ii) registered
and applications for registration of trademarks and service marks, (iii) registered domain names, and (iv) registered copyrights,
in each case, included in Company Intellectual Property owned by the Company and (v) any license agreement governing Company Material
Licensed IP. Such list shall contain, as applicable, (A) the name of all actual and recorded owners, (B) the jurisdiction in which
the application or registration was made, (C) the application and registration numbers, (D) whether such Company Intellectual Property
is owned by the Company, exclusively licensed to the Company or non-exclusively licensed to the Company, and (E) the filing and
registration, issue and application dates. The list pertaining to the license agreements governing Company Material Licensed IP
shall contain (x) the name and date of the license agreement pursuant to which such Company Material Licensed IP is licensed and
(y) whether or not such license agreement grants an exclusive license to the Company. The Company owns, or has the right to use
the Company Intellectual Property, in the conduct of the business of the Company as currently conducted. The Company Intellectual
Property owned by the Company is owned solely and exclusively by the Company, free and clear of any Encumbrances other than Permitted
Encumbrances. The Company Intellectual Property owned by the Company and, to the Knowledge of the Company, the Company Material
Licensed IP, is valid, enforceable, subsisting and in full force and effect. None of the Company Intellectual Property owned by
the Company, and to the Knowledge of the Company, none of the Company Material Licensed IP, is or has been subject to any pending,
concluded, or, to the Knowledge of the Company, threatened, Legal Proceeding or other proceeding (including any interference, derivation,
re-examination, opposition, cancellation reissue or other post-grant proceeding, but excluding customary office actions issued
by an application examiner with the United States Patent and Trademark Office or its foreign equivalent in the ordinary course
of business in connection with the prosecution of a pending application for a patent or a trademark registration) which challenges
the validity, enforceability, use, right to use, scope, duration, effectiveness or ownership of any item of such Company Intellectual
Property.
(b) The
Company owns or possesses the right to use all Intellectual Property necessary to conduct its business as currently conducted by
the Company, and the Company has not received any written, or to the Knowledge of the Company, any non-written, notice from any
Person asserting any claim to the contrary. Each item of Company Intellectual Property owned by the Company immediately subsequent
to the Effective Time will be owned and available for use by the Surviving Entity on the same terms and conditions as are in effect
immediately prior to the Effective Time. Subject to obtaining any consent set forth on
Section 3.14(b)
of the Company
Disclosure Schedule, each item of Company Material Licensed IP will be licensed to and available for use by the Surviving Entity
on the same terms and conditions as are in effect immediately prior to the Effective Time.
(c) To
the Knowledge of the Company, the conduct of the business of the Company, including the development, use, manufacture, marketing,
sale and offer for sale of the products and services of the Company, has not infringed, misappropriated or otherwise violated,
and does not and will not infringe, misappropriate or otherwise violate any Intellectual Property of any Person. The Company has
not received any written, or to the Knowledge of the Company, any non-written, notice since the Company Lookback Date of any claims
that have been made against the Company alleging the infringement, misappropriation or violation by the Company of any Intellectual
Property of any Person. To the Company’s Knowledge, since the Company Lookback Date, no Person has infringed, misappropriated
or otherwise violated any Company Intellectual Property owned by the Company or any Company Material Licensed IP, and there is
no and has not been any Legal Proceeding pursuant to which the Company or, to the Knowledge of the Company, its licensor has alleged
any such infringement, misappropriation or violation by any Person.
(d) Except
as set forth in any Contract set forth in
Section 3.14(d)(i)
of the Company Disclosure Schedule, no funding, facilities
or other resources of any Governmental Entity, university, college, other educational institution or nonprofit research center
was used in the development of any Company Intellectual Property owned by the Company, or to the Knowledge of the Company, in any
Company Material Licensed IP; nor, does any such entity own or have rights to (or have the option to obtain such ownership or rights
to) any Company Intellectual Property owned by the Company, or to the Knowledge of the Company, to any Company Material Licensed
IP, other than in each case, pursuant to the provisions of any Contract set forth in or
Section 3.14(d)(ii)
of the
Company Disclosure Schedule.
(e) The
Company has used commercially reasonable efforts to protect and maintain its rights in all material Company Intellectual Property.
Since the Company Lookback Date,
the Company’s collection, storage, use and dissemination of personally identifiable
information and any other data that could reasonably be used to identify any consumer, patient, employee or other person or any
of their respective devices has, at all times complied in all material respects with all applicable Law, privacy policies and terms
of use and other contractual obligations relating to privacy, data protection or data security. Since the Company Lookback Date,
no breach, security incident, or violation of any data security policy in relation to personally identifiable information or other
data that could reasonably be used to identify any consumer, patient, employee or other person or any of their respective devices
has occurred, or is or was threatened, and there has been no unauthorized or illegal processing of such data, other than breaches
of internal protocol in the ordinary course of business. The Company maintains commercially reasonable security procedures to protect
against loss, misuse, unauthorized access, disclosure, and destruction of personally identifiable information and other data pertaining
to consumers, patients, employees or other persons. Since the Company Lookback Date,
the Company has not received written,
or to the Knowledge of the Company, any non-written, notice of any claims (including any investigation or notice from any Governmental
Entity) that have been asserted or threatened against the Company alleging, any violation of any Person’s privacy or personally
identifiable information or data rights or non-compliance with applicable Laws, privacy policies or terms of use or other contractual
obligations relating to privacy, data protection or data security.
(f) The
Company has (i) caused all current and former employees and all other Persons involved in the conception, reduction to practice,
creation or development of any Intellectual Property for the Company to execute a binding and enforceable agreement which includes
provisions sufficient to ensure that the Company is the sole and exclusive owner of any and all Intellectual Property conceived,
reduced to practice, created or developed by such employees within the scope of or resulting from his or her employment with the
Company or, in the case of a Person other than an employee, from the services such Person performs for the Company; and (ii) caused
all current employees and other Persons with access to any non-public Company Intellectual Property to execute a binding and enforceable
confidentiality agreement or other agreement that includes customary confidentiality terms sufficient to protect the proprietary
interests of the Company with respect to such Company Intellectual Property. Copies of the forms of agreements referred to in the
foregoing
clauses (i)
and
(ii)
(collectively, “
Company IP Agreements
”) have been made available
to Parent prior to the date hereof, and to the Knowledge of the Company, no material breach of any such agreement by the other
party thereto has occurred or been threatened.
(g) Except
with respect to Contracts set forth on
Section 3.14(g)
of the Company Disclosure Schedule and identified as such, the
Company is not obligated to make any material payments by way of royalties, fees or otherwise to any owner or licensor of, or other
claimant to, any Intellectual Property.
(h) There
are no actions that must be taken within 180 days of the date of this Agreement, including the payment of any registration, maintenance
or renewal fees or the filing of any response to an official action of a court or Governmental Entity (including the United States
Patent and Trademark Office or similar foreign government agencies) or the filing of any application for the purpose of obtaining,
maintaining, perfecting, preserving or renewing any of the owned Company Intellectual Property.
(i) Except
as set forth on
Section 3.14(i)
of the Company Disclosure Schedule, Company has not (i) entered into any Contract under
which it has, or may have, the obligation to transfer any ownership of, or granted any exclusive license to use or distribute (or
entered into any agreement under which it has, or may have, the obligation to grant any exclusive license to use or distribute),
or authorized the retention of any exclusive rights to use or joint ownership of, any of the Company Intellectual Property, to
any other Person, (ii) entered into any Contract under which it has, with respect to any of the Company Intellectual Property,
granted any license, sublicense, covenant not to sue, assert or exploit or (iii) entered into any Contract under which the Company
has granted any Person the right to bring a lawsuit for infringement or misappropriation of any of the Company Intellectual Property.
(j) None
of the execution and delivery of this Agreement, the consummation of the Transactions, or the performance by the Company of its
obligations hereunder, conflict or will conflict with, alter or impair, any of the Company’s rights in or to any Company
Intellectual Property or the validity, enforceability, use, right to use, ownership, priority, duration, scope or effectiveness
of any such Company Intellectual Property or otherwise trigger any additional payment obligations with respect to any Company Intellectual
Property.
Section 3.15
Real
Property
.
(a) The
Company does not own any real property, has never owned any real property and is not party to any Contract to purchase any real
property.
Section 3.15(a)
of the Company Disclosure Schedule sets forth a complete and accurate list of all real property
currently leased, subleased or licensed by or from the Company or otherwise used or occupied by the Company (the “
Leased
Real Property
”), including the name of the lessor, licensor, sublessor, master lessor and/or lessee, the date and term
of the lease, license, sublease or other occupancy right and each amendment thereto.
(b) The
Company has made available to Parent true, correct and complete copies of all leases, lease guaranties, subleases, agreements for
the leasing, use or occupancy of, or otherwise granting a right in or relating to the Leased Real Property, including all amendments,
terminations and modifications thereof (“
Lease Agreements
”); and there are no other Lease Agreements affecting
the Leased Real Property or to which the Company is bound, other than those identified in
Section 3.15(a)
of the Company
Disclosure Schedule. All such Lease Agreements are legally valid and enforceable in accordance with their respective terms, and
there is not, under any of such Lease Agreements, any existing material default, or event of default (or event which with notice
or lapse of time, or both, would constitute a material default), and no rentals are past due. The Company has not received any
written notice of a default, alleged failure to perform, or any offset or counterclaim with respect to any such Lease Agreement,
which has not been fully remedied and withdrawn. The Company currently occupies all of the Leased Real Property for the operation
of its business.
Section 3.16
Assets
.
The
Company has good and valid title to, or leasehold interest in, all assets material to its business, free and clear of Encumbrances,
except for Permitted Encumbrances. All equipment included in such properties which is necessary or desirable to the business of
the Company is in good condition and repair (ordinary wear and tear excepted). The property and assets of the Company are sufficient
for the conduct of its business as presently conducted.
Section 3.17
Company
Plans
.
(a)
Section 3.17(a)
of the Company Disclosure Schedule sets forth each “employee benefit plan” as such term is defined in Section 3(3)
of ERISA (such as pension and 401(k) plans, and medical, life, and disability plans), and any bonus, stock option, stock purchase,
restricted stock, incentive, deferred compensation, retiree medical or life insurance, cafeteria plan, dependent care plan, supplemental
retirement or other benefit plan, program or arrangement or any employment, termination, severance, retention, stay bonus or other
contract, agreement, plan, program or arrangement for the benefit of any current or former employee, officer, director or independent
contractor of the Company (collectively, the “
Company Plans
”) that the Company maintains or makes contributions
to or has any responsibility or liability for.
(b) The
Company has made available to Parent copies of: (i) the most recent annual report (Form Series 5500 and all schedules and financial
statements attached thereto), if any, required under applicable Laws in connection with each Company Plan; (ii) if the Company
Plan is subject to the minimum funding standards of Section 302 of ERISA, the most recent annual and periodic accounting of Company
Plan assets, if any; (iii) the most recent summary plan description required under ERISA or any similar Law with respect to each
Company Plan; (iv) all material correspondence since January 1, 2015 to or from any Governmental Entity relating to any Company
Plan; and (v) the most recent IRS determination or opinion letter issued with respect to each Company Plan intended to be qualified
under Section 401(a) of the Code.
(c) Each
Company Plan that is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter (or
opinion letter, if applicable) from the U.S. Internal Revenue Service stating that such Company Plan is so qualified. Each Company
Plan has been maintained in compliance with its terms and has been maintained in material compliance with all applicable Laws.
(d) The
execution and delivery of this Agreement, the purchase of Company Shares pursuant to the Offer and the consummation of the Merger
(i) will not materially increase the benefits payable by any Acquired Company under any Company Plan and (ii) will not result in
any acceleration of the time of payment or vesting of any material benefits payable by any Acquired Company under any Company Plan.
(e) The
Company is in material compliance with all applicable Laws relating to the employment of its employees.
(f) Each
individual who is classified by the Company as an independent contractor has been properly classified for purposes of participation
and benefit accrual under each Company Plan.
(g) There
is no agreement, plan, arrangement or other Contract covering any director or officer or other employee of the Company, and no
payments have been made or will be made to any director or officer or other employee of the Company, that, considered individually
or considered collectively with any other such Contracts or payments, will, or would reasonably be expected to, result in any payment
that will not be deductible by the Company by reason of Section 280G of the Code, or give rise directly or indirectly to the
payment of any amount that would not be deductible pursuant to Section 162(m) of the Code (or any comparable provision
under U.S. state or local or non-U.S. Tax Laws). The Company is not a party to or has any obligation under any Contract to
compensate any Person for excise Taxes payable pursuant to Section 4999 of the Code or any Taxes required by Section 409A
of the Code.
Section 3.18
Labor
Matters
.
(a) As
of the date of this Agreement, the Company is not a party to, nor does the Company have a duty to bargain for, any collective bargaining
agreement with a labor organization or works council representing any of its employees and there are no labor organizations or
works councils representing, purporting to represent or, to the Knowledge of the Company, seeking to represent any employees of
the Company. To the Knowledge of the Company, there has not been any strike, slowdown, work stoppage, lockout, job action, picketing,
labor dispute, union organizing activity, or any threat thereof, or any similar activity or dispute, affecting the Company or any
of its employees. There is not now pending, and, to the Knowledge of the Company, no Person has threatened to commence, any such
strike, slowdown, work stoppage, lockout, job action, picketing, labor dispute or union organizing activity or any similar activity
or dispute. To the Knowledge of the Company, there is no material claim or material grievance pending or threatened relating to
any employment contract, wages and hours, plant closing notification, employment statute or regulation, privacy right, labor dispute,
workers’ compensation policy or long-term disability policy, safety, retaliation, immigration or discrimination matters involving
any employee of the Company, including charges of unfair labor practices or harassment complaints.
(b) The
Company has not taken any action which would constitute a “plant closing” or “mass layoff” within the meaning
of the Worker Adjustment and Retraining Notification Act (the “
WARN Act
”) or similar state or local law or issued
any notification of a plant closing or mass layoff required by the WARN Act or similar state or local law in the ninety (90) day
period ending on the date of this Agreement, or incurred any liability or obligation under WARN Act or any similar state or local
law that remains unsatisfied. No terminations prior to the Closing by the Company would trigger any notice or other obligations
under the WARN Act or similar state or local law.
(c)
The
Company is not delinquent in any payments to any employees of the Company or Contingent Workers of the Company for any wages, salaries,
commissions, bonuses, fees or other direct compensation due with respect to any services performed for it to the date hereof or
amounts required to be reimbursed to any employee or Contingent Worker.
Section 3.19
Transactions
with Affiliates
.
Except as set forth in
Section 3.19
of the Company Disclosure
Schedule, there are no loans, leases, arrangements involving the reimbursement of non-business related expenses, or other Contracts
or transactions between the Company and any present or former member, director, officer, employee or independent contractor of
the Company, or to the Knowledge of the Company, any member of such officer’s, director’s, employee’s, independent
contractor’s or member’s immediate family, or any Person controlled by such officer, director, employee, independent
contractor or member or his or her immediate family. To the knowledge of the Company,
except as set forth in
Section 3.19
of the Company Disclosure Schedule, no member, director, officer, employee or independent contractor of the Company or any
of their respective spouses or family members, owns directly or indirectly, on an individual or joint basis, any interest in,
or serves as an officer or director or in another similar capacity of, any competitor, customer or supplier of the Company, or
any organization which has a material contract or arrangement with the Company.
Section 3.20
Taxes
.
(a) The
Company has filed all income and other material Tax Returns required to be filed, and each such Tax Return is true, correct and
complete in all material respects. All Taxes due and owing by the Company (whether or not shown on any Tax Return) have been paid
or will be paid prior to the Closing. There are no Encumbrances for Taxes (other than Permitted Encumbrances) upon any of the assets
or property of the Company.
(b) Since
the Company Lookback Date, the Company has not received from any Taxing Authority any (i) written notice indicating an intent
to open an audit or other review of any Taxes or Tax Returns of the Company, (ii) written request for information related
to Taxes or Tax Returns of the Company, or (iii) written notice of deficiency or proposed adjustment for any amount of Tax
proposed, asserted, or assessed against the Company by any Taxing Authority.
(c) The
Company is not (nor has it ever been) a party to or bound by any Tax allocation or sharing agreement (other than pursuant to the
customary provisions of an agreement entered into in the ordinary course of business the primary purpose of which is not related
to Taxes, such as leases, licenses or credit agreements). The Company has not (i) been a member of an Affiliated group filing a
consolidated federal income Tax Return (other than a group, the common parent of which was the Company), and (ii) had, and does
not have any, liability for the Taxes of any other Person under Treasury Regulations Section 1.1502-6 (or any similar provision
of Law), as a transferee or successor.
(d) The
Company has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax
assessment or deficiency. No written claim has ever been made and delivered to the Company by a Taxing Authority in a jurisdiction
where the Company does not file Tax Returns that the Company is or may be subject to taxation by that jurisdiction or that the
Company must file Tax Returns in such jurisdiction.
(e) The
Company has withheld and paid all Taxes required to have been withheld and paid in connection with any amounts paid or owing to
any employee, independent contractor, creditor, stockholder or other third party.
(f) The
Company filed an election on IRS Form 8832 electing to be treated as an association taxable as a corporation effective as of August
1, 2016 (the “
Check the Box Election
”). Prior to the effective date of the Check the Box Election, the Company
was at all times since its formation treated as a partnership or a disregarded entity for federal and applicable state and local
income Tax purposes.
(g) The
Company has not knowingly taken any action (or failed to take any action) that would prevent the Merger from qualifying as a “reorganization”
within the meaning of Section 368(a) of the Code.
(h) The
Company has not been a party to any “reportable transaction,” as defined in Code Section 6707A(c)(1) and Treasury Regulation
Section 1.6011-4.
(i) The
Company has not knowingly taken any action (or failed to take any action) that would prevent the Merger taken together with any
contemporaneous contributions of cash and debt to Parent from constituting an “exchange” governed by the provisions
of Section 351 of the Code.
Section 3.21
Insurance
.
The
Company has in full force and effect adequate insurance policies with coverages customary for similarly situated companies in
the same or similar industries and as required by applicable Law. Since the Company Lookback Date, the Company has not received
any written notice from any insurance company of any (a) premature cancellation or invalidation of any material insurance policy
held by the Company (except with respect to policies that have been replaced with similar policies), (b) refusal of any coverage
or rejection of any material claim under any material insurance policy held by the Company or (c) material adjustment in
the amount of the premiums payable with respect to any insurance policy held by the Company, except for notices that have been
withdrawn or are no longer pending. As of the date of this Agreement, there is no pending material claim by the Company under
any insurance policy held by the Company.
Section 3.22
Brokers
.
Except
as set forth on
Section 3.22
of the Company Disclosure Schedules, no broker, finder or investment banker is entitled
to any brokerage, finder’s or other fee or commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Company.
Section 3.23
Approval
Required
.
The Company Member Approval is the only vote of the holders of any Company Securities
necessary to approve this Agreement and to consummate the Transactions, including the Merger.
Section 3.24
Disclosure
.
No
representation or warranty made by the Company in this
Article III
, including the Company Disclosure Schedule, contains
any untrue statement of a material fact or omits to state any material fact necessary to make any of them, in light of the circumstances
under which they were made, not misleading.
Article IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Except as set forth
in the Parent Disclosure Schedule, (it being understood and agreed that information disclosed in any section of the Parent Disclosure
Schedule shall be deemed to be disclosed with respect to any representation or warrant in any other section of the Parent Disclosure
Schedule only to the extent that (a) cross references to other sections are set forth in the Parent Disclosure Schedule or (b)
its relevance to such representation and warranty in such other section is reasonably and readily apparent solely from the text
of such disclosure made without review of any referenced material) its relevance to such representation and warranty in such other
section is reasonably and readily apparent solely from the text of such disclosure made without review of any referenced material),
Parent and Merger Sub hereby represent and warrant to the Company that the statements contained in this
Article IV
are true, correct and complete as of the date of this Agreement, as follows:
Section 4.01
Organization,
Authority and Qualification
.
(a) Parent
is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware and has all requisite
corporate power and authority necessary to own or lease and operate all of its properties and assets and to carry on its business
as it is being conducted. Each Parent Subsidiary is duly organized, validly existing and in good standing under the applicable
Laws of its jurisdiction of incorporation and has all requisite corporate power and authority necessary to own or lease and operate
all of its properties and assets and to carry on its business as it is being conducted. Parent and each Parent Subsidiary is duly
qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of the business conducted
by it or the character or location of the properties and assets owned, leased or operated by it makes such qualification necessary,
except where the failure to be so qualified, licensed or in good standing does not currently have, and would not reasonably be
expected to have, individually or in the aggregate, a Parent Material Adverse Effect.
(b) The
Parent Board, by resolutions duly adopted by unanimous vote at a meeting of all members of the Parent Board duly called and held
has (i) determined that this Agreement and the Transactions, including the Merger, are fair to, and in the best interests of, the
stockholders of Parent, (ii) approved and declared advisable the Transactions, including the Merger, in accordance with the DGCL,
(iii) directed that this Agreement and the Transactions, including the Merger, be submitted to the stockholders of Parent for adoption,
and (iv) resolved to recommend that the stockholders of Parent adopt this Agreement and the Transactions, including the Merger,
and directed that such matter be submitted for consideration by the stockholders at a special stockholders meeting.
(c) The
only votes of the holders of any class or series of capital stock of Parent required in connection with the Transactions is the
Parent Stockholder Approval.
Section 4.02
Capitalization
.
(a) The
capitalization of Parent as of the date of this Agreement and as of immediately prior to the Effective Time is set forth on
Section 4.02(a)
of the Parent Disclosure Schedule. Except as disclosed on
Section 4.02(a)
of the Parent Disclosure Schedule, there
are no authorized or outstanding (a) capital stock, equity interests or other securities of Parent, (b) securities of Parent convertible
into, exchangeable or exercisable for capital stock, equity interests, or other securities of the Parent, (c) subscription, calls,
commitments, Contracts, options, warrants, or other rights to purchase or acquire from Parent, or obligations of Parent to issue,
any capital stock, equity interests, or other securities, including securities convertible into, exchangeable or exercisable for
shares of capital stock, equity interests, or other securities of Parent, or (d) bonds, debentures, notes, or other indebtedness
that entitle the holders to vote (or convertible into, exchangeable or exercisable for, securities that entitle the holders to
vote) with holders of capital stock, equity interests, or other securities of Parent on any matter (the items in
clauses (a)
,
(b)
,
(c)
and
(d)
being referred to collectively as the “
Parent Securities
” and the items
in clauses
(a)
,
(b)
,
(c)
and
(d)
with respect to any Parent Subsidiary instead of Parent, being referred
to collectively as the “
Parent Subsidiary Securities
”)). There are no outstanding obligations of Parent to repurchase,
redeem, or otherwise acquire the Parent Securities. The Parent Stock is duly authorized and validly issued.
(b) Set
forth on
Section 4.02(b)
of the Parent Disclosure Schedule is a true and complete list of all Subsidiaries of Parent
(the “
Parent Subsidiaries
”). Except for the Parent Subsidiaries, Parent does not own, directly or indirectly,
any capital stock or other voting securities of, or ownership interests in, any Person. Parent owns 100% of the outstanding Parent
Subsidiary Securities.
Section 4.03
Authority
and Noncontravention
.
(a) Parent
and Merger Sub each have all necessary corporate power and authority to execute and deliver this Agreement and, subject to obtaining
the Parent Stockholder Approval, to perform their respective obligations hereunder and to consummate the Transactions. The execution
and delivery of and performance by Parent and Merger Sub under this Agreement, and the consummation of the Transactions, have been
duly authorized and approved by the board of directors of Parent and Merger Sub, and except for obtaining the Parent Stockholder
Approval, no other corporate action on the part of Parent or Merger Sub is necessary to authorize the execution and delivery of
and performance by Parent under this Agreement and the consummation by it of the Transactions. This Agreement has been duly executed
and delivered by Parent and Merger Sub and, assuming due authorization, execution and delivery hereof by the other parties hereto,
constitute legal, valid and binding obligations of Parent and Merger Sub, enforceable against Parent and Merger Sub in accordance
with its terms, except that such enforceability may be limited by and is subject to the Bankruptcy and Equity Exception.
(b) Except
as set forth on
Section 4.03
of the Parent Disclosure Schedule, neither the execution and delivery of this Agreement
by Parent and Merger Sub, nor the consummation by Parent and Merger Sub of the Transactions, nor compliance by Parent and Merger
Sub with any of the terms or provisions hereof, will (i) assuming the Parent Stockholder Approval is obtained, conflict with or
violate any provision of the Governing Documents of Parent or Merger Sub, (ii) assuming that each of the consents, authorizations
and approvals referred to in
Section 4.04
and the Parent Stockholder Approval are obtained (and any condition precedent
to any such consent, authorization or approval has been satisfied) and each of the filings referred to in
Section 4.04
are made and any applicable waiting periods referred to therein have expired, violate any Law or Judgment applicable to Parent
or Merger Sub or (iii) require any consent or any other action by any Person under, result in any violation or breach of, result
in the loss of a benefit under, conflict with any provision of, or constitute a default (with or without notice or lapse of time,
or both) under, any terms, conditions or provisions of any Contract by which Parent is bound, which in each case would result in
a Parent Material Adverse Effect.
Section 4.04
Governmental
Consents and Approvals
. Except for, (a) the filing with the SEC of a proxy statement relating to the Parent Stockholders Meeting
(as amended or supplemented from time to time, the “
Proxy Statement
”) and other filings required under, and
compliance with other applicable requirements of, the Securities Exchange Act of 1934 (the “
Exchange Act
”) and
the rules of NASDAQ, (b) the filing of the Proxy Statement as described in
Section 5.05
, (c) the filing of the Certificate
of Merger with the Secretary of State of the State of Delaware pursuant to the DGCL, and (d) the notices, consents and approvals
set forth in
Section 4.04
of the Parent Disclosure Schedule, no consents or approvals of, or filings, declarations
or registrations with, any Governmental Entity are necessary for the execution and delivery of this Agreement by Parent or Merger
Sub and the consummation by Parent or Merger Sub of the Transactions, other than as do not currently have, and would not reasonably
be expected to have, individually or in the aggregate, a Parent Material Adverse Effect.
Section 4.05
SEC
Filings; Financial Information; Books and Records
.
(a) Parent
has delivered or made available to the Company accurate and complete copies of all registration statements, proxy statements, Certifications
(as defined below) and other statements, reports, schedules, forms and other documents filed or furnished by Parent with the SEC
since January 1, 2014 (the “
Parent SEC Documents
”), other than such documents that can be obtained on the SEC’s
website at www.sec.gov. Except as set forth in
Section 4.05(a)
of the Parent Disclosure Schedule, all material statements,
reports, schedules, forms and other documents required to have been filed by Parent or its officers with the SEC have been so filed.
As of the time it was filed with the SEC (or, if amended or superseded by a filing prior to the date of this Agreement, then on
the date of such filing), each of the Parent SEC Documents complied in all material respects with the applicable requirements of
the Securities Act or the Exchange Act (as the case may be) and, to Parent’s Knowledge, as of the time they were filed, none
of the Parent SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made,
not misleading. The certifications and statements required by (A) Rule 13a-14 under the Exchange Act and (B) 18 U.S.C. §1350
(Section 906 of the Sarbanes-Oxley Act) relating to the Parent SEC Documents (collectively, the “
Certifications
”)
are accurate and complete and comply in all material respects as to form and content with all applicable Laws.
(b) The
financial statements (including any related notes) contained or incorporated by reference in the Parent SEC Documents (the “
Parent
Financial Statements
”): (i) complied as to form in all material respects with the published rules and regulations of
the SEC applicable thereto; (ii) were prepared in accordance with GAAP (except as may be indicated in the notes to such financial
statements or, in the case of unaudited financial statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis
unless otherwise noted therein throughout the periods indicated; and (iii) fairly present (subject in the case of unaudited financial
statements to normal and recurring year-end audit adjustments) in all material respects the consolidated financial position of
Parent as of the respective dates thereof and the consolidated results of operations and cash flows of Parent for the periods covered
thereby.
(c) To
the Knowledge of Parent, Parent’s auditor has at all times since the Parent Lookback Date been: (i) a registered public accounting
firm (as defined in Section 2(a)(12) of the Sarbanes-Oxley Act); (ii) “independent” with respect to Parent within the
meaning of Regulation S-X under the Exchange Act; and (iii) in compliance with subsections (g) through (l) of Section 10A of the
Exchange Act and the rules and regulations promulgated by the SEC thereunder.
(d) From
the Parent Lookback Date, through the date hereof, Parent has not received any comment letter from the SEC or the staff thereof
or any correspondence from The NASDAQ Stock Market or the staff thereof relating to the delisting or maintenance of listing of
the Parent Common Stock on the NASDAQ Capital Market, other than such documents that can be obtained on the SEC’s website
at www.sec.gov.
(e) Parent
is not eligible to use Form S-3 to register its equity securities under the Securities Act for resale on a continuous basis on
an automatic shelf registration statement that will become effective immediately pursuant to Rule 462(e) and (f) upon filing with
the SEC, but anticipates that it will be able to use Form S-3 upon filing of its annual report on Form 10-K for the year ended
December 31, 2016 with the SEC
.
Section 4.06
Absence
of Undisclosed Liabilities
. There are no material Liabilities of Parent or any Parent Subsidiaries, other than Liabilities
(a) reflected or reserved against on the Parent Financial Statements, or (b) set forth in
Section 4.06
of
the Parent Disclosure Schedule. As of the date of this Agreement, neither Parent nor any Parent Subsidiary has any material Indebtedness
for borrowed money. Except as disclosed in the Parent SEC Documents, neither Parent nor any Parent Subsidiary has ever effected
or otherwise been involved in any “off-balance sheet arrangements” (as defined in Item 303(a)(4)(iii) of Regulation
S-K under the Exchange Act).
Section 4.07
Conduct
in the Ordinary Course; Absence of Certain Changes, Events and Conditions
. Except as set forth on
Section 4.07
of the Parent Disclosure Schedule, since December 31, 2015, Parent and the Parent Subsidiaries have conducted their respective
operations in the ordinary course and consistent with past practice and there has not been or occurred (a) any condition, change,
event, occurrence or effect that has, or would reasonably be expected to have, individually or in the aggregate, a Parent Material
Adverse Effect, or (b) any condition, action, event, occurrence or effect that, if taken during the period from the date of this
Agreement through the Effective Time without the Company’s consent, would constitute a breach of
Section 5.01(c)
.
Section 4.08
Legal
Proceedings
. Except as set forth on
Section 4.08
of the Parent Disclosure Schedule, as of the date hereof, there
is no pending or, to the Knowledge of Parent, threatened, Legal Proceeding against or, to the Knowledge of Parent, any investigation,
informal inquiry or request for documents specifically relating to, Parent or any Parent Subsidiary or any of the assets or operations
of Parent or any Parent Subsidiary or, to the Knowledge of Parent, any of their present or former directors, officer or employees
(in each case, in their capacity as such), nor is there any Judgment imposed or binding upon Parent or any Parent Subsidiary, in
each case, by or before any Governmental Entity or arbitrator, that has or would reasonably be expected to have, individually or
in the aggregate, a Parent Material Adverse Effect or that in any manner seeks to prevent, enjoin, alter or materially delay the
Transactions. There are no material internal investigations or internal inquiries that, since the Parent Lookback Date, have been
conducted by or at the direction of the Parent Board or the board of directors of any Parent Subsidiary (or any committee thereof)
concerning any financial, accounting or other misfeasance or malfeasance issues.
Section 4.09
Compliance
with Laws
.
(a) Parent
and the Parent Subsidiaries are, and since the Parent Lookback Date have been, in compliance in all material respects with all
Laws applicable to Parent or the Parent Subsidiaries, any of their respective properties or other assets or any of their respective
businesses or operations (other than Health Care Laws which are governed exclusively by
Section 4.10
.
(b) Parent
and the Parent Subsidiaries hold, and are in compliance with, in all material respects all licenses, franchises, permits, certificates,
approvals, orders and authorizations from Governmental Entities required by Law for the conduct of their respective business as
it is now being conducted (collectively, “
Parent Permits
”). All such Parent Permits are in full force and effect
and, since the Parent Lookback Date, neither Parent nor any Parent Subsidiary has received written notice to the effect that a
Governmental Entity was considering the amendment, termination, revocation or cancellation of any Parent Permit, which amendment,
termination, revocation or cancellation would reasonably be expected to have, individually or in the aggregate, a Parent Material
Adverse Effect. The execution and delivery of this Agreement and the consummation of the Transactions will not cause the revocation
or cancellation of any Parent Permit, the revocation or cancellation of which would have a Parent Material Adverse Effect.
(c) Since
the Parent Lookback Date, neither Parent nor any Parent Subsidiary nor, the Knowledge of Parent, any of their respective officers,
directors, agents or employees has: (i) used any funds for unlawful contributions, gifts or entertainment, or for other unlawful
expenses, related to political activity; (ii) made any unlawful payment to foreign or domestic government officials or employees
or to foreign or domestic political parties or campaigns; (iii) violated any provision of the Foreign Corrupt Practices Act of
1977; or (iv) engaged in any business or effected any transactions with any Person (A) located in a Restricted Nation; (B) that
is owned, controlled by or acting on behalf of an individual, business or organization in of a Restricted Nation; (C) that is a
government of a Restricted Nation; (D) that is owned, controlled by or acting on behalf of a government of a Restricted Nation;
or (E) that is an OFAC Sanctioned Person. None of (1) the execution, delivery and performance of this Agreement or (2) the consummation
of the Transactions, will result in a violation by Parent or any Parent Subsidiary of any of the OFAC Sanctions or of any anti-money
laundering laws of the United States or any other applicable jurisdiction.
(d) Since
the Parent Lookback Date, except as described in the Parent SEC Documents, neither Parent nor any Parent Subsidiary has (i) received
any written notice from any Governmental Entity regarding any material violation of any Law or (ii) filed with or otherwise
provided to any Governmental Entity any written notice regarding any material violation by Parent or any Parent Subsidiary of any
Law, except in each case, any written notices regarding any violations that would not reasonably be expected to result in a Parent
Material Adverse Effect.
Section 4.10
Regulatory
Matters
.
(a) Neither
Parent nor any Parent Subsidiary, nor to the Knowledge of Parent has, any current officer, employee, agent or director of any such
entity, made an untrue statement of a material fact or fraudulent statement to any Governmental Entity or failed to disclose a
material fact required to be disclosed to any Governmental Entity. Neither Parent nor any Parent Subsidiary is the subject of any
pending or, to the Knowledge of Parent, threatened investigation in respect of the business of the Parent or any Parent or Parent
Subsidiary employee, officer or agent by any Governmental Entity. Parent and each Parent Subsidiary are, and to the Knowledge of
Parent, all officers, directors, employees and agents of Parent and each Parent Subsidiary are, and since the Parent Lookback Date
have been, in compliance with all Health Care Laws. Neither Parent nor any Parent Subsidiary is the subject of any pending or,
to the Knowledge of Parent threatened, investigation in respect of the business of the Parent or any Parent or Parent Subsidiary
employee, officer or agent by any Governmental Entity for any violation of any Health Care Law or any other applicable Law. There
is no act, omission, event or circumstance that would reasonably be expected to give rise to any such action, suit, demand, claim,
complaint, hearing, investigation, notice, demand letter, warning letter, proceeding or request for information or any liability
for failure to comply with any Health Care Laws.
(b) Neither
Parent nor any Parent Subsidiary nor any individual currently employed by, or under contract with, Parent or any Parent Subsidiary
to perform functions for Parent or any Parent Subsidiary has been excluded from participating in, debarred, suspended, or otherwise
made ineligible to participate in, any federal health care program (as defined in 42 U.S.C. § 1320a-7b(f)) or been subject
to sanction pursuant to 42 U.S.C. § 1320a-7a or 1320a-8, been convicted of a crime described at 42 U.S.C. § 1320a-7b,
or charged with or under investigation for any offense that may lead to such exclusion, debarment, suspension, or ineligibility.
Neither Parent nor any Parent Subsidiary, nor any of its employees, officers, directors, or controlling stockholders have committed
a violation of any Law, specifically including, but not limited to, the Health Care Laws. Parent has, and since the Parent Lookback
Date has had, a qualified medical director.
(c) Neither
Parent nor any Parent Subsidiary has experienced any Breach of Unsecured Protected Health Information (as defined by HIPAA) that
would be required to be externally reported, with respect to Protected Health Information (as defined by HIPAA) within its possession,
control, or custody that would be material to the business of Parent or any Parent Subsidiary.
Section 4.11
Assets
.
Except as set forth on
Section 4.11
of the Parent Disclosure Schedule, Parent and each Parent Subsidiary has good and
valid title to or leasehold interest in all assets material to its business, free and clear of Encumbrances, except for Permitted
Encumbrances. All equipment included in such properties which is necessary or desirable to the business of Parent and the Parent
Subsidiaries is in good condition and repair (ordinary wear and tear excepted). The property and assets of Parent and the Parent
Subsidiaries are sufficient for the conduct of their respective business as presently conducted.
Section 4.12
Transactions
with Affiliates
. Except as set forth in in the Parent SEC Documents, there are no loans, leases, arrangements involving the
reimbursement of non-business related expenses, or other Contracts or transactions between Parent or any Parent Subsidiary on the
one hand, and any present or former stockholder, director, officer, employee or independent contractor of Parent or any Parent
Subsidiary on the other hand, or to the Knowledge of Parent, any member of such officer’s, director’s, employee’s,
independent contractor’s or stockholder’s immediate family, or any Person controlled by such officer, director, employee,
independent contractor or stockholder or his or her immediate family. To the knowledge of Parent,
except as set forth in
the Parent SEC Documents, no stockholder, director, officer, employee or independent contractor of Parent or any Parent Subsidiary,
or any of their respective spouses or family members, owns directly or indirectly, on an individual or joint basis, any interest
in, or serves as an officer or director or in another similar capacity of, any competitor, customer or supplier of Parent or any
Parent Subsidiary, or any organization which has a material contract or arrangement with Parent or any Parent Subsidiary.
Section 4.13
Insurance
.
Parent and the Parent Subsidiaries have in full force and effect adequate insurance policies with coverages customary for similarly
situated companies in the same or similar industries and as required by applicable Law. Since the Parent Lookback Date, neither
Parent nor any Parent Subsidiary has received any written notice from any insurance company of any (a) premature cancellation or
invalidation of any material insurance policy held by Parent or any Parent Subsidiary (except with respect to policies that have
been replaced with similar policies), (b) refusal of any coverage or rejection of any material claim under any material insurance
policy held by Parent or a Parent Subsidiary or (c) material adjustment in the amount of the premiums payable with respect
to any insurance policy held by Parent or a Parent Subsidiary, except for notices that have been withdrawn or are no longer pending,
in each case other than any such cancellation, invalidation, refusal or coverage, rejection of a claim or adjustment that would
reasonably be expected to result in a Parent Material Adverse Effect. As of the date of this Agreement, there is no pending material
claim by Parent or a Parent Subsidiary under any such insurance policy.
Section 4.14
Brokers
.
No broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission in connection with
the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Parent or any Parent Subsidiary.
Section 4.15
Disclosure
.
No representation or warranty made by Parent or Merger Sub in this
Article IV
, contains any untrue statement of a material
fact or omits to state any material fact necessary to make any of them, in light of the circumstances under which they were made,
not misleading.
Section 4.16
Controls
and Procedures, Certifications and Other Matters Relating to the Sarbanes-Oxley Act
.
(a) Parent
maintains internal control over financial reporting that provides assurance that (i) records are maintained in reasonable detail
and accurately and fairly reflect the transactions and dispositions of Parent’s assets, (ii) transactions are executed with
management’s authorization and (iii) transactions are recorded as necessary to permit preparation of the Parent Financial
Statements and to maintain accountability for Parent’s assets.
(b) Except
as set forth on
Section 4.16
of the Parent Disclosure Schedule, Parent maintains disclosure controls and procedures
required by Rules 13a-15 or 15d-15 under the Exchange Act, and such controls and procedures are effective to provide reasonable
assurance that material information concerning Parent is made known on a timely basis to management.
(c) Neither
Parent nor, to the Knowledge of Parent, any of its officers has received notice from any Governmental Entity questioning or challenging
the accuracy, completeness or manner of filing or submission of any Parent SEC Document, including without limitation the Certifications.
(d) Since
January 1, 2013, Parent has not extended or maintained credit, arranged for the extension of credit, modified or renewed an extension
of credit, in the form of a personal loan or otherwise, to or for any director or executive officer of Parent.
Section 4.17
Material
Contracts
. (a)
Section 4.17(a)
of the Parent Disclosure Schedule contains a true, correct and complete list of
the following Contracts to which either Parent or a Parent Subsidiary is a party or by which it is bound as of the date hereof
(such Contracts being “
Parent Material Contracts
”):
(i) (A)
each employment agreement and Contracts with independent contractors entered into by Parent or a Parent Subsidiary and (B) each
Contract the terms of which obligate or may in the future obligate Parent or a Parent Subsidiary to make any change of control,
severance or other similar payment to any current or former employee or independent contractors;
(ii) each
Contract (A) containing any “most favored nations” terms and conditions (including with respect to pricing) or
exclusivity obligations (other than any non-disclosure, confidentiality or other similar agreement), (B) granting any right of
first refusal, right of first offer or similar right or (C) containing any other term, condition or clause that, individually or
in the aggregate, limits or purports to limit in any material respect the ability of the Company to own, operate, manufacture,
sell, distribute, transfer, pledge or otherwise dispose of any material assets or business of Parent or any Parent Subsidiary (or,
after the Effective Time, Parent or its Affiliates);
(iii) each
Contract reasonably expected to require payments to or from either Parent or a Parent Subsidiary in excess of $25,000 per year
or in excess of $50,000 during the term of the Contract;
(iv) all
material broker, distributor, dealer, manufacturer’s representative, franchise, agency, sales promotion, market research,
marketing, consulting and advertising Contracts;
(v) each
Contract relating to Indebtedness of Parent or a Parent Subsidiary or under which Parent or any Parent Subsidiary has advanced
or loaned any funds to any other Person;
(vi)
each Contract under which Parent or a Parent Subsidiary leases, subleases or licenses any real property;
(vii) each
Contract under which Parent or a Parent Subsidiary leases personal property (not relating primarily to real property), pursuant
to which Parent or a Parent Subsidiary is required to make rental payments in excess of $25,000 per year;
(viii) each
Contract with any Governmental Entity;
(ix) each
Contract for the disposition of any portion of the assets or business of Parent or a Parent Subsidiary, or any agreement for the
acquisition, directly or indirectly, of a portion of the assets or business of any other Person (whether by merger, sale of stock
or assets or otherwise);
(x) each
Contract that limits or purports to limit the ability of Parent or a Parent Subsidiary to compete in any line of business or with
any Person or in any geographic area or during any period of time;
(xi) each
Contract that is related to Parent Intellectual Property and with respect to Parent Material Licensed IP, each Contract relating
to the license, sublicense, agreement, covenant not to sue or permission covering each item;
(xii) any
distribution, license, marketing, promotion, manufacturing, supply, or development Contract or other Contract concerning the use,
development, commercialization, or distribution of the Parent Intellectual Property or current, proposed, or intended products,
technology or services;
(xiii) each
Contract in which Parent or a Parent Subsidiary has agreed to purchase a minimum quantity of goods relating to any product manufactured,
produced or distributed by Parent;
(xiv) each
Contract providing for benefits under any Parent Plan;
(xv) each
Contract establishing or governing the material terms of any joint venture, partnership, strategic alliance, collaboration, research
and development project or similar arrangement;
(xvi) all
Contracts that provide for the indemnification by Parent or any Parent Subsidiary of any Person or the assumption of any Tax (other
than commercial agreements entered into in the ordinary course of business, the principal purpose of which is not related to Taxes),
environmental or other Liability of any Person;
(xvii) each
Contract that contains any “single-trigger,” “double-trigger” or other vesting acceleration provisions
subject to acceleration (in whole or in part) as a result of the Merger or any of the other transactions contemplated by this Agreement
(whether alone or in combination with any termination of employment or other event);
(xviii) all
other Contracts, whether or not made in the ordinary course of business, which are material to Parent or a Parent Subsidiary, or
the absence of which would have a Parent Material Adverse Effect.
(b) (i)
Each Parent Material Contract is legally valid and binding on Parent or a Parent Subsidiary to the extent Parent or a Parent Subsidiary
is a party thereto, as applicable, and to the Knowledge of Parent, each other party thereto, and is in full force and effect and
enforceable in accordance with its terms (subject to the Bankruptcy and Equity Exception); (ii) Parent and the Parent Subsidiaries,
and, to the Knowledge of Parent, any other party thereto, has performed all material obligations required to be performed by such
party under each Parent Material Contract; (iii) neither Parent nor a Parent Subsidiary is in material default under any Parent
Material Contract, nor, to the Knowledge of Parent, does any condition exist that, with notice or lapse of time or both, would
constitute a material default under any Parent Material Contract; (iv) to the Knowledge of Parent, no other party to a Parent Material
Contract is in material default thereunder, nor does any condition exist that, with notice or lapse of time or both, would constitute
a material default of such other party under any Parent Material Contract; and (v) neither Parent nor a Parent Subsidiary has received
any written notice of termination or cancellation under any Parent Material Contract or received any written notice of breach or
of default in any material respect under any Parent Material Contract, which breach has not been cured. Prior to the date hereof,
Parent has made available to the Company true, correct and complete copies of all Parent Material Contracts required to be set
forth on
Section 4.17(a)
of the Parent Disclosure Schedule, and will make available to the Company copies of all Parent
Material Contracts entered into after the date hereof, in each case including amendments thereto.
Section 4.18
Intellectual
Property
.
(a)
Section 4.18(a)
of the Parent Disclosure Schedule sets forth a true, correct and complete list of all (i) issued and pending Patents, (ii) registered
and applications for registration of trademarks and service marks, (iii) registered domain names, and (iv) registered copyrights,
in each case, included in Parent Intellectual Property owned by Parent or a Parent Subsidiary and (v) any license agreement governing
Parent Material Licensed IP. Such list shall contain, as applicable, (A) the name of all actual and recorded owners, (B) the jurisdiction
in which the application or registration was made, (C) the application and registration numbers, (D) whether such Parent Intellectual
Property is owned by, exclusively licensed to, or non-exclusively licensed to Parent or a Parent Subsidiary, and (E) the filing
and registration, issue and application dates. The list pertaining to the license agreements governing Parent Material Licensed
IP shall contain (x) the name and date of the license agreement pursuant to which such Parent Material Licensed IP is licensed
and (y) whether or not such license agreement grants an exclusive license to Parent or a Parent Subsidiary. Parent or a Parent
Subsidiary owns, or has the right to use the Parent Intellectual Property, in the conduct of the business of such party as currently
conducted. Except as set forth on
Section 4.18(a)
of the Parent Disclosure Schedule, Parent Intellectual Property owned
by Parent or a Parent Subsidiary is owned solely and exclusively by such party, free and clear of any Encumbrances other than Permitted
Encumbrances. The Parent Intellectual Property owned by Parent or a Parent Subsidiary and, to the Knowledge of Parent, the Parent
Material Licensed IP, is valid, enforceable, subsisting and in full force and effect. None of the Parent Intellectual Property
owned by Parent or a Parent Subsidiary, and to the Knowledge of Parent, none of the Parent Material Licensed IP, is or has been
subject to any pending, concluded, or, to the Knowledge of Parent, threatened, Legal Proceeding or other proceeding (including
any interference, derivation, re-examination, opposition, cancellation reissue or other post-grant proceeding, but excluding customary
office actions issued by an application examiner with the United States Patent and Trademark Office or its foreign equivalent in
the ordinary course of business in connection with the prosecution of a pending application for a patent or a trademark registration)
which challenges the validity, enforceability, use, right to use, scope, duration, effectiveness or ownership of any item of such
Parent Intellectual Property.
(b) Parent
or a Parent Subsidiary owns or possesses the right to use all Intellectual Property necessary to conduct its business as currently
conducted by Parent and the Parent Subsidiaries, and neither Parent nor a Parent Subsidiary has received any written, or to the
Knowledge of Parent, any non-written, notice from any Person asserting any claim to the contrary. Each item of Parent Intellectual
Property owned by Parent or a Parent Subsidiary immediately subsequent to the Effective Time will be owned and available for use
by such party on the same terms and conditions as are in effect immediately prior to the Effective Time. Subject to obtaining any
consent set forth on
Section 4.18(b)
of the Parent Disclosure Schedule, each item of Parent Material Licensed IP will
be licensed to and available for use by Parent or a Parent Subsidiary on the same terms and conditions as are in effect immediately
prior to the Effective Time.
(c) To
the Knowledge of Parent, the conduct of the business of Parent, including the development, use, manufacture, marketing, sale and
offer for sale of the products manufactured, distributed and produced by Parent and services of Parent, have not infringed, misappropriated
or otherwise violated, and does not and will not infringe, misappropriate or otherwise violate any Intellectual Property of any
Person. Except as set forth on
Section 4.18(c)
of the Parent Disclosure Schedule, Parent has not received any written,
or to the Knowledge of Parent, any non-written, notice since the Parent Lookback Date of any claims that have been made against
Parent alleging the infringement, misappropriation or violation by Parent of any Intellectual Property of any Person. Except as
set forth on
Section 4.18(c)
of the Parent Disclosure Schedule, to Parent’s Knowledge, since the Parent Lookback
Date, no Person has infringed, misappropriated or otherwise violated any Parent Intellectual Property owned by Parent or any Parent
Material Licensed IP, and there is no and has not been any Legal Proceeding pursuant to which Parent or, to the Knowledge of Parent,
its licensor has alleged any such infringement, misappropriation or violation by any Person.
(d) Except
as set forth in any Contract set forth in
Section 4.18(d)(i)
of the Parent Disclosure Schedule, no funding, facilities
or other resources of any Governmental Entity, university, college, other educational institution or nonprofit research center
was used in the development of any Parent Intellectual Property owned by Parent, or to the Knowledge of Parent, in any Parent Material
Licensed IP; nor, does any such entity own or have rights to (or have the option to obtain such ownership or rights to) any Parent
Intellectual Property owned by Parent, or to the Knowledge of Parent, to any Parent Material Licensed IP, other than in each case,
pursuant to the provisions of any Contract set forth in or
Section 4.18(d)(ii)
of the Parent Disclosure Schedule.
(e) Parent
and the Parent Subsidiaries have used commercially reasonable efforts to protect and maintain its rights in all material Parent
Intellectual Property. Since the Parent Lookback Date,
Parent’s and the Parent Subsidiaries’ collection, storage,
use and dissemination of personally identifiable information and any other data that could reasonably be used to identify any consumer,
patient, employee or other person or any of their respective devices has, at all times complied in all material respects with all
applicable Law, privacy policies and terms of use and other contractual obligations relating to privacy, data protection or data
security. Since the Parent Lookback Date, no breach, security incident, or violation of any data security policy in relation to
personally identifiable information or other data that could reasonably be used to identify any consumer, patient, employee or
other person or any of their respective devices has occurred, or is or was threatened, and there has been no unauthorized or illegal
processing of such data, other than breaches of internal protocol in the ordinary course of business. Parent and the Parent Subsidiaries
maintain commercially reasonable security procedures to protect against loss, misuse, unauthorized access, disclosure, and destruction
of personally identifiable information and other data pertaining to consumers, patients, employees or other persons. Since the
Parent Lookback Date,
neither Parent nor the Parent Subsidiaries have received written, or to the Knowledge of Parent, any
non-written, notice of any claims (including any investigation or notice from any Governmental Entity) that have been asserted
or threatened against Parent or any Parent Subsidiary alleging, any violation of any Person’s privacy or personally identifiable
information or data rights or non-compliance with applicable Laws, privacy policies or terms of use or other contractual obligations
relating to privacy, data protection or data security.
(f) Parent
or a Parent Subsidiary has (i) caused all current and former employees and all other Persons involved in the conception, reduction
to practice, creation or development of any Intellectual Property for Parent and the Parent Subsidiaries to execute a binding and
enforceable agreement which includes provisions sufficient to ensure that Parent or a Parent Subsidiary is the sole and exclusive
owner of any and all Intellectual Property conceived, reduced to practice, created or developed by such employees within the scope
of or resulting from his or her employment with Parent or such Parent Subsidiary, or, in the case of a Person other than an employee,
from the services such Person performs for Parent or a Parent Subsidiary; and (ii) caused all current employees and other Persons
with access to any non-public Parent Intellectual Property to execute a binding and enforceable confidentiality agreement or other
agreement that includes customary confidentiality terms sufficient to protect the proprietary interests of Parent or such Parent
Subsidiary with respect to such Parent Intellectual Property. Copies of the forms of agreements referred to in the foregoing
clauses
(i)
and
(ii)
(collectively, “
Parent IP Agreements
”) have been made available to Parent prior to the
date hereof, and to the Knowledge of Parent, no material breach of any such agreement by the other party thereto has occurred or
been threatened.
(g) Except
with respect to Contracts set forth on
Section 4.18(g)
of the Parent Disclosure Schedule and identified as such, neither
Parent nor any Parent Subsidiary is obligated to make any material payments by way of royalties, fees or otherwise to any owner
or licensor of, or other claimant to, any Intellectual Property.
(h) Except
as set forth on
Section 4.18(h)
of the Parent Disclosure Schedule, to the knowledge of Parent, there are no actions
that must be taken within 180 days of the date of this Agreement, including the payment of any registration, maintenance or renewal
fees or the filing of any response to an official action of a court or Governmental Entity (including the United States Patent
and Trademark Office or similar foreign government agencies) or the filing of any application for the purpose of obtaining, maintaining,
perfecting, preserving or renewing any of the owned Parent Intellectual Property.
(i) Except
as set forth on
Section 4.18
of the Parent Disclosure Schedule, neither Parent nor any Parent Subsidiary has (i) entered
into any Contract under which it has, or may have, the obligation to transfer any ownership of, or granted any exclusive license
to use or distribute (or entered into any agreement under which it has, or may have, the obligation to grant any exclusive license
to use or distribute), or authorized the retention of any exclusive rights to use or joint ownership of, any of the Parent Intellectual
Property, to any other Person, (ii) entered into any Contract under which it has, with respect to any of the Parent Intellectual
Property, granted any license, sublicense, covenant not to sue, assert or exploit or (iii) entered into any Contract under which
Parent or a Parent Subsidiary has granted any Person the right to bring a lawsuit for infringement or misappropriation of any of
the Parent Intellectual Property.
(j) None
of the execution and delivery of this Agreement, the consummation of the Transactions, or the performance by Parent or Merger Sub
of their obligations hereunder, conflict or will conflict with, alter or impair, any of Parent’s or of a Parent Subsidiary’s
or any rights in or to any Parent Intellectual Property or the validity, enforceability, use, right to use, ownership, priority,
duration, scope or effectiveness of any such Parent Intellectual Property or otherwise trigger any additional payment obligations
with respect to any Parent Intellectual Property.
Section 4.19
Parent
Plans
.
(a)
Section 4.19(a)
of the Parent Disclosure Schedule sets forth each “employee benefit plan” as such term is defined in Section 3(3) of
ERISA (such as pension and 401(k) plans, and medical, life, and disability plans), and any bonus, stock option, stock purchase,
restricted stock, incentive, deferred compensation, retiree medical or life insurance, cafeteria plan, dependent care plan, supplemental
retirement or other benefit plan, program or arrangement or any employment, termination, severance, retention, stay bonus or other
contract, agreement, plan, program or arrangement for the benefit of any current or former employee, officer, director or independent
contractor of Parent or any Parent Subsidiary (collectively, the “
Parent Plans
”) that Parent or a Parent Subsidiary
maintains or makes contributions to or has any responsibility or liability for.
(b) Parent
has made available to the Company copies of: (i) the most recent annual report (Form Series 5500 and all schedules and financial
statements attached thereto), if any, required under applicable Laws in connection with each Parent Plan; (ii) if the Parent Plan
is subject to the minimum funding standards of Section 302 of ERISA, the most recent annual and periodic accounting of Parent Plan
assets, if any; (iii) the most recent summary plan description required under ERISA or any similar Law with respect to each Parent
Plan; (iv) all material correspondence since January 1, 2015 to or from any Governmental Entity relating to any Parent Plan; and
(v) the most recent IRS determination or opinion letter issued with respect to each Parent Plan intended to be qualified under
Section 401(a) of the Code.
(c) Each
Parent Plan that is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter (or
opinion letter, if applicable) from the U.S. Internal Revenue Service stating that such Parent Plan is so qualified. Each Company
Parent Plan has been maintained in compliance with its terms and has been maintained in material compliance with all applicable
Laws.
(d) The
execution and delivery of this Agreement and the consummation of the Transactions (i) will not materially increase the benefits
payable by Parent or any Parent Subsidiary under any Parent Plan and (ii) will not result in any acceleration of the time of payment
or vesting of any material benefits payable by Parent or any Parent Subsidiary under any Parent Plan.
(e) Parent
and the Parent Subsidiaries are in material compliance with all applicable Laws relating to the employment of its employees.
(f) There
is no agreement, plan, arrangement or other Contract covering any director or officer or other employee of Parent or any Parent
Subsidiary, and no payments have been made or will be made to any director or officer or other employee of Parent or any Parent
Subsidiary, that, considered individually or considered collectively with any other such Contracts or payments, will, or would
reasonably be expected to, result in any payment that will not be deductible by Parent or such Parent Subsidiary by reason of Section 280G
of the Code, or give rise directly or indirectly to the payment of any amount that would not be deductible pursuant to Section 162(m) of
the Code (or any comparable provision under U.S. state or local or non-U.S. Tax Laws). Neither Parent nor any Parent Subsidiary
is a party to or has any obligation under any Contract to compensate any Person for excise Taxes payable pursuant to Section 4999
of the Code or any Taxes required by Section 409A of the Code.
(g) Each
individual who is classified by Parent as an independent contractor has been properly classified for purposes of participation
and benefit accrual under each Parent Plan.
Section 4.20
Labor
Matters
.
(a) As
of the date of this Agreement, neither Parent nor any Parent Subsidiary is a party to, nor does Parent or any Parent Subsidiary
have a duty to bargain for, any collective bargaining agreement with a labor organization or works council representing any of
its employees and there are no labor organizations or works councils representing, purporting to represent or, to the Knowledge
of Parent, seeking to represent any employees of Parent or any Parent Subsidiary. To the Knowledge of Parent, there has not been
any strike, slowdown, work stoppage, lockout, job action, picketing, labor dispute, union organizing activity, or any threat thereof,
or any similar activity or dispute, affecting Parent, any Parent Subsidiary, or any of their respective employees. There is not
now pending, and, to the Knowledge of Parent, no Person has threatened to commence, any such strike, slowdown, work stoppage, lockout,
job action, picketing, labor dispute or union organizing activity or any similar activity or dispute. Except as set forth on
Section 4.20
of the Parent Disclosure Schedule, to the Knowledge of Parent, there is no material claim or material grievance pending or threatened
relating to any employment contract, wages and hours, plant closing notification, employment statute or regulation, privacy right,
labor dispute, workers’ compensation policy or long-term disability policy, safety, retaliation, immigration or discrimination
matters involving any employee of Parent or any of Parent Subsidiaries, including charges of unfair labor practices or harassment
complaints.
(b) Neither
Parent nor any Parent Subsidiary has taken any action which would constitute a “plant closing” or “mass layoff”
within the meaning of the WARN Act or similar state or local law or issued any notification of a plant closing or mass layoff required
by the WARN Act or similar state or local law in the ninety (90) day period ending on the date of this Agreement, or incurred any
liability or obligation under WARN Act or any similar state or local law that remains unsatisfied. Except with the prior written
consent of the Company, no terminations prior to the Closing by Parent or any Parent Subsidiary will trigger any notice or other
obligations under the WARN Act or similar state or local law.
(c)
Section 4.20(c)(i)
of the Parent Disclosure Schedule contains a complete and accurate list of all employees of Parent and the Parent Subsidiaries
(“
Parent Employees
”) and Contingent Workers of Parent as of the date of this Agreement, setting forth for each
Parent Employee his or her position or title, whether classified as exempt or non-exempt for wage and hour purposes and, if exempt,
the type of exemption relied upon, whether paid on a salary, hourly or commission basis and the actual annual base salary or rates
of compensation, bonus potential, number of stock options (including amounts vested and unvested), date of hire, status (
i.e.
,
active or inactive and if inactive, the type of leave and estimated duration) and the total amount of bonus, retention, severance
and other amounts to be paid to such employee at the Closing or otherwise in connection with the Merger or upon the termination
of such employee.
Section 4.20(c)(ii)
of the Parent Disclosure Schedule also contains a complete and accurate
list of all Contingent Workers of Parent, showing for each such Contingent Worker such individual’s role in Parent’s
business and fee or compensation arrangements and any retention or severance payments that could be owed to such Contingent Worker
in connection with the Merger or upon the termination of services of such Contingent Worker. Except as set forth on
Section 4.20(c)(ii)
of the Parent Disclosure Schedule, neither Parent nor any Parent Subsidiary is delinquent in any payments to any Parent Employee
or Contingent Worker of Parent for any wages, salaries, commissions, bonuses, fees or other direct compensation due with respect
to any services performed for it to the date hereof or amounts required to be reimbursed to such Parent Employee or Contingent
Worker of Parent.
Section 4.21
Environmental
Matters
. (a) Parent and the Parent Subsidiaries are in compliance in all material respects with all applicable Environmental
Laws, which compliance includes obtaining, maintaining and complying with all Parent Permits required under Environmental Laws
for the operation of its business; (b) there is no enforcement proceeding or Legal Proceeding relating to or arising from
any noncompliance with, or Liability under, Environmental Laws (including, without limitation, relating to or arising from the
Release or threatened Release of, or exposure of any Person to, any Hazardous Materials) that is pending or, to the Knowledge of
Parent, threatened against Parent or any Parent Subsidiary relating to any real property owned, operated or leased by Parent or
a Parent Subsidiary; (c) since the Parent Lookback Date, neither Parent nor any Parent Subsidiary has received any written notice
of, or entered into, any Judgment involving uncompleted, outstanding or unresolved Liabilities or corrective or remedial obligations
relating to or arising under Environmental Laws (including, without limitation, relating to or arising from the Release or threatened
Release of, or exposure of any Person to, any Hazardous Materials); and (d) neither the execution of this Agreement by Parent nor
the consummation of the Transactions will require any investigation, remediation or other action with respect to Hazardous Materials,
or any notice to or consent of Governmental Entities, pursuant to any applicable Environmental Law. This
Section 4.21
constitutes the sole and exclusive representation and warranty of Parent regarding environmental, health and safety matters,
including, without limitation, all matters arising under Environmental Laws.
Section 4.22
Real
Property
.
(a) Neither
Parent nor any Parent Subsidiary owns any real property, has never owned any real property and is not party to any Contract to
purchase any real property.
Section 4.22
of the Parent Disclosure Schedule sets forth a complete and accurate list
of all real property currently leased, subleased or licensed by or from Parent or any Parent Subsidiary, or otherwise used or occupied
by Parent or a Parent Subsidiary (the “
Parent
Leased Real Property
”), including the name of the lessor,
licensor, sublessor, master lessor and/or lessee, the date and term of the lease, license, sublease or other occupancy right and
each amendment thereto.
(b) Parent
has made available to the Company true, correct and complete copies of all Lease Agreements granting a right in or relating to
the Parent Leased Real Property; and there are no other Lease Agreements affecting the Parent Leased Real Property or to which
Parent or a Parent Subsidiary is bound, other than those identified in
Section 4.22
of the Parent Disclosure Schedule.
All such Lease Agreements are legally valid and enforceable in accordance with their respective terms, and there is not, under
any of such Lease Agreements, any existing material default, or event of default (or event which with notice or lapse of time,
or both, would constitute a material default), and no rentals are past due. Neither Parent nor any Parent Subsidiary has received
any written notice of a default, alleged failure to perform, or any offset or counterclaim with respect to any such Lease Agreement,
which has not been fully remedied and withdrawn. Parent and the Parent Subsidiaries currently occupy all of the Parent Leased Real
Property for the operation of its business.
Section 4.23
Taxes
.
(a) Except
as set forth on
Section 4.23
of the Parent Disclosure Schedule, Parent and the Parent Subsidiaries have filed all income
and other material Tax Returns required to be filed, and each such Tax Return is true, correct and complete in all material respects.
Except as set forth on
Section 4.23
of the Parent Disclosure Schedule, all Taxes due and owing by Parent or any Parent
Subsidiary (whether or not shown on any Tax Return) have been paid or will be paid prior to the Closing. There are no Encumbrances
for Taxes (other than Permitted Encumbrances) upon any of the assets or property of Parent or any Parent Subsidiary.
(b) Except
as set forth on
Section 4.23
of the Parent Disclosure Schedule, since the Parent Lookback Date, neither Parent nor
any Parent Subsidiary has received from any Taxing Authority any (i) written notice indicating an intent to open an audit
or other review of any Taxes or Tax Returns of Parent or any Parent Subsidiary, (ii) written request for information related
to Taxes or Tax Returns of Parent or any Parent Subsidiary, or (iii) written notice of deficiency or proposed adjustment for
any amount of Tax proposed, asserted, or assessed against Parent or any Parent Subsidiary by any Taxing Authority.
(c) Neither
Parent nor any Parent Subsidiary is (nor has it ever been) a party to or bound by any Tax allocation or sharing agreement (other
than pursuant to the customary provisions of an agreement entered into in the ordinary course of business the primary purpose of
which is not related to Taxes, such as leases, licenses or credit agreements). Neither Parent nor any Parent Subsidiary (i) has
been a member of an Affiliated group filing a consolidated federal income Tax Return (other than a group, the common parent of
which was Parent), and (ii) had, and does not have any, liability for the Taxes of any other Person under Treasury Regulations
Section 1.1502-6 (or any similar provision of Law), as a transferee or successor.
(d) Neither
Parent nor any Parent Subsidiary has waived any statute of limitations in respect of Taxes or agreed to any extension of time with
respect to a Tax assessment or deficiency. No written claim has ever been made and delivered to Parent or any Parent Subsidiary
by a Taxing Authority in a jurisdiction where Parent or such Parent Subsidiary does not file Tax Returns that Parent or such Parent
Subsidiary is or may be subject to taxation by that jurisdiction or that Parent or any Parent Subsidiary must file Tax Returns
in such jurisdiction.
(e) Parent
and the Parent Subsidiaries have withheld and paid all Taxes required to have been withheld and paid in connection with any amounts
paid or owing to any employee, independent contractor, creditor, stockholder or other third party.
(f) Parent
has not knowingly taken any action (or failed to take any action) that would prevent the Merger from qualifying as a “reorganization”
within the meaning of Section 368(a) of the Code.
(g) Parent
has not been a party to any “reportable transaction,” as defined in Code Section 6707A(c)(1) and Treasury Regulation
Section 1.6011-4.
Section 4.24
Proxy
Statement
. The Proxy Statement, at the date the Proxy Statement (and any amendment or supplement thereto) is first mailed to
the Parent stockholders and at the time of the Parent Stockholder Meeting (or any adjournment or postponement thereof), will not
contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which they were made, not misleading. The Proxy Statement
will, when filed, comply as to form in all material respects with the applicable requirements of the Securities Act and the Exchange
Act and will include a recommendation by the Parent Board to vote in favor of the Parent Stockholder Matters.
Section 4.25
Corporate
Books and Records
. The corporate minute books of Parent and the Parent Subsidiaries contain, in all material respects, accurate
records of all meetings and accurately reflect, in all material respects, all other actions taken by the stockholders, the Parent
Board, the board of directors of any Parent Subsidiary and all committees thereof. Complete and accurate copies of all corporate
minutes of Parent since January 1, 2015, have been provided by Parent to the Company.
Section 4.26
Approval
Required
. The Parent Stockholder Approval is the only vote of the stockholders of Parent necessary to approve the Parent Stockholder
Matters.
Section 4.27
Valid
Issuance
. The shares of Parent Stock to be issued as Merger Consideration will, when issued in accordance with the provisions
of this Agreement, have been duly authorized, and be validly issued, fully paid and non-assessable. The Parent Common Stock that
will be issuable upon conversion of the New Preferred Stock will have been duly authorized and reserved for issuance.
Article V
COVENANTS
Section 5.01
Conduct
of Business.
(a) Except
as expressly permitted or required by this Agreement, as required by applicable Law or as set forth in
Section 5.01(a)
of the Company Disclosure Schedule (
provided
that no information disclosed in any section or subsection of the Company Disclosure
Schedule other than
Section 5.01(a)
thereof will be deemed disclosed under
Section 5.01(a)
thereof), during
the period from the date of this Agreement until the Effective Time, unless Parent otherwise consents in writing, the Company shall
(i) conduct its businesses only in the ordinary course of business and (ii) use commercially reasonable efforts to (A) maintain
and preserve intact its present lines of business and goodwill associated therewith, (B) maintain in effect all of its material
foreign, federal, state and local Company Permits, (C) maintain its rights and franchises and preserve satisfactory relationships
with Governmental Entities and employees and material customers, suppliers, distributors, contractors, creditors, licensors, licensees
and others having material business relationships with the Company, (D) keep available the services of its present directors and
officers and (E) comply in all material respects with all applicable Laws.
(b) Without
limiting the generality of the foregoing, except as set forth in
Section 5.01(a)
of the Company Disclosure Schedule
or as expressly permitted or required by this Agreement or as required by applicable Law, the Company shall not directly or indirectly
do any of the following without the prior written consent of Parent:
(i) issue,
sell or grant, or authorize the issuance, sale or grant of, any Company Securities;
(ii) redeem,
purchase or otherwise acquire, or offer to redeem, purchase or otherwise acquire, any Company Securities;
(iii) (A)
declare, authorize, set aside for payment or pay any dividend on, or make any other distribution in respect of, (whether in cash,
stock, property or any combination thereof) any shares of its capital stock or (B) adjust, split, combine, subdivide or reclassify
any shares of its capital stock;
(iv) incur,
create, assume, suffer to exist or otherwise become liable with respect to any Indebtedness;
(v) make
any loans, advances or capital contributions to, or investments in, any other Person;
(vi) sell,
lease, license or otherwise transfer, abandon or permit to lapse, or create or incur any Encumbrance on (A) any Company Intellectual
Property or (B) any of its properties, securities, interests, businesses or assets, except (x) as required to be effected prior
to the Effective Time pursuant to Contracts in force on the date of this Agreement, or (y) dispositions of inventory, equipment
or other assets that are no longer used or useful in the conduct of the business of the Company;
(vii) make
any capital expenditures or incur any obligations or liabilities in respect thereof in an amount in excess of $5,000 in the aggregate;
(viii) make
any acquisition (including by merger, consolidation, acquisition of stock or assets or otherwise) of any material portion of the
assets or business or business division of any other Person;
(ix) except
as required to ensure that an Company Plan is in compliance with applicable Law or to comply with the terms of any Company Plan,
(A) increase in any material respect the compensation, bonuses, fringe or other benefits of, or pay any bonus of any kind or amount
whatsoever to, any of the directors, officers, employees, former employees or consultants of the Company, except, in the case of
employees that are not officers or members of the Company Board, increases in salaries, wages and benefits of employees made in
the ordinary course of business; (B) except as contemplated by this Agreement, adopt, enter into, terminate or amend any Company
Plan (including changes with respect to funding obligations thereof);
(x) (A)
grant any severance, change of control, retention or termination benefits to any director, officer, employee, former employee or
consultant of the Company, except in the ordinary course of business with respect to an employee or independent contractor who
is not a member of the Company Board or an executive officer of the Company; (B) take any action to accelerate the vesting or payment
of any compensation or benefit under any Company Plan, except as provided in this Agreement; (C) hire any officer or other employee,
except to replace existing officers or employees in the ordinary course of business; (D) terminate the employment of any director,
officer, employee or consultant of the Company, except in the ordinary course of business;
(xi) make
any change to its methods of accounting, except as required by GAAP, as required by a Governmental Entity or quasi-Governmental
Entity (including the Financial Accounting Standards Board or any similar organization) or as required by applicable Law;
(xii) except
as required by applicable Law, make or change any material Tax election that is inconsistent with the Company’s past practice,
change any material annual Tax accounting period, adopt or change any material method of Tax accounting, enter into any closing
agreement with respect to a material Tax, or settle any material Tax claim, audit or assessment;
(xiii) settle,
or offer or propose to settle, any Legal Proceeding (except with respect to immaterial routine matters in the ordinary course of
business consistent with past practice);
(xiv) (A)
amend or modify in any material respect or terminate any Company Material Contract or waive, release or assign any material rights
under a Company Material Contract or (B) except in the ordinary course of business, enter into any Contract that would, if entered
into prior to the date hereof, be a Company Material Contract;
(xv) amend
the Governing Documents of the Company;
(xvi) form
any Subsidiary;
(xvii) adopt
a plan or agreement of complete or partial liquidation or dissolution or resolutions providing for a complete or partial liquidation,
dissolution, restructuring, recapitalization or other reorganization of the Company;
(xviii) take
any action that would reasonably be expected to prevent or materially impede, interfere with, hinder or delay the consummation
by Parent or any of its Subsidiaries of the Transactions;
(xix) conduct
any research or development activities, including the conduct of any clinical trial or study, except for research and development
activities related to the goods and services of the Company in the ordinary course of business;
(xx) agree,
resolve or commit to take any of the foregoing actions; or
(xxi)
engage in any action that could reasonably be expected to cause the Merger to fail to qualify as a “reorganization”
under Section 368(a) of the Code, whether or not otherwise permitted by the provisions of this
Section 5.01
.
(c) Except
as expressly permitted or required by this Agreement, as required by applicable Law or as set forth in
Section 5.01(c)
of the Parent Disclosure Schedule (
provided
that no information disclosed in any section or subsection of the Parent Disclosure
Schedule other than
Section 5.01(c)
thereof will be deemed disclosed under
Section 5.01(c)
thereof), during
the period from the date of this Agreement until the Effective Time, unless the Company otherwise consents in writing, Parent and
the Parent Subsidiaries shall (i) conduct their respective businesses only in the ordinary course of business and (ii) use
reasonable best efforts to (A) maintain and preserve intact their respective present lines of business and goodwill associated
therewith, (B) maintain in effect all of their material foreign, federal, state and local Permits, (C) maintain their rights and
franchises and preserve satisfactory relationships with Governmental Entities and employees and material customers, suppliers,
distributors, contractors, creditors, licensors, licensees and others having material business relationships with Parent and the
Parent Subsidiaries, (D) keep available the services of its present directors and officers and (E) comply in all material respects
with all applicable Laws. Without limiting the generality of the foregoing, except as set forth in
Section 5.01(c)
of the Parent Disclosure Schedule or as expressly permitted or required by this Agreement or as required by applicable Law, neither
Parent nor any Parent Subsidiary shall directly or indirectly do any of the following without the prior written consent of the
Company:
(i) issue,
sell or grant, or authorize the issuance, sale or grant of, any Parent Securities or Parent Subsidiary Securities;
(ii) redeem,
purchase or otherwise acquire, or offer to redeem, purchase or otherwise acquire, any Parent Securities or Parent Subsidiary Securities;
(iii) incur,
create, assume, suffer to exist or otherwise become liable with respect to any Indebtedness;
(iv) amend
the Governing Documents of Parent in a manner that would result in a Parent Material Adverse Effect;
provided
, that Parent
may cause its certificate of incorporation to be amended in connection with a reverse split of the outstanding Parent Common Stock;
(v) form
any new Subsidiary;
(vi) adopt
a plan or agreement of complete or partial liquidation or dissolution or resolutions providing for a complete or partial liquidation,
dissolution, restructuring, recapitalization or other reorganization of Parent or any Parent Subsidiary;
(vii) take
any action that would reasonably be expected to prevent or materially impede, interfere with, hinder or delay the consummation
by Parent of the Transactions;
(viii) conduct
any research or development activities, including the conduct of any clinical trial or study, except for research and development
activities related to the products or services of Parent in the ordinary course of business as of the date hereof;
(ix) make
any loans, advances or capital contributions to, or investments in, any other Person;
(x) sell,
lease, license or otherwise transfer, abandon or permit to lapse, or create or incur any Encumbrance on (A) any Parent Intellectual
Property or (B) any of its properties, securities, interests, businesses or assets, except (x) as required to be effected prior
to the Effective Time pursuant to Contracts in force on the date of this Agreement, or (y) dispositions of inventory, equipment
or other assets that are no longer used or useful in the conduct of the business of Parent or any Parent Subsidiary;
(xi) make
any capital expenditures or incur any obligations or liabilities in respect thereof in an amount in excess of $5,000 in the aggregate;
(xii) make
any acquisition (including by merger, consolidation, acquisition of stock or assets or otherwise) of any material portion of the
assets or business or business division of any other Person;
(xiii) except
as required to ensure that a Parent Plan is in compliance with applicable Law or to comply with the terms of a Parent Plan, (A)
increase in any material respect the compensation, bonuses, fringe or other benefits of, or pay any bonus of any kind or amount
whatsoever to, any of the directors, officers, employees, former employees or consultants of Parent or any Parent Subsidiary, except,
in the case of employees that are not officers or members of the Parent Board or increases in salaries, wages and benefits of employees
made in the ordinary course of business; (B) except as contemplated by this Agreement, adopt, enter into, terminate or amend any
Parent Plan (including changes with respect to funding obligations thereof);
(xiv) (A)
grant any severance, change of control, retention or termination benefits to any director, officer, employee, former employee or
consultant of Parent or any Parent Subsidiary, except in the ordinary course of business with respect to an employee or independent
contractor who is not a member of the Parent Board or an executive officer of Parent; (B) take any action to accelerate the vesting
or payment of any compensation or benefit under any Parent Plan, except as provided in this Agreement; (C) hire any officer or
other employee, except to replace existing officers or employees in the ordinary course of business; (D) terminate the employment
of any director, officer, employee or consultant of Parent, except in the ordinary course of business;
(xv)
(A) adopt, enter into, terminate or amend any Parent Stock Plan, except as required by Law; or (B) grant any awards under any Parent
Stock Plan;
(xvi) make
any change to its methods of accounting, except as required by GAAP, as required by a Governmental Entity or quasi-Governmental
Entity (including the Financial Accounting Standards Board or any similar organization) or as required by applicable Law;
(xvii) except
as required by applicable Law, make or change any material Tax election that is inconsistent with Parent’s or any Parent
Subsidiary’s past practice, change any material annual Tax accounting period, adopt or change any material method of Tax
accounting, or enter into any closing agreement with respect to a material Tax, settle any material Tax claim, audit or assessment;
(xviii) settle,
or offer or propose to settle, any Legal Proceeding (except with respect to immaterial routine matters in the ordinary course of
business consistent with past practice);
(xix) (A)
amend or modify in any material respect or terminate any Parent Material Contract or waive, release or assign any material rights
under a Parent Material Contract or (B) except in the ordinary course of business, enter into any Contract that would, if entered
into prior to the date hereof, be a Parent Material Contract; or
(xx) engage
in any action that could reasonably be expected to cause the Merger to fail to qualify as a “reorganization” under
Section 368(a) of the Code, whether or not otherwise permitted by the provisions of this
Section 5.01
; or
(xxi) agree,
resolve or commit to take any of the foregoing actions.
Section 5.02
Company
Member Approval
. The Company shall obtain the Company Member Approval promptly after the date hereof.
Section 5.03
Access
to Information; Confidentiality
. Subject to applicable Laws relating to the exchange of information, from the date hereof until
the earlier of the Effective Time or the date on which this Agreement is terminated in accordance with its terms, the Company on
the one hand and Parent on the other hand shall, and shall direct and use their respective reasonable best efforts to cause their
Representatives to, (i) afford to each other and their respective Representatives reasonable access during normal business hours
and upon reasonable advance notice to their books, Contracts, records, officers, employees, agents, properties, facilities and
other assets, (ii) furnish promptly to each other and their respective Representatives such financial and operating data and such
other information concerning their business and properties as such Persons may reasonably request, and (iii) instruct their Representatives
to cooperate with any investigation of a party to this Agreement;
provided
that all such parties and their respective Affiliates
and Representatives shall conduct any such activities in such a manner as not to interfere unreasonably with the business or operations
of the other party. Until the Effective Time, the information provided will be subject to the terms of the confidentiality letter
agreement, dated as of January 22, 2016 between Parent and the Company (as it may be amended from time to time, the “
Confidentiality
Agreement
”), and, without limiting the generality of the foregoing, the parties shall not, and shall cause their respective
Representatives not to, use such information for any purpose unrelated to the consummation of the Merger and the other Transactions.
Section 5.04
Private
Placement
. The Company shall promptly take such actions and cause the holders of Company Units to provide all documentation,
including investor questionnaires, reasonably requested by Parent to allow Parent to issue the Merger Shares to such holders in
a manner that satisfies the requirements of Rule 506 of Regulation D under the Securities Act, including certifications to Parent:
(a) that either (i) such holder is and will be, as of the Effective Time, an “accredited investor” (as such term is
defined in Rule 501 of Regulation D under the Securities Act) and as to the basis on which such holder is an accredited investor;
or (ii) such holder is not and will not be, as of the Effective Time, an “accredited investor”, in which case such
holder either alone or with such holder’s purchaser representative has such knowledge and experience in financial and business
matters that such holder is capable of evaluating the merits and risks of the Merger Shares; and (iii) that the Merger Shares are
being acquired for such holder’s account for investment only and not with a view towards, or with any intention of, a distribution
or resale thereof for at least a period of six (6) months following the Closing.
Section 5.05
Preparation
of the Proxy Statement; Stockholders Meeting
.
(a) Subject
to receipt of Parent from the Company of the financial statements of the Company described in
Schedule II
required under
the rules of the Exchange Act to be included in the Proxy Statement, as promptly as reasonably practicable following the date of
this Agreement (and in any event within ten (10) Business Days after the date hereof), Parent shall prepare and file with the SEC
the Proxy Statement, and the Company shall cooperate with Parent with the preparation of the foregoing. Parent, with the Company’s
cooperation, shall use its commercially reasonable efforts to respond as promptly as reasonably practicable to and resolve all
comments received from the SEC or its staff concerning the Proxy Statement as soon as practicable following the date of filing.
Parent will use its reasonable best efforts to (i) cause the Proxy Statement to be mailed to Parent’s stockholders,
in each case as promptly as practicable after the SEC confirms that it has no further comments on the Proxy Statement and (ii)
ensure that the Proxy Statement, and any amendments or supplements thereto, comply in all material respects with the rules and
regulations promulgated by the SEC under the Exchange Act. The Company shall cooperate with Parent in connection with the preparation
and filing of the Proxy Statement, including promptly furnishing to Parent in writing upon request any and all information relating
to the Company as may be required to be set forth in the Proxy Statement under applicable Law and, shall prepare and deliver any
financial statements requested by the SEC in connection with preparation of the Proxy Statement. The Company agrees that such information
supplied by it in writing for inclusion (or incorporation by reference) in the Proxy Statement will not, on the date it is first
mailed to stockholders of Parent and at the time of the Parent Stockholders Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. If, at any time prior to the Effective Time, any information
relating to the Company or its Affiliates, officers or directors, should be discovered by the Company which should be set forth
in an amendment or supplement to the Proxy Statement so that the Proxy Statement would not include any untrue statement of a material
fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they
were made, not misleading, the Company shall promptly notify Parent so that it may file with the SEC an appropriate amendment or
supplement describing such information and, to the extent required by Law, disseminate such amendment or supplement to the stockholders
of Parent.
(b) In
connection with Parent’s preparation and filing with the SEC of the Proxy Statement, Goodwin Procter LLP, counsel for the
Company, shall, if required by applicable Law, as jointly determined in good faith by Troutman Sanders LLP, counsel to Parent,
and Goodwin Procter LLP, opine on the accuracy of the disclosure contained in the portion of the Proxy Statement addressing the
Tax considerations applicable to the Merger in a form required by applicable Law, as jointly determined in good faith by Troutman
Sanders LLP and Goodwin Procter LLP. If the opinion required pursuant to this
Section 5.05(b)
directly addresses the
tax-deferred nature of the Merger under Section 368 of the Code and/or Section 351 of the Code, then, if requested by Goodwin Procter
LLP, Troutman Sanders LLP, counsel for Parent, shall deliver an identical opinion. In rendering such opinion, Goodwin Procter LLP
and Troutman Sanders LLP, if applicable, may require and shall be entitled to rely upon representations of officers of Parent and
the Company reasonably satisfactory in form and substance to such counsel.
(c) Parent
shall, as soon as reasonably practicable after the SEC confirms that it has no further comments on the Proxy Statement or that
Parent may commence mailing the Proxy Statement for the purpose of voting on the approval of the issuance of the Merger Consideration
to comply with NASDAQ Rule 5635(a) in accordance with applicable Law, Parent’s Governing Documents and the NASDAQ rules,
duly give notice of, convene and hold a meeting of its stockholders to consider the adoption of the Parent Stockholder Matters
and such other matters as may be then legally required (including any adjournment or postponement thereof, the “
Parent
Stockholders Meeting
”). Any adjournment, delay or postponement of the Parent Stockholders Meeting shall require the prior
written consent of the Company.
Section 5.06
Mutual
Non-Solicitation
.
(a)
No
Solicitation by the Company
.
(i) Unless
and until this Agreement is terminated in accordance with the provisions of
Article VII
, without the prior written
consent of Parent, neither the Company nor any Representative of the Company shall directly or indirectly (A) initiate, solicit,
seek or knowingly encourage or support any inquiries, proposals or offers that constitute or may reasonably be expected to lead
to, an Acquisition Proposal, (B) engage or participate in, or knowingly facilitate, any discussions or negotiations regarding any
inquiries, proposals or offers that constitute, or may reasonably be expected to lead to, an Acquisition Proposal, (C) furnish
to any Person other than Parent or Merger Sub any non-public information that could reasonably be expected to be used for the purposes
of formulating any Acquisition Proposal, (D) waive, terminate, modify or release any Person (other than Parent and its Affiliates)
from any provision of or grant any permission, waiver or request under any “standstill” or similar agreement or obligation,
or (E) enter into any letter of intent, agreement in principle or other similar type of agreement relating to an Acquisition Proposal,
or enter into any agreement or agreement in principle requiring the Company to abandon, terminate or fail to consummate the transactions
contemplated hereby or resolve, propose or agree to do any of the foregoing;
provided
,
however
, that prior to obtaining
the Company Member Approval, the Company may take the following actions in response to an unsolicited
bona fide
written
Acquisition Proposal received by the Company or its Representatives after the date hereof that the Company Board has determined,
in good faith, after consultation with its outside counsel and independent financial advisors, constitutes, or would reasonably
be expected to lead to, a Company Superior Proposal: (1) furnish nonpublic information regarding the Company to the Person making
the Acquisition Proposal to the Company (a “
Company Qualified Bidder
”) and (2) engage in discussions or negotiations
with the Company Qualified Bidder and its representatives with respect to such Acquisition Proposal;
provided
that (w) the
Company receives from the Company Qualified Bidder an executed confidentiality agreement the terms of which are not less restrictive
to such Person than those contained in the Confidentiality Agreement, and containing additional provisions that expressly permit
the Company to comply with the terms of this
Section 5.06
(a copy of such confidentiality agreement shall promptly,
and in any event within twenty-four (24) hours, be provided to Parent for informational purposes only), (x) the Company contemporaneously
supplies to Parent any such nonpublic information or access to any such nonpublic information to the extent it has not been previously
provided or made available to Parent, (y) the Company has not breached this
Section 5.06
, and (z) the Company Board
determines in good faith, after consultation with its outside legal counsel and financial advisors, that failure to take such actions
would be inconsistent with the fiduciary duties of the Company Board under applicable Laws.
(ii) Except
as otherwise provided in
Section 5.06(a)(iii)
, neither the Company Board nor any committee of the Company Board shall
fail to make, withhold, withdraw, amend, change, qualify or publicly propose to withhold, withdraw, amend, change or qualify in
a manner adverse to Parent, the recommendation by the Company Board to the members of the Company to vote in favor and adopt the
matters set forth in the Company Member Approval, knowingly make any public statement inconsistent with such recommendation, fail
to recommend against acceptance of any Acquisition Proposal within ten (10) Business Days after the public announcement of any
such Acquisition Proposal, approve, adopt, recommend or propose publicly to approve, adopt or recommend any Acquisition Proposal,
or make any public statement inconsistent with its recommendation (any action described in this sentence being referred to as a
“
Company Change of Recommendation
”).
(iii) Notwithstanding
the foregoing, if at any time prior to obtaining the Company Member Approval, the Company receives a
bona fide
, unsolicited
Acquisition Proposal that the Company Board concludes in good faith, after consultation with its outside legal counsel and financial
advisors, constitutes a Superior Proposal, and the Company Board determines in good faith (after consultation with outside legal
counsel) that the failure to make such Company Change of Recommendation or enter into such definitive agreement would be inconsistent
with the fiduciary duties of the Company Board under applicable Laws, the Company Board may (A) effect a Company Change of Recommendation,
and/or (B) enter into a definitive agreement with respect to such Superior Proposal and terminate this Agreement;
provided
,
however
that the Company shall not take any action pursuant to the foregoing
clause (B)
, and any entry into an agreement
or purported termination of this Agreement pursuant to the foregoing
clause (B)
shall be void and of no force or effect,
unless the Company has complied with this
Section 5.06
and the Company pays the fee set forth in and in accordance
with
Section 7.03
;
provided
further
,
however
, that such actions in the foregoing
clauses (A)
and
(B)
may only be taken at a time that is after (I) the fifth (5
th
) Business Day following Parent’s
receipt of written notice from the Company that the Company Board and/or a committee thereof is prepared to take such action (which
notice will specify the material terms of the applicable Acquisition Proposal), and (B) at the end of such period, the Company
Board and/or a committee thereof determines in good faith, after taking into account all amendments or revisions irrevocably committed
to by Parent and after consultation with the Company’s outside legal counsel and financial advisors, that such Acquisition
Proposal remains a Superior Proposal. During any such five (5) Business Day period (the “
Company Notice Period
”),
Parent shall be entitled to deliver to the Company one or more counterproposals to such Acquisition Proposal and the Company will,
and cause its Representatives to, negotiate with Parent in good faith (to the extent Parent desires to negotiate) to make such
adjustments in the terms and conditions of this Agreement so that the applicable Acquisition Proposal ceases to constitute a Superior
Proposal. In the event of any material revision to the terms of any Superior Proposal, including any revision in price, the Company
Notice Period shall be extended, if applicable, to ensure that at least three (3) Business Days remain in the Company Notice Period
subsequent to the time that the Company notifies Parent of any such material revision (it being understood that there may be multiple
extensions).
(iv) Nothing
in this
Section 5.06
shall prohibit the Company Board from making any disclosure to the members of the Company, if,
in the good faith judgment of the Company Board, after consultation with its outside legal counsel, failure to make such disclosure
would be inconsistent with its fiduciary duties under applicable Laws.
(b)
No
Solicitation by Parent
.
(i) Unless
and until this Agreement is terminated in accordance with the provisions of
Article VII
, without the prior written
consent of the Company, none of Parent, its Subsidiaries or any Representative of Parent or any of its Subsidiaries shall directly
or indirectly (A) initiate, solicit, seek or knowingly encourage or support any inquiries, proposals or offers that constitute
or may reasonably be expected to lead to, an Acquisition Proposal, (B) engage or participate in, or knowingly facilitate, any discussions
or negotiations regarding any inquiries, proposals or offers that constitute, or may reasonably be expected to lead to, an Acquisition
Proposal, (C) furnish to any Person other than the Company any non-public information that could reasonably be expected to be used
for the purposes of formulating any Acquisition Proposal, (D) waive, terminate, modify or release any Person (other than the Company
and its Affiliates) from any provision of or grant any permission, waiver or request under any “standstill” or similar
agreement or obligation, or (E) enter into any letter of intent, agreement in principle or other similar type of agreement relating
to an Acquisition Proposal, or enter into any agreement or agreement in principle requiring Parent to abandon, terminate or fail
to consummate the transactions contemplated hereby or resolve, propose or agree to do any of the foregoing;
provided
,
however
, that prior to the approval of the Parent Stockholder Matters at the Parent Stockholder Meeting, Parent may take the
following actions in response to an unsolicited
bona fide
written Acquisition Proposal received by Parent or its Representatives
after the date hereof that the Parent Board has determined, in good faith, after consultation with its outside counsel and independent
financial advisors, constitutes, or would reasonably be expected to lead to, a Superior Proposal: (1) furnish nonpublic information
regarding Parent to the Person making the Acquisition Proposal (a “
Parent Qualified Bidder
”); and (2) engage
in discussions or negotiations with the Parent Qualified Bidder and its representatives with respect to such Acquisition Proposal;
provided
that (w) Parent receives from the Parent Qualified Bidder an executed confidentiality agreement the terms of which
are not less restrictive to such Person than those contained in the Confidentiality Agreement, and containing additional provisions
that expressly permit Parent to comply with the terms of this
Section 5.06
(a copy of such confidentiality agreement
shall promptly, and in any event within twenty-four (24) hours, be provided to the Company for informational purposes only),
(x) Parent contemporaneously supplies to the Company any such nonpublic information or access to any such nonpublic information
to the extent it has not been previously provided or made available to the Company, (y) Parent has not breached this
Section 5.06
,
and (z) the Parent Board determines in good faith, after consultation with its outside legal counsel, that failure to take such
actions would be inconsistent with the fiduciary duties of the Parent Board under applicable Laws.
(ii) Except
as otherwise provided in
Section 5.06(b)(iii)
, neither the Parent Board nor any committee of the Parent Board shall
fail to make, withhold, withdraw, amend, change, qualify or publicly propose to withhold, withdraw, amend, change or qualify in
a manner adverse to the Company, the recommendation by the Parent Board that the stockholders of Parent vote in favor and adopt
the Parent Stockholder Matters, knowingly make any public statement inconsistent with such recommendation, fail to recommend against
acceptance of an Acquisition Proposal within ten (10) Business Days after the public announcement of any such Acquisition Proposal,
approve, adopt, recommend or propose publicly to approve, adopt or recommend any Acquisition Proposal, or make any public statement
inconsistent with its recommendation (any action described in this sentence being referred to as a “
Parent Change of Recommendation
”).
(iii) Notwithstanding
the foregoing, if at any time prior to the approval of the Parent Stockholder Matters at the Parent Stockholder Meeting, Parent
receives a
bona fide
, unsolicited Acquisition Proposal that the Parent Board concludes in good faith, after consultation
with its outside legal counsel and financial advisors, constitutes a Superior Proposal, and the Parent Board determines in good
faith (after consultation with outside legal counsel) that failure to make such Parent Change of Recommendation or enter into such
definitive agreement would be inconsistent with the fiduciary duties of the Parent Board under applicable Laws, the Parent Board
may (A) effect a Parent Change of Recommendation, and/or (B) enter into a definitive agreement with respect to such Superior Proposal
and terminate this Agreement;
provided
,
however
that neither Parent nor Merger Sub shall not take any action pursuant
to the foregoing
clause (B)
, and any entry into an agreement or purported termination of this Agreement pursuant to the
foregoing
clause (B)
shall be void and of no force or effect, unless Parent has complied with this
Section 5.06
and Parent pays the fee set forth in and in accordance with
Section 7.03
;
provided
further
,
however
,
that such actions in the foregoing
clauses (A)
and
(B)
may only be taken at a time that is after (I) the fifth (5
th
)
Business Day following the Company’s receipt of written notice from Parent that the Parent Board and/or a committee thereof
is prepared to take such action (which notice will specify the material terms of the applicable Acquisition Proposal), and (II)
at the end of such period, the Parent Board and/or a committee thereof determines in good faith, after taking into account all
amendments or revisions irrevocably committed to by the Company and after consultation with Parent’s outside legal counsel
and financial advisors, that such Acquisition Proposal remains a Superior Proposal. During any such five (5) Business Day period
(the “
Parent Notice Period
”), the Company shall be entitled to deliver to Parent one or more counterproposals
to such Acquisition Proposal and Parent will, and cause its Representatives to, negotiate with the Company in good faith (to the
extent the Company desires to negotiate) to make such adjustments in the terms and conditions of this Agreement so that the applicable
Acquisition Proposal ceases to constitute a Superior Proposal. In the event of any material revision to the terms of any Superior
Proposal, including any revision in price, the Parent Notice Period shall be extended, if applicable, to ensure that at least three
(3) Business Days remain in the Parent Notice Period subsequent to the time that Parent notifies the Company of any such material
revision (it being understood that there may be multiple extensions).
(iv) Nothing
in this
Section 5.06
shall prohibit Parent from complying with Rule 14e-2 or Rule 14d-9 promulgated under the Exchange
Act with regard to an Acquisition Proposal, respectively, or from Parent Board making any disclosure to the Parent Stockholders
if, in the good faith judgment of the Parent Board, after consultation with its outside legal counsel, that failure to take such
action or make such disclosure would be inconsistent with its fiduciary duties under applicable Laws.
(c) Both
the Company and Parent shall notify the other as promptly as practicable, and in no event later than twenty-four (24) hours after
receipt of any inquiries, discussions, negotiations, proposals or expressions of interest with respect to an Acquisition Proposal
received by Parent or the Company, as applicable, and any such notice shall be made orally and in writing and shall indicate in
reasonable detail the terms and conditions of such proposal, inquiry or contact, including price, and the identity of the offeror.
Both the Company and Parent shall keep the other fully informed, on a current basis, of the status and material developments (including
any changes to the terms) of such Acquisition Proposal.
(d) The
Company and Parent shall, and shall cause each of their respective Representatives to, immediately cease and cause to be terminated
any and all existing activities, discussions or negotiations with any Person conducted heretofore with respect to, or that may
reasonably be expected to lead to, an Acquisition Proposal, and shall use commercially reasonable efforts to cause any such Person
(or its agents or advisors) in possession of non-public information in respect of the Company, Parent or any Subsidiaries of Parent
that was furnished on or behalf of the Company or Parent (as applicable) to return or destroy (and confirm destruction of) all
such information. The Company and Parent agree that any breach of this Section 5.06 by any Subsidiary, Affiliate or Representative
of the Company or Parent shall constitute a breach of this Section 5.06 by the Company or Parent, as applicable.
(e) Neither
the Company nor Parent will exempt any Persons for any state takeover Law or waive the provisions of Section 203 of the DGCL, except
in connection with a Superior Proposal.
Section 5.07
Consents
.
The Company shall obtain all necessary consents, waivers and approvals of any parties to any Contracts and/or Company Permits,
and give all necessary notices to such parties, as are required thereunder in connection with the Merger or for any such Contracts
or Company Permits to remain in full force and effect, all of which are required to be listed in
Section 5.07(a)
of
the Company Disclosure Schedule so as to preserve all rights of, and benefits to, the Company under such Contract or Permit from
and after the Effective Time (the “
Company Required Consents
”). The Company Required Consents shall be in a
form reasonably satisfactory to Parent, and the Company shall consult with Parent and provide Parent with an opportunity to participate
in the discussions with each counterparty to a Company Required Consent. Parent shall obtain all necessary consents, waivers and
approvals of any parties to any Contracts and/or Parent Permits, and give all necessary notices to such parties, as are required
thereunder in connection with the Merger or for any such Contracts or Parent Permits to remain in full force and effect, all of
which are required to be listed in
Section 5.07(a)
of the Parent Disclosure Schedule so as to preserve all rights of,
and benefits to, Parent under such Contract or Permit from and after the Effective Time (the “
Parent Required Consents
”).
The Parent Required Consents shall be in a form reasonably satisfactory to the Company, and Parent shall consult with the Company
and provide the Company with an opportunity to participate in the discussions with each counterparty to a Parent Required Consent.
Section 5.08
Efforts
.
Subject to the terms and conditions provided in this Agreement, each of the parties shall use its commercially reasonable efforts
to take promptly, or cause to be taken promptly, all actions, and to do promptly, or cause to be done promptly, all things necessary,
proper or advisable under applicable laws and regulations to consummate and make effective the Transactions, to cause all conditions
to the obligations of the other parties hereto to effect the Merger to occur, to obtain all necessary waivers, consents, approvals
and other documents required to be delivered hereunder and to effect all necessary registrations and filings and to remove any
injunctions or other impediments or delays, legal or otherwise, in order to consummate and make effective the transactions contemplated
by this Agreement for the purpose of securing to the parties hereto the benefits contemplated by this Agreement;
provided
,
however
, that no party to this Agreement shall be required to agree to (a) any license, sale or other disposition or
holding separate (through establishment of a trust or otherwise) of any shares of capital stock or of any business, assets or properties
of such party, its subsidiaries or Affiliates, (b) the imposition of any limitation on the ability of such party, its subsidiaries
or Affiliates to conduct their respective businesses or own any capital stock or assets or to acquire, hold or exercise full rights
of ownership of their respective businesses, or (c) the imposition of any impediment on such party, its subsidiaries or Affiliates
under any statute, rule, regulation, executive order, decree, order or other legal restraint governing competition, monopolies
or restrictive trade practices. Nothing herein shall require Parent or the Company to litigate with any Governmental Entity.
Section 5.09
Employment
Arrangements
.
(a) The
Company shall cause each employment agreement or other arrangement listed on
Section 5.09(a)
of the Company Disclosure
Schedule to be terminated at or prior to the Effective Time, and Parent shall enter into the Employment Agreements.
(b) Following
the date of this Agreement Parent shall use commercially reasonable efforts to assist the Company in identifying the Parent Employees
who should be retained by Parent following the Effective Time. Effective no later than immediately prior to the Effective
Time, Parent shall terminate all Parent Employees, except those designated by written notice by the Company (the “
Continuing
Employees
”), which notice shall be provided to Parent no later than five (5) Business Days prior to the Effective Time.
Parent shall require any Parent Employees that are not a Continuing Employees to execute a separation agreement or similar document,
including valid release of claims, in a form reasonably satisfactory to the Company as a condition to the receipt of severance
paid by the Parent.
Section 5.10
Listing
.
Parent shall use commercially reasonable efforts to maintain its existing listing on the NASDAQ Capital Market and cause the shares
of Parent Common Stock issued as Merger Consideration to be approved for listing on the NASDAQ Capital Market at or within a reasonable
period of time after the Effective Time.
Section 5.11
Directors
and Officers
. Prior to the Effective Time, Parent will take all necessary action to:
(a) Cause
the number of members of the Parent Board to be fixed at seven (7);
(b) To
cause, concurrently with the Effective Time:
(i) In
the event that immediately following the issuance of Merger Shares at the Effective Time pursuant to
Section 2.08
,
Section 2.08(c)
and
Section 2.09
, but without giving effect to the New Preferred Stock Financing, the Company
Percentage will be equal to or less than 55.0%, (A) two (2) of such directors to be persons designated by the Company who
are identified as “Company Director Designees” on
Schedule III
(as such schedule may be amended by the Company
at any time prior to a date two (2) Business Days before the Effective Time) (the “
Company Director Designees
”),
(B) two (2) of such directors to be persons designated by the current Parent Board who are identified as “Parent Director
Designees” on
Schedule III
(the “
Parent Director Designees
”), (C) two (2) of such directors to
be persons designated by the holders of New Preferred Stock immediately following the New Preferred Stock Financing, who are identified
as “Investor Director Designees” on
Schedule III
(the “
Investor Director Designees
”), and
(D) one (1) such director to be a person not otherwise an Affiliate of any party to this Agreement or any purchaser of New Preferred
Stock (the “
Independent Designees
”);
(ii) In
the event that immediately following the issuance of Merger Shares at the Effective Time pursuant to
Section 2.08
,
Section 2.08(c)
and
Section 2.09
, but without giving effect to the New Preferred Stock Financing, the Company
Percentage will be greater than 55.0%, (A) three (3) of such directors to be Company Director Designees, (B) two (2) of
such directors to be Parent Director Designees, and (C) two (2) of such directors to be Investor Director Designees;
(c) to
obtain the necessary resignations of the directors of Parent serving immediately prior to the Effective Time who are not among
the directors designated above, which resignations will be effective concurrently with the effectiveness of the elections referred
to in
clauses (a)
and
(b)
; and
(d) to
cause the officers of Parent to be as of the Effective Time those persons identified as such on
Schedule IV
(as such schedule
may be mutually agreed by the parties at any time prior to a date that is two (2) Business Days before the Effective Time).
If any Company Director
Designee or Investor Director Designee is, prior to the Effective Time, unable or unwilling to hold office beginning concurrently
with the Effective Time, the Persons entitled to designate such designee in accordance with
Section 5.11(b)
will designate
another to be appointed as a director in his or her place;
provided
such person will comply with the applicable NASDAQ Capital
Market rules and NASDAQ listing requirements.
If any Parent Director
Designee is, prior to the Effective Time, unable or unwilling to hold office beginning concurrently with the Effective Time, the
current Parent Board will designate another to be appointed as a director in his or her place;
provided
such person will
comply with the applicable NASDAQ Capital Market rules and NASDAQ listing requirements.
Section 5.12
Indemnification
of Officers and Directors
.
(a) From
the Effective Time through the sixth anniversary of the date on which the Effective Time occurs, Parent shall, and shall cause
the Surviving Entity to, jointly and severally, indemnify and hold harmless each person who is now, or has been at any time prior
to the date hereof, or who becomes prior to the Effective Time, a director, manager or officer of Parent or the Company (the “
D&O
Indemnified Parties
”), against all claims, losses, liabilities, damages, judgments, fines and reasonable fees, costs
and expenses, including fees and disbursements of legal counsel, incurred in connection with any claim, action, suit, proceeding
or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to the fact that the D&O
Indemnified Party is or was a director, manager or officer of the Company, whether asserted or claimed prior to, at or after the
Effective Time, to the fullest extent permitted under the DGCL for directors or officers of Delaware corporations. Each D&O
Indemnified Party will be entitled to advancement of expenses incurred in the defense of any such claim, action, suit, proceeding
or investigation from each of Parent and the Surviving Entity, jointly and severally, upon receipt by Parent or the Surviving Entity
from the D&O Indemnified Party of a request therefor;
provided
that any person to whom expenses are advanced provides
an undertaking, to the extent required by the DGCL, other applicable Law or the applicable Governing Documents, to repay such advances
if it is ultimately determined that such person is not entitled to indemnification.
(b) The
Governing Documents of Parent shall contain, and Parent shall cause the Governing Documents of the Surviving Entity to so contain,
provisions no less favorable with respect to indemnification, advancement of expenses and exculpation of present and former managers
and officers of the Company than are presently set forth in the Governing Documents of the Company which provisions shall not be
amended, modified or repealed for a period of six years’ time from the Effective Time in a manner that would adversely affect
the rights thereunder of individuals who, at or prior to the Effective Time, were officers or directors of the Company.
(c) Prior
to the Closing, the Company shall obtain and pay for coverage to be extended through the purchase of “tail” insurance
coverage with at least the same coverage and amounts and containing terms and conditions that are not less advantageous to the
managers and officers of the Company as the Company’s existing policies with respect to claims arising out of or relating
to events which occurred before or at the Effective Time (including in connection with the transactions contemplated by this Agreement)
(the “
D&O Tail Policy
”). The Company shall bear the cost of the D&O Tail Policy, and such costs, to
the extent not paid prior to the Closing, shall be included in the determination of Liabilities of the Company as of the Effective
Time. During the term of the D&O Tail Policy, Parent shall not (and shall cause the Surviving Entity not to) take any action
following the Closing to cause the D&O Tail Policy to be cancelled or any provision therein to be amended or waived;
provided
,
that neither Parent, the Surviving Entity nor any Affiliate thereof shall be obligated to pay any premiums or other amounts in
respect of such D&O Tail Policy. If such “tail” coverage has been obtained at or prior to the Effective Time, Parent
shall, and shall cause the Surviving Entity to, cause such coverage to remain in full force and effect for its full term, and continue
to honor the obligations thereunder.
(d) Parent
shall pay all expenses, including reasonable attorneys’ fees, that may be incurred by the persons referred to in this
Section 5.12
in connection with their enforcement of their rights provided in this
Section 5.12
but only if and to the extent that
such persons are successful on the merits of such enforcement action.
(e) The
provisions of this
Section 5.12
are intended to be in addition to the rights otherwise available to the current and
former officers, managers and directors of Parent and the Company by law, charter, statute, bylaw or agreement, and shall operate
for the benefit of, and shall be enforceable by, each of the D&O Indemnified Parties, their heirs and their representatives.
(f) In
the event Parent or the Surviving Entity or any of their respective successors or assigns (i) consolidates with or merges into
any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (ii) transfers
all or substantially all of its properties and assets to any person, then, and in each such case, proper provision shall be made
so that the successors and assigns of Parent or the Surviving Entity, as the case may be, shall succeed to the obligations set
forth in this
Section 5.12
.
Section 5.13
Tax
Matters
.
(a) Sellers
shall prepare and timely file (or, to the extent Sellers are not legally permitted or are otherwise unable to file such Tax Returns,
Parent shall timely file as prepared by Sellers) all Tax Returns of the Company that are required to be filed after the Closing
Date relating to a Tax period of the Company ending on or prior to the Closing, and all such Tax Returns shall be prepared in accordance
with applicable Law and past practices of the Company (to the extent such practices are consistent with applicable Law). Further,
Sellers shall be responsible for, and shall timely pay, all Taxes due and owing relating to all Tax periods ending on or prior
to the Closing.
(b) Unless
the parties agree the Merger does not qualify for the Intended Tax Treatment, (i) each of the parties hereto agree to use reasonable
best efforts not to take any action (or fail to take any action), either prior to or following the Closing that would prevent the
Merger from qualifying as a “reorganization” within the meaning of Section 368(a) of the Code, (ii) each of the parties
hereto shall use its reasonable best efforts to cause the Merger to qualify as a “reorganization” within the meaning
of Section 368(a) of the Code, (iii) Parent intends to continue the historic business of the Company after the Closing or use at
least a significant portion of the Company’s historic business assets in a business within Parent’s “qualified
group” (as defined in Treasury Regulations Section 1.368-1(d)(4)(ii)), (iv) Parent has no present plan or intention
to sell, transfer or otherwise dispose of any of its membership interest in the Surviving Entity following the Merger, and shall
not sell, transfer or otherwise dispose of any of its member interest in the Surviving Entity prior to the date that is three years
after the Effective Time, and (v) Parent has no present plan or intention to cause the Surviving Entity to issue additional equity
interests in the Surviving Entity following the Merger, that in either case would result in Parent’s not having “control”
of the Surviving Entity within the meaning of Section 368(c) of the Code. Neither Parent nor any “related person”
(as defined in Treasury Regulations Section 1.368-1(e)(4)) to Parent has any plan or intention to redeem or reacquire, either directly
or indirectly, any of the Merger Shares issued to the Sellers in the Merger specifically.
(c) Parent
shall receive a properly executed statement, issued by the Company pursuant to Treasury Regulations Sections 1.897-2(h) and
1.1445-2(c)(3) dated no more than thirty (30) days prior to the Closing Date and signed by an officer of the Company, and in form
and substance reasonably satisfactory to Parent, certifying that interests in the Company, including Company Units, do not constitute
“United States real property interests” under Section 897(c) of the Code and the Company shall have provided notice
to the IRS in accordance with the provisions of Treasury Regulations Section 1.897-2(h)(2).
(d) From
the date hereof, through, and after the Closing, Sellers, Parent, Company, and the Surviving Entity shall reasonably cooperate
and shall provide such assistance to the other party, and make available to the other party, as reasonably requested, the books
and records, documents, information or data, in each case relating to Taxes of the Company or Parent, as applicable, for taxable
periods ending on or prior to the Closing Date, including with respect to any “loss transaction” as defined in Treasury
Regulation Section 1.6011-4, for purposes of preparing or reviewing Tax Returns, for complying with or representing the Company’s,
the Surviving Entity’s, or Parent’s interests in any Tax controversy or other investigative demand by a Governmental
Authority, for financial reporting or other SEC reporting purposes, or for any other legitimate Tax-related reason not injurious
to the other party, including with respect to making Tax representations in connection with any future transactions.
Section 5.14
Stockholder
Litigation
. Until the earlier of the termination of this Agreement in accordance with its terms or the Effective Time, Parent,
on the one hand, and the Company, on the other hand, shall give the other party the opportunity to participate in the defense or
settlement of any stockholder or member litigation relating to this Agreement or any of the Transactions, and shall not settle
any such litigation without the other party’s written consent, which will not be unreasonably withheld, conditioned or delayed.
Section 5.15
Section 16
Matters
. Prior to the Closing, the Parent Board shall use all reasonable efforts to approve in advance in accordance with the
procedures set forth in Rule 16b-3 promulgated under the Exchange Act any acquisitions and/or dispositions of equity securities
of Parent resulting from the Transactions by each Person who is subject to Section 16 of the Exchange Act (or who will become
subject to Section 16 of the Exchange Act as a result of the Transactions) with respect to equity securities of Parent.
Section 5.16
Form
S-3
(a) Parent
agrees to promptly file with the SEC a “shelf” registration statement on Form S-3 or other appropriate form in connection
with the registration under the Securities Act of the Registrable Securities (the “
Registration Statement
”)
as soon as Parent is eligible to use Form S-3 following the Effective Time, but in no event later than the date following the earlier
of (x) the date that Parent files its annual report on Form 10-K for the year ended December 31, 2016 with the SEC and (y) March
30, 2017. Parent shall maintain the effectiveness of such Registration Statement thereafter for a period of two years after such
Registration Statement is declared effective by the SEC.
(b) In
connection with the filing of the Registration Statement on Form S-3, Parent shall, as expeditiously as reasonably possible:
(i) prepare
and file with the SEC such amendments and supplements to such Registration Statement, and the prospectus used in connection with
such Registration Statement, as may be necessary to comply with the Securities Act in order to enable the disposition of all Registrable
Securities covered by such Registration Statement;
(ii) furnish
to the holders selling such Registrable Securities (the “
Selling Holders
”) such numbers of copies of a prospectus,
including a preliminary prospectus, as required by the Securities Act, and such other documents as the holders may reasonably request
in order to facilitate their disposition of their Registrable Securities;
(iii) use
its commercially reasonable efforts to register and qualify the Registrable Securities covered by such Registration Statement under
such other securities or blue-sky laws of such jurisdictions as shall be reasonably requested by the Selling Holders;
provided
that Parent shall not be required to qualify to do business or to file a general consent to service of process in any such states
or jurisdictions, unless Parent is already subject to service in such jurisdiction and except as may be required by the Securities
Act;
(iv) promptly
make available for inspection by the Selling Holders, any managing underwriters participating in any disposition pursuant to such
Registration Statement, and any attorney or accountant or other agent retained by any such underwriter or selected by the Selling
Holders, all financial and other records, pertinent corporate documents, and properties of Parent, and cause Parent’s officers,
directors, employees, and independent accountants to supply all information reasonably requested by any such seller, underwriter,
attorney, accountant, or agent, in each case, as necessary or advisable to verify the accuracy of the information in such registration
statement and to conduct appropriate due diligence in connection therewith;
(v) notify
each Selling Holder, promptly after Parent receives notice thereof, of the time when such Registration Statement has been declared
effective or a supplement to any prospectus forming a part of such registration statement has been filed; and
(vi) after
such Registration Statement becomes effective, notify each Selling Holder of any request by the SEC that Parent amend or supplement
such registration statement or prospectus.
(c) All
expenses incurred in connection with registrations, filings, or qualifications pursuant to this
Section 5.16
, including
all registration, filing, and qualification fees; printers’ and accounting fees; fees and disbursements of counsel for Parent
shall be borne and paid by Parent and underwriting discounts and commissions relating to Registrable Securities covered by such
registration statement shall be borne
pro rata
by the Selling Holders.
(d) In
connection with the disposition of any Registrable Securities under the Registration Statement pursuant to
Section 5.16
:
(i)
To the extent permitted by law, Parent will indemnify and hold harmless each Selling Holder, and the partners, members, officers,
directors, and stockholders of each such Selling Holder and any underwriter (as defined in the Securities Act) for each such Selling
Holder; and each Person, if any, who controls such Selling Holder or underwriter within the meaning of the Securities Act or the
Exchange Act, against any Damages, and Parent will pay to each such Selling Holder, underwriter, controlling Person, or other aforementioned
Person any reasonable legal or other expenses reasonably incurred thereby in connection with investigating or defending any
claim or proceeding from which Damages may result, as such expenses are incurred;
provided, however
, that the
indemnity agreement contained in this
Section 5.16(d)
shall not apply to amounts paid in settlement of any such claim
or proceeding if such settlement is effected without the consent of Parent, which consent shall not be unreasonably withheld, nor
shall Parent be liable for any Damages to the extent that they arise out of or are based upon actions or omissions made in reliance
upon and in conformity with written information furnished by or on behalf of any such Selling Holder, underwriter, controlling
Person, or other aforementioned Person expressly for use in connection with such registration.
(ii) To
the extent permitted by law, each Selling Holder, severally and not jointly, will indemnify and hold harmless Parent, and each
of its directors, each of its officers who has signed the Registration Statement, each Person (if any), who controls Parent within
the meaning of the Securities Act, legal counsel and accountants for Parent, any underwriter (as defined in the Securities Act),
any other Holder selling securities in such Registration Statement, and any controlling Person of any such underwriter or other
Selling Holder, against any Damages, in each case only to the extent that such Damages arise out of or are based upon actions or
omissions made in reliance upon and in conformity with written information furnished by or on behalf of such Selling Holder expressly
for use in connection with such registration; and each such Selling Holder will pay to Parent and each other aforementioned Person
any reasonable legal or other expenses reasonably incurred thereby in connection with investigating or defending any claim or proceeding
from which Damages may result, as such expenses are incurred;
provided, however
, that the indemnity agreement contained
in this
Section 5.16(d)
shall not apply to amounts paid in settlement of any such claim or proceeding if such settlement
is effected without the consent of the Selling Holder, which consent shall not be unreasonably withheld; and
provided
further
that in no event shall the aggregate amounts payable by any Selling Holder by way of indemnity or contribution under
Section 5.16(d)
exceed the proceeds from the offering received by such Selling Holder (net of any selling expenses paid by such Selling Holder),
except in the case of fraud or willful misconduct by such Selling Holder.
Article VI
CONDITIONS
TO THE MERGER
Section 6.01
Conditions
to Each Party’s Obligation to Effect the Merger
. The respective obligations of each party to effect the Merger shall
be subject to the fulfillment (or waiver by all parties, to the extent permitted by applicable Law) at or prior to the Effective
Time of the following conditions:
(a) Each
of the Company Member Approval and Parent Stockholder Approval shall have been obtained.
(b) No
Governmental Order or any other Law shall have been adopted, issued, enacted, promulgated, enforced or entered by any Governmental
Entity that remains in effect and which has the effect of restraining, enjoining or otherwise prohibiting the consummation of the
Merger and the other Transactions.
(c) No
Legal Proceeding pending, or overtly threatened in writing, by an official of a Governmental Entity in which such Governmental
Entity indicates that it intends to conduct any Legal Proceeding or taking any other action: (a) challenging or seeking to
restrain or prohibit the consummation of the Merger; (b) relating to the Merger and seeking to obtain from Parent, Merger
Sub or the Company any damages or other relief that may be material to Parent or the Company; or (c) seeking to prohibit or
limit in any material and adverse respect a party’s ability to vote, transfer, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of Parent.
(d) Parent
and the Persons listed on
Exhibit A
attached hereto shall have executed the Employment Agreements.
(e) The
New Preferred Stock Financing shall have been consummated.
(f) The
existing shares of Parent Common Stock shall have been continually listed on the NASDAQ Capital Market as of and from the date
of this Agreement through the Closing Date, and the shares of Parent Common Stock issued in connection with the Merger shall have
been approved for listing (subject only to notice of issuance) on The NASDAQ Global Market or The NASDAQ Capital Market, effective
at the Effective Time.
Section 6.02
Conditions
to Obligation of the Company to Effect the Merger
. The obligation of the Company to effect the Merger is further subject to
the fulfillment of, or the waiver by the Company, to the extent permitted by applicable Law, on or prior to the Effective Time
of, the following conditions:
(a) The
representations and warranties of Parent and Merger Sub contained in this Agreement (i) shall have been true and correct as
of the date of this Agreement except for those representations and warranties which address matters only as of a particular date
(which representations shall have been true and correct as of such particular date) and (ii) shall be true and correct on
and as of the Closing Date with the same force and effect as if made on the Closing Date, except in each case where the failure
to be true and correct has not had, and would not reasonably be expected to have, a Parent Material Adverse Effect, it being understood
that, for purposes of determining the accuracy of such representations and warranties, any update of or modification to the Parent
Disclosure Schedule made or purported to have been made after the date of this Agreement shall be disregarded.
(b) Parent
shall have performed in all material respects all obligations and complied in all material respects with all covenants required
by this Agreement to be performed or complied with by it prior to the Effective Time.
(c) There
shall not have occurred and be continuing any event, occurrence, revelation or development of a state of circumstances or facts
which, individually or in the aggregate, has had or would reasonably be expected to have a Parent Material Adverse Effect.
(d) Parent
shall have delivered to the Company a certificate, dated the Effective Time and signed by an executive officer of Parent, certifying
to the effect that the conditions set forth in
Sections 6.02(a)
,
6.02(b)
and
6.02(c)
have been satisfied.
(e) Parent
shall have obtained the Parent Required Consents.
(f) The
Parent Board shall have been expanded in accordance with
Section 5.11(a)
and the appropriate designees appointed to
the Parent Board in accordance with
Section 5.11(b)
.
(g) The
counterparties set forth on
Section 6.02(f)
of the Company Disclosure Schedules shall have agreed to reduce the aggregate
Liabilities of the Company to the amount set forth under the heading “New Outstanding Indebtedness.”
(h) A
Certificate of Amendment to Parent’s certificate of incorporation setting forth the Charter Amendment shall have been duly
filed with the Secretary of State of the State of Delaware and be in full force and effect.
(i) Parent
shall have delivered to the Company a Lock-Up Agreement executed by Parent and each stockholder of Parent set forth on
Schedule
V
attached hereto.
(j) Parent
shall have no outstanding Parent Closing Indebtedness as of immediately prior to the Effective Time.
(k) Parent
shall have delivered to the Company a counterpart signature page executed by Parent to each Lock-Up Agreement described in
Section 6.03(f)
.
(l) Parent
shall not have sold or issued, or entered into any agreement, commitment or arrangement to sell or issue, any New Preferred Stock
except for (i) the New Preferred Stock issuable upon the conversion of Parent Stockholder Indebtedness and (ii) the New Preferred
Stock sold and issued in the New Preferred Stock Financing.
(m) Parent
shall have removed all Tax assessments and cleared all Tax delinquencies set forth on
Section 4.23
of the Parent Disclosure
Schedule (including all interest and penalties) with no further obligation or Liability of Parent with respect thereto.
(n) Parent
shall have performed and complied with its obligations under
Section 5.09(b)
and shall have terminated all Parent Employees
other than the Continuing Employees and all severance, retention, change of control, COBRA or other payments with respect to such
Parent Employees shall have been either paid in full by Parent prior to Closing or included as a Liability of Parent in the Parent
Working Capital Deficit.
Section 6.03
Conditions
to Obligation of Parent to Effect the Merger
. The obligation of Parent to effect the Merger is further subject to the fulfillment
of, or the waiver by Parent on or prior to the Effective Time of, the following conditions:
(a) The
representations and warranties of the Company contained in this Agreement (i) shall have been true and correct as of the date
of this Agreement, except for those representations and warranties which address matters only as of a particular date (which representations
shall have been true and correct as of such particular date) and (ii) shall be true and correct on and as of the Closing Date
with the same force and effect as if made on the Closing Date, except in each case where the failure to be true and correct has
not had, and would not reasonably be expected to have, a Company Material Adverse Effect, it being understood that, for purposes
of determining the accuracy of such representations and warranties, any update of or modification to the Company Disclosure Schedule made
or purported to have been made after the date of this Agreement shall be disregarded.
(b) The
Company shall have performed in all material respects all obligations required to be performed by it under this Agreement at or
prior to the Closing Date.
(c) There
shall not have occurred and be continuing any event, occurrence, revelation or development of a state of circumstances or facts
which, individually or in the aggregate, has had or would reasonably be expected to have a Company Material Adverse Effect.
(d) The
Company shall have delivered to Parent a certificate, dated the Effective Time and signed by an executive officer of the Company,
certifying to the effect that the conditions set forth in
Sections 6.03(a)
,
6.03(b)
and
6.03(c)
have been
satisfied.
(e) The
Company Unit Recapitalization shall have been effectuated.
(f) The
Company shall have delivered to Parent a counterpart signature page to the Lock-Up Agreement executed by Sellers holding at least
a majority of the outstanding Merger Shares immediately following the Effective Time.
(g) The
Company shall have obtained the Company Required Consents.
Section 6.04
Frustration
of Closing Conditions
. Neither the Company nor Parent may rely, either as a basis for not consummating the Merger or terminating
this Agreement and abandoning the Merger, on the failure of any condition set forth in
Sections 6.01
,
6.02
or
6.03
,
as the case may be, to be satisfied if such failure was caused by such party’s willful and material breach of any provision
of this Agreement or the willful and material breach of its obligation to use its reasonable best efforts to consummate the Merger
and the other Transactions. For purposes of this Agreement, “willful and material breach” shall mean a deliberate act
or a deliberate failure to act by an officer or other senior executive of the applicable party, which act or failure to act constitutes
in and of itself a material breach of this Agreement, and which breach was the conscious object of the act or failure to act.
Article VII
TERMINATION
Section 7.01
Termination
.
Subject to
Section 7.02
, this Agreement may be terminated and the Merger abandoned at any time prior to the Closing:
(a) by
mutual written consent of the Company and Parent;
(b) by
either the Company or Parent, if the Merger has not been consummated by the date that is six (6) months following the date of this
Agreement, or such other date, if any, as the Company and Parent shall agree upon in writing (the “
Termination Date
”);
provided
,
however
, that the right to terminate this Agreement under this
Section 7.01(b)
shall not be
available to any party whose breach under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur
on or before such date;
(c) by
either the Company or Parent, if any Judgment, statute, Law, ordinance, rule, regulation or other legal restraint or prohibition
having the effects set forth in
Section 6.01(b)
shall be in effect and shall have become final and non-appealable;
(d) by
the Company, if Parent shall have breached or failed to perform in any material respect any of its representations, warranties,
covenants or other agreements contained in this Agreement, which breach or failure to perform (i) would give rise to the failure
of a condition set forth in
Section 6.02(a)
or
(b)
and (ii) is incapable of being cured or has not been cured
by Parent within thirty (30) calendar days after written notice has been given by the Company to Parent of such breach or failure
to perform;
(e) by
Parent, if the Company shall have breached or failed to perform in any material respect any of its representations, warranties,
covenants or other agreements contained in this Agreement, which breach or failure to perform (i) would give rise to the failure
of a condition set forth in
Section 6.03(a)
or
(b)
and (ii) is incapable of being cured or has not been cured
by the Company within thirty (30) calendar days after written notice has been given by Parent to the Company of such breach or
failure to perform;
(f) by
the Company (at any time prior to Parent obtaining Parent Stockholder Approval) if a Parent Triggering Event shall have occurred;
(g) by
Parent (at any time prior to the Company obtaining Company Member Approval) if a Company Triggering Event shall have occurred;
(h) by
Parent in connection with Parent entering into a definitive agreement to effect a Superior Proposal with respect to Parent; or
(i) by
the Company in connection with the Company entering into a definitive agreement to effect a Superior Proposal with respect to the
Company.
The party desiring to terminate this Agreement shall give written
notice of such termination to the other party.
Section 7.02
Effect
of Termination
. Upon the termination of this Agreement pursuant to
Section 7.01
, this Agreement shall forthwith
become null and void except for this
Section 7.02
,
Section 7.03
and
Article VIII
, which shall
survive such termination;
provided
that nothing herein shall relieve any party from liability for any willful or intentional
breach of a covenant of this Agreement prior to such termination. In addition, the Confidentiality Agreement shall not be affected
by the termination of this Agreement.
Section 7.03
Expenses;
Termination Fees
.
(a) Except
as otherwise set forth in this Agreement, whether or not the Merger is consummated, all fees and expenses incurred in connection
with the Merger, this Agreement and the transactions contemplated by this Agreement, including the fees and disbursements of counsel,
financial advisors and accountants, shall be paid by the party hereto incurring such fees or expenses.
(b) (i) If
this Agreement is terminated by the Company or Parent pursuant to
Section 7.01(f)
or
Section 7.01(h)
, respectively,
Parent shall pay to the Company, by wire transfer of immediately available funds within three Business Days after termination of
the Agreement, a nonrefundable fee in an amount equal to $256,500.
(ii) If
this Agreement is terminated by Parent or the Company pursuant to
Section 7.01(g)
or
Section 7.01(i)
, respectively,
the Company shall pay to Parent, by wire transfer of immediately available funds within three Business Days after termination of
the Agreement, a nonrefundable fee in an amount equal to $256,500.
(c) Each
party hereto acknowledges that the agreements contained in this
Section 7.03
are an integral part of the Merger and
the transactions contemplated by this Agreement, and that, without these agreements, the parties would not enter into this Agreement;
accordingly, if either party fails to pay when due any amount payable by such party under
Section 7.03(a)
or
Section 7.03(b)
,
then (i) such party shall reimburse the other party for reasonable costs and expenses (including reasonable fees and disbursements
of counsel) incurred in connection with the collection of such overdue amount and the enforcement by the other party of its rights
under this
Section 7.03
, and (ii) such party shall pay to the other party interest on such overdue amount (for
the period commencing as of the date such overdue amount was originally required to be paid and ending on the date such overdue
amount is actually paid to the other party in full) at a rate per annum equal to the “prime rate” (as announced by
Bank of America or any successor thereto) in effect on the date such overdue amount was originally required to be paid.
Article VIII
MISCELLANEOUS
Section 8.01
Non-Survival
of Representations and Warranties
.
None of the representations and warranties in this
Agreement or in any schedule, instrument or other document delivered pursuant to this Agreement shall survive the Effective Time.
This
Section 8.01
shall not limit any covenant or agreement of the parties which by its terms contemplates performance
after the Effective Time.
Section 8.02
Entire
Agreement; Assignment
.
This Agreement, the Company Disclosure Schedule, the Parent Disclosure
Schedule and the annexes and exhibits hereto, together with the other instruments referred to therein, including the Employment
Agreements (a) constitute the entire agreement among the parties hereto with respect to the subject matter hereof and supersede
all other prior agreements and understandings, both written and oral, among the parties hereto with respect to the subject matter
hereof and (b) shall not be assigned by any party hereto (whether by operation of law or otherwise), other than with the
prior written consent of Parent, Merger Sub and the Company. Any attempted assignment of this Agreement not in accordance with
the terms of this
Section 8.02
shall be void.
Section 8.03
Notices
.
All
notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed
to have been duly given upon receipt) by delivery in person, by facsimile (followed by overnight courier), E-mail (followed by
overnight courier), or by registered or certified mail (postage prepaid, return receipt requested) to the other parties hereto
as follows:
If to Parent or Merger Sub, to:
Transgenomic, Inc.
12325 Emmet Street
Omaha, NE 68164
Attention: Paul Kinnon
Email: pkinnon@transgenomic.com
Facsimile: (402) 452-5401
with a copy (which shall not constitute notice) to:
Troutman Sanders LLP
Troutman Sanders Building
1001 Haxall Point
Richmond, VA 23219
Attention: John Owen Gwathmey
Email: johnowen.gwathmey@troutmansanders.com
Facsimile: (804) 698-5174
If to the Company, to:
Precipio Diagnostics, LLC
4 Science Park
New Haven, CT 06511
Attention: Ilan Danieli, Chief Executive Officer
Email: idanieli@precipiodx.com
Facsimile: (203) 901-1289
with a copy (which shall not constitute notice) to:
Goodwin Procter LLP
The New York Times Building
620 Eighth Avenue
New York, NY 10018
|
Attention:
|
Stephen M. Davis
|
|
|
Andrew Goodman
|
|
Email:
|
SDavis@goodwinlaw.com
|
|
|
AGoodman@goodwinlaw.com
|
|
Facsimile:
|
(646) 558-4078
|
|
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(212) 937-3172
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or such other address or facsimile number
as such party may hereafter specify by like notice to the other parties hereto. All such notices, requests and other communications
shall be deemed received on the date of receipt by the recipient thereof if received prior to 5:00 p.m. in the place of receipt
and such day is a Business Day in the place of receipt. Otherwise, any such notice, request or communication shall be deemed not
to have been received until the next succeeding Business Day in the place of receipt.
Section 8.04
Public
Announcements
. No party hereto shall make, or cause to be made, any press release or public announcement in respect of this
Agreement or the Transactions or otherwise communicate with any news media without the prior written consent of Parent and the
Company, and the parties hereto shall cooperate as to the timing and contents of any such press release, public announcement or
communication, (a) unless, in the reasonable opinion of counsel, such communication is required by applicable Law, in which
case the parties hereto shall use their reasonable best efforts to allow Parent to review such press release, announcement or communication
prior to its issuance, distribution or publication, (b) except for disclosure made in connection with the enforcement of any
right or remedy relating to this Agreement or the Transactions or thereby or (c) except for disclosure made in connection with
the Proxy Statement or the Parent Stockholder Meeting or otherwise required by the Securities Act, the Exchange Act or the rules
of NASDAQ.
Section 8.05
Governing
Law; Jurisdiction
.
(a) This
Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without giving effect to any
choice or conflict of laws provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the
application of the Laws of any jurisdiction other than the State of Delaware.
(b) Each
of the parties hereto hereby agrees that (i) all actions and proceedings arising out of or relating to this Agreement shall be
heard and determined in the Chancery Court of the State of Delaware and any state appellate court therefrom sitting in New Castle
County in the State of Delaware (or, if the Chancery Court of the State of Delaware declines to accept jurisdiction over a particular
matter, any state or federal court within the State of Delaware), (ii) agrees that it will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such court and (iii) a final Judgment in any action or proceeding shall
be conclusive and may be enforced in other jurisdictions by suit on the Judgment or in any other manner provided by Law.
(c) Each
party irrevocably consents to the service of process outside the territorial jurisdiction of the courts referred to in this
Section 8.05
in any such action or proceeding by mailing copies thereof by registered or certified United States mail, postage prepaid, return
receipt requested, to its address as specified in
Section 8.03
. However, the foregoing shall not limit the right of
a party to effect service of process on the other party by any other legally available method.
Section 8.06
Construction;
Interpretation
. The term “this Agreement” means this Agreement and Plan of Merger together with all Schedules and
Exhibits hereto, as the same may from time to time be amended, modified, supplemented or restated in accordance with the terms
hereof. The headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning
or interpretation of this Agreement. No party hereto, nor its respective counsel, shall be deemed the drafter of this Agreement
for purposes of construing the provisions hereof, and all provisions of this Agreement shall be construed according to their fair
meaning and not strictly for or against any party. Unless otherwise indicated to the contrary herein by the context or use thereof:
(i) the words “herein,” “hereto,” “hereof” and words of similar import refer to this Agreement
as a whole, including the Schedules and Exhibits, and not to any particular section, subsection, paragraph, subparagraph or
clause contained in this Agreement; (ii) masculine gender shall also include the feminine and neutral genders, and vice
versa; (iii) words importing the singular shall also include the plural, and vice versa; and (iv) the words “include,”
“includes” or “including” shall be deemed to be followed by the words “without limitation.”
Section 8.07
Exhibits
and Schedules
. All Exhibits and Schedules or other documents expressly referenced in this Agreement are hereby incorporated
into this Agreement and are hereby made a part hereof as if set out in full in this Agreement. Any item disclosed on any Schedule
referenced by a particular representation and warranty in this Agreement shall be deemed to have been disclosed with respect to
other representations and warranties in this Agreement to the extent such item is disclosed in a way as to make its relevance to
such other representations and warranties reasonably apparent on its face. The specification of any dollar amount in the representations
or warranties contained in this Agreement or the inclusion of any specific item in any Schedule is not intended to imply that such
amounts, or higher or lower amounts or the items so included or other items, are or are not material, and no party shall use the
fact of the setting of such amounts or the inclusion of any such item in any dispute or controversy as to whether any obligation,
items or matter not described herein or included in a Schedule is or is not material for purposes of this Agreement.
Section 8.08
Parties
in Interest
. This Agreement shall be binding upon and inure solely to the benefit of each party hereto (and its permitted assigns),
and nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any right, benefit or remedy
of any nature whatsoever under or by reason of this Agreement;
provided
,
however
, that the holders of Company Securities
as of immediately prior to the Effective Time shall be third-party beneficiaries of
Section 5.13Section 5.13(b)(iv)
with the right to enforce the covenants and obligations of Parent set forth therein.
Section 8.09
Severability
.
If any term or other provision of this Agreement is invalid, illegal or unenforceable, all other provisions of this Agreement shall
remain in full force and effect so long as the economic or legal substance of the Transactions is not affected in any manner materially
adverse to any party. Upon such determination that any term or other provision is invalid, illegal or unenforceable, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties hereto as closely
as possible in a mutually acceptable manner in order that the transactions contemplated by this Agreement are consummated as originally
contemplated to the greatest extent possible.
Section 8.10
Amendment
.
Prior to the Effective Time, subject to applicable Law (including the DGCL and DLLCA) and
Section 8.11
, this Agreement
may be amended or modified only by a written agreement executed and delivered by duly authorized officers of Parent, Merger Sub
and the Company. This Agreement may not be modified or amended except as provided in the immediately preceding sentence and any
purported amendment by any party or parties hereto effected in a manner which does not comply with this
Section 8.10
shall be void.
Section 8.11
Extension;
Waiver
. At any time prior to the Effective Time, the Company may (a) extend the time for the performance of any of the
obligations or other acts of Parent or Merger Sub contained herein, (b) waive any inaccuracies in the representations and
warranties of Parent or Merger Sub contained herein or in any document, certificate or writing delivered by Parent or Merger Sub
pursuant hereto or (c) waive compliance by Parent or Merger Sub with any of the agreements or conditions contained herein.
At any time prior to the Effective Time, Parent may (i) extend the time for the performance of any of the obligations or other
acts of the Company contained herein, (ii) waive any inaccuracies in the representations and warranties of the Company contained
herein or in any document, certificate or writing delivered by the Company pursuant hereto or (iii) waive compliance by the
Company with any of the agreements or conditions contained herein. Any agreement on the part of any party hereto to any such extension
or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. The failure of any party hereto
to assert any of its rights hereunder shall not constitute a waiver of such rights.
Section 8.12
Counterparts;
Facsimile Signatures
. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original,
but all of which shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement
by facsimile or scanned pages shall be effective as delivery of a manually executed counterpart to this Agreement.
Section 8.13
Waiver
of Jury Trial
. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING BETWEEN
THE PARTIES HERETO ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS.
Section 8.14
Remedies
.
The parties hereto agree that immediate, extensive and irreparable damage would occur for which monetary damages would not be an
adequate remedy in the event that any of the provisions of this Agreement are not performed in accordance with their specific terms
or are otherwise breached. Accordingly, the parties agree that, if for any reason Parent, Merger Sub or the Company shall have
failed to perform its obligations under this Agreement or otherwise breached this Agreement, then the party seeking to enforce
this Agreement against such nonperforming party under this Agreement shall be entitled to specific performance and the issuance
of immediate injunctive and other equitable relief without the necessity of proving the inadequacy of money damages as a remedy,
and the parties further agree to waive any requirement for the securing or posting of any bond in connection with the obtaining
of any such injunctive or other equitable relief, this being in addition to and not in limitation of any other remedy to which
they are entitled at Law or in equity.
* * * * *
IN WITNESS WHEREOF
,
each of the parties has caused this Agreement and Plan of Merger to be duly executed on its behalf as of the day and year first
above written.
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PRECIPIO DIAGNOSTICS, LLC
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By:
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/s/ Ilan Danieli
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|
Ilan Danieli
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Chief Executive Officer
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TRANSGENOMIC, INC.
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|
|
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By:
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/s/ Paul Kinnon
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Paul Kinnon
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President and Chief Executive Officer
|
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NEW HAVEN LABS INC.
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By:
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/s/ Paul Kinnon
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Paul Kinnon
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President
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First
Amendment to Agreement and Plan of Merger
This
First
Amendment to Agreement and Plan of Merger
(this “
Amendment
”), dated as of February 2, 2017, is entered
into by and among Transgenomic, Inc. (“
Parent
”), a Delaware corporation, New Haven Labs Inc., a Delaware corporation
and a wholly owned subsidiary of Parent (“
Merger Sub
”), and Precipio Diagnostics, LLC, a Delaware limited liability
company (the “
Company
”).
Whereas
,
Parent, Merger Sub and the Company are parties to that Agreement and Plan of Merger, dated as of October 12, 2016 (the “
Agreement
”);
Whereas
,
Parent, Merger Sub and the Company desire to amend the Agreement on the terms and conditions set forth herein;
Whereas
,
Section 8.10
of the Agreement provides that prior to the Effective Time, subject to applicable Law (including the
DGCL and DLLCA) and
Section 8.11
of the Agreement, the Agreement may be amended or modified only by a written agreement
executed and delivered by duly authorized officers of Parent, Merger Sub and the Company; and
Whereas
,
the respective Boards of Directors of the parties to the Agreement have approved this Amendment prior to the Effective Time.
Now,
Therefore
, in consideration of the foregoing and the respective representations, warranties, covenants and agreements
set forth below and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, do hereby agree as follows:
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1.
|
Definitions
. Capitalized terms used and not otherwise defined herein (including in the recitals
hereto) shall have the meanings given to them in the Agreement.
|
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a.
|
Section 1.01
of the Agreement is hereby amended
as follows:
|
|
i.
|
The definition of “
Parent Closing Indebtedness
” is deleted in its entirety and
replaced with the following:
|
“
Parent Closing Indebtedness
”
means all Indebtedness of Parent except for (i) accounts payable to trade creditors and accrued expenses in the ordinary course
of business, (ii) the Parent Stockholder Indebtedness and (iii) Unsecured Noteholder Indebtedness.”
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ii.
|
The following definitions are added to
Section 1.01
:
|
“
Alternative Financing
”
means a financing that is consummated on terms substantially similar to the terms and conditions set forth on the New Preferred
Stock Financing, but with different Investors.”
“
Merger Shares
”
means 160,585,422 shares of Parent Common Stock representing the total number of shares of Parent Common Stock to be issued in
the Merger.”
“
Unsecured Noteholder
Indebtedness
” means the $125,000 Unsecured Convertible Promissory Note dated as of January 20, 2015, and amended as of
January 17, 2017, held by MAZ Partners LP and including all accrued and unpaid interest thereon.”
b.
Section
2.02
of the Agreement is hereby amended by deleting the term “Article VII” set forth therein and inserting the
term “Article VI”.
c.
Section
2.09
of the Agreement is deleted in its entirety.
d.
Section
5.16(a)
of the Agreement is deleted in its entirety and replaced with the following:
“(a) Parent agrees to
promptly file with the SEC a “shelf” registration statement on Form S-3 or other appropriate form in connection with
the registration under the Securities Act of the Registrable Securities (the “
Registration Statement
”) as soon
as practicable following the Effective Time, but in no event later than June 1, 2017. Parent shall maintain the effectiveness of
such Registration Statement thereafter for a period of two years after such Registration Statement is declared effective by the
SEC.”
e.
Section
5.12(c)
of the Agreement is deleted in its entirety and replaced with the following:
“(c) At the Effective
Time, the Company’s Directors and Officers Insurance (the “
D&O Policy
”) shall be amended to cover
the D&O Indemnified Parties for claims arising from and after the Effective Time with respect to matters for which the D&O
Indemnified Parties may be entitled to indemnification by the Company as set forth in
Section 5.12(a)
. Such D&O Policy
shall provide insurance coverage with at least the same coverage and amounts and containing terms and conditions that are not less
advantageous to the directors and officers of Parent as Parent’s existing policies with respect to claims arising out of
or relating to events which occurred before or at the Effective Time (including in connection with the transactions contemplated
by this Agreement) and Parent and the Company agree and covenant to maintain such D&O Policy for a period of not less than
six years on behalf of the D&O Indemnified Parties.”
f.
Section
5.01(a)
of the Company Disclosure Schedule is hereby amended by adding the following events:
|
4.
|
The issuance of convertible promissory notes to new and existing Company investors in the aggregate
principal amount of $300,000 (which amount may be increased upon the Company’s determination).
|
g.
Section
5.01(c)
of the Parent Disclosure Schedule is hereby amended by adding the following events:
|
8.
|
Issuance of warrants to holder of Unsecured Noteholder Indebtedness.
|
|
9.
|
Unsecured letter of credit issued by the Company to the Parent on February 2, 2017.
|
|
10.
|
Issuance of Parent common stock upon conversion of Indebtedness held by affiliates of Third Security,
LLC as contemplated by that certain Termination and Tenth Amendment to Loan and Security Agreement dated as of February 2, 2017,
among Parent, Third Security Senior Staff 2008 LLC and the other lenders party thereto.
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h.
Section
6.01(d)
of the Agreement is deleted in its entirety.
i.
Section
6.01(e)
of the Agreement is deleted in its entirety and replaced with the following:
“(c) The New Preferred
Stock Financing shall have been consummated; provided that; such condition shall be deemed to be satisfied in the event that the
New Preferred Stock Financing has not been consummated within two Business after the Parent Stockholder Approval has been obtained
and an Alternative Financing is consummated within 60 days of the date that the Parent Stockholder Approval has been obtained.”
j.
Section
6.02(e)
of the Agreement is deleted in its entirety and replaced with the following:
“(e) Parent shall have
obtained the consent of the lenders parties to Parent’s outstanding secured debt.”
k.
Section
6.02(l)
of the Agreement is deleted in its entirety and replaced with the following:
“(l) Parent shall not
have sold or issued, or entered into any agreement, commitment or arrangement to sell or issue, any New Preferred Stock except
for (i) the New Preferred Stock issuable upon the conversion of Parent Stockholder Indebtedness, (ii) the New Preferred Stock sold
and issued in the New Preferred Stock Financing, and (iii) an Alternative Financing in the event that the New Preferred Stock Financing
has not been consummated within two Business after the Parent Stockholder Approval has been obtained.”
l. Each
of Section
6.02(g),
Section 6.02(m)
and
Section 6.03(g)
of the Agreement is deleted in its entirety.
m.
Section
7.01(b)
of the Agreement is deleted in its entirety and replaced with the following:
“(b) by either the Company
or Parent, if the Merger has not been consummated by June 30, 2017, or such other date, if any, as the Company and Parent shall
agree upon in writing (the “
Termination Date
”);
provided, however
, that the right to terminate this Agreement
under this
Section 7.01(b)
shall not be available to any party whose breach under this Agreement has been the cause of,
or resulted in, the failure of the Closing to occur on or before such date;”
|
3.
|
Waivers
. The parties desire to waive certain terms and conditions of the Merger Agreement
as follows:
|
|
a.
|
Acknowledge and Waiver of Potential Delisting from the NASDAQ Capital Market
. The Company
hereby acknowledges that Parent is currently not in compliance with the listing requirements for the NASDAQ Capital Market and
that Parent has received permission from the NASDAQ Capital Market’s Nasdaq Hearing Panel (the “NASDAQ Panel”)
to continue its listing on the NASDAQ Capital Market to allow Parent to close the Merger. The NASDAQ Panel has granted Parent’s
request to extend its continued listing on the NASDAQ Capital Market until February 19, 2017 on the condition that the Merger must
be closed on or before February 19, 2017. The Company hereby acknowledges that the Merger will not close on February 19, 2017 and
that Parent may become delisted from the NASDAQ Capital Market on February 19, 2017 if it is otherwise unable to obtain another
extension of its continued listing beyond February 19, 2017 (the “Delisting”). Parent will use its commercially reasonable
efforts to maintain its continued listing on the NASDAQ Capital Market, including commercially reasonable efforts to obtain from
the NASDAQ Panel another extension of its continued listing beyond February 19, 2017. The Company hereby acknowledges the possibility
of a Delisting and hereby waives (i) any breach of
Section 5.10
of the Agreement, (ii) the fulfillment of the condition
set forth in
Section 6.01(f)
of the Agreement and (iii) any Company termination right pursuant to
Section 7.01
of
the Agreement, in each case to the extent such breach, failed condition or termination right is triggered solely by the Delisting.
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|
4.
|
Effect of Amendment
. The provisions of the Agreement are amended and modified by the provisions
of this Amendment. If any provision of the Agreement is materially different from or inconsistent with any provision of this Amendment,
the provision of this Amendment shall control, and the provision of the Agreement shall, to the extent of such difference or inconsistency,
be disregarded.
|
|
5.
|
Single Agreement
. This Amendment and the Agreement, as amended and modified by the provisions
of this Amendment, shall constitute and shall be construed as a single agreement. The provisions of the Agreement, as amended and
modified by the provisions of this Amendment, are incorporated herein by this reference and are ratified and affirmed. The term
“Agreement” as used in the Agreement shall be deemed to refer to the Agreement as amended hereby.
|
|
6.
|
Headings
. The underlined headings herein are for convenience only and shall not affect the
interpretation of this Amendment.
|
|
7.
|
Governing Law; Jurisdiction
. This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Delaware, without giving effect to any choice or conflict of laws provision or rule (whether of
the State of Delaware or any other jurisdiction) that would cause the application of the Laws of any jurisdiction other than the
State of Delaware.
|
|
8.
|
Counterparts
. This Amendment may be executed in one or more counterparts, each of which
shall be deemed to be an original, but all of which shall constitute one and the same agreement. Delivery of an executed counterpart
of a signature page to this Amendment by facsimile or scanned pages shall be effective as delivery of a manually executed counterpart
to this Amendment.
|
|
9.
|
Entire Agreement
. The Agreement, as amended and modified by this Amendment, constitutes
the entire agreement between the parties with respect to the subject matter of this Agreement and supersedes all prior agreements
and understandings, both oral and written, between the parties with respect to its subject matter.
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{Signature Page to Follow}
IN WITNESS WHEREOF, the parties hereto have
caused this Amendment to be executed as of the date first written above by their respective officers thereunto duly authorized.
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PRECIPIO DIAGNOSTICS, LLC
|
|
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|
|
By:
|
/s/ Ilan Danieli
|
|
|
Ilan Danieli
|
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|
Chief Executive Officer
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TRANSGENOMIC, INC.
|
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|
|
By:
|
/s/ Paul Kinnon
|
|
|
Paul Kinnon
|
|
|
President and Chief Executive Officer
|
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NEW HAVEN LABS INC.
|
|
|
|
|
By:
|
/s/ Paul Kinnon
|
|
|
Paul Kinnon
|
|
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President
|
Annex
B
October 12, 2016
Personal and Confidential
Board of Directors
Transgenomic, Inc.
12325 Emmet Street
Omaha, Nebraska 68164
Members of the Board of Directors:
You have requested
our opinion as to the fairness, from a financial point of view, to the holders of common stock, par value $0.01 per share (the
“
Common Stock
”), of Transgenomic, Inc., a Delaware corporation (the “
Company
”), of the Exchange
Ratio (as defined below) set forth in a draft of the Agreement and Plan of Merger (the “
Agreement
”), dated as
of October 12, 2016, to be entered into among the Company, New Haven Labs Inc., a Delaware corporation and a wholly owned subsidiary
of the Company (the “
Merger Sub
”), and Precipio Diagnostics, LLC, a Delaware limited liability company (“
Precipio
”). The
Agreement provides for the merger of the Merger Sub with and into Precipio (the “
Merger
”) pursuant to which,
among other things, each outstanding membership interest of Precipio will be converted into the right to receive 25.7505 shares
of Common Stock of the Company (the shares of Common Stock issuable at such ratio being the “
Exchange Ratio
”). The
terms and conditions of the Merger are more fully set forth in the Agreement. Capitalized terms not otherwise defined
in this letter have the same meaning as in the Agreement.
We, as a customary
part of our investment banking business, engage in the valuation of businesses and their securities in connection with mergers
and acquisitions, underwriting and secondary distributions of securities, private placements and valuations for estate, corporate
and other purposes. We have been engaged by the Company to provide certain financial services in connection with the
Merger and we will receive a fee from the Company for providing such services, a substantial portion of which is contingent upon
the consummation of the Merger. We have also been engaged by the Company to render an opinion to its Board of Directors and we
will receive a fee from the Company for rendering this opinion. This opinion fee is not contingent upon the consummation of the
Merger or the conclusions reached in our opinion. Further the Company has agreed to reimburse us for certain expenses and indemnify
us against certain liabilities that may arise in relation to our engagement. We have not been requested to, and did not, (i) participate
in negotiations with respect to the Agreement, or (ii) advise the Board of Directors or any other party with respect to alternatives
to the Merger.
In the ordinary
course of our business, we and our affiliates may actively trade securities of the Company for our own account or the account of
our customers and, accordingly, we may at any time hold a long or short position in such securities. We have, in the past, provided
financial advisory and financing services to the Company and may continue to do so, and have received, and may receive, fees for
the rendering of such services.
In connection
with our review of the Merger, and in arriving at our opinion, we have: (i) reviewed the financial terms of the draft of the Agreement
dated October 12, 2016; (ii) reviewed certain business, financial and other information and data with respect to the Company publicly
available or made available to us from internal records of the Company; (iii) reviewed certain business, financial and other information
and data with respect to Precipio made available to us from internal records of Precipio; (iv) reviewed certain internal financial
projections for the Company and Precipio on a stand-alone basis prepared for financial planning purposes and furnished to us by
management of the Company and Precipio, respectively; (v) reviewed and analyzed certain forecasted pro forma financial information
relating to the operating performance of the Company following completion of the Merger that were furnished to us by management
of Precipio; (vi) conducted discussions with members of the senior management of the Company and Precipio with respect to the business
and prospects of the Company and Precipio, respectively, on a stand-alone basis and on a combined basis; (vii) reviewed the reported
prices and trading activity of Common Stock of the Company and similar information for certain other companies deemed by us to
be comparable to the Company; (viii) compared the financial performance of the Company and Precipio with that of certain other
publicly traded companies deemed by us to be comparable to the Company and Precipio, respectively; (ix) reviewed the financial
terms, to the extent publicly available, of certain comparable merger transactions that we deemed relevant; and (x) performed a
discounted cash flows analysis for the Company and Precipio, each on a stand-alone basis and on a pro forma combined basis. In
addition, we have conducted such other analyses, examinations and inquiries and considered such other financial, economic and market
criteria as we have deemed necessary and appropriate in arriving at our opinion.
In conducting
our review and in rendering our opinion, we have relied upon and assumed the accuracy, completeness and fairness of the financial,
accounting and other information discussed with us, reviewed by us, provided to us or otherwise made available to us, and have
not attempted to independently verify, and have not assumed responsibility for the independent verification, of such information. We
have further relied upon the assurances of the Company’s and Precipio’s management that the information provided has
been prepared on a reasonable basis in accordance with industry practice, and that they are not aware of any information or facts
that would make the information provided to us incomplete or misleading. We have assumed that there have been no material
changes in either the Company’s or Precipio’s assets, financial condition, results of operations, business or prospects
since the date of the last financial statements made available to us. Without limiting the generality of the foregoing,
for the purpose of this opinion, we have assumed that neither the Company nor Precipio is a party to any material pending transaction,
including any external financing, recapitalization, acquisition or merger, other than the Merger. With respect to financial
forecasts, estimates of net operating loss tax benefits and other estimates and forward-looking information relating to the Company,
Precipio and the Merger reviewed by us, we have assumed that such information reflects the best currently available estimates and
judgments of the Company’s and Precipio’s management, respectively. We express no opinion as to any financial
forecasts, net operating loss or other estimates or forward-looking information of the Company or Precipio or the assumptions on
which they were based. For purposes of our analyses, we have also assumed that Liabilities (as such term is defined in the Agreement)
of the Company are equal to $8.0 million and that Liabilities of Precipio are equal to $1.2 million. We have relied, with your
consent, on advice of the outside counsel and the independent accountants to the Company and Precipio, and on the assumptions of
the management of the Company and Precipio, as to all accounting, legal, tax and financial reporting matters with respect to the
Company, Precipio and the Agreement. Without limiting the foregoing, we have assumed that the Merger qualifies as a “reorganization”
described in Section 368(a) of the Code, that the Agreement constitutes a “plan of reorganization” within the
meaning of Section 1.368-2(g) of the regulations promulgated under the Code and that the parties to the Agreement each are
a “party to the reorganization” within the meaning of Section 368(a) of the Code.
We have assumed
that the final form of the Agreement will be substantially similar to the draft, dated October 12, 2016, reviewed by us, without
modification of any material terms or conditions. We have assumed that the representations and warranties contained
in the Agreement are true and correct, that each party will perform all of the covenants and agreements required to be performed
by it under the Agreement, and that the Merger will be consummated pursuant to the terms of the Agreement without amendments thereto
and without waiver by any party of any conditions or obligations thereunder. In arriving at our opinion, we have assumed
that all the necessary regulatory approvals and consents required for the Merger will be obtained in a manner that will not adversely
affect the Company or Precipio or alter the terms of the Merger.
In arriving at
our opinion, we have not performed any appraisals or valuations of any specific assets or liabilities (fixed, contingent or other)
of the Company or Precipio or concerning the solvency or appraised or fair value of the Company or Precipio, and have not been
furnished with any such appraisals or valuations, and we have made no physical inspection of the property or assets of the Company
or Precipio. We express no opinion regarding the liquidation value of any entity. The analyses we performed
in connection with this opinion were going concern analyses of an entity. We were not requested to opine, and no opinion
is hereby rendered, as to whether any analyses of an entity, other than as a going concern, is appropriate in the circumstances
and, accordingly, we have performed no such analyses.
We have undertaken
no independent analysis of any pending or threatened litigation, governmental proceedings or investigations, possible unasserted
claims or other contingent liabilities, to which any of the Company, Precipio or their respective affiliates is a party or may
be subject and at the Company’s direction and with its consent, our opinion makes no assumption concerning and therefore
does not consider, the possible assertion of claims, outcomes, damages or recoveries arising out of any such matters. No
company or transaction used in any analysis for purposes of comparison is identical to the Company, Precipio or the Merger. Accordingly,
an analysis of the results of the comparisons is not mathematical; rather, it involves complex considerations and judgments about
differences in the companies and transactions to which the Company, Precipio and the Merger were compared and other factors that
could affect the public trading value or transaction value of the companies.
This opinion is
necessarily based upon the information available to us, facts and circumstances and economic, market and other conditions as they
exist and are subject to evaluation on the date hereof; events occurring after the date hereof could materially affect the assumptions
used in preparing this opinion. We are not expressing any opinion herein as to the price at which shares of Common Stock
of the Company have traded or such stock may trade following announcement of the Merger or at any future time. We have
not undertaken to reaffirm or revise this opinion or otherwise comment upon any events occurring after the date hereof and do not
have any obligation to update, revise or reaffirm this opinion.
Consistent with
applicable legal and regulatory requirements, we have adopted policies and procedures to establish and maintain the independence
of our research department and personnel. As a result, our research analysts may hold opinions, make statements or recommendations,
and/or publish research reports with respect to the Company and the Merger and other participants in the Merger that differ from
the views of our investment banking personnel.
This opinion is
furnished pursuant to our engagement letter dated December 1, 2015, as amended on August 29, 2016 and October 10, 2016. This
opinion is directed to the Board of Directors of the Company in connection with its consideration of the Merger. This
opinion is not intended to be and does not constitute a recommendation to any stockholder of the Company as to how such stockholder
should act or vote with respect to the Merger or any other matter. Except with respect to the use of this opinion in
connection with the proxy statement relating to the Merger in accordance with our engagement letter with the Company, this opinion
shall not be published or otherwise used, nor shall any public references to us be made, without our prior written approval. This
opinion has been approved by the Craig-Hallum Fairness Opinion Committee.
This opinion addresses
solely the fairness, from a financial point of view, to the holders of Common Stock of the Company of the Exchange Ratio set forth
in the Agreement and does not address any other terms or agreement relating to the Merger. We were not requested to
opine as to, and this opinion does not address, the basic business decision to proceed with or effect the Merger, or any solvency
or fraudulent conveyance consideration relating to the Merger. We express no opinion as to the relative merits of the
Merger as compared to any alternative business strategies or transactions that might exist for the Company or any other party or
the effect of any other transaction in which the Company or any other party might engage. We express no opinion as to
the amount, nature or fairness of the consideration or compensation to be received in or as a result of the Merger by preferred
stockholders, warrant holders, option holders, officers, directors or employees of the Company or Precipio, or any other class
of such persons, or relative to or in comparison with the Exchange Ratio.
Based upon and
subject to the foregoing and based upon such other factors as we consider relevant, it is our opinion that, as of the date hereof,
the Exchange Ratio is fair, from a financial point of view, to the holders of Common Stock of the Company.
Sincerely,
Craig-Hallum Capital Group, LLC
Annex
C
VOTING AGREEMENT
THIS VOTING AGREEMENT (this “
Agreement
”),
dated as of October , 2016, is made by and among Transgenomic, Inc., a Delaware corporation (“
Parent
”), Precipio
Diagnostics, LLC, a Delaware limited liability company (the “
Company
”), and the undersigned holder (“
Stockholder
”)
of shares of capital stock (the shares owned beneficially or of record by Stockholder, the “
Shares
”) of Parent.
WHEREAS, Parent, New Haven Labs Inc., a
Delaware corporation and a wholly owned subsidiary of Parent (“
Merger Sub
”), and the Company have entered into
an Agreement and Plan of Merger, dated of even date herewith (the “
Merger Agreement
”), providing for the merger
of Merger Sub with and into the Company (the “
Merger
”);
WHEREAS, as of the date hereof, Stockholder
beneficially owns and has sole or shared voting power with respect to the number of Shares, and holds stock options or other rights
to acquire the number of Shares indicated opposite Stockholder’s name on
Schedule 1
attached hereto;
WHEREAS, as an inducement and a condition
to the willingness of the Company to enter into the Merger Agreement, and in consideration of the substantial expenses incurred
and to be incurred by them in connection therewith, Stockholder has agreed to enter into and perform this Agreement; and
WHEREAS, all capitalized terms used in this
Agreement without definition herein shall have the meanings ascribed to them in the Merger Agreement.
NOW, THEREFORE, in consideration of, and
as a condition to, the Company entering into the Merger Agreement and proceeding with the transactions contemplated thereby, and
in consideration of the expenses incurred and to be incurred by them in connection therewith, Stockholder, Parent and the Company
agree as follows:
1.
Agreement
to Vote Shares
. Subject to the terms and conditions hereof, Stockholder agrees that, from and after the date hereof until the
Expiration Date (as defined in
Section
2 below), at any meeting of the stockholders of Parent or any adjournment or postponement
thereof, or in connection with any written consent of the stockholders of Parent, with respect to the Merger, the Merger Agreement
or any Acquisition Proposal, Stockholder shall:
(a) appear
at such meeting or otherwise cause the Shares and any New Shares (as defined in
Section
3 below) to be counted as present
thereat for purposes of calculating a quorum;
(b) vote
(or cause to be voted), or deliver a written consent (or cause a written consent to be delivered) covering all of the Shares: (i)
in favor of adoption and approval of the Parent Stockholder Matters and all other matters contemplated by the Merger Agreement
as to which stockholders of Parent are called upon to vote as necessary for consummation of the Merger and the other transactions
contemplated by the Merger Agreement; and (ii) against any Acquisition Proposal; and
(c) vote
(or cause to be voted), or deliver a written consent (or cause a written consent to be delivered) covering all of the Shares against
any of the following actions (other than those actions that relate to the Merger and any other transactions contemplated by the
Merger Agreement): (i) any merger, consolidation, business combination, sale of assets, or reorganization of the Parent or any
Subsidiary (as defined in the Merger Agreement) of Parent, (ii) any sale, lease or transfer of all or substantially all of the
assets of Parent or any Subsidiary of Parent, (iii) any reorganization, recapitalization, dissolution, liquidation or winding up
of Parent or any Subsidiary of Parent, (iv) any material change in the capitalization of Parent or any Subsidiary of Parent, or
the corporate structure of Parent or any Subsidiary of Parent, except as contemplated by the Merger Agreement, or (v) any other
action that is intended, or would reasonably be expected to, impede, interfere with, delay, postpone, or materially and adversely
affect the Merger or any other transactions contemplated by the Merger Agreement.
2.
Expiration
Date
. As used in this Agreement, the term “
Expiration Date
” shall mean the earlier to occur of (a) the Effective
Time, (b) such date and time as the Merger Agreement shall be terminated pursuant to Article VII thereof or otherwise, (c) such
time as there is a Parent Change of Recommendation, or (d) upon mutual written agreement of the parties to terminate this Agreement.
Upon termination or expiration of this Agreement, no party shall have any further obligations or liabilities under this Agreement;
provided
,
however
, such termination or expiration shall not relieve any party from liability for any willful breach
of this Agreement or acts of bad faith prior to termination hereof.
3.
Additional
Purchases
. Stockholder agrees that any shares of capital stock or other equity securities of Parent that Stockholder purchases
or with respect to which Stockholder otherwise acquires sole or shared voting power after the execution of this Agreement and prior
to the record date for determining Parent stockholders entitled to vote with respect to the Parent Shareholder Matters, whether
by the exercise of any stock options or otherwise (collectively, “
New Shares
”), shall be subject to the terms
and conditions of this Agreement to the same extent as if they constituted the Shares hereunder.
4.
Agreement
to Retain Shares
.
(a) From
and after the date hereof until the Expiration Date, Stockholder shall not, directly or indirectly, (i) cause or permit the Transfer
(as defined below) of any of the Shares of which Stockholder is the beneficial owner (A) unless each person (as defined in the
Merger Agreement) to which any of such Shares, or any interest in any of such Shares, is or may be transferred shall have (1) executed
a counterpart of this Agreement and (2) agreed in writing to hold such Shares (or interest in such Shares) subject to all of the
terms and provisions of this Agreement, (B) except by will or operation of law, in which case this Agreement shall bind the transferee,
or (C) as contemplated by the Merger Agreement, (ii) grant any proxies or powers of attorney, other than consistently with the
terms of
Section
1 of this Agreement, or deposit any Shares into a voting trust or enter into a voting agreement with respect
to any Shares, or (iii) take any action that would make any representation or warranty of Stockholder contained herein untrue or
incorrect in any material respect or have the effect of preventing or disabling Stockholder from performing Stockholder’s
material obligations under this Agreement.
(b) A
person shall be deemed to have effected a “
Transfer
” of a Share if such person directly or indirectly (i) sells,
pledges, encumbers, assigns, grants an option with respect to, transfers or disposes of such Share or any interest in such Share,
or (ii) enters into an agreement or commitment providing for the sale of, pledge of, encumbrance of, assignment of, grant of an
option with respect to, transfer of or disposition of such Share or any interest therein.
5.
Representations
and Warranties of Stockholder
. Stockholder hereby represents and warrants to Parent and the Company as follows:
(a) Stockholder
has the full power and authority to execute and deliver this Agreement and to perform Stockholder’s obligations hereunder;
(b) this
Agreement has been duly executed and delivered by or on behalf of Stockholder and, assuming this Agreement constitutes a valid
and binding agreement of Parent and the Company, constitutes a valid and binding agreement with respect to Stockholder, enforceable
against Stockholder in accordance with its terms, except as enforcement may be limited by general principles of equity whether
applied in a court of law or a court of equity and by bankruptcy, insolvency and similar laws affecting creditors’ rights
and remedies generally;
(c) except
as otherwise set forth on
Schedule 1
attached hereto, as of the date hereof, Stockholder beneficially owns the number of
Shares indicated opposite such Stockholder’s name on
Schedule 1
attached hereto, and will own any New Shares, free
and clear of any liens, claims, security interests, pledges or other encumbrances or restrictions of any kind or nature whatsoever
(“
Liens
”) except for any restrictions under applicable securities laws, and has sole or shared, and otherwise
unrestricted, voting power with respect to such Shares or New Shares and none of the Shares or New Shares is or will be subject
to any voting trust or other agreement, arrangement or restriction with respect to the voting of the Shares or the New Shares,
except as contemplated by this Agreement;
(d) the
execution and delivery of this Agreement by Stockholder does not, and the performance by Stockholder of his, her or its obligations
hereunder and the compliance by Stockholder with any provisions hereof will not: (i) violate or conflict with, result in a material
breach of or constitute a material default (or an event that with notice or lapse of time or both would become a material default)
under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of any
Liens on any Shares or New Shares pursuant to, any agreement, instrument, note, bond, mortgage, contract, lease, license, permit
or other obligation or any order, arbitration award, judgment or decree to which Stockholder is a party or by which Stockholder
is bound, or any law, statute, rule or regulation to which Stockholder is subject, except for such violations, conflicts, breaches,
defaults, rights, Liens or other occurrences as would not materially impair the ability of Stockholder to perform its obligations
under this Agreement or prevent or materially delay the consummation of any of the actions contemplated hereby, or (ii) in the
event that Stockholder is a corporation, partnership, trust or other entity, any bylaw or other organizational document of Stockholder;
(e) the
execution and delivery of this Agreement by Stockholder does not, and the performance of this Agreement by Stockholder does not
and will not, require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or
regulatory authority by Stockholder except for applicable requirements, if any, of the Exchange Act, and except where the failure
to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not prevent or delay
the performance by Stockholder of his, her or its obligations under this Agreement in any material respect;
(f) as
of the date hereof, there is no action pending or, to the knowledge of Stockholder, threatened against or affecting Stockholder
before or by any Governmental Entity that would reasonably be expected to impair in any material respect the ability of Stockholder
to perform its obligations hereunder or to consummate the transactions contemplated hereby on a timely basis; and
(g) Stockholder
understands and acknowledges that the Company is entering into the Merger Agreement in reliance upon Stockholder’s execution
and delivery of this Agreement and the representations and warranties of Stockholder contained herein, and such Stockholder understands
and acknowledges that the Merger Agreement governs the terms of the Merger and the other transactions contemplated thereby.
6.
Irrevocable
Proxy
. Subject to the penultimate sentence of this
Section
6, by execution of this Agreement, Stockholder does hereby
appoint the Company with full power of substitution and resubstitution, as Stockholder’s true and lawful attorney and irrevocable
proxy, to the fullest extent of the undersigned’s rights with respect to the Shares, to vote, if Stockholder is unable to
perform his, her or its obligations under this Agreement, each of such Shares solely with respect to the matters set forth in
Section
1 hereof. Stockholder intends this proxy to be irrevocable and coupled with an interest hereunder until the Expiration Date.
Notwithstanding anything contained herein to the contrary, this irrevocable proxy shall automatically terminate upon the Expiration
Date of this Agreement. Stockholder hereby revokes any proxy previously granted by Stockholder with respect to the Shares and/or
the New Shares and represents that none of such previously granted proxies are irrevocable.
7.
Waiver
of Appraisal Rights
. Stockholder hereby irrevocably waives any and all rights he or it may have as to appraisal, dissent or
any similar or related matter with respect to any of such Stockholder’s Shares that may arise with respect to the Merger
or any of the transactions contemplated by the Merger Agreement.
8.
No
Solicitation
. Stockholder, insofar as such Stockholder is acting in his, her or its capacity as a Stockholder, shall not (a)
initiate, solicit, seek or knowingly encourage or support any inquiries, proposals or offers that constitute or may reasonably
be expected to lead to, an Acquisition Proposal, (b) engage or participate in, or facilitate, any discussions or negotiations regarding,
or furnish any nonpublic information to any person in connection with, any inquiries, proposals or offers that constitute, or may
reasonably be expected to lead to, an Acquisition Proposal, (c) enter into any letter of intent, agreement in principle or other
similar type of agreement relating to an Acquisition Proposal, or enter into any agreement or agreement in principle requiring
Parent to abandon, terminate or fail to consummate the transactions contemplated hereby, (d) initiate a stockholders’ vote
or action by consent of the Company’s stockholders with respect to an Acquisition Proposal, (e) except by reason of this
Agreement, become a member of a “group” (within the meaning of Section 13(d) of the Exchange Act) with respect to any
voting securities of Parent that takes any action in support of an Acquisition Proposal, or (f) propose or agree to do any of the
foregoing. In the event that Stockholder is a corporation, partnership, trust or other entity, it shall not permit any of its subsidiaries
or affiliates (as defined in the Merger Agreement) to, nor shall it authorize any officer, director or representative of Stockholder,
or any of its subsidiaries or affiliates to, undertake any of the actions contemplated by this
Section
8. Nothing in this
Section
8 shall restrict any actions permitted under the Merger Agreement by any Stockholder in his, her or its capacity
as an officer or director of Parent.
9.
Stockholder
Capacity
. Stockholder is entering into this Agreement solely in its capacity as a record holder and/or beneficial owner of
Shares and nothing in this Agreement shall be deemed to impose any obligation, restriction, limitation or liability on Stockholder
in any other manner or capacity, including in his, her or its capacity as an officer, director, employee, agent or representative
of Parent.
10.
Specific
Enforcement
. The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof or was otherwise breached. It is accordingly agreed that the parties shall be
entitled to seek specific relief hereunder, including, without limitation, an injunction or injunctions to prevent and enjoin breaches
of the provisions of this Agreement and to enforce specifically the terms and provisions hereof, in any state or federal court
in any competent jurisdiction, in addition to any other remedy to which they may be entitled at law or in equity. Any requirements
for the securing or posting of any bond with respect to any such remedy are hereby waived.
11.
Further
Assurances
. Stockholder shall, from time to time, execute and deliver, or cause to be executed and delivered, such additional
or further consents, documents and other instruments as Parent or the Company may reasonably request for the purpose of carrying
out the transactions contemplated by this Agreement and the Merger Agreement.
12.
Disclosure
.
Stockholder hereby agrees that Parent and the Company may publish and disclose in the Proxy Statement, any prospectus filed with
any regulatory authority in connection with the Merger and any related documents filed with such regulatory authority and as otherwise
required by Law, such Stockholder’s identity and ownership of Shares and the nature of such Stockholder’s commitments,
arrangements and understandings under this Agreement and may further file this Agreement as an exhibit to any filing made by Parent
or the Company as required by Law or the terms of the Merger Agreement, including with the SEC or other regulatory authority, relating
to the Merger, all subject to prior review and an opportunity to comment by Stockholder’s counsel.
13.
Notice
.
All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by facsimile (followed by overnight courier), E-mail (followed
by overnight courier), or by registered or certified mail (postage prepaid, return receipt requested) to Parent or the Company,
as the case may be, at the addresses set forth in Section 8.03 of the Merger Agreement and to each Stockholder at its address set
forth on
Schedule 1
attached hereto (or at such other address for a party as shall be specified by like notice).
14.
Severability
.
If any term or other provision of this Agreement is determined to be invalid, illegal or incapable of being enforced by any rule
of Law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect
so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse
to any party. Upon a final determination that any term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely
as possible to the fullest extent permitted by applicable Law in an acceptable manner to the end that the transactions contemplated
hereby are fulfilled to the extent possible and the parties agree that the court making such determination shall have the power
to reduce the scope, duration, area or applicability of the term or provision, to delete specific words or phrases, or to replace
any invalid, void or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest
to expressing the intention of the invalid or unenforceable term or provision.
15.
Binding
Effect and Assignment
. All of the covenants and agreements contained in this Agreement shall be binding upon, and inure to
the benefit of, the respective parties and their permitted successors, assigns, heirs, executors, administrators and other legal
representatives, as the case may be. This Agreement may not be assigned by any party hereto without the prior written consent of
the other parties hereto.
16.
No
Third Party Beneficiaries
. This Agreement is not intended, and shall not be deemed, to confer any rights or remedies upon any
person other than the parties hereto and their respective successors and permitted assigns, to create any agreement of employment
with any person or to otherwise create any third-party beneficiary hereto.
17.
No
Waivers
. No waivers of any breach of this Agreement extended by Parent or the Company to Stockholder shall be construed as
a waiver of any rights or remedies of Parent or the Company, as applicable, with respect to any other stockholder of Company who
has executed an agreement substantially in the form of this Agreement with respect to Shares held or subsequently held by such
stockholder or with respect to any subsequent breach of Stockholder or any other such stockholder of the Company. No waiver of
any provisions hereof by any party shall be deemed a waiver of any other provisions hereof by any such party, nor shall any such
waiver be deemed a continuing waiver of any provision hereof by such party.
18.
Governing
Law; Jurisdiction and Venue
.
(a) This
Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without giving effect to any
choice or conflict of laws provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the
application of the Laws of any jurisdiction other than the State of Delaware.
(b) Each
of the parties hereto hereby agrees that (i) all actions and proceedings arising out of or relating to this Agreement shall be
heard and determined in the Chancery Court of the State of Delaware and any state appellate court therefrom sitting in New Castle
County in the State of Delaware (or, if the Chancery Court of the State of Delaware declines to accept jurisdiction over a particular
matter, any state or federal court within the State of Delaware), (ii) agrees that it will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such court and (iii) a final Judgment in any action or proceeding shall
be conclusive and may be enforced in other jurisdictions by suit on the Judgment or in any other manner provided by Law.
(c) Each
party irrevocably consents to the service of process outside the territorial jurisdiction of the courts referred to in this
Section
18
in any such action or proceeding by mailing copies thereof by registered or certified United States mail, postage prepaid,
return receipt requested, to its address as specified in
Section 18
. However, the foregoing shall not limit the right of
a party to effect service of process on the other party by any other legally available method.
19.
Waiver
of Jury Trial
. The parties hereto hereby waive any right to trial by jury with respect to any action or proceeding related
to or arising out of this Agreement, any document executed in connection herewith and the matters contemplated hereby and thereby.
20.
No
Agreement Until Executed
. Irrespective of negotiations among the parties or the exchanging of drafts of this Agreement, this
Agreement shall not constitute or be deemed to evidence a contract, agreement, arrangement or understanding between the parties
hereto unless and until (a) the Parent Board has approved, for purposes of any applicable anti-takeover laws and regulations and
any applicable provision of Parent’s Certificate of Incorporation, the transactions contemplated by the Merger Agreement,
(b) the Merger Agreement is executed by all parties thereto, and (c) this Agreement is executed by all parties hereto.
21.
Entire
Agreement; Amendment
. This Agreement supersedes all prior agreements, written or oral, among the parties hereto with respect
to the subject matter hereof and contains the entire agreement among the parties with respect to the subject matter hereof. This
Agreement may not be amended, supplemented or modified, and no provisions hereof may be modified or waived, except by an instrument
in writing signed by each party hereto.
22.
Effect
of Headings
. The section headings herein are for convenience only and shall not affect the construction of interpretation of
this Agreement.
23.
Definition
of Merger Agreement
. For purposes of this Agreement, the term “
Merger Agreement
” includes such agreement
as it shall be amended or modified from time to time.
24.
Counterparts
.
This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement.
{Signature Page to Follow}
Annex D
VOTING AGREEMENT
THIS VOTING AGREEMENT (this “
Agreement
”),
dated as of October , 2016, is made by and among Transgenomic, Inc., a Delaware corporation (“
Parent
”), Precipio
Diagnostics, LLC, a Delaware limited liability company (the “
Company
”), and the undersigned holders (each a
“
Holder
” and collectively, the “
Holders
”) of units, warrants, convertible promissory notes
or other rights to acquire units (the units owned beneficially or of record by the Holders, the “
Units
”) of
the Company.
WHEREAS, Parent, New Haven Labs, Inc., a
Delaware corporation and a wholly owned subsidiary of Parent (“
Merger Sub
”), and the Company have entered into
an Agreement and Plan of Merger, dated of even date herewith (the “
Merger Agreement
”), providing for the merger
of Merger Sub with and into the Company (the “
Merger
”);
WHEREAS, as of the date hereof, each Holder
beneficially owns and has sole or shared voting power with respect to the number of Units, and holds convertible promissory notes,
warrants or other rights to acquire the number of Units indicated opposite such Holder’s name on
Schedule 1
attached
hereto;
WHEREAS, as an inducement and a condition
to the willingness of the Parent to enter into the Merger Agreement, and in consideration of the substantial expenses incurred
and to be incurred by it in connection therewith, each Holder has agreed to enter into and perform this Agreement; and
WHEREAS, all capitalized terms used in this
Agreement without definition herein shall have the meanings ascribed to them in the Merger Agreement.
NOW, THEREFORE, in consideration of, and
as a condition to, the Parent entering into the Merger Agreement and proceeding with the transactions contemplated thereby, and
in consideration of the expenses incurred and to be incurred by it in connection therewith, each Holder, Parent and the Company
agree as follows:
1.
Agreement
to Vote Units
. Subject to the terms and conditions hereof, and without limitation of any Holder’s rights under the Merger
Agreement, and in the case of Kuzven Precipio Investor LLC and Kuzven Precipio B Investor LLC, subject to their satisfaction with
the terms of the New Preferred Stock, each Holder agrees that, from and after the date hereof until the Expiration Date (as defined
in
Section
2 below), at any meeting of the unitholders of the Company or any adjournment or postponement thereof, or in
connection with any written consent of the unitholders of the Company, with respect to the Merger, the Merger Agreement or any
Acquisition Proposal, such Holder shall:
(a) appear
at such meeting or otherwise cause the Units and any New Units (as defined in
Section
3 below) to be counted as present
thereat for purposes of calculating a quorum;
(b) vote
(or cause to be voted), or deliver a written consent (or cause a written consent to be delivered) covering all of the Units held
by such Holder: (i) in favor of adoption and approval of all matters contemplated by the Merger Agreement as to which unitholders
of the Company are called upon to vote as necessary for consummation of the Merger and the other transactions contemplated by the
Merger Agreement; and (ii) against any Acquisition Proposal; and
(c) vote
(or cause to be voted), or deliver a written consent (or cause a written consent to be delivered) covering all of the Units held
by such Holder against any of the following actions (other than those actions that relate to the Merger and any other transactions
contemplated by the Merger Agreement): (i) any merger, consolidation, business combination, sale of assets, or reorganization of
the Company or any Subsidiary (as defined in the Merger Agreement) of the Company, (ii) any sale, lease or transfer of all or substantially
all of the assets of the Company or any Subsidiary of the Company, (iii) any reorganization, recapitalization, dissolution, liquidation
or winding up of the Company or any Subsidiary of the Company, (iv) any material change in the capitalization of the Company or
any Subsidiary of the Company, or the corporate structure of the Company or any Subsidiary of the Company, except as contemplated
by the Merger Agreement, or (v) any other action that is intended, or would reasonably be expected to, impede, interfere with,
delay, postpone, or materially and adversely affect the Merger or any other transactions contemplated by the Merger Agreement.
2.
Expiration
Date
. As used in this Agreement, the term “
Expiration Date
” shall mean the earlier to occur of (a) the Effective
Time, (b) such date and time as the Merger Agreement shall be terminated pursuant to Article VII thereof or otherwise, (c) such
time as there is a Company Change of Recommendation, or (d) upon mutual written agreement of the parties to terminate this Agreement.
Upon termination or expiration of this Agreement, no party shall have any further obligations or liabilities under this Agreement;
provided
,
however
, such termination or expiration shall not relieve any party from liability for any willful breach
of this Agreement or acts of bad faith prior to termination hereof.
3.
Additional
Purchases
. Each Holder agrees that any shares of capital stock or other equity securities of the Company that such Holder purchases
or with respect to which such Holder otherwise acquires sole or shared voting power after the execution of this Agreement, whether
by the exercise of any warrants, promissory notes or otherwise (collectively, “
New Units
”), shall be subject
to the terms and conditions of this Agreement to the same extent as if they constituted Units hereunder.
4.
Agreement
to Retain Units
.
(a) From
and after the date hereof until the Expiration Date, no Holder shall, directly or indirectly, (i) cause or permit the Transfer
(as defined below) of any of the Units of which such Holder is the beneficial owner (A) unless each person (as defined in the Merger
Agreement) to which any of such Units, or any interest in any of such Units, is or may be transferred shall have (1) executed a
counterpart of this Agreement and (2) agreed in writing to hold such Units (or interest in such Units) subject to all of the terms
and provisions of this Agreement, (B) except by will or operation of law, in which case this Agreement shall bind the transferee,
or (C) as contemplated by the Merger Agreement, (ii) grant any proxies or powers of attorney, other than consistently with the
terms of
Section
1 of this Agreement, or deposit any Units into a voting trust or enter into a voting agreement with respect
to any Units, or (iii) take any action that would make any representation or warranty of such Holder contained herein untrue or
incorrect in any material respect or have the effect of preventing or disabling such Holder from performing such Holder’s
material obligations under this Agreement. For the avoidance of doubt, the foregoing shall not restrict the exchange of interests
in the Company for other interests in the Company.
(b) A
person shall be deemed to have effected a “
Transfer
” of a Unit if such person directly or indirectly (i) sells,
pledges, encumbers, assigns, grants an option with respect to, transfers or disposes of such Unit or any interest in such Unit,
or (ii) enters into an agreement or commitment providing for the sale of, pledge of, encumbrance of, assignment of, grant of an
option with respect to, transfer of or disposition of such Unit or any interest therein.
5.
Representations
and Warranties of Holders
. Each Holder hereby represents and warrants to Parent and the Company as follows:
(a) Such
Holder has the full power and authority to execute and deliver this Agreement and to perform such Holder’s obligations hereunder;
(b) this
Agreement has been duly executed and delivered by or on behalf of such Holder and, assuming this Agreement constitutes a valid
and binding agreement of Parent and the Company, constitutes a valid and binding agreement with respect to such Holder, enforceable
against such Holder in accordance with its terms, except as enforcement may be limited by general principles of equity whether
applied in a court of law or a court of equity and by bankruptcy, insolvency and similar laws affecting creditors’ rights
and remedies generally;
(c) except
as otherwise set forth on
Schedule 1
attached hereto, as of the date hereof, such Holder beneficially owns the number of
Units indicated opposite such Holder’s name on
Schedule 1
attached hereto, and will own any New Units, free and clear
of any liens, claims, security interests, pledges or other encumbrances or restrictions of any kind or nature whatsoever (“
Liens
”)
except for any restrictions under applicable securities laws, and has sole or shared, and otherwise unrestricted, voting power
with respect to such Units or New Units and none of the Units or New Units is or will be subject to any voting trust or other agreement,
arrangement or restriction with respect to the voting of the Units or the New Units, except as contemplated by this Agreement;
(d) the
execution and delivery of this Agreement by such Holder does not, and the performance by such Holder of his, her or its obligations
hereunder and the compliance by such Holder with any provisions hereof will not: (i) violate or conflict with, result in a material
breach of or constitute a material default (or an event that with notice or lapse of time or both would become a material default)
under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of any
Liens on any Units or New Units pursuant to, any agreement, instrument, note, bond, mortgage, contract, lease, license, permit
or other obligation or any order, arbitration award, judgment or decree to which such Holder is a party or by which such Holder
is bound, or any law, statute, rule or regulation to which such Holder is subject, except for such violations, conflicts, breaches,
defaults, rights, Liens or other occurrences as would not materially impair the ability of such Holder to perform his, her or its
obligations under this Agreement or prevent or materially delay the consummation of any of the actions contemplated hereby, or
(ii) in the event that such Holder is a corporation, partnership, trust or other entity, any bylaw or other organizational document
of such Holder;
(e) the
execution and delivery of this Agreement by such Holder does not, and the performance of this Agreement by such Holder does not
and will not, require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or
regulatory authority by such Holder except for applicable requirements, if any, of the Exchange Act, and except where the failure
to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not prevent or delay
the performance by such Holder of his, her or its obligations under this Agreement in any material respect;
(f) as
of the date hereof, there is no action pending or, to the knowledge of such Holder, threatened against or affecting such Holder
before or by any Governmental Entity that would reasonably be expected to impair in any material respect the ability of such Holder
to perform his, her or its obligations hereunder or to consummate the transactions contemplated hereby on a timely basis; and
(g) such
Holder understands and acknowledges that Parent is entering into the Merger Agreement in reliance upon such Holder’s execution
and delivery of this Agreement and the representations and warranties of such Holder contained herein, and such Holder understands
and acknowledges that the Merger Agreement governs the terms of the Merger and the other transactions contemplated thereby.
6.
Irrevocable
Proxy
. Subject to the penultimate sentence of this
Section
6, by execution of this Agreement, each Holder does hereby
appoint the Parent with full power of substitution and resubstitution, as such Holder’s true and lawful attorney and irrevocable
proxy, to the fullest extent of the undersigned’s rights with respect to the Units, to vote, if such Holder is unable to
perform his, her or its obligations under this Agreement, each of such Units solely with respect to the matters set forth in
Section
1 hereof. Each Holder intends this proxy to be irrevocable and coupled with an interest hereunder until the Expiration Date.
Notwithstanding anything contained herein to the contrary, this irrevocable proxy shall automatically terminate upon the Expiration
Date of this Agreement. Each Holder hereby revokes any proxy previously granted by such Holder with respect to the Units and/or
the New Units and represents that none of such previously granted proxies are irrevocable.
7.
Waiver
of Appraisal Rights
. Each Holder hereby irrevocably waives any and all rights he or it may have as to appraisal, dissent or
any similar or related matter with respect to any of such Holder’s Units that may arise with respect to the Merger or any
of the transactions contemplated by the Merger Agreement.
8.
No
Solicitation
. Each Holder, insofar as such Holder is acting in his, her or its capacity as a Holder, shall not (a) initiate,
solicit, seek or knowingly encourage or support any inquiries, proposals or offers that constitute or may reasonably be expected
to lead to, an Acquisition Proposal, (b) engage or participate in, or facilitate, any discussions or negotiations regarding, or
furnish any nonpublic information to any person in connection with, any inquiries, proposals or offers that constitute, or may
reasonably be expected to lead to, an Acquisition Proposal, (c) enter into any letter of intent, agreement in principle or other
similar type of agreement relating to an Acquisition Proposal, or enter into any agreement or agreement in principle requiring
Company to abandon, terminate or fail to consummate the transactions contemplated hereby, (d) initiate a unitholders’ vote
or action by consent of the Company’s holders with respect to an Acquisition Proposal, (e) except by reason of this Agreement,
become a member of a “group” (within the meaning of Section 13(d) of the Exchange Act) with respect to any voting securities
of the Company that takes any action in support of an Acquisition Proposal, or (f) propose or agree to do any of the foregoing.
In the event that a Holder is a corporation, partnership, trust or other entity, it shall not permit any of its subsidiaries or
affiliates (as defined in the Merger Agreement) to, nor shall it authorize any officer, director or representative of such Holder,
or any of its subsidiaries or affiliates to, undertake any of the actions contemplated by this
Section
8. Nothing in this
Section
8 shall restrict any actions permitted under the Merger Agreement by any Holder in his, her or its capacity as an
officer, manager or director of the Company.
9.
Holder
Capacity
. Each Holder is entering into this Agreement solely in his, her or its capacity as a record holder and/or beneficial
owner of Units and nothing in this Agreement shall be deemed to impose any obligation, restriction, limitation or liability on
any Holder in any other manner or capacity, including in his, her or its capacity as an officer, director, employee, agent or representative
of the Company.
10.
Specific
Enforcement
. The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof or was otherwise breached. It is accordingly agreed that the parties shall be
entitled to seek specific relief hereunder, including, without limitation, an injunction or injunctions to prevent and enjoin breaches
of the provisions of this Agreement and to enforce specifically the terms and provisions hereof, in any state or federal court
in any competent jurisdiction, in addition to any other remedy to which they may be entitled at law or in equity. Any requirements
for the securing or posting of any bond with respect to any such remedy are hereby waived.
11.
Further
Assurances
. Each Holder shall, from time to time, execute and deliver, or cause to be executed and delivered, such additional
or further consents, documents and other instruments as Parent or the Company may reasonably request for the purpose of carrying
out the transactions contemplated by this Agreement and the Merger Agreement.
12.
Disclosure
.
Each Holder hereby agrees that Parent and the Company may publish and disclose in the Proxy Statement, any prospectus filed with
any regulatory authority in connection with the Merger and any related documents filed with such regulatory authority and as otherwise
required by Law, such Holder’s identity and ownership of Units and the nature of such Holder’s commitments, arrangements
and understandings under this Agreement and may further file this Agreement as an exhibit to any filing made by Parent or the Company
as required by Law or the terms of the Merger Agreement, including with the SEC or other regulatory authority, relating to the
Merger, all subject to prior review and an opportunity to comment by such Holder’s counsel.
13.
Notice
.
All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by facsimile (followed by overnight courier), E-mail (followed
by overnight courier), or by registered or certified mail (postage prepaid, return receipt requested) to Parent or the Company,
as the case may be, at the addresses set forth in Section 8.03 of the Merger Agreement and to each Holder at his, her or its address
set forth on
Schedule 1
attached hereto (or at such other address for a party as shall be specified by like notice).
14.
Severability
.
If any term or other provision of this Agreement is determined to be invalid, illegal or incapable of being enforced by any rule
of Law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect
so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse
to any party. Upon a final determination that any term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely
as possible to the fullest extent permitted by applicable Law in an acceptable manner to the end that the transactions contemplated
hereby are fulfilled to the extent possible and the parties agree that the court making such determination shall have the power
to reduce the scope, duration, area or applicability of the term or provision, to delete specific words or phrases, or to replace
any invalid, void or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest
to expressing the intention of the invalid or unenforceable term or provision.
15.
Binding
Effect and Assignment
. All of the covenants and agreements contained in this Agreement shall be binding upon, and inure to
the benefit of, the respective parties and their permitted successors, assigns, heirs, executors, administrators and other legal
representatives, as the case may be. This Agreement may not be assigned by any party hereto without the prior written consent of
the other parties hereto.
16.
No
Third Party Beneficiaries
. This Agreement is not intended, and shall not be deemed, to confer any rights or remedies upon any
person other than the parties hereto and their respective successors and permitted assigns, to create any agreement of employment
with any person or to otherwise create any third-party beneficiary hereto.
17.
No
Waivers
. No waivers of any breach of this Agreement extended by Parent or the Company to any Holder shall be construed as a
waiver of any rights or remedies of Parent or the Company, as applicable, with respect to any other equityholder of the Company
who has executed an agreement substantially in the form of this Agreement with respect to Units held or subsequently held by such
equityholder or with respect to any subsequent breach of any Holder or any other such equityholder of the Parent. No waiver of
any provisions hereof by any party shall be deemed a waiver of any other provisions hereof by any such party, nor shall any such
waiver be deemed a continuing waiver of any provision hereof by such party.
18.
Governing
Law; Jurisdiction and Venue
.
(a) This
Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without giving effect to any
choice or conflict of laws provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the
application of the Laws of any jurisdiction other than the State of Delaware.
(b) Each
of the parties hereto hereby agrees that (i) all actions and proceedings arising out of or relating to this Agreement shall be
heard and determined in the Chancery Court of the State of Delaware and any state appellate court therefrom sitting in New Castle
County in the State of Delaware (or, if the Chancery Court of the State of Delaware declines to accept jurisdiction over a particular
matter, any state or federal court within the State of Delaware), (ii) agrees that it will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such court and (iii) a final Judgment in any action or proceeding shall
be conclusive and may be enforced in other jurisdictions by suit on the Judgment or in any other manner provided by Law.
(c) Each
party irrevocably consents to the service of process outside the territorial jurisdiction of the courts referred to in this
Section
18
in any such action or proceeding by mailing copies thereof by registered or certified United States mail, postage prepaid,
return receipt requested, to his, her or its address as specified in
Section 18
. However, the foregoing shall not limit
the right of a party to effect service of process on the other party by any other legally available method.
19.
Waiver
of Jury Trial
. The parties hereto hereby waive any right to trial by jury with respect to any action or proceeding related
to or arising out of this Agreement, any document executed in connection herewith and the matters contemplated hereby and thereby.
20.
No
Agreement Until Executed
. Irrespective of negotiations among the parties or the exchanging of drafts of this Agreement, this
Agreement shall not constitute or be deemed to evidence a contract, agreement, arrangement or understanding between the parties
hereto unless and until (a) the Company Board has approved, for purposes of any applicable anti-takeover laws and regulations and
any applicable provision of the Company’s Certificate of Formation, the transactions contemplated by the Merger Agreement,
(b) the Merger Agreement is executed by all parties thereto, and (c) this Agreement is executed by all parties hereto.
21.
Entire
Agreement; Amendment
. This Agreement supersedes all prior agreements, written or oral, among the parties hereto with respect
to the subject matter hereof and contains the entire agreement among the parties with respect to the subject matter hereof. This
Agreement may not be amended, supplemented or modified, and no provisions hereof may be modified or waived, except by an instrument
in writing signed by each party hereto.
22.
Effect
of Headings
. The section headings herein are for convenience only and shall not affect the construction of interpretation of
this Agreement.
23.
Definition
of Merger Agreement
. For purposes of this Agreement, the term “
Merger Agreement
” includes such agreement
as it shall be amended or modified from time to time.
24.
Counterparts
.
This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement.
{Signature Page to Follow}
Annex E
TRANSGENOMIC, INC.
2017 STOCK OPTION AND INCENTIVE PLAN
SECTION 1.
|
GENERAL PURPOSE OF THE PLAN;
DEFINITIONS
|
The name of the plan is the Transgenomic,
Inc. 2017 Stock Option and Incentive Plan (the “Plan”). The purpose of the Plan is to encourage and enable the officers,
employees, Non-Employee Directors and Consultants of Transgenomic, Inc. (the “Company”) and its Subsidiaries upon whose
judgment, initiative and efforts the Company largely depends for the successful conduct of its businesses to acquire a proprietary
interest in the Company. It is anticipated that providing such persons with a direct stake in the Company’s welfare will
assure a closer identification of their interests with those of the Company and its stockholders, thereby stimulating their efforts
on the Company’s behalf and strengthening their desire to remain with the Company.
The following terms shall be defined as
set forth below:
“Act”
means the Securities
Act of 1933, as amended, and the rules and regulations thereunder.
“Administrator”
means
either the Board or the compensation committee of the Board or a similar committee performing the functions of the compensation
committee and which is comprised of not less than two Non-Employee Directors who are independent.
“Award”
or
“Awards,”
except where referring to a particular category of grant under the Plan, shall include Incentive Stock Options, Non-Qualified Stock
Options, Stock Appreciation Rights, Restricted Stock Units, Restricted Stock Awards, Unrestricted Stock Awards, Cash-Based Awards,
Performance Share Awards and Dividend Equivalent Rights.
“Award Certificate”
means
a written or electronic document setting forth the terms and provisions applicable to an Award granted under the Plan. Each Award
Certificate is subject to the terms and conditions of the Plan.
“Board”
means the Board
of Directors of the Company.
“Cash-Based Award”
means
an Award entitling the recipient to receive a cash-denominated payment.
“Code”
means the Internal
Revenue Code of 1986, as amended, and any successor Code, and related rules, regulations and interpretations.
“Consultant”
means any
natural person that provides bona fide services to the Company, and such services are not in connection with the offer or sale
of securities in a capital-raising transaction and do not directly or indirectly promote or maintain a market for the Company’s
securities.
“Covered Employee”
means
an employee who is a “Covered Employee” within the meaning of Section 162(m) of the Code.
“Dividend Equivalent Right”
means an Award entitling the grantee to receive credits based on cash dividends that would have been paid on the shares of Stock
specified in the Dividend Equivalent Right (or other award to which it relates) if such shares had been issued to and held by the
grantee.
“Effective Date”
means
the date on which the Plan becomes effective as set forth in
Section 21
.
“Exchange Act”
means
the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.
“Fair Market Value”
of
the Stock on any given date means the fair market value of the Stock determined in good faith by the Administrator;
provided,
however,
that if the Stock is admitted to quotation on the National Association of Securities Dealers Automated Quotation System
(“NASDAQ”), NASDAQ Global Market or another national securities exchange, the determination shall be made by reference
to market quotations. If there are no market quotations for such date, the determination shall be made by reference to the last
date preceding such date for which there are market quotations.
“Incentive Stock Option”
means any Stock Option designated and qualified as an “incentive stock option” as defined in Section 422 of the
Code.
“Non-Employee Director”
means a member of the Board who is not also an employee of the Company or any Subsidiary.
“Non-Qualified Stock Option”
means any Stock Option that is not an Incentive Stock Option.
“Option”
or
“Stock
Option”
means any option to purchase shares of Stock granted pursuant to
Section
5.
“Performance-Based Award”
means any Restricted Stock Award, Restricted Stock Units, Performance Share Award or Cash-Based Award granted to a Covered Employee
that is intended to qualify as “performance-based compensation” under Section 162(m) of the Code and the regulations
promulgated thereunder.
“Performance Criteria”
means the criteria that the Administrator selects for purposes of establishing the Performance Goal or Performance Goals for an
individual for a Performance Cycle. The Performance Criteria (which shall be applicable to the organizational level specified by
the Administrator, including, but not limited to, the Company or a unit, division, group, or Subsidiary of the Company) that will
be used to establish Performance Goals are limited to the following: total shareholder return, earnings before interest, taxes,
depreciation and amortization, net income (loss) (either before or after interest, taxes, depreciation and/or amortization), changes
in the market price of the Stock, economic value-added, funds from operations or similar measure, sales or revenue, acquisitions
or strategic transactions, operating income (loss), cash flow (including, but not limited to, operating cash flow and free cash
flow), return on capital, assets, equity, or investment, return on sales, gross or net profit levels, productivity, expense, margins,
operating efficiency, customer satisfaction, working capital, earnings (loss) per share of Stock, sales or market shares and number
of customers, any of which may be measured either in absolute terms or as compared to any incremental increase or as compared to
results of a peer group. The Committee may appropriately adjust any evaluation performance under a Performance Criterion to exclude
any of the following events that occurs during a Performance Cycle: (i) asset write-downs or impairments, (ii) litigation or claim
judgments or settlements, (iii) the effect of changes in tax law, accounting principles or other such laws or provisions affecting
reporting results, (iv) accruals for reorganizations and restructuring programs, and (v) any item of an unusual nature or of a
type that indicates infrequency of occurrence, or both, including those described in the Financial Accounting Standards Board’s
authoritative guidance and/or in management’s discussion and analysis of financial condition of operations appearing the
Company’s annual report to stockholders for the applicable year.
“Performance Cycle”
means
one or more periods of time, which may be of varying and overlapping durations, as the Administrator may select, over which the
attainment of one or more Performance Criteria will be measured for the purpose of determining a grantee’s right to and the
payment of a Restricted Stock Award, Restricted Stock Units, Performance Share Award or Cash-Based Award, the vesting and/or payment
of which is subject to the attainment of one or more Performance Goals. Each such period shall not be less than 12 months.
“Performance Goals”
means,
for a Performance Cycle, the specific goals established in writing by the Administrator for a Performance Cycle based upon the
Performance Criteria.
“Performance Share Award”
means an Award entitling the recipient to acquire shares of Stock upon the attainment of specified performance goals.
“Restricted Shares”
means
the shares of Stock underlying a Restricted Stock Award that remain subject to a risk of forfeiture or the Company’s right
of repurchase.
“Restricted Stock Award”
means an Award of Restricted Shares subject to such restrictions and conditions as the Administrator may determine at the time
of grant.
“Restricted Stock Units”
means an Award of stock units subject to such restrictions and conditions as the Administrator may determine at the time of grant.
“Sale Event”
shall mean
(i) the sale of all or substantially all of the assets of the Company on a consolidated basis to an unrelated person or entity,
(ii) a merger, reorganization or consolidation pursuant to which the holders of the Company’s outstanding voting power and
outstanding stock immediately prior to such transaction do not own a majority of the outstanding voting power and outstanding stock
or other equity interests of the resulting or successor entity (or its ultimate parent, if applicable) immediately upon completion
of such transaction, (iii) the sale of all of the Stock of the Company to an unrelated person, entity or group thereof acting in
concert, or (iv) any other transaction in which the owners of the Company’s outstanding voting power immediately prior to
such transaction do not own at least a majority of the outstanding voting power of the Company or any successor entity immediately
upon completion of the transaction other than as a result of the acquisition of securities directly from the Company.
“
Sale Price
” means the
value as determined by the Administrator of the consideration payable, or otherwise to be received by stockholders, per share of
Stock pursuant to a Sale Event.
“Section 409A”
means
Section 409A of the Code and the regulations and other guidance promulgated thereunder.
“Stock”
means the Common
Stock, par value $0.01 per share, of the Company, subject to adjustments pursuant to
Section
3.
“Stock Appreciation Right”
means an Award entitling the recipient to receive shares of Stock having a value equal to the excess of the Fair Market Value of
the Stock on the date of exercise over the exercise price of the Stock Appreciation Right multiplied by the number of shares of
Stock with respect to which the Stock Appreciation Right shall have been exercised.
“Subsidiary”
means any
corporation or other entity (other than the Company) in which the Company has at least a 50 percent interest, either directly or
indirectly.
“Ten Percent Owner”
means
an employee who owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10 percent
of the combined voting power of all classes of stock of the Company or any parent or subsidiary corporation.
“Unrestricted Stock Award”
means an Award of shares of Stock free of any restrictions.
SECTION 2.
|
ADMINISTRATION OF PLAN;
ADMINISTRATOR AUTHORITY TO SELECT GRANTEES AND DETERMINE AWARDS
|
(a)
Administration
of Plan
. The Plan shall be administered by the Administrator.
(b)
Powers
of Administrator
. The Administrator shall have the power and authority to grant Awards consistent with the terms of the Plan,
including the power and authority:
(i)
to
select the individuals to whom Awards may from time to time be granted;
(ii)
to determine the time or times of grant, and the extent, if any, of Incentive Stock Options, Non-Qualified Stock Options,
Stock Appreciation Rights, Restricted Stock Awards, Restricted Stock Units, Unrestricted Stock Awards, Cash-Based Awards, Performance
Share Awards and Dividend Equivalent Rights, or any combination of the foregoing, granted to any one or more grantees;
(iii)
to determine the number of shares of Stock to be covered by any Award;
(iv)
to
determine and modify from time to time the terms and conditions, including restrictions, not inconsistent with the terms of the
Plan, of any Award, which terms and conditions may differ among individual Awards and grantees, and to approve the forms of Award
Certificates;
(v)
to
accelerate at any time the exercisability or vesting of all or any portion of any Award in circumstances involving the grantee’s
death, disability, retirement or termination of employment, or a change in control (including a Sale Event);
(vi)
subject to the provisions of
Section 5(c)
, to extend at any time the period in which Stock Options may be
exercised; and
(vii)
at any time to adopt, alter and repeal such rules, guidelines and practices for administration of the Plan and for its own
acts and proceedings as it shall deem advisable; to interpret the terms and provisions of the Plan and any Award (including related
written instruments); to make all determinations it deems advisable for the administration of the Plan; to decide all disputes
arising in connection with the Plan; and to otherwise supervise the administration of the Plan.
All decisions and interpretations of the
Administrator shall be binding on all persons, including the Company and Plan grantees.
(c)
Delegation of Authority to Grant Awards
. Subject to applicable law, the Administrator, in its discretion, may delegate
to the Chief Executive Officer of the Company all or part of the Administrator’s authority and duties with respect to the
granting of Awards to individuals who are (i) not subject to the reporting and other provisions of Section 16 of the Exchange
Act and (ii) not Covered Employees. Any such delegation by the Administrator shall include a limitation as to the amount of Stock
underlying Awards that may be granted during the period of the delegation and shall contain guidelines as to the determination
of the exercise price and the vesting criteria. The Administrator may revoke or amend the terms of a delegation at any time but
such action shall not invalidate any prior actions of the Administrator’s delegate or delegates that were consistent with
the terms of the Plan.
(d)
Award Certificate
. Awards under the Plan shall be evidenced by Award Certificates that set forth the terms, conditions
and limitations for each Award which may include, without limitation, the term of an Award and the provisions applicable in the
event employment or service terminates.
(e)
Indemnification
. Neither the Board nor the Administrator, nor any member of either or any delegate thereof, shall
be liable for any act, omission, interpretation, construction or determination made in good faith in connection with the Plan,
and the members of the Board and the Administrator (and any delegate thereof) shall be entitled in all cases to indemnification
and reimbursement by the Company in respect of any claim, loss, damage or expense (including, without limitation, reasonable attorneys’
fees) arising or resulting therefrom to the fullest extent permitted by law and/or under the Company’s articles or bylaws
or any directors’ and officers’ liability insurance coverage which may be in effect from time to time and/or any indemnification
agreement between such individual and the Company.
(f)
Foreign Award Recipients
. Notwithstanding any provision of the Plan to the contrary, in order to comply with the
laws in other countries in which the Company and its Subsidiaries operate or have employees or other individuals eligible for Awards,
the Administrator, in its sole discretion, shall have the power and authority to: (i) determine which Subsidiaries shall be covered
by the Plan; (ii) determine which individuals outside the United States are eligible to participate in the Plan; (iii) modify the
terms and conditions of any Award granted to individuals outside the United States to comply with applicable foreign laws; (iv)
establish subplans and modify exercise procedures and other terms and procedures, to the extent the Administrator determines such
actions to be necessary or advisable (and such subplans and/or modifications shall be attached to this Plan as appendices);
provided,
however,
that no such subplans and/or modifications shall increase the share limitations contained in
Section 3(a)
hereof;
and (v) take any action, before or after an Award is made, that the Administrator determines to be necessary or advisable to obtain
approval or comply with any local governmental regulatory exemptions or approvals. Notwithstanding the foregoing, the Administrator
may not take any actions hereunder, and no Awards shall be granted, that would violate the Exchange Act or any other applicable
United States securities law, the Code, or any other applicable United States governing statute or law.
SECTION 3.
|
STOCK ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION
|
(a)
Stock Issuable
. The maximum number of shares of Stock reserved and available for issuance under the Plan shall be
20,000,000 shares, subject to adjustment as provided in this
Section
3;
provided, however,
that Awards with
respect to no more than 2,000,000 shares may be granted under the Plan prior to the completion of the transactions contemplated
by the Agreement and Plan of Merger, dated October 12, 2016 among the Company, New Haven Labs Inc., and Precipio Diagnostics, LLC.
For purposes of this limitation, the shares of Stock underlying any Awards that are forfeited, canceled, held back upon exercise
of an Option or settlement of an Award to cover the exercise price or tax withholding, reacquired by the Company prior to vesting,
satisfied without the issuance of Stock or otherwise terminated (other than by exercise) shall be added back to the shares of Stock
available for issuance under the Plan. In the event the Company repurchases shares of Stock on the open market, such shares shall
not be added to the shares of Stock available for issuance under the Plan. Subject to such overall limitations, shares of Stock
may be issued up to such maximum number pursuant to any type or types of Award;
provided, however,
that Stock Options or
Stock Appreciation Rights with respect to no more than 2,000,000 shares of Stock may be granted to any one individual grantee during
any one calendar year period, and no more than 20,000,000 shares of the Stock may be issued in the form of Incentive Stock Options.
The shares available for issuance under the Plan may be authorized but unissued shares of Stock or shares of Stock reacquired by
the Company.
(b)
Maximum Awards to Non-Employee Directors
. Notwithstanding anything to the contrary in this Plan, the value of all
Awards awarded under this Plan and all other cash compensation paid by the Company to any Non-Employee Director in any calendar
year shall not exceed $500,000. For the purpose of this limitation, the value of any Award shall be its grant date fair value,
as determined in accordance with ASC 718 or successor provision but excluding the impact of estimated forfeitures related to service-based
vesting provisions.
(c)
Changes in Stock
. Subject to
Section 3(d)
hereof, if, as a result of any reorganization, recapitalization,
reclassification, stock dividend, stock split, reverse stock split or other similar change in the Company’s capital stock,
the outstanding shares of Stock are increased or decreased or are exchanged for a different number or kind of shares or other securities
of the Company, or additional shares or new or different shares or other securities of the Company or other non-cash assets are
distributed with respect to such shares of Stock or other securities, or, if, as a result of any merger or consolidation, sale
of all or substantially all of the assets of the Company, the outstanding shares of Stock are converted into or exchanged for securities
of the Company or any successor entity (or a parent or subsidiary thereof), the Administrator shall make an appropriate or proportionate
adjustment in (i) the maximum number of shares reserved for issuance under the Plan, including the maximum number of shares that
may be issued in the form of Incentive Stock Options, (ii) the number of Stock Options or Stock Appreciation Rights that can be
granted to any one individual grantee and the maximum number of shares that may be granted under a Performance-Based Award, (iii)
the number and kind of shares or other securities subject to any then outstanding Awards under the Plan, (iv) the repurchase price,
if any, per share subject to each outstanding Restricted Stock Award, and (v) the exercise price for each share subject to
any then outstanding Stock Options and Stock Appreciation Rights under the Plan, without changing the aggregate exercise price
(
i.e.
, the exercise price multiplied by the number of Stock Options and Stock Appreciation Rights) as to which such Stock
Options and Stock Appreciation Rights remain exercisable. The Administrator shall also make equitable or proportionate adjustments
in the number of shares subject to outstanding Awards and the exercise price and the terms of outstanding Awards to take into consideration
cash dividends paid other than in the ordinary course or any other extraordinary corporate event. The adjustment by the Administrator
shall be final, binding and conclusive. No fractional shares of Stock shall be issued under the Plan resulting from any such adjustment,
but the Administrator in its discretion may make a cash payment in lieu of fractional shares.
(d)
Mergers and Other Transactions
. In the case of and subject to the consummation of a Sale Event, the parties thereto
may cause the assumption or continuation of Awards theretofore granted by the successor entity, or the substitution of such Awards
with new Awards of the successor entity or parent thereof, with appropriate adjustment as to the number and kind of shares and,
if appropriate, the per share exercise prices, as such parties shall agree. To the extent the parties to such Sale Event do not
provide for the assumption, continuation or substitution of Awards, upon the effective time of the Sale Event, the Plan and all
outstanding Awards granted hereunder shall terminate. In such case, except as may be otherwise provided in the relevant Award Certificate,
all Options and Stock Appreciation Rights that are not exercisable immediately prior to the effective time of the Sale Event shall
become fully exercisable as of the effective time of the Sale Event, all other Awards with time-based vesting, conditions or restrictions
shall become fully vested and nonforfeitable as of the effective time of the Sale Event, and all Awards with conditions and restrictions
relating to the attainment of performance goals may become vested and nonforfeitable in connection with a Sale Event in the Administrator’s
discretion or to the extent specified in the relevant Award Certificate. In the event of such termination, (i) the Company shall
have the option (in its sole discretion) to make or provide for a payment, in cash or in kind, to the grantees holding Options
and Stock Appreciation Rights, in exchange for the cancellation thereof, in an amount equal to the difference between (A) the Sale
Price multiplied by the number of shares of Stock subject to outstanding Options and Stock Appreciation Rights (to the extent then
exercisable at prices not in excess of the Sale Price) and (B) the aggregate exercise price of all such outstanding Options and
Stock Appreciation Rights; or (ii) each grantee shall be permitted, within a specified period of time prior to the consummation
of the Sale Event as determined by the Administrator, to exercise all outstanding Options and Stock Appreciation Rights (to the
extent then exercisable) held by such grantee. The Company shall also have the option (in its sole discretion) to make or provide
for a payment, in cash or in kind, to the grantees holding other Awards in an amount equal to the Sale Price multiplied by the
number of vested shares of Stock under such Awards.
Grantees under the Plan will be such full
or part-time officers and other employees, Non-Employee Directors and Consultants of the Company and its Subsidiaries as are selected
from time to time by the Administrator in its sole discretion.
(a)
Award of Stock Options
. The Administrator may grant Stock Options under the Plan. Any Stock Option granted under
the Plan shall be in such form as the Administrator may from time to time approve.
Stock Options granted under the Plan may
be either Incentive Stock Options or Non-Qualified Stock Options. Incentive Stock Options may be granted only to employees of the
Company or any Subsidiary that is a “subsidiary corporation” within the meaning of Section 424(f) of the Code.
To the extent that any Option does not qualify as an Incentive Stock Option, it shall be deemed a Non-Qualified Stock Option.
Stock Options granted pursuant to this
Section
5
shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent
with the terms of the Plan, as the Administrator shall deem desirable. If the Administrator so determines, Stock Options may be
granted in lieu of cash compensation at the optionee’s election, subject to such terms and conditions as the Administrator
may establish.
(b)
Exercise Price
. The exercise price per share for the Stock covered by a Stock Option granted pursuant to this
Section
5
shall be determined by the Administrator at the time of grant but shall not be less than 100 percent of the Fair Market Value on
the date of grant. In the case of an Incentive Stock Option that is granted to a Ten Percent Owner, the option price of such Incentive
Stock Option shall be not less than 110 percent of the Fair Market Value on the grant date.
(c)
Option Term
. The term of each Stock Option shall be fixed by the Administrator, but no Stock Option shall be exercisable
more than ten years after the date the Stock Option is granted. In the case of an Incentive Stock Option that is granted to a Ten
Percent Owner, the term of such Stock Option shall be no more than five years from the date of grant.
(d)
Exercisability; Rights of a Stockholder
. Stock Options shall become exercisable at such time or times, whether or
not in installments, as shall be determined by the Administrator at or after the grant date. The Administrator may at any time
accelerate the exercisability of all or any portion of any Stock Option. An optionee shall have the rights of a stockholder only
as to shares acquired upon the exercise of a Stock Option and not as to unexercised Stock Options.
(e)
Method of Exercise
. Stock Options may be exercised in whole or in part, by giving written or electronic notice of
exercise to the Company, specifying the number of shares to be purchased. Payment of the purchase price may be made by one or more
of the following methods except to the extent otherwise provided in the Option Award Certificate:
(i)
In cash, by certified or bank check or other instrument acceptable to the Administrator;
(ii)
Through the delivery (or attestation to the ownership following such procedures as the Company may prescribe) of shares
of Stock that are not then subject to restrictions under any Company plan. Such surrendered shares shall be valued at Fair Market
Value on the exercise date;
(iii)
By the optionee delivering to the Company a properly executed exercise notice together with irrevocable instructions to
a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company for the purchase price;
provided
that in the event the optionee chooses to pay the purchase price as so provided, the optionee and the broker shall comply with
such procedures and enter into such agreements of indemnity and other agreements as the Company shall prescribe as a condition
of such payment procedure; or
(iv)
With respect to Stock Options that are not Incentive Stock Options, by a “net exercise” arrangement pursuant
to which the Company will reduce the number of shares of Stock issuable upon exercise by the largest whole number of shares with
a Fair Market Value that does not exceed the aggregate exercise price.
Payment instruments will be received subject to collection.
The transfer to the optionee on the records of the Company or of the transfer agent of the shares of Stock to be purchased pursuant
to the exercise of a Stock Option will be contingent upon receipt from the optionee (or a purchaser acting in his stead in accordance
with the provisions of the Stock Option) by the Company of the full purchase price for such shares and the fulfillment of any other
requirements contained in the Option Award Certificate or applicable provisions of laws (including the satisfaction of any withholding
taxes that the Company is obligated to withhold with respect to the optionee). In the event an optionee chooses to pay the purchase
price by previously-owned shares of Stock through the attestation method, the number of shares of Stock transferred to the optionee
upon the exercise of the Stock Option shall be net of the number of attested shares. In the event that the Company establishes,
for itself or using the services of a third party, an automated system for the exercise of Stock Options, such as a system using
an internet website or interactive voice response, then the paperless exercise of Stock Options may be permitted through the use
of such an automated system.
(f)
Annual Limit on Incentive Stock Options
. To the extent required for “incentive stock option” treatment
under Section 422 of the Code, the aggregate Fair Market Value (determined as of the time of grant) of the shares of Stock
with respect to which Incentive Stock Options granted under this Plan and any other plan of the Company or its parent and subsidiary
corporations become exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. To the extent
that any Stock Option exceeds this limit, it shall constitute a Non-Qualified Stock Option.
SECTION 6.
|
STOCK APPRECIATION RIGHTS
|
(a)
Award of Stock Appreciation Rights
. The Administrator may grant Stock Appreciation Rights under the Plan. A Stock
Appreciation Right is an Award entitling the recipient to receive shares of Stock having a value equal to the excess of the Fair
Market Value of a share of Stock on the date of exercise over the exercise price of the Stock Appreciation Right multiplied by
the number of shares of Stock with respect to which the Stock Appreciation Right shall have been exercised.
(b)
Exercise Price of Stock Appreciation Rights
. The exercise price of a Stock Appreciation Right shall not be less than
100 percent of the Fair Market Value of the Stock on the date of grant.
(c)
Grant and Exercise of Stock Appreciation Rights
. Stock Appreciation Rights may be granted by the Administrator independently
of any Stock Option granted pursuant to
Section
5 of the Plan.
(d)
Terms and Conditions of Stock Appreciation Rights
. Stock Appreciation Rights shall be subject to such terms and conditions
as shall be determined on the date of grant by the Administrator. The term of a Stock Appreciation Right may not exceed ten years.
The terms and conditions of each such Award shall be determined by the Administrator, and such terms and conditions may differ
among individual Awards and grantees.
SECTION 7.
|
RESTRICTED STOCK
AWARDS
|
(a)
Nature of Restricted Stock Awards
. The Administrator may grant Restricted Stock Awards under the Plan. A Restricted
Stock Award is any Award of Restricted Shares subject to such restrictions and conditions as the Administrator may determine at
the time of grant. Conditions may be based on continuing employment (or other service relationship) and/or achievement of pre-established
performance goals and objectives.
(b)
Rights as a Stockholder
. Upon the grant of the Restricted Stock Award and payment of any applicable purchase price,
a grantee shall have the rights of a stockholder with respect to the voting of the Restricted Shares and receipt of dividends;
provided
that if the lapse of restrictions with respect to the Restricted Stock Award is tied to the attainment of performance
goals, any dividends paid by the Company during the performance period shall accrue and shall not be paid to the grantee until
and to the extent the performance goals are met with respect to the Restricted Stock Award. Unless the Administrator shall otherwise
determine, (i) uncertificated Restricted Shares shall be accompanied by a notation on the records of the Company or the transfer
agent to the effect that they are subject to forfeiture until such Restricted Shares are vested as provided in
Section 7(d)
below, and (ii) certificated Restricted Shares shall remain in the possession of the Company until such Restricted Shares are vested
as provided in
Section 7(d)
below, and the grantee shall be required, as a condition of the grant, to deliver to the Company
such instruments of transfer as the Administrator may prescribe.
(c)
Restrictions
. Restricted Shares may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed
of except as specifically provided herein or in the Restricted Stock Award Certificate. Except as may otherwise be provided by
the Administrator either in the Award Certificate or, subject to
Section 18
below, in writing after the Award is issued,
if a grantee’s employment (or other service relationship) with the Company and its Subsidiaries terminates for any reason,
any Restricted Shares that have not vested at the time of termination shall automatically and without any requirement of notice
to such grantee from or other action by or on behalf of, the Company be deemed to have been reacquired by the Company at its original
purchase price (if any) from such grantee or such grantee’s legal representative simultaneously with such termination of
employment (or other service relationship), and thereafter shall cease to represent any ownership of the Company by the grantee
or rights of the grantee as a stockholder. Following such deemed reacquisition of Restricted Shares that are represented by physical
certificates, a grantee shall surrender such certificates to the Company upon request without consideration.
(d)
Vesting of Restricted Shares
. The Administrator at the time of grant shall specify the date or dates and/or the attainment
of pre-established performance goals, objectives and other conditions on which the non-transferability of the Restricted Shares
and the Company’s right of repurchase or forfeiture shall lapse. Subsequent to such date or dates and/or the attainment of
such pre-established performance goals, objectives and other conditions, the shares on which all restrictions have lapsed shall
no longer be Restricted Shares and shall be deemed “vested.”
SECTION 8.
|
RESTRICTED STOCK UNITS
|
(a)
Nature of Restricted Stock Units
. The Administrator may grant Restricted Stock Units under the Plan. A Restricted
Stock Unit is an Award of stock units that may be settled in shares of Stock upon the satisfaction of such restrictions and conditions
at the time of grant. Conditions may be based on continuing employment (or other service relationship) and/or achievement of pre-established
performance goals and objectives. The terms and conditions of each such Award shall be determined by the Administrator, and such
terms and conditions may differ among individual Awards and grantees. Except in the case of Restricted Stock Units with a deferred
settlement date that complies with Section 409A, at the end of the vesting period, the Restricted Stock Units, to the extent vested,
shall be settled in the form of shares of Stock. Restricted Stock Units with deferred settlement dates are subject to Section 409A
and shall contain such additional terms and conditions as the Administrator shall determine in its sole discretion in order to
comply with the requirements of Section 409A.
(b)
Election to Receive Restricted Stock Units in Lieu of Compensation
. The Administrator may, in its sole discretion,
permit a grantee to elect to receive a portion of future cash compensation otherwise due to such grantee in the form of an award
of Restricted Stock Units. Any such election shall be made in writing and shall be delivered to the Company no later than the date
specified by the Administrator and in accordance with Section 409A and such other rules and procedures established by the Administrator.
Any such future cash compensation that the grantee elects to defer shall be converted to a fixed number of Restricted Stock Units
based on the Fair Market Value of Stock on the date the compensation would otherwise have been paid to the grantee if such payment
had not been deferred as provided herein. The Administrator shall have the sole right to determine whether and under what circumstances
to permit such elections and to impose such limitations and other terms and conditions thereon as the Administrator deems appropriate.
Any Restricted Stock Units that are elected to be received in lieu of cash compensation shall be fully vested, unless otherwise
provided in the Award Certificate.
(c)
Rights as a Stockholder
. A grantee shall have the rights as a stockholder only as to shares of Stock acquired by
the grantee upon settlement of Restricted Stock Units;
provided, however,
that the grantee may be credited with Dividend
Equivalent Rights with respect to the stock units underlying his Restricted Stock Units, subject to the provisions of
Section
11
and such terms and conditions as the Administrator may determine.
(d)
Termination
. Except as may otherwise be provided by the Administrator either in the Award Certificate or, subject
to
Section 18
below, in writing after the Award is issued, a grantee’s right in all Restricted Stock Units that
have not vested shall automatically terminate upon the grantee’s termination of employment (or cessation of service relationship)
with the Company and its Subsidiaries for any reason.
SECTION 9.
|
UNRESTRICTED STOCK AWARDS
|
Grant or Sale of Unrestricted Stock
.
The Administrator may grant (or sell at par value or such higher purchase price determined by the Administrator) an Unrestricted
Stock Award under the Plan. An Unrestricted Stock Award is an Award pursuant to which the grantee may receive shares of Stock free
of any restrictions under the Plan. Unrestricted Stock Awards may be granted in respect of past services or other valid consideration,
or in lieu of cash compensation due to such grantee.
SECTION 10.
|
CASH-BASED AWARDS
|
Grant of Cash-Based Awards
. The Administrator
may grant Cash-Based Awards under the Plan. A Cash-Based Award is an Award that entitles the grantee to a payment in cash upon
the attainment of specified Performance Goals. The Administrator shall determine the maximum duration of the Cash-Based Award,
the amount of cash to which the Cash-Based Award pertains, the conditions upon which the Cash-Based Award shall become vested or
payable, and such other provisions as the Administrator shall determine. Each Cash-Based Award shall specify a cash-denominated
payment amount, formula or payment ranges as determined by the Administrator. Payment, if any, with respect to a Cash-Based Award
shall be made in accordance with the terms of the Award and may be made in cash.
SECTION 11.
|
PERFORMANCE
SHARE AWARDS
|
(a)
Nature of Performance Share Awards
. The Administrator may grant Performance Share Awards under the Plan. A Performance
Share Award is an Award entitling the grantee to receive shares of Stock upon the attainment of performance goals. The Administrator
shall determine whether and to whom Performance Share Awards shall be granted, the performance goals, the periods during which
performance is to be measured, which may not be less than one year except in the case of a Sale Event, and such other limitations
and conditions as the Administrator shall determine.
(b)
Rights as a Stockholder
. A grantee receiving a Performance Share Award shall have the rights of a stockholder only
as to shares of Stock actually received by the grantee under the Plan and not with respect to shares subject to the Award but not
actually received by the grantee. A grantee shall be entitled to receive shares of Stock under a Performance Share Award only upon
satisfaction of all conditions specified in the Performance Share Award Certificate (or in a performance plan adopted by the Administrator).
(c)
Termination
. Except as may otherwise be provided by the Administrator either in the Award agreement or, subject to
Section 18
below, in writing after the Award is issued, a grantee’s rights in all Performance Share Awards shall
automatically terminate upon the grantee’s termination of employment (or cessation of service relationship) with the Company
and its Subsidiaries for any reason.
SECTION 12.
|
PERFORMANCE-BASED AWARDS TO COVERED EMPLOYEES
|
(a)
Performance-Based Awards
. The Administrator may grant one or more Performance-Based Awards in the form of a Restricted
Stock Award, Restricted Stock Units, Performance Share Awards or Cash-Based Award payable upon the attainment of Performance Goals
that are established by the Administrator and relate to one or more of the Performance Criteria, in each case on a specified date
or dates or over any period or periods determined by the Administrator. The Administrator shall define in an objective fashion
the manner of calculating the Performance Criteria it selects to use for any Performance Cycle. Depending on the Performance Criteria
used to establish such Performance Goals, the Performance Goals may be expressed in terms of overall Company performance or the
performance of a division, business unit, or an individual. Each Performance-Based Award shall comply with the provisions set forth
below.
(b)
Grant of Performance-Based Awards
. With respect to each Performance-Based Award granted to a Covered Employee, the
Administrator shall select, within the first 90 days of a Performance Cycle (or, if shorter, within the maximum period allowed
under Section 162(m) of the Code) the Performance Criteria for such grant, and the Performance Goals with respect to each
Performance Criterion (including a threshold level of performance below which no amount will become payable with respect to such
Award). Each Performance-Based Award will specify the amount payable, or the formula for determining the amount payable, upon achievement
of the various applicable performance targets. The Performance Criteria established by the Administrator may be (but need not be)
different for each Performance Cycle and different Performance Goals may be applicable to Performance-Based Awards to different
Covered Employees.
(c)
Payment of Performance-Based Awards
. Following the completion of a Performance Cycle, the Administrator shall meet
to review and certify in writing whether, and to what extent, the Performance Goals for the Performance Cycle have been achieved
and, if so, to also calculate and certify in writing the amount of the Performance-Based Awards earned for the Performance Cycle.
The Administrator shall then determine the actual size of each Covered Employee’s Performance-Based Award.
(d)
Maximum Award Payable
. The maximum Performance-Based Award payable to any one Covered Employee under the Plan for
a Performance Cycle is 3,000,000 shares of Stock (subject to adjustment as provided in
Section 3(c)
hereof) or $1,000,000
in the case of a Performance-Based Award that is a Cash-Based Award.
SECTION 13.
|
DIVIDEND EQUIVALENT RIGHTS
|
(a)
Dividend Equivalent Rights
. The Administrator may grant Dividend Equivalent Rights under the Plan. A Dividend Equivalent
Right is an Award entitling the grantee to receive credits based on cash dividends that would have been paid on the shares of Stock
specified in the Dividend Equivalent Right (or other Award to which it relates) if such shares had been issued to the grantee.
A Dividend Equivalent Right may be granted hereunder to any grantee as a component of an award of Restricted Stock Units or Performance
Share Award or as a freestanding award. The terms and conditions of Dividend Equivalent Rights shall be specified in the Award
Certificate. Dividend equivalents credited to the holder of a Dividend Equivalent Right may be paid currently or may be deemed
to be reinvested in additional shares of Stock, which may thereafter accrue additional equivalents. Any such reinvestment shall
be at Fair Market Value on the date of reinvestment or such other price as may then apply under a dividend reinvestment plan sponsored
by the Company, if any. Dividend Equivalent Rights may be settled in cash or shares of Stock or a combination thereof, in a single
installment or installments. A Dividend Equivalent Right granted as a component of an Award of Restricted Stock Units or Performance
Share Award shall provide that such Dividend Equivalent Right shall be settled only upon settlement or payment of, or lapse of
restrictions on, such other Award, and that such Dividend Equivalent Right shall expire or be forfeited or annulled under the same
conditions as such other Award.
(b)
Termination
. Except as may otherwise be provided by the Administrator either in the Award Certificate or, subject
to
Section 18
below, in writing after the Award is issued, a grantee’s rights in all Dividend Equivalent Rights
shall automatically terminate upon the grantee’s termination of employment (or cessation of service relationship) with the
Company and its Subsidiaries for any reason.
SECTION 14.
|
Transferability of Awards
|
(a)
Transferability
. Except as provided in
Section 14(b)
below, during a grantee’s lifetime, his or
her Awards shall be exercisable only by the grantee, or by the grantee’s legal representative or guardian in the event of
the grantee’s incapacity. No Awards shall be sold, assigned, transferred or otherwise encumbered or disposed of by a grantee
other than by will or by the laws of descent and distribution or pursuant to a domestic relations order. No Awards shall be subject,
in whole or in part, to attachment, execution, or levy of any kind, and any purported transfer in violation hereof shall be null
and void.
(b)
Administrator Action
. Notwithstanding
Section 14(a)
, the Administrator, in its discretion, may provide
either in the Award Certificate regarding a given Award or by subsequent written approval that the grantee (who is an employee
or director) may transfer his or her Non-Qualified Stock Options to his or her immediate family members, to trusts for the benefit
of such family members, or to partnerships in which such family members are the only partners,
provided
that the transferee
agrees in writing with the Company to be bound by all of the terms and conditions of this Plan and the applicable Award. In no
event may an Award be transferred by a grantee for value.
(c)
Family Member
. For purposes of
Section 14(b)
, “family member” shall mean a grantee’s
child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the grantee’s
household (other than a tenant of the grantee), a trust in which these persons (or the grantee) have more than 50 percent of the
beneficial interest, a foundation in which these persons (or the grantee) control the management of assets, and any other entity
in which these persons (or the grantee) own more than 50 percent of the voting interests.
(d)
Designation of Beneficiary
. To the extent permitted by the Company, each grantee to whom an Award has been made under
the Plan may designate a beneficiary or beneficiaries to exercise any Award or receive any payment under any Award payable on or
after the grantee’s death. Any such designation shall be on a form provided for that purpose by the Administrator and shall
not be effective until received by the Administrator. If no beneficiary has been designated by a deceased grantee, or if the designated
beneficiaries have predeceased the grantee, the beneficiary shall be the grantee’s estate.
SECTION 15.
|
TAX WITHHOLDING
|
(a)
Payment by Grantee
. Each grantee shall, no later than the date as of which the value of an Award or of any Stock
or other amounts received thereunder first becomes includable in the gross income of the grantee for Federal income tax purposes,
pay to the Company, or make arrangements satisfactory to the Administrator regarding payment of, any Federal, state, or local taxes
of any kind required by law to be withheld by the Company with respect to such income. The Company and its Subsidiaries shall,
to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the grantee.
The Company’s obligation to deliver evidence of book entry (or stock certificates) to any grantee is subject to and conditioned
on tax withholding obligations being satisfied by the grantee.
(b)
Payment in Stock
. Subject to approval by the Administrator, a grantee may elect to have the Company’s minimum
required tax withholding obligation satisfied, in whole or in part, by authorizing the Company to withhold from shares of Stock
to be issued pursuant to any Award a number of shares with an aggregate Fair Market Value (as of the date the withholding is effected)
that would satisfy the withholding amount due. The Administrator may also require Awards to be subject to mandatory share withholding
up to the required withholding amount. For purposes of share withholding, the Fair Market Value of withheld shares shall be determined
in the same manner as the value of Stock includible in income of the Participants.
SECTION 16.
|
Section 409A
awards
|
To the extent that any Award is determined
to constitute “nonqualified deferred compensation” within the meaning of Section 409A (a “409A Award”),
the Award shall be subject to such additional rules and requirements as specified by the Administrator from time to time in order
to comply with Section 409A. In this regard, if any amount under a 409A Award is payable upon a “separation from service”
(within the meaning of Section 409A) to a grantee who is then considered a “specified employee” (within the meaning
of Section 409A), then no such payment shall be made prior to the date that is the earlier of (i) six months and one day after
the grantee’s separation from service, or (ii) the grantee’s death, but only to the extent such delay is necessary
to prevent such payment from being subject to interest, penalties and/or additional tax imposed pursuant to Section 409A. Further,
the settlement of any such Award may not be accelerated except to the extent permitted by Section 409A.
SECTION 17.
|
TERMINATION OF EMPLOYMENT, TRANSFER, LEAVE OF ABSENCE, ETC.
|
(a)
Termination of Employment
. If the grantee’s employer ceases to be a Subsidiary, the grantee shall be deemed
to have terminated employment for purposes of the Plan.
(b)
For purposes of the Plan, the following events shall not be deemed a termination of employment:
(i)
a transfer to the employment of the Company from a Subsidiary or from the Company to a Subsidiary, or from one Subsidiary
to another; or
(ii)
an approved leave of absence for military service or sickness, or for any other purpose approved by the Company, if the
employee’s right to re-employment is guaranteed either by a statute or by contract or under the policy pursuant to which
the leave of absence was granted or if the Administrator otherwise so provides in writing.
SECTION 18.
|
AMENDMENTS
AND TERMINATION
|
The Board may, at any time, amend or discontinue
the Plan and the Administrator may, at any time, amend or cancel any outstanding Award for the purpose of satisfying changes in
law or for any other lawful purpose, but no such action shall adversely affect rights under any outstanding Award without the holder’s
consent. The Administrator is specifically authorized to exercise its discretion to reduce the exercise price of outstanding Stock
Options or Stock Appreciation Rights or effect the repricing of such Awards through cancellation and re-grants. To the extent required
under the rules of any securities exchange or market system on which the Stock is listed, to the extent determined by the Administrator
to be required by the Code to ensure that Incentive Stock Options granted under the Plan are qualified under Section 422 of
the Code, or to ensure that compensation earned under Awards qualifies as performance-based compensation under Section 162(m)
of the Code, Plan amendments shall be subject to approval by the Company stockholders entitled to vote at a meeting of stockholders.
Nothing in this
Section 18
shall limit the Administrator’s authority to take any action permitted pursuant to
Section 3(c)
or
3(d)
.
SECTION 19.
|
STATUS OF PLAN
|
With respect to the portion of any Award
that has not been exercised and any payments in cash, Stock or other consideration not received by a grantee, a grantee shall have
no rights greater than those of a general creditor of the Company unless the Administrator shall otherwise expressly determine
in connection with any Award or Awards. In its sole discretion, the Administrator may authorize the creation of trusts or other
arrangements to meet the Company’s obligations to deliver Stock or make payments with respect to Awards hereunder,
provided
that the existence of such trusts or other arrangements is consistent with the foregoing sentence.
SECTION 20.
|
GENERAL PROVISIONS
|
(a)
No Distribution
. The Administrator may require each person acquiring Stock pursuant to an Award to represent to and
agree with the Company in writing that such person is acquiring the shares without a view to distribution thereof.
(b)
Delivery of Stock Certificates
. Stock certificates to grantees under this Plan shall be deemed delivered for all
purposes when the Company or a stock transfer agent of the Company shall have mailed such certificates in the United States mail,
addressed to the grantee, at the grantee’s last known address on file with the Company. Uncertificated Stock shall be deemed
delivered for all purposes when the Company or a Stock transfer agent of the Company shall have given to the grantee by electronic
mail (with proof of receipt) or by United States mail, addressed to the grantee, at the grantee’s last known address on file
with the Company, notice of issuance and recorded the issuance in its records (which may include electronic “book entry”
records). Notwithstanding anything herein to the contrary, the Company shall not be required to issue or deliver any certificates
evidencing shares of Stock pursuant to the exercise of any Award, unless and until the Administrator has determined, with advice
of counsel (to the extent the Administrator deems such advice necessary or advisable), that the issuance and delivery of such certificates
is in compliance with all applicable laws, regulations of governmental authorities and, if applicable, the requirements of any
exchange on which the shares of Stock are listed, quoted or traded. All Stock certificates delivered pursuant to the Plan shall
be subject to any stop-transfer orders and other restrictions as the Administrator deems necessary or advisable to comply with
federal, state or foreign jurisdiction, securities or other laws, rules and quotation system on which the Stock is listed, quoted
or traded. The Administrator may place legends on any Stock certificate to reference restrictions applicable to the Stock. In addition
to the terms and conditions provided herein, the Administrator may require that an individual make such reasonable covenants, agreements,
and representations as the Administrator, in its discretion, deems necessary or advisable in order to comply with any such laws,
regulations, or requirements. The Administrator shall have the right to require any individual to comply with any timing or other
restrictions with respect to the settlement or exercise of any Award, including a window-period limitation, as may be imposed in
the discretion of the Administrator.
(c)
Stockholder Rights
. Until Stock is deemed delivered in accordance with
Section 20(b)
, no right to vote
or receive dividends or any other rights of a stockholder will exist with respect to shares of Stock to be issued in connection
with an Award, notwithstanding the exercise of a Stock Option or any other action by the grantee with respect to an Award.
(d)
Other
Compensation Arrangements; No Employment Rights
. Nothing contained in this Plan shall prevent the Board from adopting other
or additional compensation arrangements, including trusts, and such arrangements may be either generally applicable or app
licable
only in specific cases. The adoption of this Plan and the grant of Awards do not confer upon any employee any right to continued
employment with the Company or any Subsidiary.
(e)
Trading
Policy Restrictions
. Option exercises and other Awards under the Plan shall be subject to the Company’s insider trading
policies and procedures, as in effect from time to time.
(f)
Clawback
Policy
. Awards under the Plan shall be subject to the Company’s clawback policy, as in effect from time to time.
SECTION
21.
|
EFFECTIVE
DATE OF PLAN
|
This
Plan shall become effective upon stockholder approval in accordance with applicable state law, the Company’s bylaws and
articles of incorporation, and applicable stock exchange rules. No grants of Stock Options and other Awards may be made hereunder
after the tenth anniversary of the Effective Date and no grants of Incentive Stock Options may be made hereunder after the tenth
anniversary of the date the Plan is approved by the Board.
SECTION
22.
|
GOVERNING
LAW
|
This
Plan and all Awards and actions taken thereunder shall be governed by, and construed in accordance with, the laws of the State
of Delaware, applied without regard to conflict of law principles.
DATE
APPROVED BY BOARD OF DIRECTORS:
|
December
13, 2016
|
|
|
DATE APPROVED
BY STOCKHOLDERS:
|
________
__, 2017
|
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