As filed with the Securities and Exchange Commission on May 10, 2011
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COMPLETE GENOMICS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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8731
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20-3226545
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(State or other jurisdiction of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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2071 Stierlin Court, Mountain
View, CA 94043
(650) 943-2800
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)
Clifford A. Reid, Ph.D.
Chairman, President and Chief Executive Officer
Complete Genomics, Inc.
2071 Stierlin Court
Mountain View, CA 94043
(650) 943-2800
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
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Alan C. Mendelson
Gregory Chin
Latham & Watkins LLP
140 Scott Drive
Menlo Park, California 94025-1008
Telephone: (650) 328-4600
Facsimile: (650) 463-2600
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Donald J. Murray
Dewey & LeBoeuf LLP
1301 Avenue of the Americas
New York, New York 10019-6092
Telephone: (212) 259-8000
Facsimile: (212) 259-6333
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box.
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If this Form is filed to
register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same
offering.
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If this Form is a post-effective amendment filed pursuant
to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
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If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities
Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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CALCULATION OF REGISTRATION FEE
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Title of Each Class of
Securities to be Registered
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Amount to be
Registered(1)
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Proposed
Maximum
Aggregate
Offering Price(1)
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Proposed
Maximum
Aggregate
Offering Price
Per Unit(2)
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Amount of
Registration Fee(1)
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Common Stock, $0.001 par value
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5,175,000
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$
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74,338,875.00
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$
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14.365
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$
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8,630.74
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(1)
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Includes 675,000 shares that the underwriters have the option to purchase to cover over-allotments.
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(2)
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Estimated solely for the purpose of calculating the registration fee based on the average of the high and low prices for the registrants common stock on The
NASDAQ Global Market on May 6, 2011, pursuant to Rule 457(c) under the Securities Act of 1933, as amended.
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The
Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. We may not sell
these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any
jurisdiction where the offer or sale is not permitted.
Subject to Completion May 10, 2011
Preliminary Prospectus
4,500,000 Shares
Common Stock
We are offering all of the 4,500,000 shares of our common stock offered by this prospectus.
Our
common stock is listed on The NASDAQ Global Market under the symbol GNOM. On May 6, 2011, the closing price of our common stock as reported on The NASDAQ Global Market was $14.78 per share.
Investing in our common stock involves a high degree of risk. Before buying any shares, you should carefully read the discussion of material risks of investing in our common stock in
Risk
Factors
beginning on page 10 of this prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting discounts and commissions
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$
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$
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Proceeds, before expenses, to us
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$
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$
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The underwriters have the option,
exercisable on or before the thirtieth day after the date of this prospectus, to purchase up to an additional 675,000 shares of our common stock at the public offering price, less the underwriting discounts and commissions payable by us, to cover
over-allotments, if any. If the underwriters exercise this option in full, the total underwriting discounts and commissions will be $ , and our total proceeds, before expenses,
will be $ .
The underwriters are offering the common stock as set
forth under Underwriting. Delivery of the shares will be made on or about , 2011.
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Jefferies
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UBS Investment Bank
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The date of this prospectus is , 2011.
You should rely only on the information contained in this prospectus. We have not, and the underwriters
have not, authorized anyone to provide you with additional information or information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers
and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of shares of our common stock.
Table of Contents
Our logo, Complete Genomics,
Complete Genomics Analysis Platform, CGA Platform, CGATools, cPAL and DNB and other trademarks or service marks of Complete Genomics, Inc. appearing in this prospectus are the property of
Complete Genomics, Inc. This prospectus contains additional trade names, trademarks and service marks of other companies. We do not intend our use or display of other companies trade names, trademarks or service marks to imply relationships
with, or endorsement or sponsorship of us by, these other companies.
i
Prospectus Summary
This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider in making
your investment decision. You should read this summary together with the more detailed information, including our financial statements and the related notes, elsewhere in this prospectus. You should carefully consider, among other things, the
matters discussed in Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations before making an investment decision. Unless otherwise indicated, Complete Genomics,
Inc., Complete Genomics, the Company, we, us and our refer to Complete Genomics, Inc.
Our Company
We are a life sciences company that has developed and commercialized an innovative DNA
sequencing platform, and our goal is to become the preferred solution for complete human genome sequencing and analysis. Our Complete Genomics Analysis Platform, or CGA Platform, combines our proprietary human genome sequencing technology with our
advanced informatics and data management software and our innovative, end-to-end, outsourced service model to provide our customers with data that is immediately ready to be used for genome-based research. We believe that our solution provides
academic and biopharmaceutical researchers with complete human genomic data and analysis at an unprecedented combination of quality, cost and scale without requiring them to invest in in-house sequencing instruments, high-performance computing
resources and specialized personnel. By removing these constraints and broadly enabling researchers to conduct large-scale complete human genome studies, we believe that our solution has the potential to significantly advance medical research and
expand understanding of the basis, treatment and prevention of complex diseases. Since launching our service in May 2010, we have sequenced over 1,400 complete human genomes, including over 600 in the first quarter of 2011, and, as of March 31,
2011, we had an order backlog of over 2,000 genomes.
We believe that our complete human genome sequencing technology, which is based on our
proprietary DNA arrays and ligation-based read technology, is superior to existing commercially available complete human genome sequencing methods in terms of quality, cost and scale. In the DNA sequencing industry, complete human genome sequencing
is generally deemed to be coverage of at least 90% of the nucleotides in the genome. Because we have optimized our technology platform and our operations for the unique requirements of high-throughput complete human genome sequencing, we are able to
achieve accuracy levels of 99.999% at a total cost that is significantly less than the total cost of purchasing and using commercially available DNA sequencing instruments and the necessary information processing technology, and then performing all
the required sequence data assembly and analysis. We believe that we will be able to further improve our accuracy levels and reduce the total cost of sequencing and analysis, enabling us to maintain significant competitive advantages over the next
several years. Because our technology resides only in our centralized facilities, we can quickly and easily implement enhancements and provide their benefits to our entire customer base. Our goal is to be the first company to sequence and analyze
high-quality complete human genomes, at scale, for a total cost of under $1,000 per genome.
While our competitors primarily sell DNA
sequencing instruments and reagents that produce raw sequenced data, requiring their customers to invest significant additional resources to process that raw data into a form usable for research, we offer our customers an end-to-end, outsourced
solution that delivers research-ready genomic data. As the cost of complete human genome sequencing declines, we believe the basis of competition in our industry will shift from the cost of sequencing to the value of the entire sequencing solution.
We believe that our integrated, advanced informatics and data management services will emerge as a key competitive advantage as this shift occurs.
Our genome sequencing center, which began commercial operations in May 2010, combines a high-throughput sample preparation facility, a collection of our proprietary high-throughput sequencing instruments
and a large- scale data center. Our customers ship us their samples via common carrier services such as Federal Express and
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United Parcel Service. We then sequence and analyze these samples and provide our customers with finished, research-ready data, enabling them to focus exclusively on their single highest
priority, discovery.
Our customers include some of the leading global academic and government research centers and biopharmaceutical
companies. At present, our facility has the capacity to sequence and analyze over 400 complete human genomes per month. We expect this capacity to increase between two- and three-fold by the end of 2011 as we deploy additional sequencers and
increase the throughput of our sequencing process through software refinements and component upgrades. In future years, we plan to construct additional genome centers in the United States and international strategic markets to accommodate an
expected growing global demand for high-quality, low-cost complete human genome sequencing on a large scale.
Our Industry
Studying how genes differ between species and among individuals within a species, or genetic variations, helps scientists to determine
their functions and roles in health and disease. Improving our understanding of the genome and its functions has driven and, we expect, will continue to drive advancements in medical research and diagnostics. Genetic analysis products comprise
instruments and consumables, as well as associated hardware, software and services directly involved in the study of DNA and RNA. Scientia Advisors, a third-party research firm, estimated genomic revenue in 2009 to be approximately $5.8 billion and
projects the market to grow to approximately $9.0 billion by 2014. Scientia Advisors further estimates that human genomics research will grow from $4.6 billion in 2009 to $7.3 billion in 2014.
The primary genetic analytical methods traditionally used by genetic researchers fall into three categories: DNA sequencing, genotyping and gene
expression analysis. DNA sequencing is the process of determining the exact order, or sequence, of the individual nucleotides in a DNA strand so that this information can be correlated to the genetic activity influenced by that segment of DNA.
Genotyping is the process of examining certain known mutations or variations in the DNA sequence of genes to determine whether the particular variant can be associated with a specific disease susceptibility or drug response. Gene expression analysis
is the process of examining the molecules that are produced when a gene is activated, or expressed, to determine whether a particular gene is expressed in a specific biological tissue.
The Importance of Complete Human Genome Sequencing and the Limitations of Existing Technologies
One of the most difficult challenges facing the genetic research and analysis industry is the need to improve our understanding of how genes contribute to diseases that have a complex pattern of
inheritance. For many diseases, multiple genes each make a subtle contribution to a persons predisposition or susceptibility to a disease or response to a drug treatment protocol. Accordingly, we believe that unraveling this complex network
will be critical to understanding human health and disease. We believe that sequencing complete human genomes is the most comprehensive and accurate method by which to achieve these objectives and improve our understanding of human disease.
Innovations in DNA sequencing have led to the development of high-throughput sequencing technologies, commonly referred to as next-generation
or second-generation sequencing, which produce thousands to millions of sequences at once. Although second-generation sequencing technologies have led to dramatic reductions in cost and improvements in quality and throughput for complete human
genome sequencing, they were designed as general-purpose instruments for sequencing the DNA or RNA of plants, animals, bacteria and viruses. We believe the key limitations of the model of purchasing and using second-generation technologies for
sequencing large numbers of complete human genomes include the following:
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High Cost
. Laboratories using commercially available DNA sequencing instruments cannot sequence complete human
genomes at a price low enough to make large-scale projects affordable to researchers.
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Insufficient Scale and Speed
. Laboratories using commercially available DNA sequencing instruments typically
require months to sequence all of the genomes for large projects.
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Difficulty of Data Management
. Many users of commercially available DNA sequencing instruments lack the costly
computing resources, storage capacity, network bandwidth and specialized personnel to process and analyze the massive data sets generated by sequencing complete human genomes.
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Our Solution
We have developed a
novel approach focused on complete human genome sequencing. Our solution combines our proprietary sequencing technology, which achieves accuracy levels of 99.999%, with our advanced informatics and data management software and our innovative,
end-to-end service model to deliver research-ready genomic data at a total cost that is significantly less than the total cost of purchasing and operating commercially available DNA sequencing instruments.
Proprietary Sequencing Technology
Our patterned
DNA nanoball, or DNB, arrays, due to their small size and biochemical characteristics, enable us to pack DNA very efficiently on a silicon chip. In addition, we have developed a highly accurate combinatorial probe-anchor ligation, or cPAL, read
technology, which enables us to read DNA fragments efficiently using small concentrations of low-cost reagents, while retaining extremely high single-read accuracy. We believe this unique combination of our proprietary DNB and cPAL technologies is
superior in both quality and cost when compared to other commercially available approaches and provides us with significant competitive advantages. As reported in the January 2010 edition of
Science,
we sequenced a complete human genome at a
consumables cost of approximately $1,800 and with a consensus error rate of approximately 1 error in 100,000 nucleotides. Our read accuracy was further validated by one of our customers, the Institute for Systems Biology, or ISB, as published in
Science Express
in March 2010. We have continued to reduce our costs of consumables, and, currently, our consumables costs are under $1,000 per genome.
Advanced Informatics and Data Management
Sequencing complete human genomes generates substantial
amounts of data that must be managed, stored and analyzed. To address this potential need by our customers, we have built a genomics data processing facility with computing infrastructure for managing both small- and large-scale genomic sequencing
projects. Our proprietary assembly software uses advanced data analysis algorithms and statistical modeling techniques to accurately reconstruct over 90% of the complete human genome from approximately two billion 70-base reads. After assembling the
genomic data, we use our analysis software to identify and annotate key differences, or variants, in each genome.
By using our analytical
tools and data management software, our customers can significantly reduce their investments in computing infrastructure. Our customers are provided with reliable access to assembled and annotated sequence data in multiple formats to ease data
sharing and comparative analyses. In addition, our data storage options provide flexibility and allow customers to customize their data management strategy based on their particular business, operational and scientific requirements. We have
developed a suite of open source analytical tools, called CGATools, designed to enable our customers to rapidly analyze the data we generate from their samples. We are also developing additional analytical tools, such as a tumor-normal
comparison tool designed to allow cancer researchers to compare a cancer genome to the normal genome from which it was derived. As the reagent cost of sequencing declines, we believe that the cost and complexity of data analysis and management will
emerge as the primary constraint for conducting complete human genome analysis.
Innovative, End-to-End Outsourced Solution
While our competitors primarily sell DNA sequencing instruments and reagents that produce raw sequenced data, our end-to-end, outsourced solution enables
our customers to offload to us the complex processes of sample
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preparation, sequencing, computing and data storage and management. We believe our services will expand the potential addressable market by enabling a broad base of researchers who may lack
sufficient capital and the specialized personnel necessary to build and operate a sequencing laboratory, or who have historically been constrained by the high total cost of sequencing, to conduct large-scale complete human genome studies.
Our end-to-end solution provides the following advantages to our customers:
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High-Quality Data.
Our technology delivers what we believe is the industrys highest quality complete human
genome data.
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Cost-Savings.
Our customers can avoid purchasing expensive sequencing instruments and high-performance computing
resources or hire the necessary specialized personnel to sequence and analyze large sets of complete human genome data.
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Speed at Scale.
Our customers can often complete their large-scale projects more quickly by using our services
than by using commercially available sequencing instruments.
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Ease of Use.
We believe our customers can avoid the difficulty and time-consuming process of purchasing and
operating their own sequencing instruments and can outsource the entire process to us, from sample preparation to delivery of research-ready data.
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Operational Flexibility.
By outsourcing their large-scale complete human genome sequencing projects to us, our
customers can free up the capacity of in-house instruments to run smaller or more targeted sequencing projects and applications.
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Technological Flexibility.
As DNA sequencing technology improves, our customers will have available to them the
latest technology that we have implemented, and they avoid the risk of their expensive instruments becoming technologically obsolete.
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Enables Customers to Focus on Discovery.
Outsourcing offloads the operational burdens of managing large-scale
genome sequencing projects and enables our customers to focus their resources on their strength in research, which can reduce the time to discovery.
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We have more than 40 past and current customers, which include some of the leading global academic and government research centers and biopharmaceutical companies. In May 2010, we received an order from
SAIC-Frederick, Inc., under a National Cancer Institute prime contract, to use our sequencing and bioinformatics end scientific services to sequence and analyze 50 tumor-normal pairs, or 100 complete human genomes. This contract contains a provision
for SAIC-Frederick to engage us at its option to sequence more than 500 additional cancer cases, or more than a 1,000 complete human genomes, over an 18-month period. In addition, we sequenced complete genomes that enabled ISB to pinpoint the causal
gene, and subsequently confirm that genes role, in Miller Syndrome. This work has led to two follow-on projects with the ISB to sequence an additional 122 and 615 genomes, respectively. We also worked with Genentech, Inc. (a member of the
Roche Group) on a non-small cell lung cancer study that was the first complete human genome sequence of a primary non-small cell lung tumor and matched normal tissue. The data we delivered allowed Genentech to measure the rate of smoking-induced
mutations accumulated over time.
Applications for Our Sequencing Service
Potential applications for our complete human genome sequencing service include:
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Cancer Research.
We believe understanding genetic mutations in cancer patients will guide development of new
cancer therapeutics and diagnostics and ultimately enable doctors to select the best course of therapy based on the specific mutations found in a tumor.
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Mendelian Disease Research.
By sequencing the complete genomes of families affected with Mendelian diseases, which
likely have a significant genetic component, we believe the genetic causes of these diseases can be discovered, which could lead to the development of novel diagnostics and therapeutics.
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Rare Variant Disease Research.
Large-scale genomic studies of central nervous system disorders, cardiac disease
and certain metabolic disorders may help to identify disrupted pathways and lead to the development of novel diagnostics and therapeutics.
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Clinical Trial Optimization.
We believe that selecting or stratifying patients on the basis of their genetic
profiles could enable the preferential admission of high responders into clinical trials, lowering costs and resulting in faster clinical trials and drug commercialization.
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In addition to these research studies, we expect future clinical applications to include:
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Companion Diagnostics.
We believe that therapeutics that are not first-line treatments for the general population
may be elevated to first-line treatments or used in combination therapies for subsets of the population that share a common genetic profile. Complete human genome studies may unlock new market opportunities for these therapies or combination
therapies.
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Cancer Pathology.
We believe that analyzing complex cancer genomes that involve large and unpredictable structural
changes will be most reliably and economically implemented using complete human genome sequencing.
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Universal Diagnostics.
As medical records technology and public health policy advance, we believe that large
numbers of people will have their complete human genomes sequenced and stored in their electronic medical records for use by their physicians in managing their health care decisions.
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Competitive Strengths
We believe that our
competitive strengths are as follows:
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Proprietary Human Genome Sequencing Technology.
Our proprietary sequencing technology achieves accuracy levels of
99.999% at a total cost that is significantly less than the total cost of purchasing and operating commercially available DNA sequencing instruments and the necessary information processing technology, and then performing all the required sequence
data assembly and analysis.
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Fully Integrated Advanced Informatics and Data Management Software.
Our solution enables our customers to manage
and gain useful information from the massive data sets generated in complete human genome sequencing.
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Highly Scalable and Capital-Efficient Business Model
. Consolidating volume across our entire customer base enables
us to sequence large numbers of genomes while avoiding the cost and complexity of employing a large field installation and support organization. By implementing a high degree of automation, we have reduced the possibility of human errors that could
adversely affect quality and increase costs.
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Unique Insight Into Customer Needs
. We interact directly with our customers on their discovery projects, which
enables us to develop and enhance our analysis software to meet our customers specific needs while expanding our understanding of variation in the human genome.
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Fast and Efficient Deployment of Operational and Technological Enhancements
. Because our sequencing operations and data center are
centralized, we can rapidly upgrade our technology and deliver the benefits to our customers. In addition, our access to genomic data allows our software engineers to continually refine and improve our software with each genome we sequence.
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Expanded Market Opportunity
. We believe our outsourced model will expand the potential addressable market by
providing academic and biopharmaceutical researchers who lack sufficient budgets or the specialized personnel necessary to build and operate a sequencing laboratory with access to high-quality, low-cost complete human genome data.
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Our Strategy
We intend to become the leading complete human genome sequencing and analysis company and the preferred platform for human genome discovery by:
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continuing to deliver the highest quality genomic data and analysis at a low total cost;
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maintaining and strengthening our technology;
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capitalizing on our scalable model;
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establishing ourselves as the leader in outsourced complete human genome sequencing;
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expanding globally to increase capacity and reach new markets;
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exploring strategic partnerships and collaborations; and
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expanding applications for the use of our technology.
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Risks Associated with our Business
Our business is subject to numerous risks, as discussed more
fully in the section entitled Risk Factors immediately following this prospectus summary. These risks include the following, among others:
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We are an early, commercial-stage company and have a limited operating history.
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We may need substantial additional capital in the future in order to maintain and expand our business.
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We have a history of losses, and we may not achieve or sustain profitability in the future, on a quarterly or annual basis.
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Our only source of revenue is our human genome sequencing service, which is a new business model in an emerging industry, and failure to achieve market
acceptance will harm our business.
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Our order backlog may never be completed, and we may never earn revenue on backlogged contracts to sequence genomes; our ability to convert backlog
orders into revenue is dependent in part on our receiving genomic samples from our customers, which can follow a signed order by weeks or months.
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The presence or absence in a specific quarter of one or more new large orders for hundreds of genomes may cause our results of operations and backlog
to fluctuate significantly on a quarterly basis.
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Our success depends on the growth of markets for analysis of genetic variation and biological function, and the shift of these markets to complete
human genome sequencing.
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We face significant competition from large, well-capitalized companies. The emergence of new competitive genome sequencing technologies may also harm
our business.
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We must significantly expand our capacity in order to reach profitability.
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If our Mountain View genome sequencing facility becomes inoperable, we will be unable to perform our genome sequencing services, and our business will
be harmed.
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If third parties assert, as they currently are asserting, that we have infringed their patents or other proprietary rights or challenge the validity of
our patents or other proprietary rights, we may become involved in costly and time-consuming disputes and litigation that could affect our ability to sell our services.
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Corporate Information
We were incorporated in the state of Delaware on June 14, 2005. The
address of our principal executive offices is 2071 Stierlin Court, Mountain View, California 94043, and our telephone number is (650) 943-2800. Our website address is www.completegenomics.com. We do not incorporate the information on, or that
can be accessed through, our website into this prospectus, and you should not consider it part of this prospectus.
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The Offering
Common stock offered by Complete Genomics
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4,500,000 shares (or 5,175,000 shares if the underwriters exercise their over-allotment option in full).
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Common stock to be outstanding after this offering
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30,488,934 shares (or 31,163,934 shares if the underwriters exercise their over-allotment option in full).
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NASDAQ Global Market symbol
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GNOM
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Use of proceeds
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We currently intend to use the net proceeds of this offering for capital expenditures to expand the sequencing and computing capacity in our Mountain View and Santa Clara leased facilities, to
finance the further development of our sequencing technology and services, for sales and marketing activities and for working capital and other general corporate purposes. Please see Use of Proceeds.
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Risk factors
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See Risk Factors starting on page 10 of this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.
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The number of shares of common stock to be outstanding after this offering is based on 25,988,934 shares outstanding as of
March 31, 2011 and excludes:
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2,875,125 shares of common stock issuable upon exercise of options outstanding as of March 31, 2011 with a weighted-average exercise price of
$2.40 per share;
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27,500 shares of common stock issuable upon vesting of restricted stock units outstanding as of March 31, 2011;
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an aggregate of 5,207,396 shares of common stock reserved for future issuance under our 2010 Equity Incentive Award Plan and Employee Stock Purchase
Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under these benefit plans; and
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2,165,323 shares of common stock subject to warrants outstanding as of March 31, 2011 with a weighted-average exercise price of $2.42 per share.
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Except as otherwise indicated, all information in this prospectus reflects or assumes no exercise of the underwriters
over-allotment option.
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Summary Financial Data
The following tables set forth a summary of our historical financial data as of, and for the periods ended on, the dates indicated. You should read these tables together with our financial statements and
the related notes, Selected Financial Data and Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this prospectus. The statement of operations data for the years
ended December 31, 2008, 2009 and 2010 are derived from our audited financial statements included elsewhere in this prospectus. The statement of operations data for the three months ended March 31, 2010 and 2011, and the balance sheet data
as of March 31, 2011 are derived from our unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements have been prepared on a basis consistent with our audited financial statements and include, in
the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the financial information in those statements. Our historical results are not necessarily indicative of the results to
be expected in any future period, and the results for the three months ended March 31, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
Three months ended
March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
(in thousands, except share and per share amounts)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
|
|
|
$
|
623
|
|
|
$
|
9,389
|
|
|
$
|
336
|
|
|
$
|
6,833
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,582
|
|
Start-up production costs
|
|
|
|
|
|
|
5,033
|
|
|
|
19,895
|
|
|
|
4,077
|
|
|
|
|
|
Research and development
|
|
|
23,633
|
|
|
|
22,424
|
|
|
|
21,691
|
|
|
|
6,169
|
|
|
|
6,808
|
|
General and administrative
|
|
|
3,179
|
|
|
|
4,953
|
|
|
|
9,345
|
|
|
|
3,099
|
|
|
|
2,780
|
|
Sales and marketing
|
|
|
1,045
|
|
|
|
1,798
|
|
|
|
6,111
|
|
|
|
1,226
|
|
|
|
2,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
27,857
|
|
|
|
34,208
|
|
|
|
57,042
|
|
|
|
14,571
|
|
|
|
18,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(27,857
|
)
|
|
|
(33,585
|
)
|
|
|
(47,653
|
)
|
|
|
(14,235
|
)
|
|
|
(12,037
|
)
|
Interest expense
|
|
|
(974
|
)
|
|
|
(3,465
|
)
|
|
|
(2,827
|
)
|
|
|
(311
|
)
|
|
|
(340
|
)
|
Interest and other income (expense), net
|
|
|
437
|
|
|
|
1,101
|
|
|
|
(7,207
|
)
|
|
|
210
|
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(28,394
|
)
|
|
|
(35,949
|
)
|
|
|
(57,687
|
)
|
|
|
(14,336
|
)
|
|
|
(12,461
|
)
|
Deemed dividend related to beneficial conversion feature of Series E convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
(405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributed to common stockholders
|
|
$
|
(28,394
|
)
|
|
$
|
(35,949
|
)
|
|
$
|
(58,092
|
)
|
|
$
|
(14,336
|
)
|
|
$
|
(12,461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(369.36
|
)
|
|
$
|
(386.56
|
)
|
|
$
|
(13.60
|
)
|
|
$
|
(51.15
|
)
|
|
$
|
(0.48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding used in computing net loss per share, basic and diluted
|
|
|
76,873
|
|
|
|
92,998
|
|
|
|
4,271,176
|
|
|
|
280,283
|
|
|
|
25,959,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
The table below presents our balance sheet data as of March 31, 2011:
|
§
|
|
on an actual basis; and
|
|
§
|
|
on an as adjusted basis to give effect to the sale of 4,500,000 shares of common stock in this offering at the assumed public offering price of $14.78
per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
|
Actual
|
|
|
As
adjusted
|
|
|
|
|
|
(in thousands)
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
68,791
|
|
|
$
|
130,743
|
|
Working capital
|
|
|
64,699
|
|
|
|
126,651
|
|
Total assets
|
|
|
105,089
|
|
|
|
167,041
|
|
Current and long-term notes payable
|
|
|
24,136
|
|
|
|
24,136
|
|
Total stockholders equity
|
|
|
62,756
|
|
|
|
124,708
|
|
Each $1.00 increase (decrease) in
the public offering price per share would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders equity by approximately $4.3 million, assuming that the number of shares we are offering, as
set forth on the cover page of this prospectus, remains the same and that the underwriters do not exercise their over-allotment option. Depending on market conditions and other considerations at the time we price this offering, we may sell a greater
or lesser number of shares than the number set forth on the cover page of this prospectus. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) each of cash and cash equivalents, working capital,
total assets and total stockholders equity by approximately $ 14.0 million, assuming the public offering price per share remains the same. An increase of 1,000,000 in the number of shares we are offering, together with a $1.00 increase in the
public offering price per share, would increase each of cash and cash equivalents, working capital, total assets and total stockholders equity by approximately $ 19.2 million. A decrease of 1,000,000 in the number of shares we are offering,
together with a $1.00 decrease in the public offering price per share, would decrease each of cash and cash equivalents, working capital, total assets and total stockholders equity by approximately $17.3 million. This information is
illustrative only, and following the pricing of this offering, we will update this information based on the actual public offering price and other terms of this offering.
9
Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to
invest in shares of our common stock. The occurrence of any of the events described below could harm our business, financial condition, results of operations and growth prospects. In such an event, the trading price of our common stock may decline
and you may lose all or part of your investment.
Risks Related to Our Limited Operating History, Financial Condition and Capital Requirements
We are an early, commercial-stage company and have a limited operating history, which may make it difficult to evaluate our current
business and predict our future performance.
We are an early, commercial-stage company and have a limited operating history. We were
incorporated in Delaware in June 2005 and began operations in March 2006. From March 2006 until mid-2009, our operations focused on research and development of our DNA sequencing technology platform. In December 2009, we recognized our first revenue
from the sale of our genome sequencing services, and in 2010 and the three months ended March 31, 2011, our revenue was $9.4 million and $6.8 million, respectively. Our limited operating history, particularly in light of our novel,
service-based business model in the rapidly evolving genome sequencing industry, may make it difficult to evaluate our current business and predict our future performance. Our lack of a long operating history, and especially our very short history
as a revenue-generating company, make any assessment of our profitability or prediction about our future success or viability subject to significant uncertainty. We have encountered and will continue to encounter risks and difficulties frequently
experienced by early, commercial-stage companies in rapidly evolving industries. If we do not address these risks successfully, our business will suffer.
Based on our current operating projections, we will need substantial additional capital in the future in order to maintain and expand our business. A failure to secure additional capital will have a
material effect on our ability to meet our long-term objectives.
Our future capital requirements are substantial, particularly as we
further develop our business, expand the sequencing and computing capacity in our Mountain View and Santa Clara, California leased facilities and establish additional genome sequencing centers. Historically, we have financed our operations through
private placements of preferred stock, convertible debt, borrowings under our credit facility, secured debt and through our recently completed initial public offering.
We believe that, based on our current level of operations and anticipated growth, our cash and cash equivalent balances, including interest income we earn on those balances, when taken together with the
proceeds from this offering, will be sufficient to meet our anticipated cash requirements beyond 12 months from the date of this offering. Based on our current operating projections, without giving effect to the proceeds from this offering, we will
need additional capital to fund our operations in 2012 and to expand our business to achieve our longer term business objectives.
We may not
be able to raise sufficient additional financing on terms that are acceptable, if at all. Given the risks associated with our business, including our limited operating history and our new business model in an emerging industry, and recent
difficulties for life sciences companies raising funds in the capital markets, we may be unable to raise additional capital in the amounts we require, if at all. Our failure to raise additional capital in sufficient amounts, will severely
impact our ability to operate our business in 2012 and meet our long-term business objectives. In addition, if future financings involve the issuance of equity securities, our existing stockholders would suffer dilution. If we raise additional
debt financing, we may be subject to additional restrictive covenants that limit our ability to conduct our business. If we fail to raise sufficient funds and continue to incur losses, our ability to operate our business, take advantage of strategic
opportunities, further develop and enhance our technology or otherwise respond to competitive pressures could significantly suffer. If this happens, we may be forced to:
|
§
|
|
slow or halt the expansion of our Mountain View facility and the establishment of additional genome sequencing centers;
|
10
|
§
|
|
slow the commercialization of our services;
|
|
§
|
|
delay or terminate research or development programs;
|
|
§
|
|
curtail or cease operations; or
|
|
§
|
|
seek to obtain funds through collaborative and licensing arrangements, which may require us to relinquish commercial rights or grant licenses on terms
that are not favorable to us.
|
The amount of additional capital and timing at which we require the additional capital
necessary to fund our operations and expand our business depends on many factors, including:
|
§
|
|
the financial success of our genome sequencing business;
|
|
§
|
|
our ability to increase the sequencing and computing capacity in our Mountain View and Santa Clara leased facilities;
|
|
§
|
|
the rate at which we establish additional genome sequencing centers and whether we can find suitable partners to establish such centers, if at all;
|
|
§
|
|
whether we are successful in obtaining payments from customers;
|
|
§
|
|
whether we can enter into collaborations or establish a recurring customer base;
|
|
§
|
|
the progress and scope of our research and development projects;
|
|
§
|
|
the effect of any joint ventures or acquisitions of other businesses or technologies that we may enter into or make in the future;
|
|
§
|
|
the filing, prosecution and enforcement of patent claims; and
|
|
§
|
|
the costs associated with lawsuits brought against us by third parties, including our current litigation with Illumina, Inc.
|
We have a history of losses, and we may not achieve or sustain profitability in the future, on a quarterly or annual
basis.
We have not been profitable in any quarterly period since we were formed. We incurred net losses of $28.4 million,
$35.9 million and $57.7 million for the years ended December 31, 2008, 2009 and 2010, respectively. As of March 31, 2011, our accumulated deficit was $151.3 million (unaudited). Based on our current operating plans and
assumptions, we do not expect to achieve profitability on an annual basis in the near future. In addition, we expect our cash expenditures to increase significantly in the near term, including significant expenditures for the expansion of our
Mountain View, California sequencing facility, research and development, sales and marketing and general and administrative expenses and the possible development of additional sequencing centers. We may encounter unforeseen difficulties,
complications and delays in expanding our Mountain View sequencing facility or in establishing additional genome sequencing centers and other unforeseen factors that require additional expenditures. These costs, among other factors, have had and
will continue to have an adverse effect on our working capital and stockholders equity. We will have to generate and sustain substantially increased revenue to achieve and maintain profitability, which we may never do. If we are unable to
achieve and then maintain profitability, the market value of our common stock will decline.
Our operating results may fluctuate in the
future. As a result, we may fail to meet or exceed the expectations of research analysts or investors, which could cause our stock price to decline.
Our financial condition and operating results may fluctuate from quarter to quarter and year to year in the future due to a variety of factors, many of which are beyond our control. Factors relating to
our business that may contribute to these fluctuations include the following, as well as other factors described elsewhere in this prospectus:
|
§
|
|
our ability to achieve profitability;
|
11
|
§
|
|
our need for and ability to obtain capital necessary to operate and expand our business;
|
|
§
|
|
the size and frequency of customer orders;
|
|
§
|
|
the presence or absence in a specific quarter of one or more new large orders for hundreds of genomes;
|
|
§
|
|
our ability to expand our sequencing operations;
|
|
§
|
|
the cost of our sequencing services;
|
|
§
|
|
the demand for the sequencing of complete human genomes;
|
|
§
|
|
the existence and extent of government funding for research and development relating to genome sequencing;
|
|
§
|
|
the emergence of alternative genome sequencing technologies;
|
|
§
|
|
risks associated with expanding our business into international markets;
|
|
§
|
|
our ability to lower the average cost per genome that we sequence;
|
|
§
|
|
our dependence on single-source suppliers;
|
|
§
|
|
our ability to manage our growth;
|
|
§
|
|
our ability to successfully partner with other businesses in joint ventures or collaborations, or integrate any businesses we may acquire with our
business;
|
|
§
|
|
our dependence on, and the need to attract and retain, key management and qualified sales personnel;
|
|
§
|
|
our ability to obtain, protect and enforce our intellectual property rights and avoid infringing the intellectual property rights of others;
|
|
§
|
|
our ability to prevent the theft or misappropriation of our know-how or technologies;
|
|
§
|
|
lawsuits brought against us by third parties;
|
|
§
|
|
business interruptions, such as earthquakes and other natural disasters;
|
|
§
|
|
public concerns about the ethical, legal and social concerns related to the use of genetic information;
|
|
§
|
|
our ability to comply with current laws and regulations and new or expanded regulatory schemes;
|
|
§
|
|
our ability to properly handle and dispose of hazardous materials used in our business and biological waste; and
|
|
§
|
|
our ability to use our net operating loss carryforwards to offset future taxable income.
|
Due to the various factors mentioned above, and others, the results of any prior quarterly or annual periods are not necessarily indicative of our future
operating performance.
Risks Related to Our Business
Our only source of revenue is our human genome sequencing service, which is a new business model in an emerging industry, and failure to achieve market acceptance will harm our business.
Since our inception, all of our efforts have been focused on the creation of a technology platform for our human genome sequencing
service, which we have only just recently commercialized. We expect to generate all of our revenue from our human genome sequencing service for the foreseeable future. As a result, market acceptance of our human genome sequencing service is critical
to our future success.
Providing genome sequencing as a service is a new and unproven business model in a relatively new and rapidly evolving
industry. We are using proprietary technology, involving multiple scientific and engineering disciplines, and a novel service model to bring complete human genome sequencing to an unproven market. Historically,
12
companies in this industry have sold sequencing instruments directly to customers, and the customer performs the sequencing itself. We do not know if the purchasers and users of sequencing
instruments will adopt our service model. For example, many potential customers want to sequence human genomes for proprietary studies that may lead to discoveries which they would seek to exploit, either commercially or through the publication of
scientific literature. Accordingly, these potential customers may have significant reservations about allowing a third party to control the sequencing processes for their proprietary studies. Alternatively, other potential customers may want to
sequence only portions of human genomes, rather than complete human genomes. There are many reasons why our services might not become widely adopted, ranging from logistical or quality problems to a failure by our sales force to engage potential
customers, and including the other reasons stated in this Risk Factors section. As a result, our genome sequencing service may not achieve sufficient market acceptance to allow us to become profitable.
Our success depends on the growth of markets for analysis of genetic variation and biological function, and the shift of these markets to complete
human genome sequencing.
We are currently targeting customers for our genome sequencing service in academic and government research
institutions and in the pharmaceutical and other life science industries. Our customers are using our service for small- and large-scale human genome studies for a wide variety of diagnostic and discovery applications. These markets are new and
emerging, and they may not develop as quickly as we anticipate, or reach their full potential. The development of the market for complete human genome sequencing and the success of our service depend in part on the following factors:
|
§
|
|
demand by researchers for complete human genome sequencing;
|
|
§
|
|
the usefulness of genomic data in identifying or treating disease;
|
|
§
|
|
the ability of our customers to successfully analyze the genomic data we provide;
|
|
§
|
|
the ability of researchers to convert genomic data into medically valuable information;
|
|
§
|
|
the capacity and scalability of the hardware storage components necessary to store, manage, backup, retain and safeguard genomic data; and
|
|
§
|
|
the development of software tools to efficiently search, correlate and manage genomic data.
|
For instance, demand for our genome sequencing service may decrease if researchers fail to find meaningful correlations between genetic variation and
disease susceptibility through genome-wide association studies. In addition, factors affecting research and development spending generally, such as changes in the regulatory environment affecting pharmaceutical and other life science companies and
changes in government programs that provide funding to companies and research institutions, could harm our business. If our target markets do not develop in a timely manner, demand for our service may grow at a slower rate than we expect, or may
fall, and we may not achieve profitability.
To date, relatively few complete human genomes have been sequenced, in large part due to the high
cost of large-scale sequencing. Our business plan assumes that the demand for sequencing complete human genomes will increase significantly as the cost of complete human genome sequencing decreases. This assumption may prove to be incorrect, or the
increase in demand may take significantly more time than we anticipate. For example, potential customers may not think our cost reductions are sufficient to permit or justify large-scale sequencing. Moreover, some companies and institutions have
focused on sequencing targeted areas of the genome that are believed to be primarily associated with disorders and diseases, as opposed to the entire genome. Demand for sequencing complete human genomes may not increase if these targeted sequencing
strategies, such as exome sequencing, where selected regions containing key portions of genes are sequenced, prove to be more cost effective or are viewed as a more efficient method of genetic analysis than complete human genome sequencing. Since
exome sequencing is currently less expensive than the sequencing of an entire human genome, customers, including those with limited budgets, may choose to sequence exomes instead of using our human genome sequencing services.
13
We face significant competition. Our failure to compete effectively could adversely affect our sales
and results of operations.
We currently compete with companies that develop, manufacture and market genome sequencing instruments or
provide genome sequencing services. We expect competition to increase as our competitors develop new, improved or cheaper instruments or expand their businesses to include sequencing services, and as new companies enter the market with innovative
technologies.
The market for genome sequencing technology is highly competitive and is served by several large companies with significant
market shares. For example, established companies such as Illumina, Inc., Life Technologies Corporation and Roche Diagnostics Corporation are marketing instruments for genetic sequencing that are directly competitive with our services, and these
companies have significantly greater financial, technical, marketing and other resources than we do to invest in new technologies and have substantial intellectual property portfolios and substantial experience in product development and regulatory
expertise. Also, there are many other companies, such as NABsys, Inc., Oxford Nanopore Technologies, Ltd. and Pacific Biosciences, Inc., that are developing sequencing technologies or services that would compete with ours. Moreover, large
established companies may acquire smaller companies with emerging technologies and use their extensive resources to develop and commercialize such technologies or incorporate such technologies into their instruments and services. For example, in
2010, Life Technologies acquired Ion Torrent Systems, Inc., a chip-based sequencing technology company.
In addition, there are many research,
academic and other non-profit institutions that are pursuing new sequencing technologies. These institutions often have access to significant government and other funding. For example, BGI (formerly known as Beijing Genomics Institute) in the
Peoples Republic of China offers a service that is similar to ours and is funded by the government of China. In the United States, agencies such as the National Human Genome Research Institute provide funding to institutions to discover new
sequencing technology. We may compete directly with these institutions, or these institutions may license their technologies to third parties with whom we would compete.
While many of our existing competitors primarily sell sequencing instruments, they may also provide sequencing services like us. Since these competitors have already developed their own sequencing
technology, they will not experience significant technological barriers to entry and can likely enter the sequencing services market fairly quickly and with little additional cost. For example, Illumina started providing whole genome sequencing
services in-house and through its Illumina Genome Network in mid-2010, and Life Technologies has recently announced a collaboration to build a genome sequencing facility. Furthermore, many of these instrumentation companies have already established
a significant market presence and are trusted by customers in the industry. As established instrumentation companies enter the sequencing services market, many potential customers may purchase sequencing services from these companies instead of us,
even if we offer superior technology and services.
For more information regarding our existing and potential
competitors, please see BusinessCompetition.
The emergence of competitive genome sequencing technologies may harm our
business.
The success of our genome sequencing services will depend, in part, on our ability to continue to enhance the performance
and decrease the cost of our genome sequencing technology. A number of genome sequencing technologies exist, and new methods and improvement to existing methods are currently being developed, including technology platforms developed by companies
that we expect will directly compete with us as providers of sequencing services or instruments. These new technologies may result in faster, more cost-effective and more accurate sequencing methods than ours. For example, our sequencing technology
does not currently cover all of the nucleotides in the genome. If competitive technologies emerge that sequence portions of the genome that our technology does not, our business could suffer if those portions contain important genomic information.
We expect to face competition from emerging companies, including NABsys, Oxford Nanopore Technologies and Pacific Biosciences. As a result of the emergence of these competitive sequencing technologies, demand for our service may decline or never
develop sufficiently to sustain our operations.
14
Our industry is rapidly changing, with emerging and continually evolving technologies that increase the
efficiency and reduce the cost of sequencing genomes. As new technologies emerge, we believe that the cost and error rates of, and the time required to, sequence human genomes will eventually decrease to a level where competition in the industry
will shift to other factors, such as providing related services and analytical technologies. We may not be able to maintain any technological advantage over these new sequencing technologies, and if we fail to compete effectively on other factors
relevant to our customers, our business will suffer.
Our order backlog may never be completed, and we may never earn revenue on
backlogged contracts to sequence genomes.
As of March 31, 2011, we had a backlog of orders for sequencing over 2,000 genomes,
which we believe could result in approximately $15.0 million in revenue over the next 12 months. This figure represents the number of genomes for which customers have placed sequencing orders that we believe are firm and for which we have not yet
recognized revenue. We may not be able to convert order backlog into revenue at the rate or times we anticipate, or at all. Consequently, the order backlog we report in this prospectus and elsewhere from time to time may not be indicative of future
revenue.
We may fail to complete backlog orders as we expect for many reasons. We may experience sequencing delays or customers might cancel
orders. We are in the early stages of launching our services, and while we have been increasing our throughput capacity rapidly, we have in the past experienced growing backlog due to our inability to keep pace with new orders. Delays in sequencing
for which we are responsible could cause backlog orders to be cancelled by customers, which has happened to us at least once. Even with sufficient throughput capacity, we are not always in control of the rate at which we complete orders and
therefore convert backlog to revenue. For example, customers often place firm orders with us before providing us with genomic samples, delaying our start of the sequencing process by weeks or months. Additionally, once we receive a customers
samples, we test them to assure that they are of sufficient quality and quantity for sequencing. If not, we contact the customer and request additional samples, resulting in further delay. Also, customers may negotiate a period of time, measured in
weeks or in some cases months, to accept or reject our sequencing reports once delivered. Customer acceptance in these instances is a prerequisite for recording revenue for those orders. For these reasons, you should use caution in adopting changes
in, or the absolute amount of, our backlog as a proxy for market acceptance of our sequencing services or as an indicator of future revenue.
The presence or absence in a specific quarter of one or more new large orders, or the cancellation of any previous orders, for hundreds of genomes
may cause our results of operations and backlog to fluctuate significantly on a quarterly basis.
Since beginning commercial
operations, we have received purchase orders or contracts from a limited number of customers each quarter, typically between 10 and 20 customers quarterly. Historically, the size of each purchase order has fluctuated between a few genomes and
multiple hundreds of genomes. As a result, the presence or absence in a specific quarter of one or more new large orders, or the cancellation of any previous orders, for hundreds of genomes, combined with our uncertain sales cycle and changes in the
variables that influence conversion of orders into revenue, may cause our results of operations and our backlog to fluctuate on a quarterly basis. These fluctuations may be significant from one quarter to the next. In addition, our limited
commercial history and the characteristics of our quarterly orders makes it very difficult to predict or forecast our future operating results and backlog.
We must significantly increase our production capabilities in order to achieve profitability.
We have very limited experience in running a commercial-scale production facility. We have only one sequencing facility, which at present has the capacity to sequence over 400 complete human genomes per
month. This capacity is significantly less than what would be required to achieve profitability. Our business plan assumes that we will be able to increase our capacity multiple fold.
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We plan to increase the capacity of our sequencing facility by installing additional sequencing machines,
improving our software and designing and installing newer generations of sequencing instruments that are currently under research and development. We may also construct additional genome sequencing centers in the United States and elsewhere in 2012
and afterward. We may encounter difficulties in expanding our sequencing infrastructure, and we may not build and improve this infrastructure in time to meet the volume, quality or timing requirements necessary to be successful. Manufacturing and
supply quality issues may arise, including due to third parties who provide the components of our technology platform. Implementing improvements to our sequencing technology may involve significant changes, which may result in delays, or may not
achieve expected results. For example, we are experimenting with increasing the density of DNBs on our DNA arrays. These experiments may be unsuccessful and may not lead to feasible technological improvements that increase the capacity or reduce the
costs of our sequencing services. If capacity or cost limitations prevent us from meeting our customers expectations, we will lose revenue and our potential customers may take their business to our competitors.
Our need to increase capacity may require us to upgrade our machines to enhance our current production process. This may render our current machines
obsolete sooner than anticipated. If this occurs, the value of these machines could be impaired and we may need to write down the value of this equipment, which could have a material impact on our financial statements in light of the dollar
significance of the long-lived assets carried on our balance sheet.
Our genome sequencing technology platform was developed for human
DNA and is not currently optimized to sequence non-human DNA.
Our technology platform was developed and has been optimized for
sequencing human DNA, and we do not intend to sequence non-human DNA. We face significant competition from established companies who sell genome sequencing instruments that can sequence both human and non-human DNA. Many of the academic and research
institutions that are our target customers conduct studies on both human and non-human DNA. Prospective customers may choose to purchase sequencing instruments from a competitor because of their broader sequencing application. Our competitors may
also choose to provide sequencing services for non-human DNA. As a result, there may not be sufficient demand for our human genome sequencing service, which will harm our business.
We depend on a limited number of suppliers, including single-source suppliers, of various critical components for our sequencing process. The loss of these suppliers, or their failure to supply us
with the necessary components on a timely basis, could cause delays in the current and future capacity of our sequencing center and adversely affect our business.
We depend on a limited number of suppliers, including some single-source suppliers, of various critical components for our sequencing process. We do not have long-term contracts with our suppliers or
service providers. Because we do not have long-term contracts, our suppliers generally are not required to provide us with any guaranteed minimum production levels. As a result, we may not be able to obtain sufficient quantities of critical
components in the future.
Although alternative suppliers exist for each of the critical components of our sequencing process, that process has
been designed around the functions, limitations, features and specifications of the components that we currently utilize. For example, the cameras in our sequencers are supplied by Hamamatsu Photonics and the optical equipment is supplied by Carl
Zeiss, Inc. A failure by either or both of these companies to supply these components would require us to integrate alternative cameras and optical equipment, and potentially integrate other components, into future sequencing instruments. If we are
required to integrate new components into future sequencers, we would experience a delay in the deployment of these sequencers, and, as a result, our efforts to expand our sequencing capacity would be delayed.
A delay or interruption by our suppliers may also harm our business. For example, the wafers that comprise the base of our sample slide are fabricated by
SVTC Technologies, L.L.C. We have not yet qualified an alternative source for the supply of these wafers, which are critical to our sequencing process, and the custom manner in
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which these wafers are made may make it difficult to qualify other semiconductor suppliers to manufacture them for us. Similarly, an interruption of services by Amazon Web Services, on whom we
rely to deliver finished genomic data to our customers, would result in our customers not receiving their data on time.
In addition, the lead
time needed to establish a relationship with a new supplier can be lengthy, and we may experience delays in meeting demand in the event we must switch to a new supplier. The time and effort to qualify a new supplier could result in additional costs,
diversion of resources or reduced manufacturing yields, any of which would negatively impact our operating results. Our dependence on single-source suppliers exposes us to numerous risks, including the following:
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our suppliers may cease or reduce production or deliveries, raise prices or renegotiate terms;
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delays by our suppliers could significantly limit our ability to sequence customer data and delay our efforts to increase our sequencing capacity;
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we may be unable to locate a suitable replacement on acceptable terms or on a timely basis, if at all; and
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delays caused by supply issues may harm our reputation, frustrate our customers and cause them to turn to our competitors for future projects.
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If our Mountain View genome sequencing facility becomes inoperable, we will be unable to perform our genome
sequencing services and our business will be harmed.
We currently do not have redundant sequencing facilities on a scale that could
support our business. We perform all of our commercial genome sequencing in our facility located in Mountain View, California. Mountain View is situated on or near earthquake fault lines. Our facility, the equipment we use to perform our sequencing
services and our other business process systems are costly to replace and could require substantial time to repair or replace. The facility may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, wildfires,
floods, acts of terrorism or other criminal activities, infectious disease outbreaks and power outages, which may render it difficult or impossible for us to sequence genomes for some period of time. In addition, these events may temporarily
interrupt our ability to receive samples from our customers or materials from our suppliers and our access to our various systems necessary to operate our business. The inability to perform our sequencing service would result in the loss of
customers and harm our reputation. While we currently maintain approximately $40.0 million in property insurance coverage, we do not currently have insurance coverage for damage arising from an earthquake. Our insurance covering damage to our
property may not be sufficient to cover all of our potential losses and will not cover us in the event of an earthquake, and may not continue to be available to us on acceptable terms, or at all.
Failure to achieve expected sequencing process yields, or variability in our sequencing process yields, could harm our operating results and damage
our reputation.
Our sequencing process, like any other commercial-scale production process, is not flawless. For example, our DNBs may
not adhere to all of the sticky spots on the surface of the silicon wafers we use to sequence DNA, or parts of the wafers may be unreadable. We refer to the efficiency of our sequencing process as its yield. The sequencing process yields
we achieve depend on the design and operation of our sequencing process, which uses a number of complex and sophisticated biochemical, informatics, optical and mechanical processes. An operational or technology failure in one of these complex
processes may result in sequencing processing yields that are lower than we anticipate or that vary between sequencing runs. In addition, we are regularly evaluating and refining our sequencing process. These refinements may initially
result in unanticipated issues that further reduce our sequencing process yields or increase the variability of our sequencing yields. Low sequencing yields, or higher than anticipated variability, increases total sequencing costs and reduces
the number of genomes we can sequence in a given time period, which can cause variability in our operating results and damage our reputation.
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We may have to resequence genomes due to contamination of DNA samples or other failures in the
sequencing process.
In the past, we have had to resequence various genome samples as a result of contamination occurring in the sample
preparation and library construction process. The sequencing process is highly sensitive, and the presence of any foreign substances during the preparation of the slide samples can corrupt the results of the sequencing process. The quality of our
sequencing runs may also vary for other reasons. Resequencing requires additional expense, time and capacity and delays the recognition of revenue from the service. Samples may be contaminated in the future or the quality of our sequencing results
may vary, which may damage our reputation and decrease the demand for our service.
Mishandling or switching of DNA samples or genomic
data may harm our reputation and result in litigation against us.
We may unintentionally mishandle DNA samples. For example, if
customer samples or sequencing results are switched, our customers would receive the wrong sequencing data, which could have significant consequences, particularly if that data is used to diagnose or treat disease. Mishandling customer samples or
data could lead to loss of current or future business, harm our reputation and result in litigation against us.
If we are not
successful in reducing the average cost of our sequencing service, demand for our services, and therefore our business, will suffer.
Our ability to expand our customer base depends highly on our ability to reduce the average cost of sequencing a human genome. For example, certain
academic or government-sponsored research organizations may forgo or delay whole genome-wide studies based on the cost required to sequence complete human genomes, in favor of other less expensive studies. Additionally, certain of our target
customers may decide it is more cost-effective to purchase sequencing instruments from a competitor than contract for our sequencing service. To compete effectively with competitors who sell and market sequencing instruments, our service must
provide cost advantages, superior quality and time savings over the purchase of sequencing instruments. In addition, as new competitors enter the market or expand their business model to include sequencing services, or as the price of competitor
sequencing services decreases, we expect increased pricing pressure, which may force us to decrease the price of our genome sequencing service. Our gross profit and operating results will suffer if we are unable to offset any reductions in our
prices by reducing our costs by developing new or enhanced technologies or methods, or increasing our sales volumes.
Reduction or delay
in research and development budgets and government funding may adversely impact our sales.
We expect that for the foreseeable future,
our revenue will be derived primarily from selling our genome sequencing service to a relatively small number of academic, governmental and other research institutions, as well as pharmaceutical and other life science companies. Our revenue may
decline substantially due to reductions and delays in research and development expenditures by these customers, which depend, in part, on their budgets and the availability of government funding. Factors that could affect the spending levels of our
customers include:
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weakness in the global economy and changing market conditions that affect our customers;
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changes in the extent to which the pharmaceutical and life science industry may use genetic information and genetic testing as a methodology for drug
discovery and development;
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changes in government programs that provide funding to companies and research institutions;
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changes in the regulatory environment affecting pharmaceutical and life science companies and research;
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impact of consolidation within the pharmaceutical and life science industry; and
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cost-reduction initiatives of customers.
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Also, government funding of research and development is subject to the political process, which is
inherently unpredictable. Any reduction in the funding of life science research and development or delay surrounding the approval of government budget proposals may cause our customers to delay or forgo purchases of our services. A reduction or
delay in demand for our service will adversely affect our ability to achieve profitability.
The timing and extent of funding provided
by the American Recovery and Reinvestment Act of 2009 could adversely affect our business, financial condition or results of operations.
In February 2009, the U.S. government enacted the American Recovery and Reinvestment Act of 2009, which we refer to as the Recovery Act, to provide
stimulus to the U.S. economy in the wake of the economic downturn. As part of the Recovery Act, over $10 billion in research funding was provided to the National Institutes of Health, or NIH, through September 2010 to support the
advancement of scientific research. A portion of the stimulus funding supported the analysis of genetic variation and biological function and may have a significant positive long-term impact on our business and the industry generally. In the
short-term, however, potential customers may delay or forgo their purchases of our services as they wait to learn whether, and to what extent, they will receive stimulus funding. If potential customers are unable to obtain stimulus money, they may
reduce their research and development budgets, resulting in a decrease in demand for our service. In addition, even if potential customers receive these stimulus funds, they may not purchase our services, and we may not benefit from the Recovery
Act.
Ethical, legal and social concerns related to the use of genetic information could reduce demand for our genome sequencing
services.
Our genome sequencing services are intended to facilitate large-scale human genome studies for a wide variety of diagnostic
and discovery applications. However, genetic testing has raised ethical, legal and social issues regarding privacy and the appropriate uses of the resulting information. Governmental authorities could, for social or other purposes, limit or regulate
the use of genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Similarly, these concerns may lead individuals to refuse to use genetics tests even if permissible.
In addition, we do not control how our customers use the genomic data we provide. In most cases, we do not know the identity of the
individuals whose DNA we sequence, the reason why their DNA is being sequenced or the intended use of the genomic data we provide. If our customers use our services or the resulting genomic data irresponsibly or in violation of legal restrictions,
our reputation could be harmed and litigation may be brought against us.
Ethical and social concerns may also influence U.S. and foreign
patent offices and courts with regard to patent protection for technology relevant to our business. These and other ethical, legal and social concerns may limit market acceptance of our technology for certain applications or reduce the potential
markets for our technology, either of which could have an adverse effect on our business, financial condition or results of operations.
We use biological and hazardous materials that require considerable expertise and expense for handling, storage and disposal and may result in
claims against us.
We work with materials, including chemicals, biological agents and compounds and DNA samples, that could be
hazardous to human health and safety or the environment. Our operations also produce hazardous and biological waste products. Federal, state and local laws and regulations govern the use, generation, manufacture, storage, handling and disposal of
these materials and wastes. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental laws and regulations may restrict our operations. If we do not comply with applicable regulations, we may be
subject to fines and penalties.
In addition, we cannot eliminate the risk of accidental injury or contamination from these materials or
wastes. While our property insurance policy provides limited coverage in the event of contamination from hazardous and biological products and the resulting cleanup costs, we do not currently have any additional insurance coverage for legal
liability for claims arising from the handling, storage or disposal of hazardous materials. Further, our
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general liability insurance and workers compensation insurance policies do not cover damages and fines arising from biological or hazardous waste exposure or contamination. Accordingly, in
the event of contamination or injury, we could be liable for damages or penalized with fines in an amount exceeding our resources and our operations could be suspended or otherwise adversely affected.
We have limited selling and marketing resources and may be unable to successfully commercialize our human genome sequencing service.
To grow our business as planned, we must expand our sales, marketing and customer support capabilities. We may be unable to attract,
retain and manage the specialized workforce necessary to gain market acceptance and successfully commercialize our services. In addition, developing these functions is time consuming and expensive.
The sale of genome sequencing services involves extensive knowledge about genomic research and sequencing technology, including the sequencing technology
of our competitors. To be successful, our sales force and related personnel must be technically proficient in a variety of disciplines. For example, many of our existing salespersons have a Ph.D. or other advanced degree in relevant scientific
fields. There are relatively few people that have the necessary knowledge and qualifications to be successful salespersons or support personnel in our industry.
In certain regions or markets, we may seek to partner with others to assist us with sales, marketing and customer support functions. However, we may be unable to find appropriate third parties with whom
to enter into these arrangements. Furthermore, if we do enter into these arrangements, these third parties may not perform as expected.
Our software may incorrectly analyze the raw genomic data produced by our sequencing equipment.
Our sequencing instruments generate raw genomic data from various segments of the genome being sequenced. This data must be arranged into the correct
order to reconstruct the original genomic structure of the sample. We have developed software algorithms that facilitate this reconstruction. However, these algorithms rely on statistical models that provide only relative assurance, and not absolute
assurance, that the original genomic structure has been reconstructed.
In addition, the genomic data we provide our customers includes a
comparison of the sequenced genome against a reference genome to help identify possible mutations or variations. This reference genome is designed to approximate a standard human genome. However, this approximation may not be accurate.
If the algorithms we use to reconstruct genomic data incorrectly reconstruct the sequenced genome, or if our reference genome is significantly
flawed, the genomic data we deliver could be inaccurate and of little or no use to our customers.
An inability to manage our planned
growth or expansion of our operations could adversely affect our business, financial condition or results of operations.
Our business
has grown rapidly, and we expect this growth to continue as we expand our sequencing capacity. For example, we had three employees at the end of 2005 and 202 employees as of March 31, 2011. The rapid expansion of our business and addition of
new personnel may place a strain on our management and operational systems. To effectively manage our operations and growth, we must continue to expend funds to enhance our operational, financial and management controls, reporting systems and
procedures and to attract and retain sufficient numbers of talented employees. If we are unable to expand our genome sequencing capacity and implement improvements to our control systems efficiently and quickly, or if we encounter deficiencies in
existing systems and controls, then we will not be able to successfully expand the commercialization of our services. In addition to enhancing our sequencing capacity, our future operating results will depend on our managements ability to:
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implement and improve our sales, marketing and customer support programs and our research and development efforts;
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enhance our operational and financial control systems;
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expand, train and manage our employee base;
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integrate acquired businesses, if applicable; and
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effectively address new issues related to our growth as they arise.
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We may not manage our expansion successfully, which could adversely affect our business, financial condition or results of operations.
If we expand our operations outside of the United States, we will face risks that may increase our operating costs.
We plan to expand our operations to include additional genome sequencing centers outside of the United States. Because the laws of certain countries currently prohibit the export of DNA, we will have to
establish local facilities to access those markets and establish a presence in other markets. To date, we have not expanded our operations outside the United States. Operating in international markets requires significant resources and management
attention and will subject us to regulatory, economic and political risks that are different from those in the United States. Because of our limited experience with international operations, our international expansion efforts may be unsuccessful.
In addition, we will face risks in doing business internationally that could increase our operating costs, including the following:
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economic conditions in various parts of the world;
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unexpected and more restrictive laws and regulations, including those laws governing ownership of intellectual property, collection and use of personal
information and other privacy considerations, hazardous materials and other activities important to our business;
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new and different sources of competition;
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multiple, conflicting and changing tax laws and regulations that may affect both our international and domestic tax liabilities and result in increased
complexity and costs;
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the difficulty of managing and staffing additional genome sequencing centers and the increased travel, infrastructure and legal compliance costs
associated with multiple international locations;
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difficulties in enforcing contracts and collecting accounts receivable, especially in developing countries;
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fluctuations in exchange rates; and
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tariffs and trade barriers, import/export controls and other regulatory or contractual limitations on our ability to sell or develop our services in
certain foreign markets.
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The success of the expansion of our business internationally will depend, in part, on our ability
to anticipate and effectively manage these and other risks associated with international operations. Our failure to manage any of these risks successfully could increase our operating costs.
Certain of our potential customers may require that we become certified under the Clinical Laboratory Improvement Amendments of 1988.
Although we are not currently subject to the Clinical Laboratory Improvement Amendment of 1988, or CLIA, we may in the future be required by certain customers to obtain a CLIA certification. CLIA, which
extends federal oversight over clinical laboratories by requiring that they be certified by the federal government or by a federally approved accreditation agency, is designed to ensure the quality and reliability of clinical laboratories by
mandating specific standards in the areas of personnel qualifications, administration and participation in proficiency testing, patient test management, quality control, quality assurance and inspections. If our customers require a CLIA
certification, we will have to continually expend time, money and effort to ensure that we meet the applicable quality and safety requirements, which may divert the attention of management and disrupt our core business operations.
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Because the market for genome sequencing is relatively new and rapidly evolving, we may become
subject to additional future governmental regulation, which may place additional cost and time burdens on our operations.
We are
subject, both directly and indirectly, to the adverse impact of existing and potential future government regulation of our operations and markets. The life sciences and pharmaceutical industries, which are significant target markets for our
services, have historically been heavily regulated. There are comprehensive federal and state laws regarding matters such as the privacy of patient information and research in genetic engineering. For example, if we inadvertently disclose private
patient information in the course of providing our sequencing services, we could be prosecuted for violations of federal law.
Legislative
bodies or regulatory authorities may adopt additional regulation that adversely affects our market opportunities. They could also extend existing regulations to cover our services. For example, medical diagnostic products may, depending on their
intended use, be regulated as medical devices by the Food and Drug Administration, or FDA, if they are:
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used in the diagnosis of disease or other conditions;
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used in the cure, mitigation, treatment or prevention of disease; or
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intended to affect the structure or any function of the body.
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Medical devices generally cannot be marketed without first receiving clearance or approval (depending on the regulatory pathway) from the FDA. We do not believe that our sequencing services are currently
subject to the FDAs medical device requirements because we do not intend our services to be used for the diagnosis of disease. However, we cannot control how the genomic information we provide will be used by our customers.
In addition, the FDA is focusing on our market, which has created uncertainty regarding the regulatory landscape. The FDA has recently taken actions
suggesting that it interprets the applicable regulations expansively to cover certain genomic devices and services, particularly those sold directly to consumers. Since June 2010, the FDA has sent numerous letters to certain companies in this
market, including 23andMe, Inc., deCODE Genetics, Knome, Inc., Navigenics, Inc. and Pathway Genomics. In these letters, the FDA noted that it considers genetic tests marketed by these companies to be subject to FDA regulation and, accordingly,
unapproved medical devices. Additionally, in March 2011, the FDA held a public two-day meeting discussing the appropriate regulation of the direct-to-consumer genetic tests. The FDA may extend this position to services such as ours. In addition, the
FDA may implement new regulations that may be broad enough to cover our operations. Changes to the current regulatory framework, including the imposition of new regulations, could arise anytime, and we may be unable to obtain or maintain FDA or
comparable regulatory approval or clearance for our services, if required. For example, the FDA may impose restrictions on the types of customers to which we can market and sell our services and the types of persons whose DNA we may sequence. Also,
future legislation may require that patients provide specific consent to have their DNA sequenced. This could require our customers to obtain new consents before they can submit DNA samples to us for sequencing.
In any event, if we expand our business to include sequencing services intended to be used for the diagnosis of disease, we will likely become subject to
regulation by the FDA or other comparable agencies of other countries, which may require us to obtain regulatory approval or clearance before we can market those services.
These regulatory approval processes may be expensive, time-consuming and uncertain, and our failure to obtain or comply with these approvals or clearances could harm our business, financial condition or
operating results.
Disruption to or failure of our data center or other technical systems may disrupt our business and harm our
operating results.
We rely on our network infrastructure, data centers, enterprise applications and technology systems for the
development and support of our sequencing service, including the preparation, analysis and transmission of data from our sequencing center, as well as for the internal operation of our business. These systems are susceptible to disruption or failure
in the event of natural disasters such as a major earthquake, fire, flood, cyber-attack, terrorist
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attack, telecommunications failure, power outage or other catastrophic event. Further, our data center and our sequencing facility, which houses certain of our technology systems, are located
near major earthquake faults. Disruptions to or the failure of our data center or any of these technology systems, including the network connection between our Mountain View facility and our data center, and the resulting loss of critical data,
could cause delays in the transmission and analysis of the sequencing data, prevent us from fulfilling our customers orders and severely affect our ability to conduct normal business operations.
Our term loans contain restrictions that limit our flexibility in operating our business.
In December 2010, we entered into two loan and security agreements and refinanced our existing credit facility. In March 2011, we entered into a new loan
and security agreement for a term loan and repaid and terminated one of the December 2010 agreements with the proceeds from the new term loan. Our term loans contain various covenants that limit our ability to engage in specified types of
transactions. These covenants limit our ability to, among other things:
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sell, transfer, lease or dispose of our assets;
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create, incur or assume additional indebtedness;
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encumber or permit liens on certain of our assets;
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make restricted payments, including paying dividends on, repurchasing or making distributions with respect to our common stock;
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make specified investments (including loans and advances);
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consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and
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enter into certain transactions with our affiliates.
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A breach of any of these covenants or a material adverse change to our business could result in a default under either or both of our term loans. Upon the occurrence of an event of default under our term
loans, our lenders could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders could proceed against the collateral
granted to them to secure such indebtedness. We have pledged substantially all of our assets, other than our intellectual property, as collateral under the term loans.
If we fail to retain the services of our key executives or if we are unable to attract and retain skilled personnel, our ability to grow our business and our competitive position would be impaired.
We believe our future success will depend in large part upon our ability to attract, retain and motivate highly skilled personnel. In
particular, we depend highly on the contributions of Clifford A. Reid, Ph.D., our President and Chief Executive Officer, and Radoje Drmanac, Ph.D., our Chief Scientific Officer. The loss of either of these executives could make it more difficult to
manage our operations and research and development activities, reduce our employee retention and revenue and impair our ability to compete. If either of these key executives were to leave us unexpectedly, we could face substantial difficulty in
hiring qualified successors and could experience a loss in productivity, both during the search for, and integration of, any such successor.
Our research and development, operations and sales and marketing personnel represent a significant asset and serve as the source of our business strategy,
scientific and technological innovations and sales and marketing initiatives. As a result, our success substantially depends on our ability to retain and attract personnel for all areas of our organization. Competition for qualified personnel is
intense, and we may not be successful in attracting and retaining qualified personnel on a timely basis or on competitive terms, if at all. In addition, many qualified personnel are located outside of Northern California, where we are located, and
some qualified personnel that we may recruit may not be interested in relocating. If we are unable to attract and retain the necessary personnel on a cost-effective basis, our ability to grow our business and our competitive position would be
impaired.
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We may engage in joint ventures or acquisitions that could disrupt our business, cause dilution to
our stockholders, reduce our financial resources and result in increased expenses.
In the future, we may enter into joint ventures or
acquire other businesses, products or technologies. Because we have not entered into any joint ventures or made any acquisitions to date, our ability to do so successfully is unproven. We may not be able to find suitable partners or acquisition
candidates, and we may not be able to complete such transactions on favorable terms, if at all, or successfully integrate any acquired business, products or technologies into our operations. If we do enter into any joint ventures or complete
acquisitions, we may not strengthen our competitive position or achieve our goals, or these transactions may be viewed negatively by customers or investors. In addition, we may have difficulty integrating and motivating personnel, technologies and
operations from acquired businesses and retaining and motivating key personnel from those businesses. Joint ventures and acquisitions may disrupt our ongoing operations, divert management from day-to-day responsibilities and increase our expenses.
Future acquisitions may reduce our cash available for operations and other uses, and could result in an increase in amortization expense related to identifiable intangible assets acquired, potentially dilutive issuances of equity securities or the
incurrence of debt. We cannot predict the number, timing or size of future joint ventures or acquisitions, or the effect that any such transactions might have on our operating results.
We incur significant costs as a result of operating as a public company, and our management devotes substantial time to new compliance initiatives. We may fail to comply with the rules that apply to
public companies, including section 404 of the Sarbanes-Oxley Act of 2002.
We have incurred and will continue to incur significant
legal, accounting and other expenses as a public company, including costs resulting from public company reporting obligations under the Securities Exchange Act of 1934, as amended, and regulations regarding corporate governance practices. The
listing requirements of The NASDAQ Global Market require that we satisfy certain corporate governance requirements relating to director independence, distributing annual and interim reports, stockholder meetings, approvals and voting, soliciting
proxies, conflicts of interest and a code of conduct. Our management and other personnel will need to devote a substantial amount of time to all of these requirements. Moreover, the reporting requirements, rules and regulations will increase our
legal and financial compliance costs and will make some activities more time-consuming and costly. These reporting requirements, rules and regulations, coupled with the increase in potential litigation exposure associated with being a public
company, could make it more difficult for us to attract and retain qualified persons to serve on our board of directors or board committees or to serve as executive officers.
In addition, the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act, and the related rules of the Securities and Exchange Commission, or SEC, require that we maintain effective internal control over
financial reporting and disclosure controls and procedures. In particular, our management and, depending on the size of our public float, independent registered public accounting firm will have to provide a report on the effectiveness of our
internal control over financial reporting with our annual report for the year ending December 31, 2011, as required by Section 404 of the Sarbanes-Oxley Act. To date, we have never conducted a review of our internal control for the purpose
of providing the reports required by these rules. During the course of our review and testing, we may identify deficiencies and be unable to remediate them before we must provide the required reports. We or our independent registered public
accounting firm may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting, which could harm our operating results, cause investors to lose confidence in our reported financial information and
cause the trading price of our stock to fall.
Our compliance with Section 404 may require that we incur substantial expense and expend
significant management time on compliance-related issues. Moreover, if we are unable to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm is unable to conclude that our
internal control over financial reporting is effective or otherwise identifies material weaknesses in our internal control, the market price of our stock would likely decline and we could be subject to sanctions or investigations by NASDAQ, the SEC
or other regulatory authorities, which would require additional financial and management resources.
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Our ability to use our net operating loss carryforwards to offset future taxable income may be
subject to certain limitations.
In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a
corporation that undergoes an ownership change is subject to limitations on its ability to use its pre-change net operating loss carryforwards, or NOLs, to offset future taxable income. If the Internal Revenue Service challenges our
analysis that our existing NOLs will not expire before utilization due to previous ownership changes, our ability to use our NOLs could be limited by Section 382 of the Code. Future changes in our stock ownership, some of which are outside of
our control, could result in an ownership change under Section 382 of the Code. Furthermore, our ability to use NOLs of companies that we may acquire in the future may be subject to limitations. For these reasons, we may not be able to use a
material portion of the NOLs reflected on our balance sheet, even if we attain profitability.
Unfavorable global economic conditions
could adversely affect our business, financial condition or results of operations.
Our results of operations could be adversely
affected by general conditions in the global economy and in the global financial markets. The recent global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn, such
as the recent global financial crisis, could result in a variety of risks to our business, including, reductions or delays in planned research and development and other expenditures by our customers or decreased funding of genomic research by
governmental entities. A weak or declining economy could also put strain on our suppliers, possibly resulting in supply disruption, or cause our customers to delay making payments for our services. Any of the foregoing could harm our business.
Risks Related to Intellectual Property
We currently are, and could in the future be, subject to litigation regarding patent and other proprietary rights that could harm our business.
Our commercial success depends in part on not infringing patents and proprietary rights of third parties. On August 3, 2010,
Illumina, Inc. and Solexa, Inc. (an entity acquired by Illumina) filed a complaint in the U.S. District Court in Delaware alleging patent infringement by us. The complaint alleges that our Complete Genomics Analysis Platform, and in particular our
combinatorial probe anchor ligation technology, infringes upon three patents held by Illumina and Solexa. The complaint seeks, among other things, a preliminary and permanent injunction against us from infringing these patents and unspecified
monetary damages. We may incur substantial time and expense in defending against this complaint. If we were found to infringe one or more valid claims of a patent-in-suit and if the district court granted an injunction on that basis, we may be
forced to redesign portions of our sequencing process, seek a license or cease the infringing activity. Redesigning portions of our sequencing process may take substantial time and resources and may delay our ability to generate revenue. In
addition, a license to the necessary patent rights may not be available on commercially reasonable terms, if at all. In the event that the district court grants an injunction and we are unsuccessful in redesigning our sequencing process or obtaining
a license, we may be forced to cease our sequencing operations altogether. See BusinessLegal Proceedings.
As we enter our
markets, it is possible other competitors will claim that our services infringe their intellectual property rights as part of a business strategy to impede our successful entry into those markets. Such competitors and other third parties may have
obtained and may in the future obtain patents covering products or processes that are similar to or may include steps or processes used in our sequencing technology, allowing them to claim that the use of our technologies infringes these
patents. In particular, we are aware of issued U.S. patents owned by competitors and other third parties, including Illumina, to which we do not have licenses that may relate to our sequencing technology and which pertain to, among other
things:
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sample preparation techniques;
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processes for making nucleic acid templates, or library construction;
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processes for making DNBs from nucleic acid templates;
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methods of making arrays of DNBs;
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sequencing methods, including those involving ligation;
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identifying genomic sequences on nucleic acid arrays;
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devices and apparatus used in nucleic acid detection systems, including optical systems; and
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information processing systems including software for base calling, sequence mapping and assembly.
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Some of the third parties that own these patents, including Illumina, have strong economic incentives, and substantial financial resources, to claim that
we are infringing their patent rights. In a patent infringement claim against us, we may assert, as a defense, that we do not infringe the relevant patent claims, that the patent is invalid or both. The strength of our defenses will depend on the
patents asserted, the interpretation of these patents, our ability to identify invalidating prior art (that is, publication of the patent holders invention or technology prior to the stated invention date) in order to invalidate
the asserted patent and on other factors. However, we could be unsuccessful in advancing non-infringement and/or invalidity arguments in our defense. In the United States, issued patents enjoy a presumption of validity, and the party challenging the
validity of a patent claim must present clear and convincing evidence of invalidity, which is a high burden of proof. Conversely, the patent owner need only prove infringement by a preponderance of the evidence, which is a lower burden of proof.
If we were found by a court to have infringed a valid patent claim, we could be prevented from using the patented technology or be required to
pay the owner of the patent rights for the rights to use that technology. If we decide to pursue a license to one or more of these patents, we may not be able to obtain such a license on commercially reasonable terms, if at all, or the license
we obtain may require us to pay substantial royalties or grant cross licenses to our patent rights. For example, if the relevant patent is owned by a competitor, that competitor may choose not to license patent rights to us, as it would be under no
obligation to do so. If we decide to develop alternative technology, we may not be able to do so on a timely or cost-effective manner, if at all.
In addition, because patent applications can take years to issue and are often afforded confidentiality for some period of time, there may currently be pending applications, unknown to us, which later
result in issued patents that processes in our sequencing technology infringe. Processes in our sequencing technology may also infringe existing issued patents of which we are currently unaware. Even though we own or have other rights to
patents, these patents do not provide us with the freedom to offer our sequencing services unimpeded by the patent rights of others. For example, we may be required to pursue or defend a patent infringement action in order to protect our
intellectual property rights or practice our sequencing technology.
In addition, we do not currently provide sequencing services intended to be used for diagnosis of disease. If we expand our business to include sequencing services intended
to be used for the diagnosis of disease, it may be necessary to license patents related to such services.
It is possible that, in addition to
our current litigation, we may in the future receive, particularly as a public company, communications from competitors and others alleging that we may be infringing their patents, trade secrets or other intellectual property rights or offering
licenses to such intellectual property or threatening litigation.
For example, an educational institution has recently invited us to engage in negotiations for the license of certain of that institutions patent rights. We have not yet
determined whether we will seek such a license. In addition to patent infringement claims, third parties may assert copyright, trademark or other proprietary rights against us. We may not be able to successfully defend against the claims
asserted by Illumina, or future claims, and our business may suffer if we are found to have infringed upon the patents held by Illumina, or if future claims are brought against us.
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We may not be able to protect our patent rights or other intellectual property which could impair our
ability to compete effectively.
We depend on proprietary technology for our success and ability to compete. If others are able to
reproduce our technology, our business will suffer significantly unless we can prevent them from competing with us. To protect our proprietary technology, we rely on patents and other intellectual property laws, as well as nondisclosure agreements,
licensing arrangements and confidentiality provisions. U.S. patent, copyright and trade secret laws afford us only limited protection, and the laws of some foreign countries do not protect proprietary rights to the same extent.
We have licensed, from Callida Genomics, Inc., U.S. and international patents and patent applications relating to our business. Because the issuance of a
patent is not conclusive of its validity or enforceability, our existing patent rights, and rights we may obtain in the future, may not provide us with meaningful protection. The patent rights on which we rely may be challenged and invalidated or
may be interpreted not to be broad enough to cover the critical components of our technology. Our pending patent applications may have their claims limited or may not result in issued patents. Moreover, our patent rights become more limited as owned
or licensed patents begin to expire in 2014. We will be able to protect our technologies from unauthorized use by third parties only to the extent that valid and enforceable patents or other proprietary rights cover them. Even if we have valid and
enforceable patents or other proprietary rights, competitors may be able to design alternative methods or devices that avoid infringement of those patents or rights.
Our key patent rights are licensed from Callida, which is owned by our Chief Scientific Officer and his spouse. If we breach the terms of these licenses, or if our relationship with Callida or its owners
deteriorates, Callida may seek to terminate the licenses. If we lose our rights to use these patents, we may be forced to re-design our sequencing technology, which would be expensive and may not be possible.
The patent positions of biotechnology companies, including us, can be highly uncertain and involve complex and evolving legal and factual questions. No
consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date in the United States. Legal developments may preclude or limit the patent protection available for our sequencing technology.
Despite our efforts to protect our proprietary rights, attempts may be made to copy or reverse engineer aspects of our sequencing technology or to obtain
and use information that we regard as proprietary. Accordingly, we may be unable to protect our proprietary rights against unauthorized third-party copying or use. Furthermore, policing the unauthorized use of our intellectual property is difficult.
Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Litigation could result in substantial costs and
diversion of resources and could harm our business.
We may incur substantial costs as a result of our current, or future, litigation or
other proceedings relating to patent and other proprietary rights.
The genomic sequencing industry includes several large companies
that have rights to many broad issued patents and pending patent applications. Competitors in this industry have fiercely litigated their patent positions and alleged infringements by others. For example, Illumina and Affymetrix were recently
involved in long and expensive patent litigation relating to DNA sequencing technology. This litigation resulted in a settlement involving the payment of $90 million by one party to the other.
Our involvement in intellectual property litigation, including our current litigation with Illumina, or administrative proceedings could result in significant expense. Some of our competitors, including
Illumina, Life Technologies and Affymetrix, have considerable resources available to them. We, on the other hand, are an early-stage commercial company with comparatively few resources available to us to engage in costly and protracted litigation.
Intellectual property infringement claims asserted against us, whether with or without merit, could be costly to defend and could limit our ability to use some technologies in the future. They will be time consuming, will divert our
managements and scientific personnels attention and may result in liability for
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substantial damages. In addition, our standard customer contract requires us to indemnify our customers for claims alleging that any of our products misappropriate or violate any third party
patent, copyright, trade secret or other intellectual property or proprietary rights.
If third parties file patent applications or are issued
patents claiming technology also claimed by us in pending applications, we may be required to participate in interference proceedings with the U.S. Patent Office or in other proceedings outside the United States, including oppositions, to determine
priority of invention or patentability. Even if we are successful in these proceedings, we may incur substantial costs, and the time and attention of our management and scientific personnel will be diverted in pursuit of these proceedings.
We may not be able to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have
encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other
intellectual property protection, especially those relating to biotechnology. This could make it difficult for us to stop the infringement of our patents or the misappropriation of our other intellectual property rights. For example, many foreign
countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors.
In these countries, patents may provide limited or no benefit.
Proceedings to enforce our patent rights in foreign jurisdictions could result
in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal
decisions by courts in the U.S. and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of intellectual property.
Confidentiality agreements with employees and others may not adequately prevent disclosures of our trade secrets and other proprietary information.
We rely in part on trade secret protection to protect our confidential and proprietary information and processes. However, trade secrets are difficult to
protect. We have taken measures to protect our trade secrets and proprietary information, but these measures may not be effective. We require new employees and consultants to execute confidentiality agreements upon the commencement of an employment
or consulting arrangement with us. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individuals relationship with us be kept
confidential and not disclosed to third parties. These agreements also generally provide that inventions conceived by the individual in the course of rendering services to us will be our exclusive property. Despite these measures, our proprietary
information may be disclosed, third parties could reverse engineer our sequencing technologies and others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. Costly
and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
Risks Related to This Offering and Ownership of Our Common Stock
Our stock price is volatile and purchasers of our common stock could incur substantial losses.
Our stock price is volatile, and from November 11, 2010, the first day of trading of our common stock, to May 6, 2011, the trading prices of our stock have ranged from $17.25 to $6.60 per share.
The market price of our common stock may fluctuate significantly in response to a number of factors. These factors include those discussed in this Risk Factors section and others such as:
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quarterly variations in our results of operations or those of our competitors;
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changes in earnings estimates or recommendations by securities analysts;
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announcements by us or our competitors of new products or services, significant contracts, commercial relationships, acquisitions or capital
commitments;
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developments with respect to intellectual property rights;
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our commencement of, or involvement in, litigation;
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changes in financial estimates or guidance, including our ability to meet our future revenue and operating profit or loss estimates or guidance;
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announcements regarding equity or debt financing transactions;
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any major changes in our board of directors or management;
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changes in governmental regulations; and
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a decrease in government funding of research and development or a slowdown in the general economy.
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In recent years, the stock market in general, and the market for technology/life science companies in particular, has experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating
performance. These fluctuations may be even more pronounced in the trading market for our stock shortly following this offering. In addition, in the past, following periods of volatility in the overall market and the market price of a particular
companys securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and divert our managements attention and resources.
If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading
opinion regarding our stock, our stock price and trading volume could decline.
The trading market for our common stock will be
influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us issue an adverse or misleading opinion regarding us, business model, technology or stock performance,
our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to
decline.
Moreover, the unpredictability of our financial results likely reduces the certainty, and therefore reliability, of the forecasts by securities or industry analysts of our future financial results, adding to the potential volatility
of our stock price.
Our directors, executive officers and principal stockholders and their respective affiliates will continue to have
substantial influence over us after this offering and could delay or prevent a change in corporate control.
Our directors, executive
officers and the holders of more than 5% of our common stock, together with their affiliates, beneficially own approximately 80% of our outstanding common stock based on the number of shares outstanding on April 29, 2011. These stockholders, acting
together, have significant influence over the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these
stockholders, acting together, have significant influence over our management and affairs. Accordingly, this concentration of ownership might harm the market price of our common stock by:
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delaying, deferring or preventing a change in control;
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impeding a merger, consolidation, takeover or other business combination involving us; or
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discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of us.
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Future sales of shares by existing stockholders could cause our stock price to decline.
If our existing stockholders sell, or if the market believes our existing stockholders will sell, substantial amounts of our common
stock in the public market, the trading price of our common stock could decline significantly.
As of April 29, 2011, there were:
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4,014,727 shares subject to outstanding options under our 2006 Equity Incentive Plan and 2010 Equity Incentive Award Plan;
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27,500 shares issuable upon vesting of restricted stock units under our 2009 Equity Incentive Plan;
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an aggregate of 4,045,407 shares reserved for future issuance under our 2010 Equity Incentive Award Plan and Employee Stock Purchase Plan, as well as
any automatic increases in the number of shares of our common stock reserved for future issuance under these benefit plans; and
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2,165,323 shares of common stock subject to warrants outstanding as of April 29, 2011 with a weighted-average exercise price of $2.42 per share.
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If additional shares are sold, or if it is perceived that they will be sold, in the public market, the price of our common
stock could decline substantially.
Some of our existing stockholders have demand and piggyback rights to require us to register with the SEC
up to approximately 21.7 million shares of our common stock, including shares issuable upon exercise of outstanding options. If we register these shares of common stock, the stockholders would be able to sell those shares freely in the public
market, subject to the lock-up agreements described above.
We also registered 6,628,347 shares of our common stock that are subject to
outstanding stock options and reserved for issuance under our equity plans. These shares can be freely sold in the public market upon issuance, subject to vesting restrictions.
Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.
The offering price of our common stock will be substantially higher than the net tangible book value of our common stock immediately after the offering. As a result, purchasers of our common stock in this
offering will incur immediate and substantial dilution of approximately $10.70 per share, based on the assumed public offering price of $14.78 per share. Those purchasers could experience additional dilution upon the exercise of outstanding stock
options and warrants. See Dilution for a more detailed discussion of the dilution new investors will incur in this offering.
We have broad discretion to determine how to use the funds raised in this offering, and may use them in ways that may not enhance our operating
results or the price of our common stock.
Our management will have broad discretion over the use of proceeds from this offering, and
we could spend the proceeds from this offering in ways our stockholders may not agree with or that do not yield a favorable return, if at all. We currently intend to use the net proceeds of this offering for capital expenditures to expand the
sequencing and computing capacity in our Mountain View and Santa Clara leased facilities, to finance the further development of our sequencing technology and services, for sales and marketing activities and for working capital and other general
corporate purposes. If we do not invest or apply the proceeds of this offering in ways that improve our operating results, we may fail to achieve expected financial results, which could cause our stock price to decline.
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Provisions in our charter documents and under Delaware law could discourage a takeover that
stockholders may consider favorable and may lead to entrenchment of management.
Our amended and restated certificate of incorporation
and amended and restated bylaws contain provisions that could delay or prevent changes in control or changes in our management without the consent of our board of directors. These provisions include the following:
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a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of
our board of directors;
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no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
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the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the
resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;
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the ability of our board of directors to authorize the issuance of shares of preferred stock and to determine the price and other terms of those
shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror;
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the ability of our board of directors to alter our bylaws without obtaining stockholder approval;
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the required approval of at least 66
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provisions of our amended and restated certificate of incorporation regarding the election and removal of directors;
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a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our
stockholders;
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the requirement that a special meeting of stockholders may be called only by the chairman of the board of directors, the chief executive officer, the
president or the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and
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advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be
acted upon at a stockholders meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquirors own slate of directors or otherwise attempting to obtain control of us.
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We are also subject to the anti-takeover provisions contained in Section 203 of the Delaware General Corporation Law.
Under Section 203, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other exceptions, the board of directors
has approved the transaction. For a description of our capital stock, see the section titled Description of Capital Stock.
We do not currently intend to pay dividends on our common stock, and, consequently, your ability to achieve a return on your investment will depend
on appreciation in the price of our common stock.
We do not currently intend to pay any cash dividends on our common stock for the
foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Additionally, the terms of our credit facility restrict our ability to pay dividends. Therefore, you are not likely to receive any dividends on your
common stock for the foreseeable future.
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Special Note Regarding Forward-Looking Statements
This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended, that are subject to the safe harbor created by those sections. These forward-looking statements involve risks and uncertainties and are contained principally in the
sections entitled Prospectus Summary, Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations and Business. These statements relate to future events or
our future financial or operational performance and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievement to differ materially from those expressed or
implied by these forward-looking statements. These risks and uncertainties are contained principally in the section entitled Risk Factors.
Forward-looking statements include all statements that are not historical facts. In some cases, you can identify forward-looking statements by terms such as may, will,
should, intend, could, would, continue, expect, plan, anticipate, believe, estimate, project, predict,
potential or the negative of those terms, and similar expressions and comparable terminology intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on
assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of
this prospectus, and, except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this prospectus.
This prospectus also contains estimates and other information concerning our current and target markets that are based on industry
publications, surveys and forecasts, including those generated by Scientia Advisors. These estimates and information involve a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates and information.
These industry publications, surveys and forecasts generally indicate that their information has been obtained from sources believed to be reliable. The industry in which we operate is subject to a high degree of uncertainty and risk due to a
variety of factors, including those described in Risk Factors. These and other factors could cause actual results to differ materially from those expressed in these publications, surveys and forecasts.
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Use of Proceeds
We estimate that we will receive net proceeds of approximately $62.0 million from the sale of 4,500,000 shares of common stock offered in this
offering, or approximately $71.4 million if the underwriters exercise their over-allotment option in full, based on the public offering price per share and after deducting the underwriting discounts and commissions and estimated offering
expenses payable by us.
We currently intend to use approximately $20.0 million of the net proceeds of this offering for capital expenditures
to expand the sequencing and computing capacity in our Mountain View and Santa Clara leased facilities. We intend to use approximately $15.0 million of the net proceeds of this offering to finance the further development of our sequencing
technology and services, and approximately $15.0 million for sales and marketing activities. We intend to use the remainder of the net proceeds of this offering for working capital and other general corporate purposes.
Each $1.00 increase (decrease) in the public offering price per share would increase (decrease) the net proceeds to us from this offering, after
deducting underwriting discounts and commissions and our estimated offering expenses, by approximately $4.3 million, assuming that the number of shares we are offering, as set forth on the cover page of this prospectus, remains the same and that the
underwriters do not exercise their over-allotment option. Depending on market conditions and other considerations at the time we price this offering, we may sell a greater or lesser number of shares than the number set forth on the cover page of
this prospectus. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering, after deducting underwriting discounts and commissions and our estimated offering
expenses, by approximately $14.0 million, assuming the public offering price per share remains the same. An increase of 1,000,000 in the number of shares we are offering, together with a $1.00 increase in the public offering price per share, would
increase the net proceeds to us from this offering, after deducting underwriting discounts and commissions and our estimated offering expenses, by approximately $19.2 million. A decrease of 1,000,000 in the number of shares we are offering, together
with a $1.00 decrease in the public offering price per share, would decrease the net proceeds to us from this offering, after deducting underwriting discounts and commissions and our estimated offering expenses, by approximately $17.3 million. This
information is illustrative only, and following the pricing of this offering, we will update this information based on the actual public offering price and other terms of this offering.
The expected use of net proceeds of this offering represents our current intentions based upon our present plan and business conditions. As of the date of this prospectus, we cannot specify with certainty
all of the particular uses for the net proceeds to be received upon the completion of this offering. Accordingly, we will have broad discretion in the application of the net proceeds, and investors will be relying on our judgment regarding the
application of the proceeds of this offering.
Until we use the net proceeds of this offering, we intend to invest the net proceeds in
short-term, interest-bearing, investment-grade securities. We cannot predict whether the proceeds invested will yield a favorable return, if any.
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Dividend Policy
We have never declared or paid cash dividends on our common stock and currently do not plan to declare dividends on shares of our common stock in the
foreseeable future. In addition, the provisions of our term loans currently prohibit us from paying cash dividends on our common stock. We expect to retain our future earnings, if any, for use in the operation and expansion of our business. The
payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, requirements under the Delaware General Corporation Law, restrictions
and covenants pursuant to our term loans and any other credit facilities we may enter into, our overall financial condition and any other factors deemed relevant by our board of directors. See Managements Discussion and Analysis of
Financial Condition and Results of OperationsLiquidity and Capital ResourcesTerm Loans for a description of the restrictions on the payment of dividends imposed by our existing term loans.
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Capitalization
The following table sets forth our capitalization as of March 31, 2011:
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on an actual basis; and
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on an as adjusted basis to give effect to the sale of 4,500,000 shares of our common stock we are offering at an assumed public offering price of
$14.78 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
|
You
should read this table together with Managements Discussion and Analysis of Financial Condition and Results of Operations and our financial statements and the related notes appearing elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2011
|
|
|
|
Actual
|
|
|
As adjusted
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands, except share
and per share amounts)
|
|
Notes payable, net of current portion
|
|
$
|
22,724
|
|
|
$
|
22,724
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value per share; 5,000,000 shares authorized, no shares issued and outstanding, actual and as
adjusted
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value per share; 300,000,000 shares authorized, 25,988,934 shares issued and outstanding, actual;
300,000,000 shares authorized, 30,488,934 shares issued and outstanding, as adjusted
|
|
|
26
|
|
|
|
31
|
|
Additional paid-in capital
|
|
|
214,039
|
|
|
|
275,986
|
|
Accumulated deficit
|
|
|
(151,309
|
)
|
|
|
(151,309
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
62,756
|
|
|
|
124,708
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
85,480
|
|
|
$
|
147,432
|
|
|
|
|
|
|
|
|
|
|
Each $1.00 increase (decrease) in the public offering price per share would increase (decrease) each of additional paid in
capital, total stockholders equity and total capitalization by approximately $4.3 million, assuming that the number of shares we are offering, as set forth on the cover page of this prospectus, remains the same and that the underwriters do not
exercise their over-allotment option. Depending on market conditions and other considerations at the time we price this offering, we may sell a greater or lesser number of shares than the number set forth on the cover page of this prospectus. An
increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) each of additional paid in capital, total stockholders equity and total capitalization by approximately $14.0 million, assuming the public
offering price per share remains the same. An increase of 1,000,000 in the number of shares we are offering, together with a $1.00 increase in the expected public offering price per share, would increase each of additional paid in capital, total
stockholders equity and total capitalization by approximately $19.2 million. A decrease of 1,000,000 in the number of shares we are offering, together with a $1.00 decrease in the public offering price per share, would decrease each of
additional paid in capital, total stockholders equity and total capitalization by approximately $17.3 million. This information is illustrative only, and following the pricing of this offering, we will update this information based on the
actual public offering price and other terms of this offering.
The outstanding share information in the table above excludes:
|
§
|
|
2,875,125 shares of common stock issuable upon exercise of options outstanding as of March 31, 2011 with a weighted-average exercise price of
$2.40 per share;
|
|
§
|
|
27,500 shares of common stock issuable upon vesting of restricted stock units outstanding as of March 31, 2011;
|
|
§
|
|
an aggregate of 5,207,396 shares of common stock reserved for future issuance under our 2010 Equity Incentive Award Plan and Employee Stock Purchase
Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under these benefit plans; and
|
|
§
|
|
2,165,323 shares of common stock subject to warrants outstanding as of March 31, 2011 with a weighted-average exercise price of $2.42 per share.
|
35
Dilution
If you invest in our common stock, you will experience dilution to the extent of the difference between the public offering price per share of our common stock you pay in this offering and the net
tangible book value per share of our common stock after this offering. As of March 31, 2011, our net tangible book value was $62.5 million, or $2.41 per share of our common stock. Net tangible book value per share is equal to our total tangible
assets minus total liabilities, all divided by the number of shares of common stock outstanding on March 31, 2011.
After giving effect to
the sale of 4,500,000 shares of common stock we are offering at an assumed public offering price of $14.78 per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our as adjusted net
tangible book value at March 31, 2011 would have been approximately $124.5 million, or $4.08 per share. This represents an immediate increase in net tangible book value of approximately $1.67 per share to existing stockholders
and an immediate dilution of approximately $10.70 per share to new investors. The following table illustrates this per share dilution:
|
|
|
|
|
|
|
|
|
Assumed public offering price per share
|
|
|
|
|
|
$
|
14.78
|
|
Net tangible book value per share as of March 31, 2011
|
|
$
|
2.41
|
|
|
|
|
|
Increase per share attributable to this offering
|
|
|
1.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As adjusted net tangible book value per share after this offering
|
|
|
|
|
|
|
4.08
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to investors in this offering
|
|
|
|
|
|
$
|
10.70
|
|
|
|
|
|
|
|
|
|
|
If the underwriters fully exercise their over-allotment option, as adjusted net tangible book value after this offering would
increase to approximately $4.30 per share, and there would be an immediate dilution of approximately $10.48 per share to new investors.
A $1.00 increase (decrease) in the public offering price per share would increase (decrease) our as adjusted net tangible book value by approximately $4.3 million, or $0.14 per share, and would decrease
(increase) dilution to investors in this offering by $0.86 per share, assuming that the number of shares we are offering, as set forth on the cover page of this prospectus, remains the same and that the underwriters do not exercise their
over-allotment option. Depending on market conditions and other considerations at the time we price this offering, we may sell a greater or lesser number of shares than the number set forth on the cover page of this prospectus. An increase
(decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) our as adjusted net tangible book value by approximately $14.0 million, or $0.32 per share, and would decrease (increase) dilution to investors in this
offering by $0.32 per share, assuming the public offering price per share remains the same. An increase of 1,000,000 in the number of shares we are offering, together with a $1.00 increase in the expected public offering price per share, would
increase our as adjusted net tangible book value as of March 31, 2011 by approximately $19.2 million, or $0.48 per share, and would increase dilution to investors in this offering by approximately $0.52 per share. A decrease of 1,000,000 in the
number of shares we are offering, together with a $1.00 decrease in the initial public offering price per share, would decrease our as adjusted net tangible book value as of March 31, 2011 by approximately $17.3 million, or approximately $0.45 per
share, and would decrease dilution to investors in this offering by approximately $0.55 per share. This information is illustrative only, and following the pricing of this offering, we will update this information based on the actual public offering
price and other terms of this offering.
To the extent that outstanding options or warrants with an exercise price per share that is less than
the as adjusted net tangible book value per share are exercised, you will experience further dilution. If all of our outstanding options and warrants described below were exercised, our as adjusted net tangible book value as of March 31, 2011
after this offering would have been approximately $131.6 million, or approximately $3.77 per share, representing dilution to new investors of approximately $0.31 per share.
36
In addition, we may choose to raise additional capital due to market conditions or strategic considerations
even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further
dilution to our stockholders.
The information and tables in this section are based on 25,988,934 shares of common stock issued and outstanding
as of March 31, 2011 and exclude:
|
§
|
|
2,875,125 shares of common stock issuable upon exercise of options outstanding as of March 31, 2011 with a weighted-average exercise price of
$2.40 per share;
|
|
§
|
|
27,500 shares of common stock issuable upon vesting of restricted stock units outstanding as of March 31, 2011;
|
|
§
|
|
an aggregate of 5,207,396 shares of common stock reserved for future issuance under our 2010 Equity Incentive Award Plan and Employee Stock Purchase
Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under these benefit plans; and
|
|
§
|
|
2,165,323 shares of common stock subject to warrants outstanding as of March 31, 2011 with a weighted-average exercise price of $2.42 per share.
|
37
Selected Financial Data
The following selected financial data should be read together with our financial statements and accompanying notes and Managements Discussion
and Analysis of Financial Condition and Results of Operations appearing elsewhere in this prospectus. The selected financial data in this section is not intended to replace our financial statements and the accompanying notes.
We derived the statement of operations data for the years ended December 31, 2008, 2009 and 2010 and the balance sheet data as of December 31,
2009 and 2010 from our audited financial statements appearing elsewhere in this prospectus. We derived the statement of operations data for the years ended December 31, 2006 and 2007 and the balance sheet data as of December 31, 2006, 2007
and 2008 from our audited financial statements not included in this prospectus. The statement of operations data for the three months ended March 31, 2010 and 2011 and the balance sheet data as of March 31, 2011 are derived from our
unaudited financial statements appearing elsewhere in this prospectus. The unaudited financial statements have been prepared on a basis consistent with our audited financial statements and include, in the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary for the fair statement of the financial information in those statements. Our historical results are not necessarily indicative of the results to be expected in any future period, and the
results for the three months ended March 31, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
Three months ended
March 31,
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
(in thousands, except share and per share amounts)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
623
|
|
|
$
|
9,389
|
|
|
$
|
336
|
|
|
$
|
6,833
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,582
|
|
Start-up production costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,033
|
|
|
|
19,895
|
|
|
|
4,077
|
|
|
|
|
|
Research and development
|
|
|
3,732
|
|
|
|
10,305
|
|
|
|
23,633
|
|
|
|
22,424
|
|
|
|
21,691
|
|
|
|
6,169
|
|
|
|
6,808
|
|
General and administrative
|
|
|
951
|
|
|
|
1,896
|
|
|
|
3,179
|
|
|
|
4,953
|
|
|
|
9,345
|
|
|
|
3,099
|
|
|
|
2,780
|
|
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
1,045
|
|
|
|
1,798
|
|
|
|
6,111
|
|
|
|
1,226
|
|
|
|
2,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,683
|
|
|
|
12,201
|
|
|
|
27,857
|
|
|
|
34,208
|
|
|
|
57,042
|
|
|
|
14,571
|
|
|
|
18,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,683
|
)
|
|
|
(12,201
|
)
|
|
|
(27,857
|
)
|
|
|
(33,585
|
)
|
|
|
(47,653
|
)
|
|
|
(14,235
|
)
|
|
|
(12,037
|
)
|
Interest expense
|
|
|
(11
|
)
|
|
|
(215
|
)
|
|
|
(974
|
)
|
|
|
(3,465
|
)
|
|
|
(2,827
|
)
|
|
|
(311
|
)
|
|
|
(340
|
)
|
Interest and other income (expense), net
|
|
|
129
|
|
|
|
163
|
|
|
|
437
|
|
|
|
1,101
|
|
|
|
(7,207
|
)
|
|
|
210
|
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(4,565
|
)
|
|
|
(12,253
|
)
|
|
|
(28,394
|
)
|
|
|
(35,949
|
)
|
|
|
(57,687
|
)
|
|
|
(14,336
|
)
|
|
|
(12,461
|
)
|
Deemed dividend related to beneficial conversion feature of Series E convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(4,565
|
)
|
|
$
|
(12,253
|
)
|
|
$
|
(28,394
|
)
|
|
$
|
(35,949
|
)
|
|
$
|
(58,092
|
)
|
|
$
|
(14,336
|
)
|
|
$
|
(12,461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributed to common stockholders, basic and diluted
|
|
$
|
(123.58
|
)
|
|
$
|
(211.00
|
)
|
|
$
|
(369.36
|
)
|
|
$
|
(386.56
|
)
|
|
$
|
(13.60
|
)
|
|
$
|
(51.15
|
)
|
|
$
|
(0.48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding used in computing net loss per share attributed to common stockholders, basic and
diluted
|
|
|
36,941
|
|
|
|
58,072
|
|
|
|
76,873
|
|
|
|
92,998
|
|
|
|
4,271,176
|
|
|
|
280,283
|
|
|
|
25,959,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
(in thousands)
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,632
|
|
|
$
|
4,260
|
|
|
$
|
6,186
|
|
|
$
|
7,765
|
|
|
$
|
68,918
|
|
|
$
|
68,791
|
|
Working capital
|
|
|
1,047
|
|
|
|
1,845
|
|
|
|
741
|
|
|
|
2,964
|
|
|
|
61,333
|
|
|
|
64,699
|
|
Total assets
|
|
|
2,748
|
|
|
|
8,762
|
|
|
|
15,754
|
|
|
|
30,278
|
|
|
|
103,160
|
|
|
|
105,089
|
|
Current and long-term notes payable
|
|
|
1,000
|
|
|
|
3,473
|
|
|
|
11,697
|
|
|
|
7,950
|
|
|
|
13,301
|
|
|
|
24,136
|
|
Convertible preferred stock warrant liability
|
|
|
39
|
|
|
|
386
|
|
|
|
1,100
|
|
|
|
1,553
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
6,236
|
|
|
|
20,223
|
|
|
|
45,622
|
|
|
|
85,833
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
$
|
(4,852
|
)
|
|
$
|
(17,121
|
)
|
|
$
|
(45,154
|
)
|
|
$
|
(77,690
|
)
|
|
$
|
73,636
|
|
|
$
|
62,756
|
|
39
Managements Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes that appear elsewhere in this
prospectus. In addition to historical financial information, the following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed below. Factors that could
cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly under the caption Risk Factors.
Overview
We are a life sciences company that has developed and commercialized a DNA sequencing
platform for complete human genome sequencing and analysis, and our goal is to become the preferred solution for complete human genome sequencing and analysis. Our Complete Genomics Analysis Platform, or CGA Platform, combines our proprietary human
genome sequencing technology with our advanced informatics and data management software and our innovative, end-to-end, outsourced service model to provide our customers with data that is immediately ready to be used for genome-based research. We
believe that our solution provides academic and biopharmaceutical researchers with complete human genomic data and analysis at an unprecedented combination of quality, cost and scale without requiring them to invest in in-house sequencing
instruments, high-performance computing resources and specialized personnel. By removing these constraints and broadly enabling researchers to conduct large-scale complete human genome studies, we believe that our solution has the potential to
significantly advance medical research and expand understanding of the basis, treatment and prevention of complex diseases.
We have targeted
our complete human genome sequencing service at academic, governmental and other research institutions, as well as pharmaceutical and other life science companies. In the DNA sequencing industry, complete human genome sequencing is generally deemed
to be coverage of at least 90% of the nucleotides in the genome. We perform our sequencing service at our Mountain View, California headquarters facility, which began commercial operation in May 2010. In the near term, we expect to make significant
expenditures related to the expansion of our Mountain View sequencing facility and our research and development initiatives, as well as to increase our sales and marketing and general and administrative expenses to support our commercial operations
and anticipated growth. In future years, we may construct additional genome centers in the United States and in other strategic markets to accommodate an expected growing, global demand for high-quality, low-cost complete human genome sequencing on
a large scale.
Our ability to generate revenue, and the timing of our revenue, will depend on generating new orders and contracts, receiving
qualified DNA samples from customers and the rate at which we can convert our backlog of sequencing orders into completed and delivered data and the price per genome contracted with the customer. We define backlog as the number of genomes for which
customers have placed orders that we believe are firm and for which no revenue has yet been recorded. As of March 31, 2011, we had a backlog of orders for sequencing over 2,000 genomes, which we believe could result in approximately $15.0
million in revenue over the next 12 months. The speed with which we can convert orders into revenue depends principally on:
|
§
|
|
the speed with which our customers provide us with qualified samples after submitting an order;
|
|
§
|
|
the rate at which our system can sequence a genome; and
|
|
§
|
|
the rate at which all significant contractual obligations are fulfilled.
|
The presence or absence in a specific quarter of one or more new large orders for hundreds of genomes combined with our uncertain sales cycle and changes in the variables that influence conversion of
orders to revenue will cause our results of operations and our backlog to fluctuate on a quarterly basis, perhaps significantly from one quarter to the next. In addition, we have only recently engaged in commercial-scale manufacturing, so we have a
very limited history on which we can rely in making predictions regarding operating variables such as equipment
40
failure, throughput yield, customer delivery of qualified genomic samples and other factors that could affect our ability to sequence genomes and recognize revenue.
We have not been profitable in any period since we were formed. We incurred net losses attributable to stock holders of $28.4 million, $35.9 million
and $58.1 million for the years ended December 31, 2008, 2009 and 2010, respectively, and $14.3 million and $12.5 million for the three months ended March 31, 2010 and 2011, respectively. We recognized revenue of $0.0 million,
$0.6 million and $9.4 million for the years ended December 31, 2008, 2009 and 2010, respectively, and $0.3 million and $6.8 million for the three months ended March 31, 2010 and 2011, respectively. As of March 31, 2011, we
had an accumulated deficit of $151.3 million.
Although we do not anticipate any material seasonal effects, given our limited operating history
as a revenue generating company, our sales cycle is uncertain. Thirty-nine customers accounted for all of the revenue we recognized in 2010, with one customer accounting for 10.6 % of total revenue in 2010. A limited number of customers
accounted for all of the revenue we recognized for the three months ended March 31, 2011, with Pfizer and the University of Amsterdam accounting for approximately 34% and 18%, respectively, of total revenue in three months ended March 31,
2011. If demand for our services expands as expected, we do not anticipate that the loss of any of the customers named above would have a material adverse effect on our future results of operations.
Key Financial Measures
Revenue
Our revenue is derived from selling our human genome sequencing service. We sell our service to our customers through a direct field
sales and support organization. Our customers enter into purchase orders, and, in some cases, genome service contracts with us. For most arrangements, we recognize revenue upon shipment of genomic data to the customer. If the customer has a
post-delivery acceptance right, which is atypical, we recognize revenue upon expiration of the acceptance period or, if sooner, customer acceptance. The per-genome price of our sequencing service is based principally on the number of genomes to be
sequenced in the arrangement, with price per genome decreasing as order size increases. We anticipate periodically reducing the price per genome for our service as the costs of sequencing decreases and competitive conditions change. We expect that
our primary source of revenue for the foreseeable future will be derived from our human genome sequencing service.
Operating Expenses
Cost of Revenue
Cost
of revenue includes the costs related to acceptance testing of customer genomic samples, sample preparation and sequencing, the processing of data generated by our sequencing instruments and delivery of data to our customers. In 2011, we achieved
full commercial production as the development of the commercial genome sequencing process was completed and employees were dedicated to the production process. Therefore, the costs we incurred sequencing genomic samples during the three months ended
March 31, 2011 are included in cost of revenue in the statement of operations.
Start-up Production Costs
Prior to 2011, we had not yet achieved full commercial production. As a result, the costs that we incurred related to the sequencing of genomic samples
during the periods prior to 2011 have been included in start-up production costs, which primarily consist of costs related to the acceptance testing of customer genomic samples, sample sequencing preparation, sample sequencing, the processing of
data generated by the prototype sequencing instruments, continued validation of the production process and optimization of instrument performance. These costs primarily include personnel-related expenses and stock-based compensation, chemical
reagents and engineering materials and supplies, consultant fees, depreciation of equipment and facilities-related costs. Prior
41
to 2009, we were primarily involved in developing our sequencing technology platform, and, as a result, most of these expenses were accounted for as research and development. In 2009, we began
providing our genome sequencing service to customers and accounted for these costs as start-up production costs.
Research and Development
Expenses
Research and development expenses consist of costs associated with scientific research activities, software and hardware
engineering development efforts and process automation. These costs primarily include personnel-related expenses, including stock-based compensation, chemical reagents and engineering materials and supplies, depreciation of equipment, consulting
fees and facilities-related costs.
In 2007, we were awarded a grant from the National Institute of Science and Technology, or NIST, through
which we are eligible to receive reimbursement of a portion of our research and development expenses and certain administrative expenses. In each of 2008 and 2009, we recognized a $0.8 million reduction in research and development expenses for
activities funded by NIST.
General and Administrative Expenses
General and administrative expenses consist principally of personnel-related expenses, including stock-based compensation for our finance, human resources and certain executive personnel, professional
services fees, such as consulting, audit, tax and legal fees, general corporate costs and facilities-related costs. We are eligible to receive reimbursement for a portion of our administrative expenses pursuant to our NIST grant. In each of 2008 and
2009, we recognized a $0.2 million reduction in general and administrative expenses for activities funded by NIST.
Sales and Marketing
Expenses
Sales and marketing expenses consist principally of personnel-related expenses, including stock-based compensation for our sales
and marketing personal, costs related to sales and marketing activities, marketing research and facilities-related costs.
Interest Expense
Interest expense consists of interest on our notes payable and issuance costs associated with our
borrowings.
Interest and Other Income (Expense), Net
Interest and other income (expense), net, consists of interest earned on our cash and cash equivalents and changes in the fair value of our convertible preferred stock warrant liability.
Critical Accounting Policies and Estimates
Our
managements discussion and analysis of our financial condition and results of operations are based on our financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of our financial statements requires our management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the applicable periods. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that it believes to be reasonable under the
circumstances. Different assumptions and judgments would change the estimates used in the preparation of our financial statements, which, in turn, could materially change the results from those reported. Our management evaluates its estimates,
assumptions and judgments on an ongoing basis. Historically, our critical accounting estimates have not differed materially from actual results. However, if our assumptions change, we may need to revise our estimates, or take other corrective
actions, either of which may also have a material adverse effect on our statements of operations, liquidity and financial condition.
42
Revenue Recognition
We generate revenue from selling our human genome sequencing services under purchase orders or contracts. Revenues are recognized when all of the following criteria are met: persuasive evidence of an
arrangement exists, title has transferred, the price is fixed or determinable and collectability is reasonably assured. Upon completion of the sequencing process, we ship the research-ready genomic data to the customer. We use shipping documents and
third-party evidence to verify shipment of the data. In order to determine whether collectability is reasonably assured, we assess a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If
we determine that collectability is not reasonably assured, we defer the recognition of revenue until collectability becomes reasonably assured. We also receive down payments from customers prior to the commencement of the genome sequencing process.
For revenue generated under purchase orders, we have established standard terms and conditions that are specified for all orders. We use the
purchase order to establish persuasive evidence of an arrangement and whether there is a fixed and determinable price for the order. Revenue is recognized based upon the shipment of individual genomic data to customers and satisfaction of related
terms and conditions contained in the purchase order. Any down payments received are recorded as deferred revenue until we meet all revenue recognition criteria.
For revenue generated under contracts, we consider each contracts terms and conditions to determine its obligations associated with the contract. We will defer revenue until individual genomic data
has been shipped to customers and related significant obligations, as defined in the contract, have been met. Any down payments received are recorded as deferred revenue until we meet all revenue recognition criteria.
Allowance for Doubtful Accounts
Receipt of payment on our existing receivables has been reasonably assured such that we do not believe that an allowance for doubtful accounts is
currently required. If our revenue increases as expected and our accounts receivable balance grows, we intend to perform regular evaluations of our customers creditworthiness and continuously monitor collections and payments to estimate an
allowance for doubtful accounts that is based on the aging of the underlying receivables and our experiences with regard to specific collection issues.
Estimated Useful Lives of Property and Equipment
We depreciate our property and
equipment using a straight-line method over their estimated useful lives. Our property primarily consists of lease improvements, and our equipment primarily consists of our sequencing instruments and computer equipment used in the sequencing
process. While we use our best judgment to determine the useful lives of our sequencing instruments and computer equipment, a significant change in technology or the emergence of an advanced technology could result in a shorter useful life than we
initially anticipated. Our equipment represents the largest asset on our balance sheet, and a subsequent reduction in the useful lives of equipment could have a material impact on our statement of operations.
Inventory
Inventory consists of
the raw materials we use in our sequencing process, work in process and finished goods. Inventories are stated at the lower of cost or market value. Cost is determined using standard costs, which approximate actual costs, on a first-in, first-out
basis. Market value is determined as the lower of replacement cost or net realizable value. We regularly review inventory quantities on hand for excess and obsolete inventories, giving consideration to potential obsolescence, our product life cycle
and development plans, product expiration and quality issues. To date, these factors have not been significant as our inventory amounts have been immaterial. However, we anticipate that these estimates will become more significant if our sequencing
volumes increase as expected.
43
Valuation of Long-Lived Assets
We assess our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. These indicators may include, but
are not limited to, significant decreases in the market value of an asset and significant changes in the extent or manner in which an asset is used. If these or other indicators are present, we test for recoverability by measuring the carrying
amount of the assets against future net cash flows which the assets are expected to generate. If these assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the
projected discounted future net cash flows arising from the assets. We make estimates and judgments about future undiscounted cash flows and fair values. Although our cash flow forecasts are based on assumptions that are consistent with our plans,
there is significant exercise of judgment involved in determining the cash flow attributable to a long-lived asset over its estimated remaining useful life. Our estimates of anticipated cash flows could be reduced significantly in the future. As a
result, the carrying amounts of our long-lived assets could be reduced through impairment charges in the future. There have been no such impairments of long-lived assets to date. However, we anticipate that a future impairment could have a material
impact on our financial statements in light of the dollar significance of the long-lived assets carried on our balance sheet.
Stock-Based Compensation
We
recognize compensation expense related to the awarding of employee stock options, based on the estimated fair value of the awards granted using the Black-Scholes option-pricing model. We also use the Black-Scholes option-pricing model to determine
the fair value of non-employee stock option grants. In accordance with authoritative guidance, the fair value of non-employee stock option grants is re-measured as they vest, and the resulting increase in value, if any, is recognized as expense
during the period the related services are rendered.
Stock Option Modification
In January 2010, our board of directors approved a modification of outstanding unexercised stock options held by then-current employees and consultants to
decrease the exercise price of these stock options to $1.50 per share. Other than a reduced exercise price, the terms and conditions of the stock options remained the same. All 85,477 unexercised options that were granted under our 2006 Equity
Incentive Plan on or before January 28, 2010 and which had an exercise price greater than $1.50 per share were modified. The incremental stock-based compensation expense due to the modification was immaterial to our financial statements.
Income Taxes
We are
subject to income taxes in the United States, and we use estimates in determining our provision for income taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax asset or liability account
balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income.
Recognition of deferred tax assets is appropriate when realization of such assets is more likely than not. We recognize a valuation allowance against our net deferred tax assets if it is more likely than
not that some portion of the deferred tax assets will not be fully realizable. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction. At December 31, 2010, we had a full valuation
allowance against all of our deferred tax assets.
Effective January 1, 2007, we adopted the new authoritative guidance to account for
uncertain tax positions. None of our currently unrecognized tax benefits would affect our effective income tax rate if recognized, due to the valuation allowance that currently offsets our deferred tax assets. We do not anticipate the total amount
of unrecognized income tax benefits relating to tax positions existing at December 31, 2010 will significantly increase or decrease in the next 12 months.
44
We assess all material positions taken in any income tax return, including all significant uncertain
positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the positions sustainability and is measured at the
largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether:
|
§
|
|
the factors underlying the sustainability assertion have changed; and
|
|
§
|
|
the amount of the recognized tax benefit is still appropriate.
|
The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.
As of December 31, 2010, we had federal and state net operating loss carryforwards of $108.5 million and $107.7 million, respectively.
The federal net operating loss carryforwards will begin to expire in 2026, and the state net operating loss carryforwards will begin to expire in 2016. In addition, as of December 31, 2010, we had federal and state research and development tax
credit carryforwards of $2.4 million and $2.6 million, respectively. The federal research and development tax credit carryforwards will expire in 2026, if not used, and the state research and development tax credit carryforwards do not expire.
Because of the net operating loss and credit carryforwards, all of our tax years, dating to inception in 2005, remain open to federal tax examinations. Most state tax jurisdictions have four open tax years at any point in time.
Under federal and similar state tax statutes, substantial changes in our ownership, may limit our ability to use our available net operating loss and tax
credit carryforwards. The annual limitation, as a result of a change-in-control, may result in the expiration of net operating losses and credits before utilization. We conducted an analysis through December 31, 2010 to determine whether
ownership changes occurred. We concluded that two ownership changes had occurred. However, as of December 31, 2010, we believe no net operating losses or tax credits will expire unused as a result of these changes.
As of December 31, 2009, we had federal and state net operating loss carryforwards of approximately $59.7 million each and federal and state
research and development tax credit carryforwards of approximately $1.9 million and $2.0 million, respectively. Our federal net operating loss and research and development tax credit carryforwards begin expiring in 2026 unless used prior to
that date. Our state net operating loss carryforwards will begin to expire in 2016, if not used, and our state research and development tax credit carryforwards do not expire. Our ability to use net operating loss and tax credit carryforwards is
subject to ownership change rules as provided under the Internal Revenue Code and similar state provisions. We have performed an analysis to determine whether an ownership change has occurred from inception to December 31, 2009. Our analysis
determined that two ownership changes have occurred during that period. Due to these ownership changes, the use of these net operating losses and research and development credits are subject to annual limitation. However, we concluded that as of
December 31, 2009, no net operating losses or research and development credits will expire before utilization due to these ownership changes. In the event we have a subsequent change in ownership, net operating loss and research and development
credit carryovers could be further limited and may expire unutilized.
45
Results of Operations
Comparison of Three Months Ended March 31, 2010 and 2011
The following table
shows the amounts of the listed items from our statements of operations for the periods presented, showing period-over-period changes (in thousands, except for percentages).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
First Quarter 2011 vs.
First Quarter 2010
|
|
|
|
2010
|
|
|
2011
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
(unaudited)
|
|
Revenue
|
|
$
|
336
|
|
|
$
|
6,833
|
|
|
$
|
6,497
|
|
|
|
1,934
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenue
|
|
|
|
|
|
|
6,582
|
|
|
|
(6,582
|
)
|
|
|
*
|
|
Start-up production costs
|
|
|
4,077
|
|
|
|
|
|
|
|
4,077
|
|
|
|
*
|
|
Research and development
|
|
|
6,169
|
|
|
|
6,808
|
|
|
|
(639
|
)
|
|
|
(10
|
)%
|
General and administrative
|
|
|
3,099
|
|
|
|
2,780
|
|
|
|
319
|
|
|
|
10
|
%
|
Sales and marketing
|
|
|
1,226
|
|
|
|
2,700
|
|
|
|
(1,474
|
)
|
|
|
(120
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
14,571
|
|
|
|
18,870
|
|
|
|
(4,299
|
)
|
|
|
(30
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(14,235
|
)
|
|
|
(12,037
|
)
|
|
|
2,198
|
|
|
|
15
|
%
|
Interest expense
|
|
|
(311
|
)
|
|
|
(340
|
)
|
|
|
(29
|
)
|
|
|
(9
|
)%
|
Interest and other income (expense), net
|
|
|
210
|
|
|
|
(84
|
)
|
|
|
(294
|
)
|
|
|
(140
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,336
|
)
|
|
$
|
(12,461
|
)
|
|
$
|
1,875
|
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
result is not meaningful.
|
Revenue
During the three months ended March 31, 2011, we recognized $6.8 million of revenue, compared to $0.3 million during the same period
in 2010. In the three months ended March 31, 2010, we generated limited revenue from small-scale pilot projects. The significant revenue increase in the three months ended March 31, 2011 as compared to the corresponding period in 2010
reflects an increase in sequencing orders resulting from our expanded marketing and sales activities, which have expanded our customer base over the last nine months. Our price points have decreased. Average price per genome decreased from the
fourth quarter of 2010 to the first quarter of 2011. Current pricing of genome services starts at $9,500 per genome for small order sizes and ranges to between $5,000 to $7,500 per genome for orders in the hundreds of genomes.
Costs of Revenue
During the three
months ended March 31, 2011, we incurred $6.6 million of costs to provide our genome sequencing service. The $6.6 million of cost of revenue primarily consisted of $2.0 million in salaries and benefits expense, $1.7 million in depreciation
expense and $0.8 million in materials.
We anticipate that these costs as a percentage of revenue will fluctuate as we increase sequencing
capacity and our capacity utilization changes, as the sequencing price we charge to our customers change and as we continue to improve and automate our human genome sequencing processes. However, we anticipate that our total cost of revenue will
increase in absolute dollars as we sequence additional genomes and our revenue grows.
Start-up Production Costs
During the three months ended March 31, 2010, we incurred $4.1 million of start-up production costs to support the development of our genome
sequencing service. The $4.1 million of start-up production costs primarily consisted of $1.4 million in salaries and benefits expense and $0.7 million in depreciation expense.
Research and Development
Research and development expenses were $6.8 million during the
three months ended March 31, 2011, compared to $6.2 million during the three months ended March 31, 2010, representing an increase of $0.6 million, or 10%. The increase in research and development expenses was primarily due to an increase
in salaries and benefits
46
expense of $0.5 million and an increase of $0.8 million in genome sequencing costs due to an increase in the number of genomes sequenced for research purposes. These increases were partially
offset by a decrease in bonus expense of $0.4 million. The increase in salaries and benefits cost is a result of increased headcount and the refocusing of certain research and development resources that had been directed to start-up production
activities in prior quarters.
We expect to continue to invest in research and development activities as we seek to enhance our sequencing
processes, components and systems to improve the yield and throughput and reduce the cost of our sequencing service. Consequently, we believe that in the near future, our research and development expenses will increase.
General and Administrative
General and
administrative expenses were $2.8 million for the three months ended March 31, 2011, compared to $3.1 million for the three months ended March 31, 2010, representing a decrease of $0.3 million, or 10%. The decrease in general and
administrative expenses was primarily due to a $0.9 million reduction in stock-based compensation expense related to equity grants to two founders in the three months ended March 31, 2010. Consulting fees also decreased by $0.2 million in the
first quarter of 2011 when compared to the same period in 2010. These decreases were partially offset by increases in employee salaries and benefits and legal and accounting fees of $0.3 million each. The increase in salaries and benefits expense
was primarily due to increased headcount to support operations as a public company. In addition, outside services expense for legal and accounting support increased primarily due to operating as a public company.
We expect that general and administrative expenses will increase for the remainder of 2011 as we operate as a public company in 2011.
Sales and Marketing
Sales and marketing
expenses were $2.7 million during the three months ended March 31, 2011, compared to $1.2 million during the three months ended March 31, 2010, representing an increase of $1.5 million, or 120%. The increase in sales and marketing expenses
is due primarily to an increase in employee salaries and benefits expense of $0.9 million, and an increase in consulting expense and seminar expense of $0.1 million each. The increase in expenses was primarily a result of the growth of our
sales and marketing organization to support the increased sales activity and overall growth of the Company.
We expect that sales and marketing
expenses will continue to increase for the remainder of 2011 as we increase our headcount for sales and marketing personnel to expand our customer base and to generate growth in terms of both complete human genomes ordered and revenues.
Interest Expense
During the three
months ended March 31, 2011, we incurred interest expense of $340,000 compared to $311,000 during the three months ended March 31, 2010. The increase in interest expense of $29,000 between the two periods was primarily due to higher debt
balances related to our loans.
Interest and Other Income (Expense), Net
Interest and other income (expense), net, for the three months ended March 31, 2011 was an expense of $0.1 million compared to income of $0.2 million for the three months ended March 31, 2010.
The change between the two periods was primarily due to the change in the valuation of our warrant liability.
Comparison of Years Ended
December 31, 2008, 2009 and 2010
During the year ended December 31, 2009, our results of operations were impacted by the
following events, which should be considered when reading the discussion of our results of operations comparing 2010 and 2009:
|
§
|
|
In 2009, we initiated start-up production activities using resources from our research and development organization. Using these research and
development resources for production activities decreased research and development expenses during 2009 by $2.2 million.
|
47
|
§
|
|
In the second quarter of 2009, we implemented temporary cost-reduction initiatives to conserve cash in light of macroeconomic conditions. The temporary
cost-reduction initiatives included a salary reduction for all company employees that averaged approximately 50%. The impact of the temporary cost-reduction initiatives on 2009 operating results was a reduction of expenses of approximately $3.4
million, including reductions in employee salaries and benefits of approximately $2.0 million, consulting and outside engineering services of approximately $0.6 million and prototype equipment expenses of approximately $0.4 million. As a result of
these cost-reduction initiatives, research and development, general and administrative and sales and marketing expenses decreased $2.7 million, $0.5 million and $0.2 million, respectively, during 2009.
|
|
§
|
|
During the fourth quarter of 2009, we reevaluated the expected useful lives of our equipment, and determined that for certain of our equipment, the
useful life should be shortened. Accordingly, we accelerated depreciation of this equipment, resulting in an additional $1.0 million in depreciation expense in the fourth quarter of 2009. Of this $1.0 million charge, approximately $0.5 million was
recorded as start-up production costs and approximately $0.5 million was recorded as research and development expense. During 2010, we did not have equipment that required acceleration of depreciation.
|
The following table shows the amounts of the listed items from our statements of operations for the periods presented, showing period-over-period changes
(in thousands, except percentages).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2009 vs. 2008
|
|
|
2010 vs. 2009
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
$ Change
|
|
|
% Change
|
|
|
$ Change
|
|
|
% Change
|
|
Revenue
|
|
$
|
|
|
|
$
|
623
|
|
|
$
|
9,389
|
|
|
$
|
623
|
|
|
|
*
|
|
|
$
|
8,766
|
|
|
|
1,407
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Start-up production costs
|
|
|
|
|
|
|
5,033
|
|
|
|
19,895
|
|
|
|
5,033
|
|
|
|
*
|
|
|
|
14,862
|
|
|
|
(295
|
)%
|
Research and development
|
|
|
23,633
|
|
|
|
22,424
|
|
|
|
21,691
|
|
|
|
(1,209
|
)
|
|
|
5
|
%
|
|
|
(733
|
)
|
|
|
3
|
%
|
General and administrative
|
|
|
3,179
|
|
|
|
4,953
|
|
|
|
9,345
|
|
|
|
1,774
|
|
|
|
(56
|
)%
|
|
|
4,392
|
|
|
|
(89
|
)%
|
Sales and marketing
|
|
|
1,045
|
|
|
|
1,798
|
|
|
|
6,111
|
|
|
|
753
|
|
|
|
(72
|
)%
|
|
|
4,313
|
|
|
|
(240
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
27,857
|
|
|
|
34,208
|
|
|
|
57,042
|
|
|
|
6,351
|
|
|
|
(23
|
)%
|
|
|
22,834
|
|
|
|
(67
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(27,857
|
)
|
|
|
(33,585
|
)
|
|
|
(47,653
|
)
|
|
|
(5,728
|
)
|
|
|
(21
|
)%
|
|
|
(14,068
|
)
|
|
|
(42
|
)%
|
Interest expense
|
|
|
(974
|
)
|
|
|
(3,465
|
)
|
|
|
(2,827
|
)
|
|
|
(2,491
|
)
|
|
|
(256
|
)%
|
|
|
638
|
|
|
|
18
|
%
|
Interest and other income (expense), net
|
|
|
437
|
|
|
|
1,101
|
|
|
|
(7,207
|
)
|
|
|
664
|
|
|
|
(152
|
)%
|
|
|
(8,308
|
)
|
|
|
(754
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(28,394
|
)
|
|
$
|
(35,949
|
)
|
|
$
|
(57,687
|
)
|
|
$
|
(7,555
|
)
|
|
|
(27
|
)%
|
|
$
|
(21,738
|
)
|
|
|
(61
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Percentage not meaningful.
|
Revenue
During 2010, we recognized $9.4 million of revenue, compared to $0.6 million during 2009. This is the result of our revenue activities not
beginning until the fourth quarter of 2009.
We recognized our first revenue of $0.6 million in the fourth quarter of 2009, which represented
sales to seven customers.
Start-up Production Costs
During 2010, we incurred $19.9 million of start-up production costs to support our genome sequencing service, compared to $5.0 million during 2009. These activities include the acceptance testing of
customer genomic samples, sample sequencing preparation, sample sequencing, the processing of data generated by our prototype sequencing instruments, continued validation of the production process and optimization of instrument performance. The
$14.9 million increase in start-up production costs was primarily due to increases in employee salaries and benefits and stock-based compensation expenses of $5.1 million and $0.1 million, respectively, depreciation expense of $3.9 million,
facilities and maintenance expense of $2.5 million and consulting expense of $0.6 million. We continued to incur start-up costs in excess of revenue during 2010 to initiate and bring our
48
human genome sequencing production process to commercial-scale. Only a portion of our production expenses varies with our service activity. Accordingly, unless we achieve significantly larger
production volume and revenue, our production costs will be greater than our revenue.
During 2009, we incurred $5.0 million of start-up
production costs to support our genome sequencing service. These costs primarily consisted of employee salaries and benefits and stock-based compensation expense of $1.7 million and $0.1 million, respectively, depreciation expense of $1.5 million,
facilities and maintenance costs of $0.6 million, reagents, materials and supplies expense of $0.3 million, data communication charges of $0.2 million, equipment expense of $0.2 million and consulting expense of $0.2 million. We incurred
considerable start-up production costs in excess of revenue during 2009 to initiate and bring our human genome sequencing production process to commercial scale. We committed significant personnel and equipment resources to our production process in
advance of our achieving full commercial production volume.
Research and Development
During 2010, we recognized $21.7 million of research and development expenses, compared to $22.4 million during 2009, representing a decrease of $0.7
million, or 3%. While there was only a 3% change in research and development expenses between the two periods, there were changes in the composition of the expenses. The primary changes during 2010 compared to 2009 were a reduction in depreciation
expense of $2.4 million, an increase in salaries and benefits expense and stock-based compensation expense of $1.3 million and $0.7 million, respectively, and an increase in facilities and maintenance costs of $1.1 million. The decrease in
depreciation expense was primarily due to the acceleration of depreciation expense of certain equipment in 2009 and the redeployment of equipment to start-up production activities. The decrease in data center expense allocated to research and
development was due to increased use of the data center in start-up production activities in 2010. The increase in salaries and benefits expense was primarily due to a charge associated with an equity grant to one of our founders in 2010 and the
temporary cost-reduction initiatives implemented during the second quarter of 2009, which resulted in lower overall salaries and benefits expense for 2009. The increase in facilities and maintenance costs was associated with the expansion of our
facilities during 2009. Our research and development costs should increase in 2011 as the expense related to additional headcount hired during 2010 will be included in 2011 for a full year. In addition, we expect to hire additional headcount in
2011. The headcount increase is necessary as our business matures and we strive to achieve our long term business objectives.
Research and
development expenses decreased $1.2 million, or 5%, in 2009 from 2008 as we used resources from our research organization to initiate commercial operations and implemented temporary cost-reduction initiatives in the second quarter of 2009. This
decrease reflects a reduction in equipment, reagents, materials and supplies and prototype equipment expense of $1.5 million. The reduction in equipment, reagents, materials and supplies expenses primarily reflects their usage in start-up production
activities. The reduction in prototype equipment expense reflects our transition to developing production equipment as well as cost-reduction measures in the second quarter of 2009. In addition, the decrease in research and development expenses
reflects a reduction in licensing arrangements expense of $1.2 million, of which, $1.0 million represents a one-time payment to Callida Genomics, Inc. in 2008 pursuant to our intellectual property license arrangement. The decrease in research and
development expenses also reflects a reduction in consulting expense and outside engineering services of $0.9 million and the disposal of obsolete equipment in 2008 of $0.5 million. These decreases in research and development expenses were offset by
increased equipment depreciation expense of $0.9 million related to investments in computing and other equipment and software and acceleration of depreciation expense for certain equipment and increased employee salaries and benefits of $0.6 million
related to increased headcount. The decrease in research and development expenses were further offset by increased stock-based compensation expense of $0.7 million, increased facilities and maintenance costs of $0.6 million associated with the
expansion of our facilities in 2009 and increased data communication costs of $0.5 million related to the expansion of our offsite data center.
49
General and Administrative
General and administrative expenses were $9.3 million for 2010, compared to $5.0 million for 2009, representing an increase of $4.3 million, or 89%. In 2010 compared to 2009, employee salaries and
benefits and stock-based compensation expense increased $3.1 million and $1.3 million, respectively. The increase in salaries and benefits expense was primarily due to the temporary cost-reduction initiatives implemented during the second quarter of
2009, which resulted in a lower overall salaries and benefits expense for 2009, increased headcount during 2010 and a charge associated with equity grants to two of our founders in 2010. In addition, outside services expense increased by $0.9
million to support patent and litigation activities during 2010. Our general and administrative costs should increase in 2011 as we expand our business and incur the costs associated with being a public company.
General and administrative expenses increased $1.8 million, or 56%, in 2009 from 2008 primarily reflecting increased facilities and maintenance costs of
$1.1 million. During 2009, significant portions of our facility were renovated to accommodate our genome sequencing center. During the period of renovation, the space being renovated was unoccupied, and associated costs were recorded as general and
administrative expense. In addition, general and administrative expenses reflect increased employee salaries and benefits and stock-based compensation expense of $0.1 million and $0.2 million, respectively, legal expense of $0.2 million, primarily
related to intellectual property matters and patent prosecution, increased consulting expense of $0.1 million related to financial and human resources consultants and increased payroll and benefits servicing fees of $0.1 million.
Sales and Marketing
Sales and marketing
expenses were $6.1 million during 2010, compared to $1.8 million during 2009, representing an increase of $4.3 million, or 238%. The increase in sales and marketing expenses was primarily due to an increase in employee salaries and benefits of $2.6
million and an increase in outside services of $0.1 million. The increase in sales and marketing expenses was also impacted by increases in travel expenses and allocation of facilities and maintenance costs of $0.4 million each. The increase in
expenses was primarily a result of the growth of our sales and marketing organization to support the increased sales activity and overall order growth in 2010. We expect that sales and marketing expenses will continue to increase in 2011 as we
increase our headcount for sales and marketing personnel to support our expected growth in revenue and the expansion of our customer base.
Sales and marketing expenses increased $0.8 million, or 72%, in 2009 from 2008 reflecting increased employee salaries and benefits and stock-based
compensation expense of $0.7 million and $0.1 million, respectively, related to increased headcount, increased facilities and maintenance costs of $0.1 million and increased travel expenses $0.1 million. The increase in sales and marketing expenses
was partially offset by decreased marketing research and public relations expense of $0.3 million. Our sales and marketing expenses in 2008 reflect our initial investment in marketing activities and primarily consist of marketing research and public
relations activities.
Interest Expense
During 2010, we incurred interest expense of $2.8 million, compared to $3.5 million during 2009. The decrease in interest expense was primarily a result of lower amortization of the debt discount related
to the common stock warrants we issued in 2010, compared to amortization of the debt discount related to the Series D preferred stock warrants issued in 2009. The Series D preferred stock warrants we issued in the first quarter of 2009 while the
common stock warrants were issued during the second quarter of 2010, resulting in a shorter period of amortization during 2010 versus 2009.
Interest expense increased by $2.5 million, or 256%, in 2009 from 2008 primarily due to $1.0 million of interest expense on higher loan balances under our
new credit facility and $1.5 million of interest charges related borrowings under convertible notes issued in 2009.
50
Interest and Other Income (Expense), Net
Interest and other income (expense), net, for 2010 was an expense of $7.2 million compared to income of $1.1 million for 2009. The change between the two periods was due to the change in the valuation of
our preferred stock warrant and purchase right liabilities.
The increase in interest and other income (expense), net, of $0.7 million in 2009
from 2008 was primarily due to the change in valuation of our convertible preferred stock warrants in 2009, offset by lower interest income due to lower cash and cash equivalents balances, as well as lower effective rates of interest earned on our
cash equivalents balance.
Selected Quarterly Results of Operations
The following table presents our unaudited quarterly results of operations for the eight fiscal quarters ended March 31, 2011. This unaudited quarterly information has been prepared on the same basis as
our audited financial statements and includes all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of the information for the quarters presented. You should read this table in conjunction with our
financial statements and the related notes thereto included in this prospectus. The results of operations for any quarter are not necessarily indicative of the results of operations for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009, quarter ended
|
|
|
Fiscal 2010, quarter ended
|
|
|
Fiscal 2011,
quarter
ended
|
|
|
|
Jun. 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
Mar. 31
|
|
|
Jun. 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
Mar. 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
623
|
|
|
$
|
336
|
|
|
$
|
1,089
|
|
|
$
|
4,161
|
|
|
$
|
3,803
|
|
|
$
|
6,833
|
|
Cost and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,582
|
|
Start-up production costs
|
|
|
687
|
|
|
|
1,258
|
|
|
|
2,762
|
|
|
|
4,077
|
|
|
|
4,908
|
|
|
|
6,007
|
|
|
|
4,903
|
|
|
|
|
|
Research and development
|
|
|
3,703
|
|
|
|
5,638
|
|
|
|
6,337
|
|
|
|
6,169
|
|
|
|
4,928
|
|
|
|
4,954
|
|
|
|
5,640
|
|
|
|
6,808
|
|
General and administrative
|
|
|
822
|
|
|
|
1,352
|
|
|
|
1,481
|
|
|
|
3,099
|
|
|
|
1,763
|
|
|
|
2,330
|
|
|
|
2,153
|
|
|
|
2,780
|
|
Sales and marketing
|
|
|
193
|
|
|
|
366
|
|
|
|
812
|
|
|
|
1,226
|
|
|
|
1,313
|
|
|
|
1,591
|
|
|
|
1,981
|
|
|
|
2,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,405
|
|
|
|
8,614
|
|
|
|
11,392
|
|
|
|
14,571
|
|
|
|
12,912
|
|
|
|
14,882
|
|
|
|
14,677
|
|
|
|
18,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(5,405
|
)
|
|
|
(8,614
|
)
|
|
|
(10,769
|
)
|
|
|
(14,235
|
)
|
|
|
(11,823
|
)
|
|
|
(10,721
|
)
|
|
|
(10,874
|
)
|
|
|
(12,037
|
)
|
Interest expense
|
|
|
(1,372
|
)
|
|
|
(1,073
|
)
|
|
|
(341
|
)
|
|
|
(311
|
)
|
|
|
(833
|
)
|
|
|
(908
|
)
|
|
|
(775
|
)
|
|
|
(340
|
)
|
Interest and other income (expense), net
|
|
|
(48
|
)
|
|
|
439
|
|
|
|
732
|
|
|
|
210
|
|
|
|
25
|
|
|
|
(8,827
|
)
|
|
|
1,385
|
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,825
|
)
|
|
$
|
(9,248
|
)
|
|
$
|
(10,378
|
)
|
|
$
|
(14,336
|
)
|
|
$
|
(12,631
|
)
|
|
$
|
(20,456
|
)
|
|
$
|
(10,264
|
)
|
|
$
|
(12,461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share attributed to common shareholders
|
|
$
|
(72.78
|
)
|
|
$
|
(98.10
|
)
|
|
$
|
(110.08
|
)
|
|
$
|
(51.15
|
)
|
|
$
|
(13.92
|
)
|
|
$
|
(21.87
|
)
|
|
$
|
(0.69
|
)
|
|
$
|
(0.48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute basic and diluted net loss per share attributed to common shareholders
|
|
|
93,770
|
|
|
|
94,268
|
|
|
|
94,278
|
|
|
|
280,283
|
|
|
|
907,075
|
|
|
|
954,022
|
|
|
|
14,820,022
|
|
|
|
25,959,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Since our inception, we have generated operating losses in every quarter, resulting in an accumulated deficit of $151.3 million as of March 31, 2011. We have financed our operations to date primarily
through private placements of preferred stock and promissory notes, borrowings under our credit facilities, proceeds from our initial public offering and term debt. As of March 31, 2011, we had working capital of $64.7 million, consisting of
$80.2 million in current assets and $15.5 million in current liabilities. As of December 31, 2010, working capital was $61.3 million, consisting of $79.0 million in current assets and $17.7 million in current liabilities.
51
Our cash is invested primarily in money market funds. Cash in excess of immediate operating requirements is invested in accordance with our investment policy, primarily with the goals of capital
preservation and liquidity maintenance.
Summary Statement of Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2008, 2009 and 2010 and the three months ended March 31, 2010 and
2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
Three months ended
March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Net cash used in operating activities
|
|
$
|
(24,303
|
)
|
|
$
|
(26,662
|
)
|
|
$
|
(35,018
|
)
|
|
$
|
(4,225
|
)
|
|
$
|
(8,902
|
)
|
Net cash used in investing activities
|
|
|
(7,419
|
)
|
|
|
(9,654
|
)
|
|
|
(18,802
|
)
|
|
|
(10,172
|
)
|
|
|
(3,120
|
)
|
Net cash provided by financing activities
|
|
|
33,648
|
|
|
|
37,895
|
|
|
|
114,973
|
|
|
|
9,003
|
|
|
|
11,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
1,926
|
|
|
$
|
1,579
|
|
|
$
|
61,153
|
|
|
$
|
(5,394
|
)
|
|
$
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows for the Three Months Ended March 31, 2010 and 2011
Operating Activities
Net cash used in
operating activities was $8.9 million during the three months ended March 31, 2011 and consisted of a net loss of $12.5 million, offset by noncash items of $3.2 million and a net increase in operating assets and liabilities of $0.4 million.
Noncash items for the three months ended March 31, 2011 consisted primarily of the change in valuation of our warrant liability of $0.1 million, depreciation expense of $2.5 million and stock-based compensation expense of $0.5 million. The
significant items in the change in operating assets and liabilities include an increase in accounts receivable of $2.4 million partially offset by a decrease in prepaid expenses and inventory of $0.3 million and $0.8 million, respectively, and
increases in deferred revenue and accounts payable of $1.3 million and $0.1 million, respectively. The increase in accounts receivable and deferred revenue were due to increased revenue and advance billing arrangements during the first three months
of 2011. The increase in accounts payable was due to purchases and expenses incurred as a result of the growth of the Company during the first three months of 2011.
Net cash used in operating activities was $4.2 million during the three months ended March 31, 2010 and consisted of a net loss of $14.3 million, offset by noncash items of $3.6 million and a net
increase in operating assets and liabilities of $6.5 million. Noncash items for the three months ended March 31, 2010 consisted primarily of depreciation expense of $1.3 million, noncash compensation expense related to stock grants to our
founders and stock-based compensation expense of $1.8 million and $0.5 million, respectively. The significant changes in operating assets and liabilities include increases in prepaid expenses and deferred revenues of $4.6 million and $1.5 million,
respectively, offset by a decrease in inventory of $0.4 million.
Investing Activities
Net cash used in investing activities was $3.1 million and $10.2 million for the three months ended March 31, 2011 and 2010, respectively. The
amounts related entirely to purchases of property and equipment and a patent. The purchases of property and equipment during the first three months of 2011 and 2010 were primarily for sequencing equipment used in production.
Financing Activities
Net cash provided
by financing activities during the three months ended March 31, 2011 of $11.9 million consisted primarily of $20.0 million in proceeds from our term loan with Oxford. These proceeds were partially offset by repayments on term loans of $8.2
million.
52
Net cash provided by financing activities during the three months ended March 31, 2010 of $9.0 million
consisted primarily of $10.1 million in net proceeds from the issuance and sale of Series D preferred stock. These proceeds were partially offset by repayment of notes payable of $1.1 million.
Cash Flows for the Years Ended December 31, 2008, 2009 and 2010
Operating Activities
Net cash used in operating activities was $35.0 million during the
year ended December 31, 2010 and consisted of a net loss of $57.7 million, offset by noncash items of $21.0 million and a net change in operating assets and liabilities of $1.5 million. Noncash items for the year ended December 31, 2010
consisted primarily of the change in valuation of our preferred stock warrant and purchase right liability of $7.2 million, depreciation expense of $8.0 million, expenses related to issuance of common stock to our founders of $1.8 million and
stock-based compensation expense of $1.8 million. The significant items in the change in operating assets and liabilities include a decrease in prepaid expenses of $4.0 million, an increase in deferred revenue of $3.8 million and increases in
inventory and accounts receivable of $3.8 million and $3.0 million, respectively. The decrease in prepaid expenses was due to the use of fully refundable short-term deposits to order components used in the construction of sequencers whose
specifications were validated during 2010. The increase in inventory was due to inventory purchases and work-in-process needed to support customer orders. The increase in deferred revenue was due to advance billing arrangements during 2010. The
increase in accounts receivable was due to increased revenue and advance billing arrangements during 2010.
Net cash used in operating
activities was $26.7 million during the year ended December 31, 2009 and consisted of a net loss of $35.9 million, offset by noncash items of $8.0 million and a net decrease in operating assets and liabilities of $1.3 million. Noncash items for
the year ended December 31, 2009 consisted primarily of depreciation expense of $5.2 million, noncash interest expense related to our promissory notes and notes payable of $2.1 million and stock-based compensation expense of $1.4 million,
partially offset by the change in valuation of our preferred stock warrant liability of $1.1 million. The significant changes in operating assets and liabilities include increases in deferred rent of $5.0 million, accounts payable of $1.1 million
and deferred revenue of $1.3 million, partially offset by an increase in prepaid expenses of $4.7 million and an increase in accounts receivable of $1.3 million. The significant change in deferred rent was due to the difference between rent amounts
paid and amounts expensed during 2009 on our facility, while the significant increase in prepaid expenses is due to making fully refundable short-term deposits for components used in the construction of sequencers whose specifications were
undetermined. The increase in accounts payable during 2009 was due to increased purchases associated with the start-up of our production facilities during the fourth quarter of 2009. The increases in accounts receivable and deferred revenue were due
to revenue recognized in the fourth quarter of 2009 and advance billing arrangements with customers.
Net cash used in operating activities was
$24.3 million for the year ended December 31, 2008 and consisted of a net loss of $28.4 million, offset by noncash items of $3.8 million and net increases in operating assets and liabilities of $0.3 million. Noncash items for the year ended
December 31, 2008 consisted mainly of depreciation and amortization expense of $2.8 million, a loss on the disposal of property and equipment of $0.5 million and stock-based compensation expense of $0.3 million. Changes in operating assets and
liabilities consisted of an increase in accrued liabilities of $0.7 million, offset by increases in prepaid expenses of $0.2 million and other current assets of $0.2 million.
Investing Activities
Net cash used in investing activities were $18.8 million, $9.7
million and $7.4 million for the years ended December 31, 2010, 2009 and 2008, respectively. The amounts related entirely to purchases of property and equipment. The purchases of property and equipment during 2010 were primarily for sequencing
equipment used in production, while the purchases of property and equipment during 2009 were for equipment used in our start-up production and research and development activities and leasehold improvements related to our facilities. Purchases of
property and equipment during 2008 were primarily for equipment to support our research and development activities.
53
Financing Activities
Net cash provided by financing activities during the year ended December 31, 2010 of $115.0 million consisted primarily of net proceeds from our IPO of common stock of $47.2 million, net proceeds
from the issuance of convertible preferred stock of $39.4 million and net proceeds from the issuance of promissory notes and notes payable of $36.2 million offset by repayment of notes payable of $8.6 million.
Net cash provided by financing activities during the year ended December 31, 2009 of $37.9 million consisted primarily of net proceeds from the
issuance of convertible preferred stock and proceeds from the issuance of promissory notes of $27.2 million and $14.7 million, respectively, offset by repayment of notes payable of $4.0 million.
Net cash provided by financing activities during the year ended December 31, 2008 of $33.6 million consisted primarily of net proceeds from the
issuance of convertible preferred stock of $25.4 million and proceeds from notes payable of $13.2 million, offset by repayment of notes payable of $5.0 million.
Operating and Capital Expenditure Requirements
To date, we have not achieved
profitability on a quarterly or annual basis. We expect our cash expenditures to increase significantly in the short-term. We plan to fund our short-term liquidity requirements using cash on hand at March 31, 2011. Our principal short-term
liquidity needs are:
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to fund our working capital for commercial operations, including personnel costs and other operating expense;
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to expand the sequencing and computing capacity in our Mountain View and Santa Clara leased facilities;
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§
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to finance the further development of our sequencing technology and services;
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to finance sales and marketing activities; and
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to service our debt obligations.
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The cost of expansion of our current sequencing and supporting computing capacity in our Mountain View and Santa Clara, California leased facilities California in 2011 is estimated to be approximately
$20.0 million. In addition, as a public company we also incur significant legal, accounting and other expenses that we did not incur as a private company. We anticipate that we will continue to incur net losses for the foreseeable future as we
continue to expand our business and build our infrastructure. We believe that, based on our current level of operations and anticipated growth, the net proceeds from our initial public offering, our cash and cash equivalent balances, including
interest income we earn on those balances, when taken together with the proceeds from this offering, will be sufficient to meet our anticipated cash requirements beyond the 12 months from the date of this filing.
In addition to our continued expenditures for the expansion of our Mountain View sequencing facility, further development of our sequencing technology and
services and expansion of our sales and marketing activities, our principal long-term liquidity needs are:
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to fund our working capital for commercial operations, including any growth in working capital required by growth in our business;
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§
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to finance the possible development of additional sequencing centers; and
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§
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to service our debt obligations.
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Our current cash resources, without giving effect to the proceeds from this offering, are insufficient to satisfy our long-term liquidity requirements. Based on our current operating projections and
without giving effect to the proceeds from this offering, we will need to raise additional capital to fund our operations in 2012 and expand our business to meet our long-term business objectives. Additional financing, which is not in place at this
time, may be from the sale of equity or convertible or other debt securities in a public or private offering, from an
54
additional credit facility or strategic partnership coupled with an investment in our company or a combination of both. If we raise additional funds through the issuance of convertible debt
securities, or other debt securities, these securities could have rights senior to those of our common stock and could contain covenants that restrict our operations. The issuance of any equity securities will also dilute the interest of our current
stockholders.
We may be unable to raise sufficient additional financing on terms that are acceptable, if at all. Given the risks
associated with our business, including our limited operating history and our new business model in an emerging industry, and recent difficulties for life sciences companies raising funds in the capital markets, we may be unable to raise additional
capital in the amounts we require, if at all. Our failure to raise additional capital and in sufficient amounts will severely impact our ability to operate our business in 2012 and meet our long-term business objectives. The timing and amount
of our future capital requirements will depend on many factors, including, but not limited to, the following:
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the financial success of our genome sequencing business;
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our ability to increase the genome sequencing capacity in our Mountain View facility;
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whether we are successful in obtaining payments from customers;
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whether we can enter into collaborations and establish a recurring customer base;
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the progress and scope of our research and development projects;
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the filing, prosecution and enforcement of patent claims;
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the rate at which we establish possible additional genome sequencing centers and whether we can find suitable partners with which to establish those
centers;
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the effect of any joint ventures or acquisitions of other businesses or technologies that we may enter into or make in the future; and
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the costs associated with lawsuits brought against us by third parties, including our current litigation with Illumina, Inc.
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Our forecast of the period of time through which our financial resources will be adequate to support our operations and the
costs to support our general and administrative, sales and marketing and research and development activities are forward-looking statements and involve risks and uncertainties. Actual results could vary materially and negatively as a result of a
number of factors, including the factors discussed under the caption Risk Factors. We have based these estimates on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect.
Contractual Obligations and Commitments
The following summarizes the future commitments arising from our contractual obligations at December 31, 2010 (in thousands):
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Payment Due by Period
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Contractual Obligations
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Total
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Less than
1 year
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1-3 years
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3-5 years
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More than
5 years
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Debt obligations
(1)
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$
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13,583
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$
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5,885
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$
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7,698
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$
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$
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Interest
(2)
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1,611
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904
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707
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Operating lease obligations
(3)
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15,364
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2,599
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5,256
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5,573
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1,936
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Purchase obligations
(4)
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5,914
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5,213
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488
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213
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Total
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$
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36,472
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$
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14,601
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$
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14,149
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$
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5,786
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$
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1,936
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(1)
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Represents our outstanding debt under our term loans as of December 31, 2010.
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(2)
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Represents interest payments on our outstanding debt under our term loans as of December 31, 2010 using rates at December 31, 2010.
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(3)
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Consists of contractual obligations under non-cancellable office space operating leases.
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(4)
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Consists of purchase obligations related to our data center and non-cancellable orders for sequencing components. The table above also includes
agreements to purchase goods or services that have cancellation provisions requiring little or no payment. The amounts under
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these contracts are included in the table above because we believe that cancellation of these contracts is unlikely and we expect to make future cash payments according to the contract terms or
in similar amounts for similar materials.
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Term Loans
On December 17, 2010, we entered into a loan and security agreement with Atel Ventures, Inc., or Atel. On March 25, 2011, we entered into a new
loan and security agreement with Oxford Finance Corporation, or Oxford.
Atel Loan Agreement
The loan and security agreement with Atel, or the Atel loan agreement, consists of a $6.0 million term loan for equipment purchases, which is
collateralized to secure the term loan. Under the terms of the Atel loan agreement, the term loan balance is being repaid in 36 equal monthly payments of principal and interest. Interest accrues on the term loan at a rate of 11.26% per annum.
The outstanding borrowings under the term loan are collateralized by a senior priority interest in certain of our current property and equipment, and all property and equipment that was purchased during the term of the Atel loan agreement. In
connection with entering into the loan and security agreement with Oxford, we and Atel made certain administrative and technical amendments to the Atel loan agreement.
In connection with the Atel loan agreement, we issued to Atel a warrant to purchase 49,834 shares of our common stock at an exercise price of $7.224 per share. The Atel warrant expires on the 10th
anniversary of the issuance date.
The Atel loan agreement contains customary representations and warranties, covenants, including closing and
advancing conditions, events of defaults and termination provisions. The affirmative covenants include, among other things, that we maintain certain cash account balances and liability and other insurance, and that we pledge security interests in
any ownership interest of a future subsidiary. The negative covenants preclude us from, among other things, disposing of certain assets, engaging in any merger or acquisition, incurring additional indebtedness, encumbering any collateral, paying
dividends or making prohibited investments, in each case without the prior consent of Atel. As of March 31, 2011, we were in compliance with all the covenants in the Atel Loan Agreement.
Oxford Loan Agreement
On March 25, 2011, we entered into a loan and security
agreement, or the Oxford loan agreement, with Oxford Finance Corporation, or Oxford. The Oxford loan agreement provides for a term loan of $20.0 million. The outstanding balance of the term loan must be repaid in full by October 1, 2014, which
we refer to as the maturity date. Under the terms of the Oxford loan agreement, the outstanding balance accrues interest at a rate of 9.80% per annum. Until the amortization date, which is, May 1, 2012, we must make monthly payments equal
to the accrued interest on the outstanding loan balance, and, following the amortization date through the maturity date, the outstanding loan balance will be repaid in thirty (30) equal monthly payments of principal and interest.
As a condition to the Oxford loan agreement, a portion of the term loan was used to repay the remaining balance of $7.4 million on our existing term loan
agreement with Comerica. Following repayment of the outstanding indebtedness, our Comerica loan agreement was terminated. We intend to use the remainder of the Oxford term loan to fund our working capital requirements.
The term loan is secured by a senior priority on all of our assets, excluding our intellectual property and those assets securing borrowings under the
Atel loan agreement. In addition, we have agreed not to pledge our intellectual property to another entity without Oxfords approval or consent.
In connection with the entry into the Oxford loan agreement, we issued to Oxford warrants to purchase an aggregate of 160,128 shares of our common stock at an exercise price of $7.495 per share. The
warrants expire on the seventh anniversary of the issuance date. We also agreed to provide Oxford certain registration rights covering the shares underlying these warrants.
56
The Oxford loan agreement contains customary representations and warranties, covenants, closing and
advancing conditions, events of defaults and termination provisions. The affirmative covenants include, among other things, that we timely file taxes, maintain certain operating accounts subject to control agreements in favor of Oxford, maintain
liability and other insurance and pledge security interests in any ownership interest of a future subsidiary. The negative covenants preclude us from among other things, disposing of certain assets, engaging in any merger or acquisition, incurring
additional indebtedness, encumbering any collateral, paying dividends or making prohibited investments, in each case without the prior consent of Oxford. The Oxford loan agreement provides that an event of default will occur if (1) there is a
material adverse change in our business, operations or condition (financial or otherwise), (2) there is a material impairment in the prospects of us repaying any portion of our obligations under the term loan, (3) there is a material
impairment in the value of the collateral pledged to secure our obligations under the agreement or in Oxfords perfection or priority over the collateral, (4) we default in the payment of any amount payable under the agreement when due, or
(5) we breach any negative covenant or certain affirmative covenants in the agreement (subject to a grace period in some cases). The repayment of the term loan is accelerated following the occurrence of an event of default or otherwise, which
would require us to immediately pay an amount equal to the sum of: (i) all outstanding principal plus accrued but unpaid interest, (ii) the prepayment fee, (iii) the final payment, plus (iv) all other sums, that shall have become
due and payable but have not been paid, including interest at the default rate with respect to any past due amounts. As of March 31, 2011, we were in compliance with all the covenants.
Indemnification
In the normal course of business, we enter into contracts and agreements that
contain a variety of representations and warranties and provide for general indemnifications. Our exposure under these agreements is unknown because it involves claims that may be made against us in the future, but have not yet been made. To date,
we have not paid any claims or been required to defend any action related to our indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations.
In accordance with our certificate of incorporation and bylaws, we have indemnification obligations to our officers and directors for specified events or
occurrences, subject to some limits, while they are serving at our request in those capacities. There have been no claims to date, and we have director and officer insurance that may enable us to recover a portion of any amounts paid for future
potential claims.
Off-Balance Sheet Arrangements
Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.
Recent Accounting Pronouncements
In October 2009,
the Financial Accounting Standards Board, or FASB, issued a new accounting standard that changes the accounting for revenue arrangements with multiple deliverables. Specifically, the new accounting standard requires an entity to allocate arrangement
consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In addition, the new standard eliminates the use of the residual method of allocation and requires the relative-selling-price method
in all circumstances in which an entity recognizes revenue for an arrangement with multiple deliverables. We adopted this standard effective in the first quarter of 2011, and the adoption did not have a significant impact on our financial
statements.
In October 2009, the FASB also issued a new accounting standard that changes revenue recognition for tangible products containing
software and hardware elements. Specifically, if certain requirements are met, revenue arrangements that contain tangible products with software elements that are essential to the functionality of the products will be accounted for under these new
accounting standards, rather than the existing software revenue recognition accounting guidance. We adopted this standard effective in the first quarter of 2011, and the adoption did not have a significant impact on our financial statements.
57
In January 2010, the FASB issued an amendment to an accounting standard which requires new disclosures for
fair value measurements and provides clarification for existing disclosure requirements. Specifically, this amendment requires an entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value
measurements and to describe the reasons for the transfers and to disclose separately information about purchases, sales, issuances and settlements in the reconciliation for fair value measurements using significant unobservable inputs, or Level 3
inputs. This amendment clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosure about the valuation techniques and inputs used to measure
fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. We have adopted this guidance and have provided the additional disclosures.
In April 2010, the FASB issued an accounting standard update which provides guidance on the criteria to be followed in recognizing revenue under the milestone method. The milestone method of recognition
allows a vendor who is involved with the provision of deliverables to recognize the full amount of a milestone payment upon achievement if, at the inception of the revenue arrangement, the milestone is determined to be substantive as defined in the
standard. We adopted this standard effective in the first quarter of 2011, and the adoption did not have a significant impact on our financial statements.
Quantitative and Qualitative Disclosures About Market Risk
As of March 31, 2011, our investment
portfolio consists of money market funds. The primary objectives of our investment are to preserve capital and maintain liquidity. Our primary exposures to market risk are interest rate income sensitivity, which is affected by changes in the general
level of U.S. interest rates, and conditions in the credit markets, including default risk. However, since all of our investments are in money market funds, we do not believe we are subject to any material market interest rate risk exposure. We do
not have any foreign currency or any other material derivative financial instruments.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash and cash
equivalents are deposited in a demand account at two financial institutions and a money market fund. At times, such deposits may be in excess of federally insured limits.
58
Business
Overview
We are a life sciences company that has developed and commercialized an innovative DNA
sequencing platform, and our goal is to become the preferred solution for complete human genome sequencing and analysis. Our Complete Genomics Analysis Platform, or CGA Platform, combines our proprietary human genome sequencing technology with our
advanced informatics and data management software and our innovative, end-to-end, outsourced service model to provide our customers with data that is immediately ready to be used for genome-based research. We believe that our solution provides
academic and biopharmaceutical researchers with complete human genomic data and analysis at an unprecedented combination of quality, cost and scale without requiring them to invest in in-house sequencing instruments, high-performance computing
resources and specialized personnel. By removing these constraints and broadly enabling researchers to conduct large-scale complete human genome studies, we believe that our solution has the potential to significantly advance medical research and
expand understanding of the basis, treatment and prevention of complex diseases. Since launching our service in May 2010, we have sequenced over 1,400 complete human genomes, including over 600 in the first quarter of 2011, and, as of March 31,
2011, we had an order backlog of over 2,000 genomes.
We believe that our complete human genome sequencing technology, which is based on our
proprietary DNA arrays and ligation-based read technology, is superior to existing commercially available complete human genome sequencing methods in terms of quality, cost and scale. In the DNA sequencing industry, complete human
genome sequencing is generally deemed to be coverage of at least 90% of the nucleotides in the genome. Because we have optimized our technology platform and our operations for the unique requirements of high-throughput complete human genome
sequencing, we are able to achieve accuracy levels of 99.999% at a total cost that is significantly less than the total cost of purchasing and using commercially available DNA sequencing instruments and the necessary information processing
technology, and then performing all the required sequence data assembly and analysis. We believe that we will be able to further improve our accuracy levels and reduce the total cost of sequencing and analysis, enabling us to maintain
significant competitive advantages over the next several years. Because our technology resides only in our centralized facilities, we can quickly and easily implement enhancements and provide their benefits to our entire customer base. Our goal is
to be the first company to sequence and analyze high-quality complete human genomes, at scale, for a total cost of under $1,000 per genome.
From the earliest days of the field of genomic sequencing to the present, companies and organizations that have achieved sequencing milestones in quality,
cost and scale have immediately announced and/or published these sequencing results. We regularly and actively monitor publications and have compared the parameters of our sequencing process and the sequencing results of competitive commercially
available technologies announced in these various publications. We are currently unaware of any scientific publications by competitors publicly announcing superior sequencing results. Based on this public data, we believe that our complete human
genome sequencing technology provides a superior combination of quality, cost and scale when compared to existing commercially available complete genome sequencing methods, when taking into consideration the total cost of purchasing, operating and
maintaining the instruments and information systems necessary for complete human genome sequencing.
While our competitors primarily sell DNA
sequencing instruments and reagents that produce raw sequenced data, requiring their customers to invest significant additional resources to process that raw data into a form usable for research, we offer our customers an end-to-end, outsourced
solution that delivers research-ready genomic data. As the cost of complete human genome sequencing declines, we believe the basis of competition in our industry will shift from the cost of sequencing to the value of the entire sequencing solution.
We believe that our integrated advanced informatics and data management services will emerge as a key competitive advantage as this shift occurs.
Our genome sequencing center, which began commercial operations in May 2010, combines a high-throughput sample preparation facility, a collection of our proprietary high-throughput sequencing instruments
and a large-
59
scale data center. Our customers ship us their samples via common carrier services such as Federal Express and United Parcel Service. We then sequence and analyze these samples and provide our
customers with finished, research-ready data, enabling them to focus exclusively on their single highest priority, discovery.
Our customers
include some of the leading global academic and government research centers and biopharmaceutical companies. At present, our facility has the capacity to sequence and analyze over 400 complete human genomes per month. We expect this capacity to
increase between two- and three-fold by the end of 2011 as we deploy additional sequencers and increase the throughput of our sequencing process through software refinements and component upgrades. In future years, we plan to construct additional
genome centers in the United States and international strategic markets to accommodate an expected growing global demand for high-quality, low-cost complete human genome sequencing on a large scale.
For genomes sequenced in the first quarter of 2011, an average of over 97% of the genome was read at ten-fold or greater coverage and we delivered data
results to our customers with a median turnaround time of 70 days. In addition, our median call rate was over 96% of the genome and over 95% of the exome.
In April 2011, we announced that we had completed the release of 69 complete human genome sequences into the public domain. These high-quality data sets can provide the research community with both a
valuable resource for scientific investigation and also serve to further validate our sequencing technology, as many of these samples have been previously analyzed as part of the International HapMap Project or the 1000 Genomes Project. Since
the launch of this initiative in February 2011, over 50 terabytes of data have been downloaded from our website by more than 750 unique IP addresses and as of the date of this prospectus.
Market Overview
Background
Every organism has a genome that contains the full set of biological instructions required to build and maintain a living example of that organism. The information contained in a genome is stored, or
encoded, in deoxyribonucleic acid, or DNA, a nucleic acid that is found in each cell of the organism. DNA is divided into discrete units called genes, which carry specific information necessary to perform a particular biological function, such as
instructions for making proteins. The chemical building blocks that make up each gene are the molecules adenine, cytosine, guanine and thymine, commonly labeled as A, C, G and T, respectively, which are known as nucleotide bases. Human DNA has
approximately three billion nucleotide bases, and their precise order is commonly known as the DNA or genetic sequence.
Studying how genes and
proteins differ between species and among individuals within a species, or genetic variations, helps scientists to determine their functions and roles in health and disease. These genetic variations can have important medical consequences. Genetic
variations may, for example, cause an individual to have a predisposition to certain diseases or to respond differently to certain drug treatments. Accordingly, improving our understanding of the genome and its functions has driven and, we expect,
will continue to drive advancements in medical research and diagnostics.
Genetic Analysis Market
Genetic analysis products comprise instruments and consumables, as well as associated hardware, software and services directly involved in the study of
DNA and ribonucleic acid, or RNA. Scientia Advisors, a third-party research firm, estimated genomic revenue in 2009 to be approximately $5.8 billion and projects the market to grow to approximately $9.0 billion by 2014. Scientia Advisors further
estimates that human genomics research will grow from $4.6 billion in 2009 to $7.3 billion in 2014. The medical research market consists of laboratories generally associated with universities, medical research centers and government
institutions, as well as biotechnology and pharmaceutical companies. In the longer term, we believe genetic analysis tools will likely play a critical role in molecular diagnostics. By detecting small, individual genetic differences, we believe
molecular diagnostic tests could be used to identify predisposition to or the presence of a disease, to select appropriate medication and dosage and to monitor disease progression and response to treatment.
60
Genetic Analysis Technologies
Since the development of the first genetic engineering techniques in the 1970s, there has been an ongoing evolution toward more accurate, faster and less expensive methods to conduct genetic analysis. The
primary analytical methods traditionally used by genetic researchers fall into three categories:
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DNA Sequencing.
DNA sequencing is the process of determining the exact order, or sequence, of the individual nucleotides in a DNA strand
so that this information can be correlated to the genetic activity influenced by that segment of DNA. Complete human genome sequencing is currently the most comprehensive form of genetic analysis, in which every base is compared to a reference
genome to determine possible mutations or variations.
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Genotyping.
Genotyping is the process of examining certain known mutations or variations in the DNA sequence of genes to determine
whether the particular variant can be associated with a specific disease susceptibility or drug response.
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Gene Expression Analysis.
Gene expression analysis is the process of examining the molecules that are produced when a gene is activated,
or expressed, to determine whether a particular gene is expressed in a specific biological tissue.
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The first major
breakthrough in genetic technology was the development of the automated DNA sequencer in 1986. Subsequent versions of commercial first-generation DNA sequencers improved on speed and throughput, eventually becoming powerful enough to enable the
first mapping of the human genome through the Human Genome Project, which was completed in 2003 at an overall cost of over $3 billion. The prohibitive cost of first-generation sequencing technologies forced scientists to use the other primary
genetic analysis technologies, genotyping and gene expression analysis. While these targeted genetic analysis technologies address the cost constraints of DNA sequencing, they generally provide only limited information to the user.
More recently, innovations in DNA sequencing have led to the development of high-throughput sequencing technologies, commonly referred to as
next-generation or second-generation sequencing, which produce thousands to millions of sequences at once. These high-throughput sequencing technologies have led to a significant reduction in the time and cost required for DNA sequencing. Next-
generation sequencing technologies are supplanting not only the older sequencing methods but also less comprehensive methods for assessing gene expression, protein binding and other biological information. Scientia Advisors estimated that the
next-generation sequencing companies had sales approaching $600 million for 2009, with an installed base in the neighborhood of 1,300 to 1,500 instruments. Scientia Advisors expects these suppliers to generate more than $1.5 billion in sales in
2014.
The Importance of Complete Human Genome Sequencing and the Limitations of General Purpose Sequencing Technologies
One of the most difficult challenges facing the genetic research and analysis industry is the need to improve our understanding of how
genes contribute to diseases that have a complex pattern of inheritance. For many diseases, multiple genes each make a subtle contribution to a persons predisposition or susceptibility to a disease or response to a drug treatment
protocol. Accordingly, we believe that unraveling this complex network will be critical to understanding human health and disease. We believe that sequencing complete human genomes is the most comprehensive and accurate method by which to achieve
these objectives and improve our understanding of human disease. However, the cost and complexity associated with complete human genome sequencing have been prohibitively high for researchers and have slowed our progress in understanding the genetic
underpinnings of disease.
Although second-generation sequencing technologies have led to dramatic reductions in cost and improvements in
quality and throughput for complete human genome sequencing, they were designed as general-purpose instruments for sequencing the DNA or RNA of plants, animals, bacteria and viruses. In particular, these second-generation sequencing technologies
were not designed for sequencing large numbers of complete human
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genomes. We believe the key limitations of the model of purchasing and using second-generation technologies to sequence large numbers of complete human genomes include the following:
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High Cost.
Commercially available DNA sequencing instruments cannot sequence complete human genomes at a price low enough to make
large-scale complete human genome sequencing projects affordable to researchers.
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Insufficient Scale and Speed.
Laboratories using commercially available DNA sequencing instruments typically require months to sequence
all of the genomes for large projects. While the timeline can be accelerated by purchasing and operating multiple DNA sequencing instruments in parallel, the capital cost is prohibitive for all but the largest research centers. Many researchers are
unable to generate the complete human genome data they need from in-house instruments in an acceptable period of time.
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Difficulty of Data Management.
Sequencing a large number of complete human genomes generates a substantial amount of data that must be
managed, stored and analyzed. Many users of commercially available DNA sequencing instruments lack the costly computing resources, storage capacity, network bandwidth and specialized personnel to process and analyze these massive data sets.
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Due to these limitations, many researchers have been using an alternative approach in which a small portion of the genome,
referred to as the exome, is targeted, enriched and sequenced. Exome sequencing is a selective sequencing strategy focusing on approximately 1.5% of the complete human genome. However, important areas of the genome lie outside of the exome, such as
the promoter regions that control gene expression and other conserved regions of the genome that are believed to perform regulatory functions. Moreover, current exome selection technologies are inefficient, typically sequencing a lower percentage of
the exome than can be sequenced by complete human genome sequencing. Within the next several years, we believe advances in complete human genome sequencing, including further decreases in cost, will drive increased adoption of complete human genome
sequencing.
Complete Genomics Solution
Although other sequencing technologies have led to dramatic reductions in cost and improvements in quality and throughput for complete human genome sequencing, these technologies were designed as
general-purpose instruments for sequencing the DNA or RNA of plants, animals, bacteria and viruses. More specifically, these technologies were not designed solely for sequencing large numbers of complete human genomes.
We have developed a novel approach focused on complete human genome sequencing. We combine our proprietary human genome sequencing technology, which
achieves accuracy levels of 99.999%, with our advanced informatics and data management software and our innovative, end-to-end service model, to deliver research-ready genomic data at a total cost that is significantly less than the total cost of
purchasing and using commercially available DNA sequencing instruments and the required information management hardware and software. We believe this novel outsourced solution overcomes the key limitations of other sequencing technologies and
addresses the unmet needs of the complete human genome research market.
Proprietary Sequencing Technology
There are two primary components of our proprietary human genome sequencing technology: DNA nanoball, or DNB, arrays and combinatorial probe-anchor
ligation, or cPAL, reads. Our patterned DNB arrays, due to their small size and biochemical characteristics, enable us to pack DNA very efficiently on a silicon chip. We have developed a proprietary process that causes the DNA to adhere to desired
spots on the chip, while conversely preventing the DNA from adhering to the area between these spots. This enables us to affix individual particles of DNA to over 90% of these spots, leading to increased efficiency in nanoarray assembly. In
addition, we have developed a highly accurate cPAL read technology, which enables us to read the DNA fragments efficiently using small concentrations of low-cost reagents while retaining extremely high single-read accuracy.
We believe this unique combination of our proprietary DNB and cPAL technologies is superior in both quality and cost to other commercially available
approaches and provides us with significant competitive advantages. As
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reported in the January 2010 edition of
Science
, we sequenced a complete human genome at a consumables cost of approximately $1,800 and with a consensus error rate of approximately 1 error
in 100,000 nucleotides. Our read accuracy was further validated by one of our customers, the Institute for Systems Biology, or ISB, as published in
Science Express
in March 2010. We have continued to reduce our costs of consumables, and,
currently, our consumables costs are under $1,000 per genome. To our knowledge, based on our review of scientific publications in the genome sequencing field announcing sequencing results, there are no commercially available technologies that have
achieved quality and cost comparable to our sequencing results. We have identified and are developing additional performance enhancements to our core technologies that we believe will enable us to maintain significant competitive advantages over the
next several years. As we implement these technological enhancements, our goal is to be the first company to sequence and analyze high-quality complete human genomes, at scale, for a total cost of under $1,000 per genome.
Advanced Informatics and Data Management Software
Sequencing complete human genomes generates substantial amounts of data that must be managed, stored and analyzed. Many users of sequencing systems have historically conducted their own in-house data
analysis on a limited number of genomes and lack the computing, storage and network bandwidth necessary to manage the massive data sets generated by larger scale complete human genome studies. In response to this need by our customers, we have built
a genomic data processing facility with computing infrastructure for managing both small- and large-scale genomic sequencing projects.
There
are two major components of our complete data management solution: assembly software and analysis software. Assembly is the process of using computers to organize all of the overlapping 70-base nucleotide sequences to reconstruct the complete human
genome. Our proprietary assembly software uses advanced data analysis algorithms and statistical modeling techniques to accurately reconstruct over 90% of the complete human genome from approximately two billion 70-base reads. After assembling the
genomic data, we use our analysis software to identify and annotate key differences, or variants, in each genome.
By using our analytical
tools and data management software, our customers can significantly reduce their investments in computing infrastructure. Our customers are provided with reliable access to assembled and annotated sequence data in multiple formats to ease their need
for data sharing and comparative analyses. In addition, our data storage options provide flexibility and allow customers to customize their data management strategy based on their particular business, operational and scientific requirements. We have
also developed a suite of open source analytical tools, called CGA Tools, designed to enable our customers to rapidly analyze the data we generate from their samples. As the reagent cost of sequencing declines, we believe that the cost and
complexity of data analysis and management will emerge as the primary constraint on complete human genome analysis.
Innovative,
End-to-End, Outsourced Solution
While our competitors primarily sell DNA sequencing instruments and reagents that produce raw
sequenced data, requiring their customers to invest significant additional resources to process that raw data into a form usable for research, we offer our customers an end-to-end, outsourced solution that delivers research-ready genomic data. Our
genome sequencing center combines a high-throughput sample preparation facility, a collection of our proprietary high-throughput sequencing instruments and a large-scale data center. Our customers ship us their samples via common carrier services
such as Federal Express and United Parcel Service. We then sequence and analyze these samples and provide our customers with finished, research-ready genomic data, enabling them to focus exclusively on their single highest priority, discovery.
Our customers can avoid purchasing expensive sequencing instruments and high-performance computing resources to sequence and analyze large
sets of complete human genomes. Our outsourced service model enables our customers to offload to us the complex processes of sample preparation, sequencing, computing and data storage and management. We believe our services will expand the potential
addressable market by enabling a broad base of researchers who may lack sufficient capital and the specialized personnel necessary to build and
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operate a sequencing laboratory, or who have historically been constrained by the high total cost of sequencing, to conduct large-scale complete human genome studies.
Customer Benefits
We believe our end-to-end solution provides the following advantages to our customers:
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High-Quality Data.
Our technology delivers what we believe is the industrys highest quality complete human genome data.
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Cost Savings.
Our customers can avoid purchasing expensive sequencing instruments and high-performance computing resources or hiring the
necessary specialized personnel to sequence and analyze large sets of complete human genome data.
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Speed at Scale.
Our customers can often complete their large-scale projects more quickly by using our services than by using commercially
available sequencing instruments.
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Ease of Use.
We believe our customers can avoid the difficult and time-consuming process of purchasing and operating their own sequencing
instruments and can outsource the entire process to us, from sample preparation to delivery of research-ready data.
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Operational Flexibility.
By outsourcing their large-scale complete human genome sequencing projects to us, our customers can free up the
capacity of in-house instruments to run smaller or more targeted sequencing projects and applications.
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Technological Flexibility.
As DNA sequencing technology improves, our customers will have available to them the latest technology that we
have implemented, and they avoid the risk of their expensive instruments becoming technologically obsolete.
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Enables Customers to Focus on Discovery.
Outsourcing offloads the operational burdens of managing large-scale genome sequencing projects
and enables our customers to focus their resources on their strengths in research, which can reduce the time to discovery.
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Competitive Strengths
We believe that our
competitive strengths are as follows:
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Proprietary Human Genome Sequencing Technology.
Our proprietary sequencing technology achieves accuracy levels of 99.999% at a total cost
that is significantly less than the total cost of purchasing and using commercially available DNA sequencing instruments and the necessary information processing technology and then performing all the required sequence data assembly and analysis. We
believe that our quality improvement and cost-reduction initiatives will allow us to maintain our quality and cost advantages over competing sequencing technologies for the next several years.
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Fully Integrated Advanced Informatics and Data Management Software.
Our solution incorporates powerful informatics, analysis and data
management software that enable our customers to manage and gain useful information from the massive data sets generated in complete human genome sequencing. Our informatics software allows us to provide research-ready data from the billions of
nucleotide sequences we identify and is optimized to reflect the characteristics of the genomic data our sequencers generate. Unlike software solutions offered by instrument manufacturers or third-party providers, we are able to continuously refine
our informatics and data management software because of our significant experience in sequencing and analyzing large numbers of complete human genomes for our customers. As the reagent cost of sequencing declines, we believe that the cost and
complexity of in-house data analysis and management will emerge as the primary constraint for researchers conducting complete human genome analysis.
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Highly Scalable and Capital-Efficient Business Model.
Consolidating volume across our entire customer base enables us to run a large
number of genomes through our sequencing process while avoiding the cost
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and complexity of employing a large field installation and support organization. By implementing a high degree of automation, we have reduced the possibility of human errors that could adversely
affect quality and increase costs. Our service-based model allows us to reduce cost and improve quality as volume increases.
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Unique Insight into Customer Needs.
Because of our unique, end-to-end service model, we interact directly with our customers on their
discovery projects. This interaction enables us to develop and enhance our analysis software to meet our customers specific needs while expanding our understanding of variation in the human genome.
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Fast and Efficient Deployment of Operational and Technological Enhancements.
Because our sequencing operations and data center are
centralized, we can rapidly upgrade our technology and deliver the benefits to our customers. In addition, our access to genomic data allows our software engineers to continually refine and improve our software with each genome we sequence.
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Expanded Market Opportunity.
We believe our outsourced model will expand the potential addressable market by providing academic and
biopharmaceutical researchers who lack sufficient budgets or the specialized personnel necessary to build and operate a sequencing laboratory with access to high-quality, low-cost complete human genome data. In addition, we believe we will be able
to service customers who require rapid sequencing of large numbers of complete human genomes.
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Customers and Applications
Customers
Since
launching our service in May 2010, we have sequenced over 1,400 complete human genomes, including over 600 in the first quarter of 2011, and, as of March 31, 2011, we had an order backlog of over 2,000 genomes. We have more than 40 past and
current customers, including the following:
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Academic Medical Center University of
Amsterdam
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Brigham & Womens
Hospital
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Broad Institute of MIT and
Harvard
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Childrens Hospital of
Boston
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Childrens Hospital of
Philadelphia
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Eli Lilly and
Company
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Erasmus Medical Centre in Rotterdam, the
Netherlands
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Flanders Institute for
Biotechnology
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Genentech, Inc.
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Institute of Cancer Research United Kingdom
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Institute of Molecular Medicine at the University of Texas
Health Science Center at Houston
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Institute for Systems Biology
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Pfizer Inc.
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SAIC-Frederick, Inc., National Cancer Institute
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Stanford University
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Scripps Translational Science Institute
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University of North Carolina
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University of Texas Southwestern Medical
Center
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Selected Customer Examples
SAIC-Frederick, Inc., National Cancer Institute Pediatric Cancer Study
SAIC-Frederick, under a National Cancer Institute (NCI) prime contract, is using our sequencing, bioinformatics and scientific services to
sequence and analyze 50 tumor-normal pairs. This analysis could enable researchers to identify patterns of tumorigenesis and ultimately lead to improved diagnosis and treatment of pediatric cancers. We are identifying and
validating mutations found in the pediatric tumor genomes under this program. These could include somatic single nucleotide polymorphisms, insertion/deletions, copy number variations and somatic variations. The sequenced data, as well as the
assembled and validated data sets are expected to be submitted to the National Center for Biotechnology Informations Short Read Archive database, as well as the TARGET Database. Upon successful completion of this project, the contract
contains a provision for SAIC-Frederick to engage us, at its option, to sequence more than 500 additional cancer cases (more than 1,000 genomes) over an 18-month period.
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Institute for Systems Biology Miller Syndrome Study
Our project with Dr. Leroy Hood of the ISB involved sequencing the complete genomes of a four-member nuclear family, including two healthy parents
and their two children who suffer from two genetic disorders: Miller Syndrome and primary ciliary dyskinesia. The data we provided allowed ISB researchers to pinpoint the causal gene and subsequently confirm that genes role in Miller Syndrome,
a disease in which the genetic basis had previously evaded detection. The results were published in
Science Express
in March 2010 and have led to two follow-on projects with the ISB to sequence an additional 122 and 615 genomes, respectively.
Genentech, Inc. Non-Small Cell Lung Cancer Study
Our project with Genentech, Inc. (a member of the Roche Group) compared the complete human genome sequences of a primary non-small cell lung tumor with nearby non-tumorous tissue taken from the lung of a
long-term smoker. This project was the first complete human genome sequence of a primary non-small cell lung tumor and matched normal tissue. Comparison of these sequences revealed both known (KRAS G12C) and novel mutations in numerous oncogenes and
led to the discovery of numerous somatic mutations. The data we delivered allowed Genentech to measure the rate of smoking-induced mutations accumulated over time and resulted in a publication in
Nature
in May 2010.
University of Texas Southwestern Medical Center Hypercholesterolemia Study
Our project with Dr. Jonathan Cohen of University of Texas Southwestern involved sequencing the complete genome of an 11-month-old breast-fed girl with cholesterol-laden deposits and very high blood
cholesterol levels. Doctors ruled out a diagnosis of a disease called sitosterolemia, based on certain blood test results. However, sequencing of the girls genome revealed a mutation in a relevant gene. This finding indicated that the infant
definitely has sitosterolemia, despite the prior contradictory test results. The major finding of this study is that complete genome sequencing identified the culprit mutations and provided a definitive diagnosis in a patient who did not have the
classical hallmark features of the disease in question. This finding demonstrates that complete genome sequencing can be a valuable aid in diagnosing and treating genetic diseases, even in individual patients. These results were published by the
Oxford University Press
in August 2010.
Applications
Potential applications for our complete human genome sequencing service include:
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Cancer Research.
Researchers are sequencing cancer genomes and comparing them to normal genomes, which are referred to as tumor-normal
pairs, to identify the mutations in cancer genomes. We believe understanding these mutations will guide development of new cancer therapeutics and diagnostics and ultimately enable doctors to select the best course of therapy based on the specific
mutations found in a tumor.
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Mendelian Disease Research.
There are thousands of Mendelian diseases, or diseases that have been found to run in families, and are
accordingly likely to have a significant genetic component. However, the genetic cause of most of these diseases is currently unknown. By sequencing the complete genomes of the affected families, we believe the genetic causes of these Mendelian
diseases can be discovered, which could lead to the development of novel diagnostics and therapeutics.
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Rare Variant Disease Research.
Diseases such as central nervous system disorders, cardiac disease and certain metabolic disorders that
appear broadly in the population are thought to be caused by rare genetic variants. Large-scale studies of affected individuals may help to identify the disrupted pathways and lead to the development of novel diagnostics and therapeutics.
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Clinical Trial Optimization.
We believe that selecting or stratifying patients on the basis of their genetic profiles could enable the
preferential admission of high responders into a clinical trial. This stratification could enable the trial to reach its conclusion with fewer patients and lower costs and result in faster clinical trials and drug commercialization.
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In addition to these research studies, we expect future clinical applications to include:
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Companion Diagnostics.
We believe that therapeutics that are not first-line treatments for the general population may be elevated to
first-line treatments or used in combination therapies for subsets of the population that share a common genetic profile. Complete human genome studies may unlock new market opportunities for these therapies or combination therapies.
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Cancer Pathology.
We believe that analyzing complex cancer genomes that involve large and unpredictable structural changes will be most
reliably and economically implemented using complete human genome sequencing. According to the National Cancer Institute SEER Cancer Statistics, there are approximately 1.5 million new cases of cancer diagnosed each year in the United States.
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Universal Diagnostics.
As medical records technology and public health policy advance, we believe that large numbers of people will have
their complete human genomes sequenced and stored in their electronic medical records for use by their physicians in managing their health care decisions.
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Our Strategy
We intend to become the leading complete human genome sequencing and analysis company
and the preferred platform for human genome discovery by:
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Continuing to Deliver the Highest Quality Genomic Data and Analysis at a Low Total Cost.
By continuing to deliver the highest quality
research-ready data and by enabling our customers to avoid the cost, complexity and risks associated with purchasing and operating the instruments and computing resources required to undertake complete human genome sequencing, our goal is to become
the preferred solution for our customers.
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Maintaining and Strengthening our Technology.
We plan to continue to conduct research and product development activities to further
improve quality, reduce costs, increase throughput and reduce our turnaround time. We plan to further develop the biochemistry, informatics, instrumentation and software that we believe together make up the industrys most robust solution. We
will also seek to continually improve our operational processes and analysis software.
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Capitalizing on our Scalable Model.
Due to the highly scalable nature of our service model, we believe we are well positioned to serve
customers looking to sequence a small number of genomes as well as customers who are looking to rapidly sequence a very large number of genomes.
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Establishing Ourselves as the Leader in Outsourced Complete Human Genome Sequencing.
We intend to continue to focus exclusively on human
genome sequencing. We believe that this focus will put us in a strong position to become the preferred platform for human genome sequencing.
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Expanding Globally to Increase Capacity and Reach New Markets.
We expect to enter into partnership agreements with domestic and
international organizations to build additional genome sequencing centers around the world. These genome sequencing centers will increase our sequencing capacity, provide us with improved access to global markets and expand our revenue
opportunities.
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Exploring Strategic Partnerships and Collaborations.
We expect to explore opportunities for strategic partnerships and collaborations
with commercial and research organizations to leverage our genome sequencing technology with the strengths of these organizations to further develop and expand the applications for our sequencing technology.
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Expanding Applications for the Use of our Technology.
While our current focus is on providing complete human genome solutions primarily
to academic and biopharmaceutical researchers, we believe that as we sequence and deliver more complete human genomes to our customers, our growing understanding of the genetic basis of human disease may lead to future applications in areas such as
cancer pathology.
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Our Human Genome Sequencing Platform Technology
Our proprietary human genome sequencing platform consists of three major technologies: our proprietary human genome sequencing technology, our high-throughput process automation technology and our
complete data management solution.
Proprietary Sequencing Technology
There are two primary components of our proprietary human genome sequencing technology: DNB arrays and cPAL reads.
DNB Arrays
We have developed a novel approach to preparing fragmented DNA for reading on
our sequencing instruments. Using a biochemical process for copying DNA, we reproduce each DNA fragment in a manner that connects all of the copies together in a head-to-tail configuration, forming a long single molecule of connected nucleotides. We
have developed proprietary techniques for causing each long single molecule to consolidate, or ball up, into a small particle of DNA that we call a DNB. The DNBs are approximately 200-300 nanometers in average diameter. Each DNB contains hundreds of
copies of the 70 bases of DNA we are seeking to read in each fragment.
The small size and biochemical characteristics of our DNBs enable us to
pack them together very tightly on a silicon chip. We use established photolithography processes developed in the semiconductor industry to create a silicon chip that has a grid pattern of small spots. The small spots are approximately 300
nanometers in diameter, and the center of each spot is separated by approximately 700 nanometers from neighboring spots. Each silicon chip has approximately 2.8 billion spots in an area 25 millimeters wide and 75 millimeters long. We have developed
a proprietary process that causes the DNA to adhere to these spots, which we refer to as sticky spots, while conversely preventing the DNA from adhering to the area between the sticky spots. When a solution of DNBs is spread across the
chip, the DNBs adhere to the sticky spots, with one DNB per spot. We have also developed proprietary techniques to fill over 90% of the sticky spots with exactly one DNB. We refer to a silicon chip filled with DNA as a DNA nanoball array. Each
completed DNA nanoball array contains over 200 billion bases of genomic DNA prepared for imaging.
cPAL Read
To read the sequence of nucleotides in each DNB, we have developed a highly accurate proprietary ligase-based DNA reading technology called cPAL. Our cPAL
technology uses the naturally occurring ligase enzyme, which accurately distinguishes between the A, C, T and G nucleotides, to attach fluorescent molecules that light up with a different color for each of the four nucleotides. By imaging the color
lights of a DNB array and decoding the color images, we can determine the sequence of nucleotides in each DNB. A key characteristic of our cPAL technology is its high accuracy of reading very short five-base sequences of DNA. We have developed a
proprietary technique for preparing the DNA fragments so that we can read seven five-base segments from each of the two ends of the DNA fragment for a total of 70 bases from each fragment. We have also developed proprietary software that generally
reconstructs over 90% of the complete human genomes from these 70 base reads from each fragment.
Advantages of our DNB arrays and our cPAL
technology over other commercially available DNA sequencing technologies include:
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High Accuracy.
Our cPAL technology has very high single-read accuracy due to the intrinsic nature (high accuracy) of the ligase enzyme.
By reading each nucleotide multiple times, we achieve a consensus error rate equal to approximately 1 error in 100,000 nucleotides.
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No Accumulation of Errors.
Many other DNA sequencing methods employ sequential processes that cause errors to accumulate as each
successive nucleotide is read, which results in a higher potential error rate for each successive nucleotide. Our cPAL technology reads each nucleotide independently, and as a result there is no accumulation of errors, which enables us to read
successive bases without increasing our error rate.
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Low Reagent Cost.
Our cPAL technology uses low concentrations of low-cost commodity reagents. Our DNB arrays achieve a very high density
of DNA on each array, which reduces the quantity, or volume, of reagents we use compared to other DNA array approaches. The combination of low concentration of low-cost reagents and smaller quantities results in lower reagent costs compared to other
commercially available DNA sequencing methods.
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High Throughput Process Automation
There are five major components of our high-throughput process automation technology: high-throughput sample preparation, high-throughput sequencing
instruments, high-performance computing infrastructure, workflow automation software and service delivery technology.
High-Throughput
Sample Preparation
Our high-throughput sample preparation technology consists of step-by-step protocols for preparing DNA for sequencing
and pipetting robots that automatically execute these protocols. We prepare genome samples in batches of 170 by loading the samples into two 96-well plates (the other eleven wells in each plate contain known, or reference, DNA that we use to monitor
the quality of the sample preparation process). We currently have capacity to start a sample preparation batch weekly, and our sample preparation capacity can be scaled by adding additional sample preparation instruments and staff as needed.
High-Throughput Sequencing Instruments
Our sequencing instruments consist of a fluidics robot that pipettes multiple types of chemical reagents (including fluorescent molecules) onto the flow slides and an imaging system that records images of
the fluorescent molecules attached to the DNA. Each sequencing instrument processes 18 flow slides at a time. The 18 flow slides are robotically moved back-and-forth from the fluidics robot to the imaging system. While one flow slide is being
imaged, the other 17 flow slides are prepared with reagents or waiting for the imager to become available. A sequencing run takes approximately 11 days. Currently, our sequencing instruments can generate between 85 and 115 gigabases of usable data
per flow slide, or 1.5-2.1 terabases per run. To sequence a complete human genome at an average coverage of 40 times requires 120 gigabases of usable data. We expect to make continued enhancements in our technology to further increase the amount of
usable data we get from each flow slide.
High-Performance Computing Infrastructure
We have built a genomic data processing facility that consists of approximately 7,500 core processors and 2,250 terabytes (a terabyte is one thousand
gigabytes) of high-speed disk storage. Our sequencing instruments are connected to our data center by a network connection that transfers data at a rate of 30 gigabits per second. Our data center has the capacity to perform all of the required
computation for several hundred genomes per month. We plan to expand our data center as needed, and we expect to make continued enhancements to our software to further increase the efficiency of our data center.
Workflow Automation Software
Our
workflow automation software tracks each sample from arrival at our facility to delivery of research-ready data to the customer. Sample tracking is accomplished through bar codes. Each 96-well plate of samples has a bar code, and each flow slide has
a bar code. The instruments that process plates and flow slides have bar code readers attached to them. User interfaces to our workflow automation software allow us to track the progress of each sample throughout sample preparation, sequencing and
computing. We are also developing a web-based customer portal to enable customers to track their projects real-time throughout the sequencing process.
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Service Delivery Technology
Our cloud-based data delivery system is based on our vendor relationship with Amazon Web Services, or AWS. We upload our customers finished genomic data to AWS, which AWS then copies to hard disks
and ships the hard disks to our customers. Our customers also can pay AWS to store their data on an ongoing basis.
Complete Data
Management Solution
There are two major components of our complete data management solution: assembly software and analysis software.
Assembly Software
Assembly
is the process of using computing methods to organize the overlapping 70-base nucleotide sequences to reconstruct the complete genome. We have developed a proprietary approach to assembly that uses a combination of advanced data analysis algorithms
and statistical modeling techniques to reconstruct over 90% of the complete human genome from approximately two billion 70-base reads. We have designed our assembly software to run in parallel across our large network of Linux computers.
As reported in an article in
Science
published in January 2010, we generated high-quality base calls in as much as 95% of the genome, identifying
between 3.2 million and 4.5 million genomic variants. Detailed validation of one genome data set demonstrated a consensus error rate of approximately 1 error in 100,000 nucleotides. For genomes sequenced in the first quarter of 2011, an
average of over 97% of the genome was read at ten-fold or greater coverage and we delivered data results to our customers with a median turnaround time of 70 days. In addition, our median call rate was over 96% of the genome and over 95% of the
exome.
Analysis Software
After assembling the genomic data, we use our analysis software to identify key variants in each genome and automatically annotate the genomic data. We
have developed a suite of open source analytical tools, called CGA Tools, designed to enable our customers to rapidly analyze the data we generate from their samples. For example, we offer a tool facilitating the comparison of two genomes, enabling
the quick determination of where the genomes differ. We are also developing additional analytical tools, such as a tumor-normal comparison tool designed to allow cancer researchers to compare a cancer genome to the normal genome from which it was
derived, a family analysis tool designed to enable researchers to compare parental genomes with the genomes of their children and a large-scale genome browser designed to allow researchers to compare the hundreds of genomes sequenced in a
large-scale study.
Technology Strategy
We plan to continue to advance our complete human genome sequencing and analysis technology in four major areas:
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Array Density.
Our unique grid patterned arrays currently consist of a 700 nanometer grid. We may reduce the grid size to 500 nanometers
and correspondingly reduce the diameter of the sticky spots and DNA nanoballs. If successful, this improvement will increase the density of the DNA on an array, which will decrease the reagent cost of sequencing.
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Instrument Speed.
Our unique grid patterned arrays enable us to align the grid pattern of the DNA on the array with the grid pattern of
the pixels in the detector, allowing us to image our arrays with very short exposure times. We may increase the speed of our instruments by acquiring and deploying new cameras that take images and transfer data at approximately six times the speed
of our existing cameras. We may also increase the number of cameras per sequencing instrument from two to four.
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Process Automation.
As our instruments get faster, we intend to improve our sample preparation, process automation and data management
technologies to process and deliver an increasing number of genomes to our customers with reduced turnaround time.
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Assembly and Analysis Software.
We continue to improve and extend our analytic capabilities through the development of software designed
to decrease genome assembly time and address specific application requirements of our customers. For instance, in December 2010, we started providing copy number variation and structural variation results to our customers. We expect to augment our
assembly and analysis software with capabilities to provide our customers with additional classes of genomic variation detection, with a specific focus on variations found in cancer genomes.
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As we implement a combination of these technology enhancements, our goal is to be the first company to sequence and analyze high-quality complete human
genomes, at scale, for a total cost of under $1,000 per genome.
Sales, Marketing and Customer Support
We sell our complete human genome sequencing service through our direct field sales and support organizations. Our sales process with each new customer
typically involves undertaking a small project, or pilot program, which enables the customer to become familiar with our outsourced solution and research-ready data. We then work with our customers to expand the relationship to larger projects.
Sales
We have
assembled a highly experienced and technically qualified field sales team, many of whom hold a Ph.D. or other advanced degree in a relevant scientific field. Each of these sales managers brings a network of extensive contacts in our targeted
customer segments. The sales group develops business opportunities and obtains orders for our complete human genome sequencing service by proactively identifying, qualifying and visiting well-funded prospects at major companies, institutions and
universities. As we have increased commercial sequencing capacity, we have continued to expand our field sales teams.
Marketing
Our marketing group has developed and maintains the Complete Genomics brand, increases market awareness and generates demand for our
solution through a variety of methods. First, we have created and continue to maintain a clear media presence via our website, press releases, interviews and articles that reinforce our market presence and scientific credibility. Second, we generate
demand by promoting the company via marketing programs and by attending and exhibiting at relevant tradeshows and conferences. Third, we continue to evolve our marketing strategy by tracking market trends, understanding customer needs and developing
appropriate products and programs. The marketing group also fulfills traditional product management requirements, such as defining our service and application strategy and roadmap, including partnering strategies, and developing sales tools,
training materials and competitive analyses for the sales group.
Customer Support
We are committed to supporting our customers through a network of scientific applications staff based in both Mountain View and locations near our most
concentrated customer bases. This team currently consists mostly of Ph.D.-level scientists with extensive bioinformatics experience. Our scientific applications team works with customers to address technical questions related to our service offering
and provide detailed training and support.
Most of the training and support efforts are focused on helping customers understand and use the
large amounts of data that are delivered as part of multi-human genome sequencing projects. We supplement these efforts with a team of Mountain View-based bioinformatics support specialists.
Research and Development
Our research and development team brings together a variety of technical
disciplines required for the development of a high-throughput sequencing system for commercial human genome sequencing services and includes DNA engineers, biochemists, molecular biologists, chemists, mathematicians, statisticians and
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electrical, mechanical, optical and software engineers. As of March 31, 2011, we had approximately 79 employees engaged in research and development, many with Ph.D.s. These professionals
apply their skills in disciplines including:
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biochemistry (sample preparation, DNA array preparation, DNA sequencing assay);
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hardware (optics, fluidics, mechanical design, flow slides);
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software (algorithms, instrument software, genome sequencing software, bioinformatics);
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information technology (high-performance data center management);
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semiconductors (mask design, surface chemistry); and
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The
research and development teams are engaged in optimization and automation of our human genome sequencing processes, components and systems to improve the performance of our human genome sequencing technologies, including increasing accuracy and
completeness, reducing cost and increasing throughput. Notable research and development accomplishments in this area include:
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DNA engineering of four directional adapters inserted in genomic DNA segments, providing DNA substrates for unchained DNA sequencing of 35+35
mate-pair bases;
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clonal DNA replication in solution to create concatamers with 300-500 DNA copies folded in DNBs of approximately 200-300 nanometers in diameter;
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high density (700 nanometer pitch) patterned DNB arrays on a 25mm x 75mm silicon slide with over 2.8 billion spots and a single DNB on over 90% of the
spots;
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reaction flow slide suitable for gravity loading sequencing chemistry by direct pipetting without using pressure or tubing that enables the processing
of up to 18 slides per run on one instrument;
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unchained DNA sequencing chemistry using cPAL technology that allows reading 10 bases from each adapter end, or up to 80 bases per DNA spot, using a
four-adapter library;
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high-throughput, two-camera DNA sequencing instrument that processes 18 flow slides in parallel by robotic transfer of slides from biochemistry station
to imaging station that employs TDI imaging at 30 frames per second;
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probability-based primary DNA base calling, read mapping and genome sequence and sequence variants determination algorithms and software for fast and
accurate sequence analysis of a large number of human genomes using up to 200 gigabases of unchained base reads per genome; and
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long fragment read technology for phasing the two parental chromosomes and reducing the final error rate by one to two orders of magnitude.
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Our research and development teams are engaged in developing new applications for our technologies, including:
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Cancer Genomes.
We are developing new methods for sequencing the complex structural variations found in cancer genomes, such as
duplications, deletions and translocations in tumor genomes. We believe these methods will enable the research community to better understand the genetic basis for cancer.
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Diploid Sequencing.
We have invented and are developing a method for independently sequencing the maternal and paternal chromosomes. We
believe this independent chromosome sequencing will be required for many molecular diagnostics, because multiple variants within a gene may or may not affect both copies of the gene.
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Human Methylomes.
We are researching possible methods of sequencing the human methylome, which we believe will be important in
understanding cancer genomes.
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Human Transcriptomes.
We are researching possible methods of sequencing the human transcriptome, which, when combined with complete human
genomes, we believe will shed light on the genetic basis of human disease and drug response.
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In the years ended
December 31, 2008, 2009 and 2010, we spent $23.6 million, $22.4 million and $21.7 million, respectively, on company-sponsored research and development activities, as we prepared to launch our commercial operations.
Intellectual Property
Our success depends in part
upon our ability to obtain and maintain intellectual property rights with respect to our products, technology and know-how, to prevent others from infringing these intellectual property rights and to operate without infringing the proprietary rights
of others. Our policy is to seek to protect our proprietary position by, among other methods, filing patent applications related to our proprietary technology, inventions and improvements that are important to the development and conduct of our
business. We also rely on trade secrets and know-how to develop and maintain our proprietary position.
Our patent strategy is to seek broad
patent protection on new developments in genome sequencing technology, and also file patent applications covering new implementations of our technology. Additionally, we file new patent applications directed at equipment and software that are used
in conjunction with our genome sequencing technology.
Our core genome sequencing technology originated at Callida Genomics, Inc., or Callida,
in the laboratory of Radoje (Rade) Drmanac, Ph.D., our Chief Scientific Officer and one of our co-founders. Dr. Drmanac played an important role in high-throughput sequencing of whole genomes using ligation-based sequencing reactions performed
on microarrays. In March 2006, we entered into a license agreement with Callida pursuant to which we exclusively licensed from Callida the relevant patent filings relating to the use of the technology in random arrays, or arrays of genomic DNA
fragments wherein the position of any specific fragment on the array is not predetermined, and probe anchor ligation, which we utilize in our commercial sequencing technology. Under this license agreement, we also obtained a nonexclusive license
under additional patent filings owned by Callida that permits us to use the random array technology without infringing such additional patents. In exchange for the licenses, we issued to Callida 13,333 shares of our common stock, paid $1.0 million
in cash for repayment of certain promissory notes held by Callida and agreed to pay $250,000 each year until the earlier of (a) March 28, 2012 and (b) such time as our common stock is traded on a national exchange and the shares
issued to Callida are freely tradeable and have a minimum fair market value of $2.0 million. The license agreement remains in effect until each of the licensed patents has either expired or has been abandoned or ruled invalid. Either party may
terminate the agreement for a material breach upon 120 days notice (or 30 days notice if the breach is due to failure to make a payment under the license agreement). Pursuant to the license agreement, Callida retains the rights to use
the exclusively licensed technology for research purposes only.
As of May 9, 2011, we have licensed from Callida eight issued U.S.
patents and six issued international patents that will expire between 2014 and 2027, and we own four issued U.S. patents that will expire between 2027 and 2028. As of May 9, 2011, we own or have licensed 100 pending patent applications,
including 55 in the United States, 38 international applications and seven applications filed under the Patent Cooperation Treaty.
In addition
to pursuing patents on our technology, we have taken steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants,
corporate partners and, when needed, our advisors.
The patent positions of companies like ours are generally uncertain, and the validity and
breadth of claims in DNA sequencing technology patents may involve complex factual and legal issues for which no consistent policy exists. Our patents and licenses may not enable us to obtain or keep any competitive advantage. Our pending U.S. and
foreign patent applications may not issue as patents or may not issue in a form that will be advantageous to us. Patents we have obtained or do obtain in the future may be challenged by re-examination, opposition or other administrative proceeding,
or may be challenged in litigation, and such challenges could result in a determination that the patent is invalid.
73
Our licensed patents may be successfully circumvented by competitors. In addition, the patent laws of
foreign countries differ from those in the United States, and the degree of protection afforded by foreign patents may be different from the protection offered by U.S. patents.
Our commercial success depends in part on our non-infringement of the patents or proprietary rights of third parties. For a description of the risks we face relating to intellectual property, please see
Risk FactorsRisks Related to Intellectual Property.
Competition
Competition among organizations developing or commercializing sequencing instruments and services is intense. The sequencing industry is dominated by large, established companies that provide instruments
and reagents for sequencing, expression analysis and genotyping. These companies include Illumina, Inc., Life Technologies Corporation and Roche Diagnostics Corporation. These competitors are large and well-established, and each maintains a
significant market share. Although historically these companies have sold instruments and reagents, some of these competitors have made recent forays into the sequencing services market. For example, Illumina started providing whole genome
sequencing services in-house and through its Illumina Genome Network in mid-2010 and announced in January 2011 that it has a backlog of over 1,000 genomes for its sequencing services. Additionally, Life Technologies recently announced a
collaboration to build a genome sequencing facility. New competitors may also enter the whole genome sequencing market, either by providing sequencing services as we do or by selling less expensive and more powerful sequencing instruments. We expect
to face more intense competition if our service-based model is successful. In addition, future competitors may include other companies, like NABsys, Inc., Oxford Nanopore Technologies, Ltd. and Pacific Biosciences, Inc., which have developed or are
developing sequencing technologies or services that may compete with ours in the future. Large, established companies may acquire smaller companies with emerging technologies and use their extensive resources to develop and commercialize or
incorporate these technologies into their instruments and services. For example, in 2010, Life Technologies acquired Ion Torrent Systems, Inc., a chip-based sequencing technology company.
A number of these and other organizations are developing methods for DNA sequencing using single molecule or long-read sequencing technologies. To date, the developers of single molecule technologies have
not demonstrated that single molecule sequencing can achieve the quality required for complete human genome discovery projects at a reasonable cost. While long-reads are critically important for
de novo
sequencing, or sequencing organisms
which have not previously been sequenced, we believe they are not required for sequencing high quality complete human genomes.
In addition to
commercial companies, there are large, government-funded or research-sponsored organizations, such as the Broad Institute of MIT and Harvard, the Genome Center at Washington University, the Baylor College of Medicine Human Genome Sequencing Center,
the Wellcome Trust Sanger Institute and BGI (formerly known as Beijing Genome Institute), that purchase commercial DNA sequencing instruments and offer DNA sequencing services to academic and commercial customers.
For a description of the risks we face related to competition, please see Risk FactorsRisks Related to Our BusinessWe face significant
competition. Our failure to compete effectively could adversely affect our sales and results of operations and The emergence of competitive genome sequencing technologies may impact our business.
Operations
We have established laboratory
operations for our first genome center in Mountain View, California, and we have additional laboratory operations in Sunnyvale, California. Our Tier III certified data center is located in Santa Clara, California. We expect to deploy additional
sequencing centers in the future, and it is likely that these will be located in other regions, including outside of the United States.
Genomic samples arrive at our facilities by common carrier, such as Federal Express or United Parcel Service, and are tested for a number of pre-defined
quality acceptance criteria. Samples that pass acceptance testing are
74
prepared for sequencing, loaded on a flow slide and sequenced on a sequencing instrument. After the sequencing process, data generated by the sequencing instrument is processed in our high
performance computing center to generate the final customer data deliverable. We upload our customers finished genomic data to AWS, which copies the data to hard disks and ships the hard disks to our customers. Our customers also can pay AWS
to store their data on an ongoing basis.
Our genome sequencing center has a finite capacity, and time to delivery will increase if demand
exceeds our capacity. In the future, we expect to reduce time to delivery though technical and procedural improvements. Our sequencing capacity is primarily determined by the equipment, automation and personnel we deploy.
Facilities
We lease approximately 67,000 square
feet of office and laboratory space at our headquarters in Mountain View, California, under a lease that expires in August 2016. We lease approximately an additional 11,000 square feet of office and laboratory space in Sunnyvale, California, under a
lease that expires in August 2016. These facilities contain laboratory and non-laboratory personnel. We also recently signed a lease for 20,000 square feet of additional space in Mountain View, California that expires in March 2013. We believe that
our current facilities are adequate for our first genome center over the next two years. We may need to acquire additional space as we deploy additional genome centers, either in Mountain View or in other locales, and we may need to expand our
Mountain View non-laboratory space for other uses. We believe additional non-laboratory expansion space near our Mountain View facility is readily available.
We also lease approximately 2,200 square feet of data center space in Santa Clara, California, under a contract that expires in June 2011. Our computing capabilities are principally located in this
facility, which is sufficient for our current operations. As our operations expand, we will need to acquire additional data center space, either at this location, or in other regional facilities.
Manufacturing and Supply
We have adopted a
manufacturing strategy of purchasing most components we use to conduct our sequencing services, including silicon wafers, optical microscopes and various other imaging components, sophisticated cameras and chemicals and reagents, from third party
suppliers. This allows us to maintain a more flexible infrastructure while focusing our expertise on deploying these components and supplies to provide high-quality, lower-cost whole genome sequencing services on a large scale.
Although alternative suppliers exist, we currently use single suppliers for certain key materials used in our sequencing process. In particular, we use
SVTC Technologies L.L.C. to provide us with the silicon chips that are the base of the flow slide used in our sequencing process and Hamamatsu Corporation for the cameras used in our sequencing instruments. We are in the process of identifying and
qualifying additional suppliers, although we cannot predict how long that qualification process will last, and the time needed to establish a relationship can be lengthy.
Delays, quality issues or interruptions by our suppliers may harm our business, and we may be forced to establish relationships with new suppliers. However, because the lead time needed to engage a new
supplier can be lengthy, we may experience delays in meeting demand if we must switch to a new supplier. For more information regarding risks related to our supply chain, please see Risk FactorsRisks Related to Our BusinessWe
depend on a limited number of suppliers, including single-source suppliers, of various critical components for our sequencing process. The loss of these suppliers, or their failure to supply us with the necessary components on a timely basis, could
cause delays in the current and future capacity of our sequencing center and adversely affect our business.
Government Regulations
We believe our sequencing service is not currently subject to FDA regulation, clearance or approval. However, if we expand our service to
encompass products that are intended to be used for the diagnosis of disease, such as
75
molecular diagnostic products, regulation by governmental authorities in the United States and other countries will be a significant factor in the development, testing, production, and marketing
of such products.
Our laboratory is subject to federal, state, regional and local regulations relating to the handling and disposal of
hazardous materials and biohazardous waste, including chemicals, biological agents and compounds and blood and other human tissue. We utilize qualified third party vendors for waste disposal and handling, and these vendors are contractually
obligated to comply with any applicable regulations. Our cost of waste disposal has historically not been material, and we expect this to be true in the future.
Due to the nature of our current operations, we have not sought accreditation for our facilities under the Clinical Laboratory Improvement Amendments, or CLIA. In addition, because the genomic data we
provide generally neither identifies nor provides a reasonable basis to identify an individual, we are not currently subject to the Health Insurance Portability and Accountability Act of 1996, or HIPAA. However, once provided to certain of our
customers, the genomic data and the activities of those customers may be regulated under both HIPAA and the Genetic Information Nondiscrimination Act of 2008.
Given the evolving nature of this industry, legislative bodies or regulatory authorities may adopt additional regulation or expand existing regulation to include our service. For example, in the future,
our service could be subject to FDA regulation or we may be required to seek CLIA accreditation for our facilities. Changes to the current regulatory framework, including the imposition of additional or new regulations, could arise at any time, and
we may be unable to obtain or maintain FDA or comparable regulatory approval or clearance of our service, if required. These regulations and restrictions may materially and adversely affect our business, financial condition and results of
operations. For more information regarding the risks of future government regulation, please see Risk FactorsRisks Related to Our BusinessBecause the market for genome sequencing is relatively new and rapidly evolving, we may
become subject to additional future governmental regulation, which may place additional cost and time burdens on our operations.
Backlog
We define order backlog as the number of genomes for which customers have placed sequencing orders that we believe are firm and for which
we have not yet recognized revenue. Estimating the dollar value of backlog that will be fulfilled within the current fiscal year, or any other particular period, requires significant judgments and estimates, as the mix of customer orders and pricing
terms varies between arrangements depending on the number of genomes covered by the arrangement. It also requires estimating the timing of the receipt of qualified samples from our customers, over which we have no control, and the timing of the
sequencing of the genomes. Unanticipated delays in obtaining and fulfilling sequencing orders would result in a delay in recognizing associated revenue.
Given the revenue variance resulting from this mix and the rapidly evolving nature of the sequencing industry, we do not believe that backlog as of any particular date is necessarily indicative of future
results. However, we do believe that order backlog is an indication of our customers willingness to utilize our solution. As of March 31, 2011, we had a backlog of over 2,000 genomes, which we believe could result in approximately $15.0
million in additional revenue over the next twelve months. Our backlog at March 31, 2010 was not significant. See Risk FactorsRisk Related to Our BusinessOur order backlog may never be completed, and we may never earn revenue
on backlogged contracts to sequence genomes.
Segment and Geographical Information
We operate in one reportable business segment, and we derived a majority of our revenue from customers located in the United States. Our total revenue from customers outside of the United States for
fiscal years 2009 and 2010 was $0.1 million and $2.7 million, respectively, or approximately 16% and 29%, respectively, of our total revenue. We had no revenue in 2008. Sales to customers located outside of the United States are denominated in U.S.
dollars. We expect that sales to international customers will be an important and growing source of revenue, particularly as we construct additional genome sequencing centers outside of the United States. All of our long-lived assets are located in
the United States.
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Employees
As of March 31, 2011, we had a total of 202 employees, 54 of whom hold Ph.D. degrees and 79 of whom are engaged in full-time research and development activities. We plan to expand our production, our
sales and marketing and our research and development programs, and we plan to hire additional staff as these initiatives are implemented. None of our employees is represented by a labor union, and we consider our employee relations to be in good
standing.
Legal Proceedings
On
August 3, 2010, a patent infringement lawsuit was filed by Illumina, Inc. and Solexa, Inc. (an entity acquired by Illumina), or the plaintiffs, against us in the U.S District Court in Delaware. The case caption is
Illumina, Inc. and Solexa,
Inc. v. Complete Genomics, Inc.
, Civil Action No. 10-649. The complaint alleges that our Complete Genomics Analysis Platform, and in particular our combinatorial probe anchor ligation technology, infringes upon three patents held by
Illumina and Solexa. The plaintiffs seek unspecified monetary damages and injunctive relief. If we are found to infringe one or more valid claims of a patent-in-suit and if the district court grants an injunction, we may be forced to redesign
portions of our sequencing process, seek a license or cease the infringing activity. On September 23, 2010, we filed our answer to the complaint as well as our counterclaims against the plaintiffs. On November 9, 2010, the U.S. District
Court in Delaware granted our motion to transfer the case to the Northern District of California. On May 5, 2011, the Court entered a stipulated order to dismiss two patents from the lawsuit. The dismissal is without prejudice but includes
conditions on the ability to file lawsuits on these patents, including a limitation that Illumina may not re-file such lawsuits against us until the later of (1) August 1, 2012, or (2) the exhaustion of all appeal rights in both
(a) the pending reexaminations in the U.S. Patent and Trademark Office and (b) the pending civil litigation in which these patents are also asserted,
Life Technologies Corp. v. Illumina,
Case No. 11-CV703 (S.D.
Cal.). Accordingly, there is now only one patent asserted against us in this lawsuit. We believe that we have substantial and meritorious defenses to the plaintiffs claims and intend to vigorously defend our position. However, a negative
outcome in this matter could have a material adverse effect on our financial position, results of operations, cash flows and business. For more information regarding the risk of this litigation and future litigation, please see Risk
FactorsWe currently are, and could in the future be, subject to litigation regarding patent and other proprietary rights that could harm our business and We may incur substantial costs as a result of our current, or future,
litigation or other proceedings relating to patent and other proprietary rights. We are not currently able to estimate the potential loss, if any, that may result from this litigation.
From time to time, we may become involved in other legal proceedings and claims arising in the ordinary course of our business. Other than as described above, we are not currently a party to any legal
proceedings the outcome of which, if determined adversely to us, we believe would individually or in the aggregate have a material adverse effect on our business, operating results, financial condition or cash flows.
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Management
Executive Officers, Key Employees and Directors
The following table sets forth certain information
about our executive officers, key employees and directors, as of March 31, 2011.
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Name
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Age
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Position
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Executive Officers
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Clifford A. Reid, Ph.D.
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52
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Chairman, President and Chief Executive Officer
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Ajay Bansal
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49
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Chief Financial Officer
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Radoje Drmanac, Ph.D.
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53
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Chief Scientific Officer
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Bruce Martin
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46
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Senior Vice President of Product Development
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Mark J. Sutherland
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53
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Senior Vice President of Business Development
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Key Employees
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Dennis Ballinger, Ph.D.
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56
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Vice President of Genomics
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William Banyai, Ph.D.
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56
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Vice President of Hardware
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R. John Curson
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68
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Vice President of Financial Operations
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Alan Dow, Ph.D.
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55
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Vice President of Intellectual Property and Legal Affairs
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Ken Prokuski
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61
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Vice President of Operations
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Aaron Solomon
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46
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Vice President of Sales
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Jennifer Turcotte
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41
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Vice President of Marketing
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Directors
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Clifford A. Reid, Ph.D.
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52
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Chairman, President and Chief Executive Officer
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Alexander E. Barkas, Ph.D.
(1)(2)
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63
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Director
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C. Thomas Caskey, M.D.
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72
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Director
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Carl L. Gordon, Ph.D., CFA
(3)
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46
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Director
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Andrew E. Senyei, M.D.
(3)
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61
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Director
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Lewis J. Shuster
(3)
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55
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Director
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Charles P. Waite, Jr.
(1)(2)
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55
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Director
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Robert T. Wall
(1)(2)
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65
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Director
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(1)
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Member of the compensation committee.
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(2)
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Member of the nominating and corporate governance committee.
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(3)
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Member of the audit committee.
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Executive
Officers and Key Employees
Clifford A. Reid, Ph.D.,
is our co-founder and Chairman and has served as our President and Chief
Executive Officer since July 2005 and as a member of our board of directors since July 2005. From March 2003 to September 2005, Dr. Reid was Vice President of Collaborative Solutions at Open Text Corporation, a software company. In 1995,
Dr. Reid co-founded Eloquent, Inc., a digital video communications company, and served as its Chief Executive Officer until 1999 and as its Chairman until 2003, when it was acquired by Open Text. In 1988, Dr. Reid co-founded Verity, Inc.,
an enterprise text search engine company, and served as its Vice President of Engineering from 1988 to 1992 and as its Executive Vice President from 1992 to 1993. Dr. Reid received a B.S. in Physics from the Massachusetts Institute of
Technology, an M.B.A. from Harvard University and a Ph.D. in Management Science and Engineering from Stanford University. As our President, Chief Executive Officer and co-founder, Dr. Reid brings expertise and knowledge regarding our business
and operations to our board of directors. He also brings to our board of directors an extensive background in the technology industry and in leadership roles, providing both strategic and operational vision and guidance.
Ajay Bansal
has served as our Chief Financial Officer since May 2010. From June 2009 to January 2010, Mr. Bansal served as Chief Financial
Officer and Executive Vice President of Business Development at Lexicon
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Pharmaceuticals, Inc., a biopharmaceutical company. From December 2007 to October 2008, Mr. Bansal served as Chief Financial Officer and Executive Vice President of Finance of Tercica, Inc.,
a biopharmaceutical company acquired by the Ipsen Group in October 2008. He also served as Chief Financial Officer and Senior Vice President of Finance of Tercica from March 2006 until December 2007. From February 2003 to January 2006,
Mr. Bansal served as Vice Present of Finance and Administration and Chief Financial Officer of Nektar Therapeutics, a biopharmaceutical company. From July 2002 to February 2003, Mr. Bansal served as Director of Operations Analysis at
Capital One Financial, a bank holding company. From August 1998 to June 2002, Mr. Bansal was at Mehta Partners LLC, a financial advisory firm, where he was named partner in January 2000. Prior to joining Mehta Partners, Mr. Bansal spent
more than ten years in management roles at Novartis, a pharmaceuticals company, and in consulting at Arthur D. Little, Inc., McKinsey & Company, Inc. and ZS Associates. Mr. Bansal received a B.S. in Mechanical Engineering from the
Indian Institute of Technology (Delhi) and an M.S. in Operations Management and an M.B.A. from Northwestern University.
Radoje Drmanac,
Ph.D.,
is our co-founder and has served as our Chief Scientific Officer since July 2005. In 2001, Dr. Drmanac co-founded Callida Genomics, Inc., a DNA sequencing company, and served as Callidas Chief Scientific Officer from 2001 to
2004 and has served as its President since 2004. In 1994, Dr. Drmanac co-founded Hyseq, Inc., a DNA array technology company that became Hyseq Pharmaceuticals, Inc. and later merged with Variagenics, Inc. to become Nuvelo, Inc., and served as
its Senior Vice President of Research from 1994 to 1998 and as its Chief Scientific Officer from 1998 to 2001. Prior to that, Dr. Drmanac served as a group leader at Argonne National Laboratory. Dr. Drmanac received a B.S., M.S. and Ph.D.
in Molecular Biology from the University of Belgrade.
Bruce Martin
has served as our Senior Vice President of Product Development since
March 2010. From May 2007 to March 2010, Mr. Martin was our Vice President of Product Development. From 2005 to May 2007, Mr. Martin served as Vice President of Product Strategy at PSS Systems, Inc., an internet software company. From 2002
to 2003, Mr. Martin served as Chief Technical Officer of Openwave Systems Inc., a software company. Mr. Martin received a B.S. in Computer Science and Electrical Engineering from the University of California, Davis.
Mark J. Sutherland
has served as our Senior Vice President of Business Development since March 2010. From October 2008 to November 2009,
Mr. Sutherland served as Senior Vice President of Business Development at GenVault Corporation, a DNA storage company. From November 2005 to September 2007, Mr. Sutherland served as Chief Business Officer for Flashpoint Technology,
Inc., a digital content management company. Beginning in August 1988, Mr. Sutherland served for 17 years in roles of increasing responsibility at Molecular Dynamics, a manufacturer of molecular biology and genetic engineering equipment,
and its successor companies, Amersham Biosciences and GE Healthcare. Mr. Sutherland served as Vice President of Genomics at Amersham from 1998 to 2001 and as VP, Strategic Alliances, at Amersham and for the Discovery Systems business of GE
Healthcare from 2001 to 2005. Mr. Sutherland received a B.S. in Chemistry with Honors from Stanford University.
Dennis Ballinger,
Ph.D.,
has served as our Vice President of Genomics since October 2008. From 2002 to 2008, Dr. Ballinger served as Vice President of Genomics at Perlegen Sciences, Inc., a developer of genetic tests. From 1999 to 2001, he served as Director
of Product Development at Ingenuity Systems, Inc., a software company. From 1998 to 1999, he served as Senior Director of Functional Genomics at Hyseq, Inc. From 1994 to 1998, he served as Director of Cardiovascular Disease Research at Myriad
Genetics, a developer of molecular diagnostic products. From 1989 to 1994, Dr. Ballinger was an Assistant Professor of molecular biology at the Sloan-Kettering Institute and Cornell University Graduate School. Dr. Ballinger received a B.S.
in molecular cell biology from University of Colorado, Boulder and a Ph.D. in cellular and developmental biology from the Massachusetts Institute of Technology and completed his postdoctoral training at the California Institute of Technology.
William Banyai, Ph.D.,
has served as our Vice President of Hardware since July 2006. From March 2000 to February 2006, Dr. Banyai
was a founder and the Chief Technical Officer of Glimmerglass Networks, an optical networking company. From February 1996 to February 2000, Dr. Banyai served as a staff physicist at the
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Lawrence Livermore National Lab. From November 1994 to November 1995, Dr. Banyai served as the Chief Technologist of Silicon Light Machines, a high-resolution display company. From September
1992 to October 1994, Dr. Banyai served as a research engineer at Stanford Universitys Ginzton Laboratory. From January 1991 to August 1992, Dr. Banyai served as a research scientist at the Sandia National Labs Compound
Semiconductor Research Facility. Dr. Banyai received a B.S. in physics and an M.S. in electrical science from the University of Michigan, an Engineer of Electrical Engineering from the University of Southern California and a Ph.D. in optical
sciences from the University of Arizona.
R. John Curson
is our co-founder and has served as our Vice President of Financial Operations
since May 2010. From July 2005 to May 2010, he served as our Chief Financial Officer. From April 2003 to July 2005, Mr. Curson was a partner of Neon Partners, an investment partnership focusing on special turn-around situations. From July
1999 until its acquisition by Open Text Corporation in April 2003, Mr. Curson served as Chief Financial Officer of Eloquent, Inc., a digital video communications company. From July 1993 to July 1999, Mr. Curson served as Chief Financial
Officer of RasterOps Inc., a digital imaging and peripherals company which, during Mr. Cursons tenure, was re-incorporated as Truevision Inc., a digital video company. Mr. Curson received a B.S. in Mechanical Engineering and an M.A.
in Operations Research and Economics from the University of Leeds, U.K., and an M.B.A. from the University of California, Los Angeles.
Alan
Dow, Ph.D.,
has served as our Vice President of Intellectual Property and Legal Affairs since September 2008. From September 2004 to September 2008, Dr. Dow worked as an attorney in private practice at BioTechnology Law Group in San Diego,
California, specializing in patent prosecution and intellectual property-related transactions. From June 2001 to July 2004, Dr. Dow served as Vice President and General Counsel of Vical Incorporated, a biopharmaceutical company. Dr. Dow
received a B.S. in Chemistry from the University of Maine at Orono, a Ph.D. in Genetics from Harvard University and a J.D. from Stanford Law School.
Ken Prokuski
has served as our Vice President of Operations since January 2010. From August 2009 to January 2010, Mr. Prokuski served as an independent consultant to us. From October 1993 to
January 2009, Mr. Prokuski served as Senior Director of Manufacturing Operations at Applied Biosystems, a life sciences company and a division of Life Technologies. From September 1992 to September 1993, Mr. Prokuski served as Material
Manager at Arico Coating Technology, a thin film deposition equipment manufacturer. From September 1991 to September 1992, Mr. Prokuski served as Director of Materials at Toshiba America, Inc., an electronics company. From January 1990 to
August 1991, Mr. Prokuski served as Operations Manager at Millipore Corporation, a life sciences company. Mr. Prokuski received a B.A. in Psychology from Northeastern Illinois University and an Executive M.B.A. from Golden Gate University.
Aaron Solomon,
has served as our Vice President of Sales since March 2009. From April 2008 to March 2009, Mr. Solomon served as
Vice President of Business Development at Tethys Bioscience, a developer of diagnostic tests. From October 2005 to April 2008, Mr. Solomon served as Director of Western Region Industrial Sales and later as Vice President of Industrial Sales at
Affymetrix, a leading DNA microarray company. From February 2004 until its acquisition by Affymetrix in October 2005, Mr. Solomon served as Vice President of Business Development at ParAllele, a targeted genotyping company. Mr. Solomon
received a B.S. in Biological Sciences from the University of California, Irvine.
Jennifer Turcotte
has served as our Vice President of
Marketing since September 2008. From November 2007 to August 2008, she served as our Senior Director of Product Marketing. From June 2007 to October 2007, Ms. Turcotte served as Senior Director, Marketing Solutions, at SAP, Inc., a
business management software company. From March 2004 to May 2007, Ms. Turcotte served as Senior Director of Product Marketing at Siperian, Inc., a software company acquired by Informatica in March 2010. Prior to joining Siperian,
Ms. Turcotte held senior product marketing positions at Rearden Commerce, a technology-based personal assistance company, Ariba, Inc., a software and information technology company, Nuance Communications, a software company, and BEA Systems,
Inc., a software company that was acquired by Oracle Corporation. Ms. Turcotte received a B.Eng. in mechanical engineering from Carleton University in Ottawa, Canada.
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Directors
Alexander E. Barkas, Ph.D.,
has served as a member of our board of directors since March 2007. In 1997, Dr. Barkas co-founded Prospect Venture Partners, a venture capital firm, and currently
serves as a Managing Director at that firm. From 1991 to 1997, Dr. Barkas was a Partner at Kleiner Perkins Caufield & Byers, a venture capital firm. Prior to that, Dr. Barkas was a Founder and Chief Executive Officer of BioBridge
Associates, a healthcare industry consulting firm. Dr. Barkas has served as Chairman of Geron Corporation, a biopharmaceutical company, since 1993 until early 2011 and as a member of the board of directors since 1992. Dr. Barkas has also
served as a director of Amicus Therapeutics, Inc., a biotechnology company, since 2004. From May 2002 to October 2008, Dr. Barkas served as a director of Tercica, and as its Chairman from August 2003 to October 2008. Dr. Barkas received a
Ph.D. in Biology from New York University and a B.A. in Biology from Brandeis University, where he currently is Chairman of the University Science Advisory Council and serves on the Board of Trustees. As a venture capitalist, Dr. Barkas brings
to our board of directors broad experience in advising and managing life science and biotechnology companies from early-stage to mature companies, including expertise in capital raising, strategic transactions, financial budgeting and reporting,
strategy and operations, recruiting and compensation. In addition, Dr. Barkas brings insight on compensation-related matters to the compensation committee based on his breadth of exposure to life science companies.
C. Thomas Caskey, M.D.,
has served as a member of our board of directors since August 2009. Since January 2006, Dr. Caskey has served as
Director and Chief Executive Officer of the Brown Foundation Institute of Molecular Medicine for the Prevention of Human Diseases, part of the University of Texas Health Science Center at Houston. Since 2003, Dr. Caskey has served as an Adjunct
Partner at Essex Woodlands Health Ventures, a venture capital firm. Dr. Caskey served as Managing Director of Cogene Biotech Ventures, Ltd., a venture capital firm, from March 2005 to October 2005 and as President and Chief Executive Officer
from April 2000 to March 2005. He served as Senior Vice President, Research, at Merck Research Laboratories, a division of Merck & Co., Inc., a pharmaceutical company, from 1995 to 2000 and as President of the Merck Genome Research
Institute from 1996 to 2000. Before joining Merck, Dr. Caskey served 25 years at Baylor College of Medicine in a series of senior positions, including Chairman, Department of Human and Molecular Genetics, and Director, Human Genome Center. He
is a member of the National Academy of Sciences. Dr. Caskey served as a director of Lexicon Genetics Incorporated, a biopharmaceutical company, from April 2000 to April 2006 and as Chairman from April 2000 to March 2005. Dr. Caskey served
as a director of Luminex Corporation, a developer of biological testing technologies, from January 2001 to May 2005. Dr. Caskey received a B.A. from the University of South Carolina and an M.D. from Duke University. Dr. Caskey brings to
the board an extensive scientific and operational background gained as a research scientist, executive and venture capital advisor focused on life science and pharmaceutical companies.
Carl L. Gordon, Ph.D., CFA,
has served as a member of our board of directors since August 2009. In 1998, Dr. Gordon co-founded OrbiMed Advisors LLC, an asset management firm, and has served as
a General Partner since that time. From 1995 to 1997, Dr. Gordon served as a Senior Biotechnology Analyst at Mehta & Isaly, the predecessor firm to OrbiMed. From 1993 to 1995, Dr. Gordon served as a Fellow at The Rockefeller
University. Since May 2008, Dr. Gordon has served as a director of Amarin Corporation, a biopharmaceutical company. From March 2004 to May 2007, Dr. Gordon served as a director of Biocryst Pharmaceuticals, Inc., a pharmaceutical company.
Dr. Gordon received an A.B. from Harvard University and a Ph.D. in molecular biology from the Massachusetts Institute of Technology. As a venture capitalist focused on life science companies who sits on numerous boards, Dr. Gordon provides
financial and operational expertise regarding our industry. In addition, Dr. Gordon provides substantial expertise in the particularly relevant scientific field of molecular biology.
Andrew E. Senyei, M.D.,
has served as a member of our board of directors since March 2006. Since 1987, Dr. Senyei has served as a Managing Director and a General Partner of Enterprise
Partners, a venture capital firm. In 1989, Dr. Senyei co-founded Molecular Biosystems, Inc., a biotechnology company acquired by Alliance Pharmaceutical Corp. in 2000. Prior to joining Enterprise Partners, Dr. Senyei served as a practicing
clinician and Adjunct Associate Professor of Obstetrics and Gynecology at the University of California, Irvine. Dr. Senyei has served as Chairman of Genoptix, Inc., a specialized medical laboratory service provider, since
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April 2000. Dr. Senyei served as a director of Adeza Biomedical Corporation, a healthcare products company, from 1987 until Adeza was acquired by Cytyc Corporation in April 2007.
Dr. Senyei has served on the Board of Trustees of Northwestern University since 2005 and on the Advisory Council of the Jacobs School of Engineering at the University of California, San Diego, since 2002. Dr. Senyei received a B.S. from
Occidental College and an M.D. from Northwestern University Medical School, and he completed his residency training at the University of California, Irvine, Medical Center. Dr. Senyeis medical and business expertise, including his
experience as a venture capitalist building and serving on the board of directors of more than 25 public and private emerging life sciences and healthcare companies, combined with his extensive prior experience as an inventor and practicing
clinician, give him valuable insight into our industry. His experience provides the seasoned business judgment and broad strategic vision which enables him to serve as an effective and valuable director and to have the qualifications and leadership
and other skills to serve on our board of directors.
Lewis J. Shuster
has served as a member of our board of directors since April
2010. In 2002, Mr. Shuster founded Shuster Capital, a strategic and operating advisor to life science companies, and has served as its Chief Executive Officer since that time. From June 2003 to November 2007, Mr. Shuster served as Chief
Executive Officer of Kemia, Inc., a drug discovery and development company. From February 2000 to December 2001, Mr. Shuster held various operating executive positions at Invitrogen Corporation, a biotechnology company that merged with Applied
Biosystems Inc. and became Life Technologies Corporation. From 1994 to 1999, Mr. Shuster served as Chief Financial Officer of Pharmacopeia, Inc., a drug discovery product and service company, and later as Chief Operating Officer of Pharmacopeia
Labs, a division of Pharmacopeia, Inc. Mr. Shuster joined Human Genome Sciences as its first employee in September 1992, and as Executive Vice President of Operations and Finance, helped guide the development and operation of what was the
worlds leading gene sequencing operation in 1994. Mr. Shuster served as a director and Chairman of the Audit Committee of Epitomics, Inc., a private monoclonal antibody firm, from 2002 until May 2010, and a director and Chairman of the
Audit Committee of Sorrento Therapeutics, Inc., a biopharmaceutical company, from September 2009 to February 2010, and a director of Retrotope, a privately held biotechnology company, since April 2008, and as a member of the Board of Managers and
Chairman of the Audit Committee of MSN Health, LLC, a privately held nurse and professional health care staffing firm, since September 2010, and as a director of ADVENTRX Pharmaceuticals, Inc., a biopharmaceutical company, since April 2011.
Mr. Shuster received a B.A. in Economics from Swarthmore College and an M.B.A. from Stanford University. Mr. Shuster provides the board with an extensive background in financial and strategic planning, auditing and accounting and financial
leadership expertise. As Chairman of the Audit Committee, Mr. Shuster also keeps the board abreast of current audit issues and collaborates with our independent registered public accounting firm and senior management team.
Charles P. Waite, Jr.,
has served as a member of our board of directors since March 2006. Mr. Waite has been a General Partner of OVP Venture
Partners II and a Vice President of Northwest Venture Services Corp. since 1987, a General Partner of OVP Venture Partners III since 1994, a General Partner of OVP Venture Partners IV since 1997, a General Partner of OVP Venture Partners V since
2000 and a General Partner of OVP Venture Partners VI since 2001, all of which are venture capital firms. He currently serves on the board of directors of eight private companies. Mr. Waite received an A.B. in History from Kenyon College and an
M.B.A. from Harvard University. Mr. Waite brings to the board significant operational and leadership experience as a venture capital investor who sits on a number of boards. Mr. Waites investment focus on life science companies also
provides substantial expertise in our industry.
Robert T. Wall
has served as a member of our board of directors since September 2010.
Since August 1984, Mr. Wall has been the Founder and President of On Point Developments, LLC, a venture management and investment company. Mr. Wall was a founder and, from November 2000 to December 2006, the Chairman of the Board of
Directors of Airgo Networks, Inc., a Wi-Fi wireless networking systems company that was acquired by QUALCOMM, Inc. in December 2006. From June 1997 to November 1998, he was Chief Executive Officer and a member of the board of directors of Clarity
Wireless, Inc., a broadband wireless data communications company that was acquired by Cisco Systems, Inc., a network and communications company, in November 1998. Mr. Wall was Chairman of the Board, President and Chief Executive Officer of
Theatrix Interactive, Inc., a consumer
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educational software publisher, from April 1994 to August 1997. Mr. Wall has also served as a director of NetApp, Inc., an enterprise storage and data management company, since January 1993.
Mr. Wall has been a member of the Board of Trustees of the Fine Arts Museums of San Francisco since June 2007 and a member of the Visiting Committee, Arts of Africa, Oceania and the Americas at the Metropolitan Museum of Art in
New York since March 2007. He received an AB degree in economics from DePauw University and an M.B.A. degree from Harvard Business School. Mr. Wall brings to the board over 30 years of experience leading and founding several
technology companies. As a result of Mr. Walls service on the boards of other public companies and varied strategic mergers and acquisition experience, he is familiar with a full range of corporate and board functions. Additionally,
Mr. Walls service as chairman of the compensation committee of another public company provides our board with valuable experience and leadership in developing and implementing our compensation policies.
Scientific Advisory Board
We maintain a
scientific advisory board consisting of members with experience and expertise in the field of genomics and genetics who provide us with consulting services. Our scientific advisory board consists of the following members:
Mark Chee, Ph.D.,
is an internationally recognized expert in genomics. He presently serves as Chief Executive Officer and Chief Scientific Officer
of Prognosys Biosciences, Inc. Previously, he co-founded Illumina, Inc., and was Director of Genetics Research at Affymetrix, Inc. He has published scientific papers on microarray technology and applications and is an inventor on over 40 issued
patents. He also serves on the External Scientific Committee of The Cancer Genome Atlas project. Dr. Chee received his B.Sc. in Biochemistry from the University of New South Wales and his Ph.D. in Molecular Biology from the University of
Cambridge.
George Church, Ph.D.,
is Professor of Genetics at Harvard Medical School and Director of the Center for Computational
Genetics. With degrees from Duke University in Chemistry and Zoology, he co-authored research on 3D-software & RNA structure with Sung-Hou Kim. His 1984 Ph.D. from Harvard in Biochemistry & Molecular Biology with Wally Gilbert
included the first direct genomic sequencing method. He co-initiated the Human Genome Project a few months later as a Research Scientist at newly formed Biogen Inc. and was a Monsanto Life Sciences Research Fellow at UCSF. He invented the broadly
applied concepts of molecular multiplexing and tags, homologous recombination methods and array DNA synthesizers. Technology transfer of automated sequencing and software to Genome Therapeutics Corp. resulted in the first commercial genome sequence
(the human pathogen, H. pylori, 1994). He has served in advisory roles for 12 journals, five granting agencies and 22 biotechnology companies. His current research focuses on integrating biosystems-modeling with personal genomics and synthetic
biology.
Leroy Hood, M.D., Ph.D.,
is currently President of the Institute for Systems Biology. His research has focused on the study of
molecular immunology, biotechnology and genomics. His professional career began at the California Institute of Technology where he and his colleagues pioneered four instruments, the DNA gene sequencer and synthesizer and the protein synthesizer and
sequencer, which comprise the technological foundation for contemporary molecular biology. In particular, the DNA sequencer has revolutionized genomics by allowing the rapid, automated sequencing of DNA, which played a crucial role in contributing
to the successful mapping of the human genome during the 1990s. In 1992, he moved to the University of Washington as founder and Chairman of the cross-disciplinary Department of Molecular Biotechnology. In 2000, he co-founded the Institute for
Systems Biology in Seattle, Washington to pioneer systems approaches to biology and medicine. He is a member of the National Academy of Sciences, the American Philosophical Society, the American Association of Arts and Sciences and the Institute of
Medicine. He has also played a role in founding numerous biotechnology companies, including Amgen, Inc., Applied Biosystems, Inc., Systemix Institute, Darwin Molecular Corp. and Rosetta Inpharmatics LLC. Dr. Hood received an M.D. from Johns
Hopkins School of Medicine and a Ph.D. in Biochemistry from the California Institute of Technology. He has published more than 600 peer-reviewed papers, is listed as an inventor on 14 issued patents and has co-authored textbooks in biochemistry,
immunology, molecular biology and genetics.
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Douglas A. Lauffenburger, Ph.D.,
is the Uncas & Helen Whitaker Professor of Bioengineering
and Director of the Biological Engineering Division at the Massachusetts Institute of Technology and also holds appointments in the Department of Biology and the Department of Chemical Engineering. Dr. Lauffenburger received B.S. and Ph.D.
degrees in chemical engineering from the University of Illinois in 1975 and the University of Minnesota in 1979, respectively. His major research interests are in cell engineering, the fusion of engineering with molecular cell biology. A central
focus of his research program is in receptor-mediated cell communication and intracellular signal transduction, with emphasis on development of predictive computational models derived from quantitative experimental studies, on cell
cue/signal/response relationships. These models have applications in drug discovery and development.
Larry Smarr, Ph.D.,
is the
founding Director of the California Institute for Telecommunications and Information Technology, a partnership between the University of California, San Diego, and University of California, Irvine, created in 2000. Dr. Smarr also holds the
Harry E. Gruber professorship in the Jacobs Schools Department of Computer Science and Engineering at the University of California, San Diego. Dr. Smarr was the founding director of the National Center for Supercomputing Applications, a
position he held until 2000. From 1997 until 2005, Dr. Smarr served on the Advisory Committee to the Director of the National Institutes of Health. Previously, he was a professor in the Astronomy and Physics departments of the University of
Illinois at Urbana-Champaign from 1979 until March 2000. Dr. Smarr received a B.A. and a M.S. in physics from the University of Missouri, a M.S. in physics from Stanford University and a Ph.D. in physics for the University of Texas, Austin.
Dr. Smarr was a member of the Fisher Scientific Biotechnology Council from 1993 through 1998, has been a member of the InterWest MedTech Advisory Committee since 1999 and has been Advisor to the CEO, MedExpert International, Inc. since 2000.
Dr. Smarr is a pioneer in the field of biomedical computing and has numerous publications in the field, including publications and quotations in
Science, Nature,
the
New York Times, Wall Street Journal, Time, Newsweek, Wired, Fortune,
Business Week,
the
Sydney Morning Herald,
the
Age
and the
Australian Broadcasting Company.
Leadership Structure of the
Board
Our board of directors is currently chaired by the President and Chief Executive Officer of the Company, Dr. Reid. Our board
has combined the positions of Chief Executive Officer and Chairman to help ensure that the board and management act with a common purpose and to facilitate the flow of information between management and the board. Our board believes that the
combination of the Chairperson and Chief Executive Officer position will provide a single, clear chain of command to continue to develop our business and execute our strategic and business plans. In addition, our board also believes that it is
advantageous to have a Chairman with an extensive history with and knowledge of the company and our industry, as is the case with Dr. Reid, who was one of our founders.
Board Composition
Independent Directors
Our board of directors currently consists of eight members. Our board of directors has determined that all of our directors, other than Dr. Reid,
qualify as independent directors in accordance with the NASDAQ listing requirements. Dr. Reid is not considered independent because he is an employee of Complete Genomics. The NASDAQ independence definition includes a series of
objective tests, such as that the director is not, and has not been for at least three years, one of our employees and that neither the director nor any of his family members has engaged in various types of business dealings with us. In addition, as
required by NASDAQ rules, our board of directors has made a subjective determination as to each independent director that no relationships exist, which, in the opinion of our board of directors, would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director. In making these determinations, our board of directors reviewed and discussed information provided by the directors and us with regard to each directors business and personal
activities and relationships as they may relate to us and our management.
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Classified Board of Directors
Our board of directors is divided into three classes with staggered, three-year terms. At each annual meeting of stockholders, the successors to directors whose terms then expire will be elected to serve
from the time of election and qualification until the third annual meeting following election. Effective upon the completion of this offering, our directors will be divided among the three classes as follows:
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the Class I directors are Carl L. Gordon, Ph.D., CFA, Lewis J. Shuster and Charles P. Waite, Jr., and their terms will expire at the annual meeting of
stockholders to be held in 2011;
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the Class II directors are Alexander E. Barkas, Ph.D. and Andrew E. Senyei, M.D., and their terms will expire at the annual meeting of stockholders to
be held in 2012; and
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the Class III directors are C. Thomas Caskey, M.D., Clifford A. Reid, Ph.D. and Robert T. Wall, and their terms will expire at the annual meeting of
stockholders to be held in 2013.
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Our amended and restated certificate of incorporation provide that the authorized number
of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will
consist of one-third of the directors. The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change-in-control of our company.
Board Diversity
Our nominating and corporate
governance committee will be responsible for reviewing with the board of directors, on an annual basis, the appropriate characteristics, skills and experience required for the board of directors as a whole and its individual members. In evaluating
the suitability of individuals candidates (both new candidates and current members), the nominating and corporate governance committee, in recommending candidates for election, and the board of directors, in approving (and, in the case of vacancies,
appointing) such candidates, will take into account many factors, including the following:
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personal and professional integrity;
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experience in corporate management, such as serving as an officer or former officer of a publicly held company;
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experience in the industries in which we compete;
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experience as a board member of another publicly held company;
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diversity of expertise and experience in substantive matters pertaining to our business relative to other board members;
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conflicts of interest; and
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practical and mature business judgment.
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Our board of directors evaluates each individual in the context of the board of directors as a whole, with the objective of assembling a group that can best maximize the success of the business and
represent stockholder interests through the exercise of sound judgment using its diversity of experience in these various areas.
Board Committees
Our board of directors has an audit committee, a compensation committee and a nominating and corporate governance committee. Our board of
directors may establish other committees to facilitate the management of our business. The composition and functions of each committee are described below.
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Audit Committee
Our audit committee oversees our corporate accounting and financial reporting process. Among other matters, the audit committee:
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appoints our independent registered public accounting firm;
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evaluates the independent registered public accounting firms qualifications, independence and performance;
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determines the engagement of the independent registered public accounting firm;
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reviews and approves the scope of the annual audit and the audit fee;
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discusses with management and the independent registered public accounting firm the results of the annual audit and the review of our quarterly
financial statements;
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approves the retention of the independent registered public accounting firm to perform any proposed permissible non-audit services;
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monitors the rotation of partners of the independent registered public accounting firm on our engagement team as required by law;
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is responsible for reviewing our financial statements and our managements discussion and analysis of financial condition and results of
operations to be included in our annual and quarterly reports to be filed with the SEC;
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reviews our critical accounting policies and estimates; and
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annually reviews the audit committee charter and the committees performance.
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The current members of our audit committee are Carl Gordon, Ph.D., CFA, Andrew E. Senyei, M.D. and Lewis J. Shuster. Mr. Shuster serves as the
chairman of the committee. All members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and NASDAQ. Our board of directors has determined that Mr. Shuster is an audit
committee financial expert as defined under the applicable rules of the SEC and has the requisite financial sophistication as defined under the applicable rules and regulations of The NASDAQ Stock Market. Under the rules of the SEC, members of the
audit committee must also meet heightened independence standards. However, a minority of the members of the audit committee may be exempt from the heightened audit committee independence standards for one year from the date of effectiveness of the
registration statement filed in connection with our initial public offering. Our board has determined that each of Dr. Senyei and Mr. Shuster meet these heightened independence standards. Due to his relationship with OrbiMed Advisors LLC
and its affiliated funds, which may be deemed to be an affiliate of us due to the size of its holdings in our securities, Dr. Gordon does not currently meet the heightened independence requirements under Rule 10A-3 of the Exchange Act. If
necessary, our board intends to appoint a new director meeting these heightened independence standards to replace Dr. Gordon as a member of our audit committee in reliance on the phase-in exemption pursuant to Rule 10A-3(b)(1)(iv)(A)(2)
under the Exchange Act. Upon expiration of this phase-in exemption in November 2011, each of our audit committee members must meet the heightened independence requirements under Rule 10A-3(b)(1) under the Exchange Act. The audit committee operates
under a written charter that satisfies the applicable standards of the SEC and NASDAQ.
Compensation Committee
Our compensation committee reviews and recommends policies relating to compensation and benefits of our officers and employees. The compensation committee
reviews and approves corporate goals and objectives relevant to compensation of our Chief Executive Officer and other executive officers, evaluates the performance of these officers in light of those goals and objectives and sets the compensation of
these officers based on such evaluations. The compensation committee also recommends to our board of directors the issuance of stock options and other awards under our stock plans. The compensation committee will review and evaluate, at least
annually, the performance of the compensation committee and its members, including compliance by the
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compensation committee with its charter. The current members of our compensation committee are Alexander E. Barkas, Ph.D., Charles P. Waite, Jr. and Robert T. Wall. Mr. Wall serves as the
chairman of the committee. Each of the members of our compensation committee is independent under the applicable rules and regulations of The NASDAQ Global Market, is a non-employee director as defined in Rule 16b-3 promulgated under the
Exchange Act and is an outside director as that term is defined in Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended, or Section 162(m). The compensation committee operates under a written charter.
Nominating and Corporate Governance Committee
The nominating and corporate governance committee is responsible for making recommendations to our board of directors regarding candidates for directorships and the size and composition of our board of
directors. In addition, the nominating and corporate governance committee is responsible for overseeing our corporate governance policies and reporting and making recommendations to our board of directors concerning governance matters. The current
members of our nominating and corporate governance committee are Alexander E. Barkas, Ph.D., Charles P. Waite, Jr. and Robert T. Wall. Dr. Barkas serves as the chairman of the committee. Each of the members of our nominating and corporate
governance committee is an independent director under the applicable rules and regulations of The NASDAQ Global Market relating to nominating and corporate governance committee independence. The nominating and corporate governance committee operates
under a written charter.
There are no family relationships among any of our directors or executive officers.
Oversight of Risk Management
Our
board of directors has an active role, as a whole and also at the committee level, in overseeing the management of our risks. The board of directors is responsible for general oversight of risks and regularly reviews information regarding our risks,
including credit risks, liquidity risks and operational risks. Our compensation committee is responsible for overseeing the management of risks relating to our companys executive compensation plans and arrangements. Our audit committee is
responsible for overseeing the management of our risks relating to accounting matters and financial reporting and legal and regulatory compliance. Our nominating and corporate governance committee is responsible for overseeing the management of our
risks associated with the independence of our board of directors and potential conflicts of interest. While each committee is responsible for evaluating certain risks and overseeing the management of such risks, our entire board of directors is
regularly informed through committee reports about such risks. Our board of directors believes its administration of its risk oversight function has not affected the board of directors leadership structure.
Compensation Committee Interlocks and Insider Participation
During 2010, our compensation committee consisted of Alexander E. Barkas, Ph.D., Carl L. Gordon, Ph.D., CFA, and Charles P. Waite, Jr. Dr. Barkas served as Chairman of the Compensation Committee.
None of the members of the compensation committee is currently, or has been at any time, one of our officers or employees. None of our executive officers currently serves, or has served during the last completed three fiscal years, as a member of
the board of directors or compensation committee of any other entity that has or had one or more executive officers serving as a member of our board of directors or compensation committee. In July 2010, Dr. Gordon resigned from the compensation
committee.
Corporate Governance Guidelines
We believe in sound corporate governance practices and have adopted formal Corporate Governance Guidelines to enhance our effectiveness. Our Board adopted these Corporate Governance Guidelines in order to
ensure that it has the necessary practices in place to review and evaluate our business operations as needed and to make decisions that are independent of our management. The Corporate Governance Guidelines are also intended to align the interests
of directors and management with those of our stockholders. The Corporate Governance Guidelines set forth the practices our Board follows with respect to Board and committee composition and selection, Board meetings, Chief Executive Officer
performance evaluation and management development and
87
succession planning for senior management, including the Chief Executive Officer position. A copy of our Corporate Governance Guidelines is available on our website at www.completegenomics.com.
Code of Business Conduct and Ethics
We adopted a Code of Business Conduct and Ethics applicable to all of our employees, officers and directors, including those officers responsible for
financial reporting as required by applicable NASDAQ listing standards, which is a code of ethics as defined by applicable SEC rules . The Code of Business Conduct and Ethics is publicly available on our website at
http://ir.completegenomics.com/governance.cfm. The Code of Business Conduct and Ethics includes an enforcement mechanism, and if we make any amendments to the Code of Business Conduct and Ethics other than technical, administrative, or other
non-substantive amendments, or grant any waivers, including implicit waivers, from a provision of this Code of Business Conduct and Ethics to our Chief Executive Officer, Chief Financial Officer or certain other finance department executives, we
will disclose the nature of the amendment or waiver, its effective date, and to whom it applies, on our website at http://ir.completegenomics.com/governance.cfm or in a current report on Form 8-K filed with the SEC. There were no waivers of the
Code of Business Conduct and Ethics during 2010.
Director Compensation
The following table sets forth certain information with respect to compensation awarded to, paid to or earned by each of Complete Genomics non-employee directors during 2010.
Fees Earned or Paid in Cash
Commencing upon our initial public offering in November 2010, each non-employee director received an annual retainer of $30,000 that was prorated to
reflect our initial public offering date. Our Chairman of the Board is an employee director and does not receive fees for his service. Each board member received committee fees for each committee on which he served, as follows:
|
|
|
|
|
|
|
Committee
|
|
Chair ($)(1)
|
|
|
Members ($)(1)
|
Audit
|
|
$
|
15,000
|
|
|
$5,000
|
Compensation
|
|
$
|
10,000
|
|
|
$5,000
|
Nominating and Corporate Governance
|
|
$
|
10,000
|
|
|
$5,000
|
(1)
|
Amounts shown are for a full year. Directors were paid 14% of these amounts as a proration for 2010 to reflect our initial public offering date of November 10,
2010.
|
Our Board retained the same levels of cash compensation for 2011.
Equity Awards
In April 2010, our
Board granted each of Dr. Caskey and Mr. Shuster an option to purchase 10,000 shares of our common stock for $1.50 per share, which our Board determined to be the fair market value of our common stock on the date of grant. In July
2010, our Compensation Committee amended each of the option grants to Dr. Caskey and Mr. Shuster to increase the exercise price of these stock options to $2.43 per share, which our Compensation Committee determined to be the fair market
value of our common stock on the date of grant following a valuation of our common stock as of March 31, 2010. At a subsequent meeting of our Board in July 2010, our Board granted each of Dr. Caskey and Mr. Shuster an option to
purchase 2,500 shares of our common stock for $2.69 per share, which our Board determined to be the fair market value of our common stock on the date of grant. Each of the stock options vest in 12 equal monthly installments measured from the
respective vesting commencement dates of August 12, 2009 for Dr. Caskey and April 8, 2010 for Mr. Shuster, which correspond to their dates of appointment to our Board.
In September 2010, our Board granted Mr. Wall an option to purchase 12,500 shares of our common stock for $6.85 per share, which our Board determined equaled the fair market value of our common stock
on the date of grant. The option vests with respect to one-third of the shares subject thereto on each of the first three anniversaries of September 13, 2010, which corresponds to the date Mr. Wall was appointed to our Board.
88
Pursuant to our non-employee director compensation policy, upon initial election or appointment to our board
of directors, each non-employee director is automatically granted a stock option to purchase 10,000 shares of our common stock with an exercise price equal to the closing trading price of our common stock on the date of grant, for which one-third of
the shares underlying the stock option vest on the one-year anniversary of the date of grant, and the remaining shares vest on a monthly basis over the following 24 months. Upon initial election or appointment, each non-employee director is also
automatically granted 5,000 restricted stock units, for which one-third of the restricted stock units vest on each anniversary of the date of grant such that the award will be fully vested on the third anniversary of the date of grant. In December
2010, each non-employee director who was serving on our board of directors upon the consummation of our initial public offering on November 10, 2010 who had not previously received an option grant in connection with his appointment to our
Board, received an initial stock option and restricted stock unit grant in accordance with this policy at the first meeting of our board of directors following our initial public offering. Dr. Caskey and Messrs. Shuster and Wall were each
granted 2,500 restricted stock units in lieu of the initial stock option and restricted stock unit grant made to other non-employee directors in December 2010, since each had received an initial stock option grant in connection with his appointment
to our Board. Consistent with the restricted stock units granted to other non-employee directors, the restricted stock units vest in substantially equal installments on each of the first three anniversaries of the date of grant.
Effective in connection with our annual meeting of stockholders in 2012, each non-employee director who has served as director since the preceding
years annual meeting of stockholders will be granted a stock option to purchase 8,000 shares of our common stock with an exercise price equal to the closing trading price of our common stock on the date of grant, which will vest in equal
monthly installments over three years, and 4,000 restricted stock units, which will vest in equal annual installments on each anniversary of the date of grant such that the award and will be fully vested on the third anniversary of the date of
grant.
Expenses
We
reimburse our directors for their travel and related expenses in connection with attending Board and committee meetings, as well as costs and expenses incurred in attending director education programs and other Complete Genomics-related seminars and
conferences.
Compensation of Directors
The following table provides information concerning the compensation paid by us to each of our non-employee directors for 2010 board service. Dr. Reid, who is our employee, does not receive
additional compensation for his services as director.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-employee Director
|
|
Fees Earned or
Paid in Cash
($) (1)
|
|
|
Stock
Awards
($) (2)(3)
|
|
|
Option
Awards
($) (2)(3)
|
|
|
All Other
Compensation ($)
|
|
|
Total ($)
|
|
Alexander E. Barkas, Ph.D.
|
|
|
6,288
|
|
|
|
38,750
|
|
|
|
51,265
|
|
|
|
|
|
|
|
96,303
|
|
Thomas Caskey, M.D.
|
|
|
4,192
|
|
|
|
19,375
|
|
|
|
23,030
|
|
|
|
|
|
|
|
46,597
|
|
Carl L. Gordon, Ph.D., CFA
|
|
|
4,890
|
|
|
|
38,750
|
|
|
|
51,265
|
|
|
|
|
|
|
|
94,905
|
|
Andrew Senyei, M.D.
|
|
|
4,890
|
|
|
|
38,750
|
|
|
|
51,265
|
|
|
|
|
|
|
|
94,905
|
|
Lewis J. Shuster
|
|
|
6,288
|
|
|
|
19,375
|
|
|
|
23,030
|
|
|
|
|
|
|
|
48,693
|
|
Charles P. Waite, Jr.
|
|
|
5,589
|
|
|
|
38,750
|
|
|
|
51,265
|
|
|
|
|
|
|
|
95,604
|
|
Robert T. Wall
|
|
|
6,288
|
|
|
|
19,375
|
|
|
|
56,688
|
|
|
|
|
|
|
|
82,351
|
|
(1)
|
Amounts reflect 14% of the annual retainers as a proration for 2010 to reflect our initial public offering date of November 10, 2010.
|
(2)
|
Reflects the aggregate grant date fair value options and restricted stock units granted in 2010 calculated in accordance with FASB ASC Topic 718. The assumptions
used in the valuation of these awards are set forth in Note 11 to our financial statements, included elsewhere in this prospectus.
|
89
(3)
|
The following table sets forth restricted stock units and stock options outstanding as of December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
of Our Common
Stock subject to
Option Awards
|
|
|
Number of
Restricted
Stock Units
|
|
Alexander E. Barkas, Ph.D.
|
|
|
10,000
|
|
|
|
5,000
|
|
Thomas Caskey, M.D.
|
|
|
12,500
|
|
|
|
2,500
|
|
Carl L. Gordon, Ph.D., CFA
|
|
|
10,000
|
|
|
|
5,000
|
|
Andrew Senyei, M.D.
|
|
|
10,000
|
|
|
|
5,000
|
|
Lewis J. Shuster
|
|
|
12,500
|
|
|
|
2,500
|
|
Charles P. Waite, Jr.
|
|
|
10,000
|
|
|
|
5,000
|
|
Robert T. Wall
|
|
|
12,500
|
|
|
|
2,500
|
|
90
Executive Compensation
Compensation Discussion and Analysis
This section
discusses the principles underlying our policies and decisions with respect to the compensation of our executive officers and the most important factors relevant to an analysis of these policies and decisions. These officers, whom we refer to as our
named executive officers, consist of Clifford A. Reid, Ph.D., President and Chief Executive Officer, Ajay Bansal, Chief Financial Officer, Bruce Martin, Senior Vice president, Product Development, Mark J. Sutherland, Senior Vice President, Business
Development, Radoje Drmanac, Ph.D., Chief Science Officer and Robert J. Curson, Former Chief Financial Officer. We did not have any executive officers other than the named executive officers during 2010.
Objectives and Philosophy Regarding our Executive Compensation
We recognize that the ability of our business to excel depends on the integrity, knowledge, imagination, skill, diversity and teamwork of our employees. To this end, we strive to create an environment of
mutual respect, encouragement and teamwork that rewards commitment and performance and that is responsive to the needs of our employees, including our named executive officers. The principles and objectives of our compensation and benefits programs
for our named executive officers are to:
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§
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|
attract, engage and retain individuals of superior ability, experience and managerial talent to lead our Company;
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§
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|
align compensation decisions with our corporate strategies, business and financial objectives and the long-term interests of our stockholders;
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§
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|
motivate and reward executives whose knowledge, skills and performance are the foundation for our continued collective success;.
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§
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|
ensure that the elements of compensation, individually and in the aggregate, do not encourage excessive risk-taking; and
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§
|
|
ensure that total compensation is fair, reasonable and competitive.
|
The compensation components described below are designed to simultaneously fulfill one or more of these principles and objectives.
Components of our Executive Compensation
The
individual components of our executive compensation consist primarily of:
|
§
|
|
post-termination benefits; and
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|
§
|
|
various other employee benefits.
|
We view each of these components as related but distinct, reviewing them each individually, as well as collectively, to ensure that the total compensation paid to our named executive officers meets the
objectives as set forth above. Not all elements are provided to all named executive officers. For example, only three of our named executive officers have change in control benefits. Instead, we determine the appropriate level for each compensation
component based in part, but not exclusively, on our understanding of the market based on the experience of our compensation committee and consistent with our recruiting and retention goals, our view of internal equity and consistency, the length of
service of our named executive officers, our overall performance and other considerations we deem relevant.
91
Historically, we have not adopted any formal or informal policies or guidelines for allocating compensation
between long-term and currently paid out compensation, between cash and noncash compensation or among different forms of noncash compensation. However, our philosophy is to make a significant percentage of our executive officer compensation tied to
stockholder returns and to keep cash compensation to a nominally competitive level while providing the opportunity to be well-rewarded through equity if we perform well over time. To this end, we use stock options as a significant component of
compensation because we believe that they best tie an individuals compensation to the creation of stockholder value. While we offer competitive base salaries, we believe stock-based compensation is a significant motivator in attracting
employees in our field.
Each of the primary elements of our executive compensation is discussed in more detail below. While we have identified
particular compensation objectives that each element of executive compensation serves, our compensation programs are designed to be flexible and complementary and to collectively serve all of the executive compensation objectives described above.
Accordingly, whether or not specifically mentioned below, we believe that, as a part of our overall executive compensation policy, each individual element, to a greater or lesser extent, serves each of our objectives.
Compensation Determination Process
Our compensation committee is responsible for recommending executive compensation for all of our named executive officers, and our board of directors will
retain primary authority regarding the determination and approval of compensation. The compensation committee also relies on our President and Chief Executive Officer, based on his experience, to provide an evaluation of each named executive
officer, other than himself, to the compensation committee. The evaluation is given in light of the Companys performance and focuses on the named executive officers leadership qualities, operational performance, business
responsibilities, career with us, current compensation arrangements and long-term potential to enhance stockholder value.
Our compensation
committee in turn reviews the performance of each named executive officer, including our President and Chief Executive Officer. This process generally occurs on an annual basis, though we do not set a predetermined time for such review. The
compensation committee begins with a review of the primary aspects of our compensation programs for our named executive officers, including base salaries, performance bonuses and equity incentive targets. As part of this process, the compensation
committee directly engaged Radford, an Aon Hewitt Consulting Company, to provide compensation surveys and a general understanding of current compensation practices. In determining the compensation of the named executive officers for 2010, the
Company used the 2009 Radford Global Life Sciences Pre-IPO Survey compiled compensation data from global life sciences companies without publicly traded securities that have raised at least $80 million in invested capital. The survey provided by
Radford reported statistics on the total compensation, position and responsibilities of executives. While our compensation committee reviewed the statistical compensation data, the surveys did not include, nor was our compensation committee aware
of, the identity of any of the surveyed companies. As a result, our compensation committee did not benchmark executive compensation against any single company or an identifiable select group of companies.
Changes to Named Executive Officers
In March 2010, we hired Mark Sutherland as our Senior Vice President, Business Development. Mr. Sutherlands annual base salary is $250,000, which was established following arms length
negotiations but in light of other senior executive base salaries and which our Compensation Committee determined to be below the 25 percentile of executives in similar positions in companies included in the compensation surveys we reviewed. For
2010, Mr. Sutherland was also eligible for a target performance bonus of up to $70,000 based on our Compensation Committees subjective assessment of the Companys progress towards its commercial milestones and his contributions to
the development of the Companys strategy and staffing of the commercial organization.
In March 2010, Bruce Martin was promoted to Senior
Vice President, Product Development. In connection with his promotion, Mr. Martins annual base salary was increased to $250,000 to be consistent with other senior executive base salaries we determined that to be below the 25 percentile of
executives in similar positions in
92
companies included in the compensation surveys we reviewed. For 2010, Mr. Martin was also eligible for a target performance bonus of up to $70,000 based on our Compensation Committees
subjective assessment of the Companys progress towards its production and development milestones and his contributions to the development of the Companys strategy and staffing of the production and development organizations.
In May 2010, Robert J. Curson assumed the position of Vice President of Financial Operations. His expertise was needed in this role as we were beginning
our commercial operations. No adjustments were made to his compensation.
In May 2010, we hired Ajay Bansal as our Chief Financial Officer
replacing Robert J. Curson. Mr. Bansals annual base salary is $250,000, which was established following arms length negotiations but in light of other senior executive base salaries and which our Compensation Committee determined to be
below the 25 percentile of executives in similar positions in companies included in the compensation surveys we reviewed. Mr. Bansal also received a $20,000 signing bonus in connection with his hiring. For 2010, Mr. Bansal was also
eligible for a target performance bonus of up to $70,000 based on our Compensation Committees subjective assessment of our Series E Preferred Stock financing, our initial public offering, and his contributions to the development of the
Companys strategy and staffing of the finance organization.
Base Salaries
In general, base salaries for our executive officers are initially established through arms-length negotiation at the time the executive is hired,
taking into account such executives qualifications, experience and prior salary. Our compensation committee has responsibility for conducting reviews of the base salaries of our named executive officers and making adjustments based on the
scope of the executives responsibilities, individual contribution, prior experience, sustained performance and internal pay equity among named executive officers. Decisions regarding salary increases may take into account the named executive
officers current salary and equity ownership. In making decisions regarding salary increases, we may also draw upon the experience of members of our board of directors or compensation committee with other companies and may also consider
internal equity. Base salaries are also reviewed in the case of significant changes in responsibility. No formulaic base salary increases are provided to our named executive officers. This strategy is consistent with our intent of offering
compensation that is cost-effective, competitive and linked to performance.
In March 2010, our Compensation Committee reviewed the 2009
Radford Global Life Sciences Pre-IPO Survey provided by Radford which indicated that our named executive officers received base salaries at levels below the 25 percentile of executives in similar positions at the companies included in this survey.
In March 2010, in connection with his promotion to Senior Vice President, Product Development, Mr. Martin base salary was increased from
$200,000 to $250,000. Our compensation committee determined that the base salary increase was appropriate in light of Mr. Martins experience, his increased responsibilities and the base salaries paid to our other named executive officers.
None of our other named executive officers received a base salary increase in 2010.
For 2010, the base salaries of our named executive officers were as follows:
|
|
|
|
|
|
|
2010 Base Salary
|
|
Clifford A. Reid, Ph.D.
|
|
$
|
320,000
|
|
Ajay Bansal
(1)
|
|
$
|
250,000
|
|
Bruce Martin
|
|
$
|
250,000
|
|
Mark J. Sutherland
(2)
|
|
$
|
250,000
|
|
Radoje Drmanac, Ph.D.
|
|
$
|
250,000
|
|
R. John Curson
|
|
$
|
230,000
|
|
(1)
|
Mr. Bansals employment with us commenced on May 10, 2010.
|
(2)
|
Mr. Sutherlands employment with us commenced on March 22, 2010.
|
93
Performance Bonuses
Historically, our named executive officers have not participated in a performance bonus program. Instead, we have relied on stock option grants to provide performance-based incentives to our named
executive officers.
In November 2009, upon the recommendation of our compensation committee following its review of all aspects of our
executive compensation program, our board of directors approved a target performance bonus amount for each of our named executive officers serving as executive officers at that time. For 2010, the annual target amount for Dr. Reid,
Dr. Drmanac and Mr. Curson was $100,000, $70,000 and $70,000, respectively. Our compensation committee recommended the level of the target bonus amounts based on its review of the Radford 2009 compensation survey and based on the
experience of the members of the compensation committee with similar bonus programs.
In March 2010, our compensation committee established
target performance bonus amount equal to $70,000 for each of Messrs. Sutherland and Martin in connection with Mr. Sutherlands hiring and Mr. Martins promotion. The level of target performance bonus was determined following our
compensation committees review of the Radford surveys and in light of the target performance bonus amounts of other named executive officers. Each performance bonus was discretionary and the amount of such bonus was to be based on our
compensation committees subjective assessment of, with respect to Mr. Sutherland, our companys progress towards its commercial milestones and his contributions to the development of companys strategy and staffing of the
commercial organization and, with respect to Mr. Martin, our companys progress towards its production and development milestones and his contributions to the development of companys strategy and staffing of the production and
development organizations.
In May 2010, our compensation committee established a target performance bonus amount equal to $70,000 for
Mr. Bansal in connection with his hiring. The level of target performance bonus was determined following our compensation committees review of the Radford surveys and in light of the target performance bonus amounts of other named
executive officers. The performance bonus was discretionary and the amount of such bonus was to be based on our compensation committees subjective assessment of our Series E Preferred Stock financing, our initial public offering, and his
contributions to the development of companys strategy and staffing of the finance organization.
In March 2010, Dr. Reid,
Dr. Drmanac and Mr. Curson each agreed to forgo these target bonus amounts and instead receive cash payments to offset taxes in connection with the stock grants described under Long-Term Equity Incentives below.
In March 2011, upon the compensation committees recommendation, our board of directors approved the payment of performance bonuses as
follows:
|
|
|
|
|
|
|
|
|
|
|
2010
Performance
Bonus
|
|
|
Percent of
Target
Performance
Bonus
Amount
|
|
Ajay Bansal
|
|
$
|
70,000
|
|
|
|
100
|
%
|
|
|
|
Bruce Martin
|
|
$
|
70,000
|
|
|
|
100
|
%
|
|
|
|
Mark J. Sutherland
|
|
$
|
28,000
|
|
|
|
40
|
%
|
Mr. Bansal received 100% of his
target performance bonus amount based on our compensation committees and our board of directors subjective assessment of his performance in guiding our company through the successful completion of our Series E Preferred Stock financing
and our initial public offering and his contributions to the development of companys strategy and staffing of the finance organization.
Mr. Martin received 100% of his target performance bonus amount based on our compensation committees and our board of directors
subjective assessment of his performance and the successful transition to commercial operations in 2010 and his contributions to the development of companys strategy and staffing of the production and development organizations.
94
Mr. Sutherland received 40% of his target performance bonus amount based on our compensation
committees and our board of directors subjective assessment that only partial progress was made regarding our commercial milestones including the number of genomes sequenced in 2010. Additionally, only partial progress was made in
building and staffing the commercial organization.
Long-Term Equity Incentives
The goal of our long-term, equity-based incentive awards is to align the interests of our named executive officers with the interests of our stockholders
by focusing our executives on long-term stock performance. In addition, because vesting is based on continued employment, our equity-based incentives also encourage the retention of our named executive officers through the vesting period of the
awards.
Our compensation committee oversees our long-term equity incentive program and our board of directors approves all equity grants to
our named executive officers. In determining the number of shares of our common stock to be subject to long-term equity incentives awarded to our named executive officers, our compensation committee has taken into account a number of internal
factors, such as the relative job scope, the value of existing long-term incentive awards, individual performance history, prior contributions to us and the size of prior grants. Based on these factors, our compensation committee determines the size
of the long-term equity incentives at levels it considers appropriate to create a meaningful opportunity for reward based on the creation of long-term stockholder value.
We use stock options to compensate our named executive officers both in the form of initial grants in connection with the commencement of employment and periodic grants aimed at both rewarding exceptional
performance and continuing to incentivize our named executive officers. To date, there has been no set program for the award of these periodic grants, and our compensation committee has used its discretion to make stock option awards to employees at
any time, including in connection with the promotion of an employee, to reward an employee, for retention purposes or in other circumstances. Going forward, our compensation committee expects to adopt a more regular process for determining and
awarding stock grants to all employees.
The exercise price of each stock option grant is the fair market value of our common stock on the
grant date, as determined by our board of directors prior to our initial public offering and using the closing trading price of our common stock on the date of grant following our initial public offering. Initial stock options granted to our named
executive officers typically vest over a four-year period as follows:
|
§
|
|
25% of the shares underlying the option vest on the first anniversary of the date of the vesting commencement date, which is typically the date of
hire; and
|
|
§
|
|
the remainder of the shares underlying the option vest in equal monthly installments over the next 36 months.
|
Our periodic grants will typically vest in equal monthly installments over four years from the date of grant. On occasion, the vesting schedules will be
altered as part of the incentive process. We believe these vesting schedules appropriately encourage long-term employment with our Company while allowing our executives to realize compensation in line with the value they have created for our
stockholders.
In February 2010, our board of directors approved additional equity grants to our named executive officers serving as executive
officers at that time to partially offset the dilutive effect of our Series D preferred stock financing. Dr. Reid, Dr. Drmanac and Mr. Curson were granted options to purchase 341,667, 218,501 and 59,001 shares of our common stock,
respectively, for a per share exercise price equal to $1.50, which our board of directors determined to be the per share fair market value of our common stock on the date of grant. These stock options vest with respect to 1/48 of the total number of
shares subject to the options on each monthly anniversary of August 12, 2009. In addition, in March 2010, Dr. Reid, Dr. Drmanac and Mr. Curson received 285,867, 395,333 and 105,333 fully vested shares of our common stock,
respectively, to partially offset the dilutive effect of the Series D preferred stock financing. Our board of directors also approved cash payments to Dr. Reid,
95
Dr. Drmanac and Mr. Curson in the amounts of $361,615, $500,087 and $133,244, respectively, to reimburse the incremental taxes incurred by our named executive officers in connection
with the stock grants and the cash payments.
As a result of our board of directors assessment of the fair market value of our common
stock following the Series D preferred stock financing, our board of directors approved a stock option modification in January 2010. The exercise price of all outstanding stock options granted before January 28, 2010 that were held by
then-current employees and consultants and had a per share exercise price greater than $1.50 per share were modified to decrease the exercise price to $1.50 per share, which our board of directors determined to be the fair market value of our common
stock on January 28, 2010. Other than a reduced exercise price, the terms and conditions of the stock options remained the same. Our board of directors determined that the modification was appropriate in light of the significant decrease in the
fair market value of our common stock.
In January 2010, our board of directors granted Mr. Martin an option to purchase 4,333 shares of
our common stock for a per share exercise price equal to $1.50, which our board of directors determined to be the per share fair market value of our common stock on the date of grant. These options vested 25% in January 2011 and the remainder of the
shares underlying the option vest in equal monthly installments over the next 36 months.
In March 2010, in connection with his commencement of
employment with us, our board of directors granted Mr. Sutherland an option to purchase 128,000 shares of our common stock for a per share exercise price equal to $1.50, which our board of directors determined to be the per share fair market
value of our common stock on the date of grant. These options vested 25% in March 2011 and the remainder of the shares underlying the option vest in equal monthly installments over the next 36 months. The number of shares subject to
Mr. Sutherlands option was determined by the internal benchmark of 0.8% of total shares outstanding at the time of grant.
In July
2010, in connection with his commencement of employment with us, our board of directors granted Mr. Bansal an option to purchase 128,000 shares of our common stock for a per share exercise price equal to $2.69, which our board of directors
determined to be the per share fair market value of our common stock on the date of grant. These options vest 25% in May 2011 and the remainder of the shares underlying the option vest in equal monthly installments over the next 36 months. The size
of Mr. Bansals grant was determined after our compensation committees and our board of directors review of the Radford survey and in light of Mr. Sutherlands new hire grant.
In July 2010, in connection with his promotion that occurred in March 2010, our board of directors granted Mr. Martin an option to purchase 42,922
shares of our common stock for a per share exercise price equal to $2.69, which our board of directors determined to be the per share fair market value of our common stock on the date of grant. These options vest 25% in July 2011 and the remainder
of the shares underlying the option vest in equal monthly installments over the next 36 months.
After our initial public offering in November
2010, our board of directors adopted a formal policy regarding the timing of stock option grants. Stock option grants cannot be made at times coinciding with the release of material non-public information.
Severance Arrangements
Our
compensation committee has provided post-termination severance benefits to some of our named executive officers, as it determined that such benefits were necessary to retain such named executive officers. Our termination benefits are intended and
designed to partially alleviate the financial impact of an involuntary termination and maintain a stable work environment. In determining the severance benefits to be payable pursuant to the agreements entered into with our named executive officers,
we relied on the experience of the members of our compensation committee to determine the level of severance benefits sufficient to retain our named executive officers. The severance payments and benefits payable to our named executive officers
pursuant to their respective severance agreements, are further described in Executive Compensation Severance Arrangements below.
96
Under our equity incentive plans, if outstanding stock options are not assumed or otherwise substituted for
in the change in control of our company, then the vesting of all outstanding stock options is fully accelerated as of immediately prior to the change in control.
Employee Benefits
We provide standard employee benefits to our full-time employees
in the United States, including our named executive officers, including health, disability and life insurance and a 401(k) plan, as a means of attracting and retaining our employees.
Tax Considerations
Section 162(m) of the Internal Revenue Code of 1986, as
amended, or the Code, generally disallows a tax deduction for compensation in excess of $1.0 million paid to our named executive officers, other than our Chief Financial Officer. Qualifying performance-based compensation is not subject to the
deduction limitation if specified requirements are met. We generally intend to structure the performance-based portion of our executive compensation, when feasible, to comply with exemptions in Section 162(m) so that the compensation remains
tax deductible to us. However, our board of directors may, in its judgment, authorize compensation payments that do not comply with the exemptions in Section 162(m) when it believes that such payments are appropriate to attract and retain
executive talent.
Summary Compensation Table
The following table sets forth certain information regarding the compensation for services performed during the years ended December 2010 and 2009 awarded to, paid to or earned by our named executive
officers, or NEOs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Principal Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
(1)
|
|
|
Option
Awards
($)
(1)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
Clifford A. Reid, Ph.D.
President and Chief Executive Officer
|
|
|
2010
|
|
|
|
320,000
|
|
|
|
|
|
|
|
668,929
|
|
|
|
580,740
|
|
|
|
|
|
|
|
367,465
|
(2)
|
|
|
1,937,134
|
|
|
|
2009
|
|
|
|
215,783
|
|
|
|
|
|
|
|
|
|
|
|
96,711
|
|
|
|
|
|
|
|
5,400
|
|
|
|
317,894
|
|
|
|
|
|
|
|
|
|
|
Ajay Bansal
(3)
Chief Financial Officer
|
|
|
2010
|
|
|
|
153,291
|
|
|
|
20,000
|
|
|
|
|
|
|
|
230,493
|
|
|
|
70,000
|
|
|
|
1,500
|
(4)
|
|
|
475,284
|
|
|
|
|
|
|
|
|
|
|
Bruce Martin
Senior Vice President of Product Development
|
|
|
2010
|
|
|
|
227,604
|
|
|
|
|
|
|
|
|
|
|
|
80,120
|
|
|
|
70,000
|
|
|
|
5,550
|
(4)
|
|
|
383,274
|
|
|
|
|
|
|
|
|
|
|
Mark J. Sutherland
(5)
Senior Vice President of Business Development
|
|
|
2010
|
|
|
|
184,253
|
|
|
|
|
|
|
|
|
|
|
|
228,925
|
|
|
|
28,000
|
|
|
|
3,975
|
(4)
|
|
|
445,153
|
|
|
|
|
|
|
|
|
|
|
Radoje Drmanac, Ph.D.
Chief Scientific Officer
|
|
|
2010
|
|
|
|
239,582
|
|
|
|
|
|
|
|
925,079
|
|
|
|
371,392
|
|
|
|
|
|
|
|
505,637
|
(6)
|
|
|
2,041,690
|
|
|
|
2009
|
|
|
|
191,360
|
|
|
|
|
|
|
|
|
|
|
|
96,436
|
|
|
|
|
|
|
|
5,400
|
|
|
|
293,196
|
|
|
|
|
|
|
|
|
|
|
R. John Curson
Former Chief Financial Officer
|
|
|
2010
|
|
|
|
220,416
|
|
|
|
|
|
|
|
246,479
|
|
|
|
100,285
|
|
|
|
|
|
|
|
138,794
|
(7)
|
|
|
705,974
|
|
|
|
2009
|
|
|
|
171,496
|
|
|
|
|
|
|
|
|
|
|
|
96,005
|
|
|
|
|
|
|
|
5,400
|
|
|
|
272,901
|
|
(1)
|
Reflects the aggregate grant date fair value dollar of awards and options granted during the applicable year and incremental fair value of options modified during
the applicable year, in each case, as calculated in accordance with FASB ASC Topic 718. The assumptions used in the valuation of these awards are set forth in Note 11 to our financial statements included elsewhere in this prospectus.
|
(2)
|
Includes $361,615 paid to Dr. Reid to reimburse the taxes incurred in connection with Dr. Reids February 2010 stock grant and the taxes incurred in
connection with such reimbursement as further described in Compensation Discussion and Analysis Long-Term Equity Incentives above and $5,850 in a benefit supplement to cover the cost of general health care expenses.
|
97
(3)
|
Mr. Bansals employment with us commenced on May 10, 2010.
|
(4)
|
Benefit supplement to cover the cost of general health care expenses.
|
(5)
|
Mr. Sutherlands employment with us commenced on March 22, 2010.
|
(6)
|
Includes $500,087 paid to Dr. Drmanac to reimburse the taxes incurred in connection with Dr. Drmanacs February 2010 stock grant and the taxes
incurred in connection with such reimbursement as further described in Compensation Discussion and Analysis Long-Term Equity Incentives and $5,550 in a benefit supplement to cover the cost of general health care expenses.
|
(7)
|
Includes $133,244 paid to Mr. Curson to reimburse the taxes incurred in connection with Mr. Cursons February 2010 stock grant and the taxes incurred
in connection with such reimbursement as further described in Compensation Discussion and Analysis Long-Term Equity Incentives and $5,550 in a benefit supplement to cover the cost of general health care expenses.
|
Grants of Plan-Based Awards For 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Name
|
|
Grant
Date
|
|
|
Estimated
Future Payouts
Under
Non-Equity
Incentive Plan
Awards
|
|
|
All Other
Stock
Awards:
Number
of Shares
of Stock
or Units
(#)
|
|
|
All Other
Option
Awards;
Number of
Securities
Underlying
Options
(#)
|
|
|
Exercise
or Base
Price of
Option
Awards
($/Share)
|
|
|
Grant Date
Fair Value
of Stock
and Option
Awards
($)
(2)
|
|
|
|
Target ($)
(1)
|
|
|
|
|
|
Clifford A. Reid, Ph.D.
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/10/2010
|
|
|
|
|
|
|
|
285,867
|
|
|
|
|
|
|
|
|
|
|
|
668,929
|
|
|
|
|
2/24/2010
|
(3)
|
|
|
|
|
|
|
|
|
|
|
341,667
|
|
|
|
1.50
|
|
|
|
580,740
|
|
|
|
|
|
|
|
|
Ajay Bansal
|
|
|
|
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/16/2010
|
(4)
|
|
|
|
|
|
|
|
|
|
|
128,000
|
|
|
|
2.69
|
|
|
|
230,493
|
|
|
|
|
|
|
|
|
Bruce Martin
|
|
|
|
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/28/2010
|
(5)
|
|
|
|
|
|
|
|
|
|
|
4,333
|
|
|
|
1.50
|
|
|
|
2,829
|
|
|
|
|
7/16/2010
|
(6)
|
|
|
|
|
|
|
|
|
|
|
42,922
|
|
|
|
2.69
|
|
|
|
77,291
|
|
|
|
|
|
|
|
|
Mark J. Sutherland
|
|
|
|
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/22/2010
|
(7)
|
|
|
|
|
|
|
|
|
|
|
128,000
|
|
|
|
1.50
|
|
|
|
228,925
|
|
|
|
|
|
|
|
|
Radoje Drmanac, Ph.D.
|
|
|
|
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/10/2010
|
|
|
|
|
|
|
|
395,333
|
|
|
|
|
|
|
|
|
|
|
|
925,079
|
|
|
|
|
2/24/2010
|
(3)
|
|
|
|
|
|
|
|
|
|
|
218,501
|
|
|
|
1.50
|
|
|
|
371,392
|
|
|
|
|
|
|
|
|
R. John Curson
|
|
|
|
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/10/2010
|
|
|
|
|
|
|
|
105,333
|
|
|
|
|
|
|
|
|
|
|
|
246,479
|
|
|
|
|
2/24/2010
|
(3)
|
|
|
|
|
|
|
|
|
|
|
59,001
|
|
|
|
1.50
|
|
|
|
100,285
|
|
(1)
|
Represents the target amount payable under our performance bonus plan. Our performance bonus plan does not include a maximum or threshold amount.
|
(2)
|
Reflects the aggregate grant date fair value of options granted during 2010 and incremental fair value of options modified during 2010, in each case, as calculated
in accordance with FASB ASC Topic 718. The assumptions used in the valuation of these awards are set forth in Note 11 to our financial statements included elsewhere in this prospectus.
|
(3)
|
This award vests over a four-year period in equal monthly installments following the vesting commencement date, August 12, 2009.
|
(4)
|
This award vests over a four-year period with 25% of the shares vesting one year after the vesting commencement date and 1/48 of the shares vesting on a monthly
basis thereafter; the vesting commencement date is May 10, 2010.
|
(5)
|
The original grant date of this stock option was September 21, 2007. The exercise price of this stock option was reduced from $16.50 per share to $1.50 per
share on January 28, 2010 based on a modification approved by the board of directors. This award vests over a four-year period with 25% of the shares vesting one year after the vesting commencement date and 1/48 of the shares vesting on a
monthly basis thereafter; the vesting commencement date is May 17, 2007.
|
(6)
|
This award vests over a four-year period with 25% of the shares vesting one year after the vesting commencement date and 1/48 of the shares vesting on a monthly
basis thereafter; the vesting commencement date is March 29, 2010.
|
(7)
|
This award vests over a four-year period with 25% of the shares vesting one year after the vesting commencement date and 1/48 of the shares vesting on a monthly
basis thereafter; the vesting commencement date is March 22, 2010.
|
98
Narrative to Summary Compensation Table and Grants of Plan-based Award Table
Employment Agreements, Offer Letters and Arrangements
We do not currently have employment agreements or offer letter agreements with Dr. Reid, Dr. Drmanac and Mr. Curson. The Company entered into offer letter agreements with each of
Mr. Bansal, Mr. Martin and Mr. Sutherland. The terms of each of the respective offer letters specify such officers salary, target bonus and stock option grants.
Equity Compensation
As described under Compensation Discussion and Analysis
above, the compensation committee approved equity compensation awards in the form of stock options and restricted stock to each Drs. Reid and Drmanac and Mr. Curson in February 2010. In connection, with joining the Company each of
Mr. Bansal and Mr. Sutherland were granted stock options in as specified in their offer letters. Mr. Martin received a stock option grant in connection with his promotion. For more information regarding the equity compensation awards
and our equity award practices, please see the section titled Compensation Discussion and Analysis Long-Term Equity Incentives. In addition, the named executive officers equity compensation awards may, under certain
circumstances, be subject to accelerated vesting in the event that a named executive officer is terminated or in the event of a change of control. For more information regarding the accelerated vesting provisions and treatment of the equity
compensation awards in the event a named executive officer is terminated or a change of control of the company, see the sections titled Severance Arrangements and Potential Payments upon Termination and/or a Change of
Control below.
Other Benefits
For a description of the other elements of our executive compensation program, see the section titled Compensation Discussion and AnalysisEmployee Benefits.
Outstanding Equity Awards at December 31, 2010
The following table sets forth information regarding outstanding equity awards as of December 31, 2010 for each NEO. All vesting is contingent upon
continued employment with Complete Genomics.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
(1)
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
|
|
Option
Exercise
Price
($)
|
|
|
Option
Expiration
Date
|
|
Clifford A. Reid, Ph.D.
|
|
|
1,287
|
(2)
|
|
|
1,803
|
|
|
|
1.50
|
|
|
|
11/12/2019
|
|
|
|
|
66,666
|
(3)(4)
|
|
|
|
|
|
|
1.50
|
|
|
|
12/27/2019
|
|
|
|
|
113,889
|
(3)
|
|
|
227,778
|
|
|
|
1.50
|
|
|
|
02/23/2020
|
|
|
|
|
|
|
Ajay Bansal
|
|
|
|
(5)
|
|
|
128,000
|
|
|
|
2.69
|
|
|
|
07/15/2020
|
|
|
|
|
|
|
Bruce Martin
|
|
|
541
|
(6)
|
|
|
452
|
|
|
|
1.50
|
|
|
|
09/20/2017
|
|
|
|
|
321
|
(2)
|
|
|
1,503
|
|
|
|
1.50
|
|
|
|
11/12/2019
|
|
|
|
|
4,721
|
(7)
|
|
|
3,934
|
|
|
|
1.50
|
|
|
|
11/12/2019
|
|
|
|
|
14,326
|
(8)
|
|
|
28,654
|
|
|
|
1.50
|
|
|
|
11/12/2019
|
|
|
|
|
|
(9)
|
|
|
42,922
|
|
|
|
2.69
|
|
|
|
07/15/2020
|
|
|
|
|
|
|
Mark J. Sutherland
|
|
|
|
(10)
|
|
|
128,000
|
|
|
|
1.50
|
|
|
|
03/21/2020
|
|
|
|
|
|
|
Radoje Drmanac, Ph.D.
|
|
|
1,193
|
(2)
|
|
|
1,671
|
|
|
|
1.50
|
|
|
|
11/12/2019
|
|
|
|
|
66,666
|
(3)(4)
|
|
|
|
|
|
|
1.50
|
|
|
|
12/27/2019
|
|
|
|
|
72,833
|
(3)
|
|
|
145,668
|
|
|
|
1.50
|
|
|
|
02/23/2020
|
|
|
|
|
|
|
R. John Curson
|
|
|
1,045
|
(2)
|
|
|
1,465
|
|
|
|
1.50
|
|
|
|
11/12/2019
|
|
|
|
|
66,666
|
(3)(4)
|
|
|
|
|
|
|
1.50
|
|
|
|
12/27/2019
|
|
|
|
|
19,667
|
(3)
|
|
|
39,334
|
|
|
|
1.50
|
|
|
|
02/23/2020
|
|
99
(1)
|
Each stock option was granted pursuant to our 2006 Equity Incentive Plan. The stock options were granted prior to the consummation of the Companys initial
public offering on November 16, 2010. The exercise price of the stock options reflect the fair market value of the Companys common stock at the date of grant based on the board of directors contemporaneous valuations of the
Companys common stock.
|
(2)
|
This award vests over a four-year period in equal monthly installments following April 1, 2009.
|
(3)
|
This award vests over a four-year period in equal monthly installments following August 12, 2009.
|
(4)
|
This award has an early exercise provision.
|
(5)
|
This award vests over a four-year period with 25% of the shares vesting on May 10, 2011 and 1/48 of the shares vesting on a monthly basis thereafter.
|
(6)
|
This award vests over a four-year period with 25% of the shares vesting on May 17, 2008 and 1/48 of the shares vesting on a monthly basis thereafter. The
exercise price of this stock option was reduced from $16.50 per share to $1.50 per share on January 28, 2010 based on a modification approved by the board of directors.
|
(7)
|
This award vests over a four-year period with 25% of the shares vesting on May 17, 2008 and 1/48 of the shares vesting on a monthly basis thereafter.
|
(8)
|
This award vests over a four-year period with 25% of the shares vesting on August 12, 2010 and 1/48 of the shares vesting on a monthly basis thereafter.
|
(9)
|
This award vests over a four-year period with 25% of the shares vesting on March 29, 2011 and 1/48 of the shares vesting on a monthly basis thereafter.
|
(10)
|
This award vests over a four-year period with 25% of the shares vesting on March 22, 2011 and 1/48 of the shares vesting on a monthly basis thereafter.
|
Option Exercises and Stock Vested in 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
Name
|
|
Number
of
Shares
Acquired on
Exercise
(#)
|
|
|
Value
Realized on
Exercise ($)
|
|
|
Number of
Shares
Acquired on
Vesting ($)
|
|
|
Value
Realized on
Vesting
($)
(1)
|
|
Clifford A. Reid, Ph.D.
|
|
|
|
|
|
|
|
|
|
|
285,867
|
|
|
|
428,801
|
|
|
|
|
|
|
Bruce Martin
|
|
|
751
29,110
3,340
|
|
|
|
1,825
70,737
8,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radoje Drmanac, Ph.D.
|
|
|
|
|
|
|
|
|
|
|
395,333
|
|
|
|
593,000
|
|
|
|
|
|
|
R. John Curson
|
|
|
|
|
|
|
|
|
|
|
105,333
|
|
|
|
158,000
|
|
(1)
|
Value realized upon vesting represents the fair market value of the shares of our common stock subject to the fully vested stock award granted in February 2010, as
determined by our board of directors.
|
Pension Benefits
We do not maintain any defined benefit pension plans.
Nonqualified Deferred Compensation
We do not maintain any
nonqualified deferred compensation plans.
Change of Control and Termination
Severance Arrangements
In March 2006, we entered into severance arrangements with
each of Dr. Reid, Dr. Drmanac and Mr. Curson. These arrangements set forth the terms of each named executive officers severance in the event of his termination of employment under specified circumstances. Under the arrangements,
if a covered named executive officers employment is terminated at any time without cause or he experiences a constructive termination (as each term is defined in his severance agreement), the Company will provide continuation of his base
salary for six months following the termination date, as well as six months vesting acceleration for stock options and restricted stock. In addition, severance benefits would include reimbursement for group health
100
continuation coverage premiums for each named executive officer and his eligible dependents under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended for six months.
Notwithstanding the foregoing, if such termination occurs within 12 months following a change-in-control, all stock options, restricted stock
and other equity awards outstanding automatically vest in full and become fully exercisable. A covered named executive officer must provide a general release of claims against our Company in order to be eligible for any severance payments.
Potential Payments upon Termination and/or a Change of Control
The following table illustrates the potential payments to each of our named executive officers in connection with:
|
§
|
|
the Officers termination without cause outside the context of a change-in-control of the Company, assuming such termination occurred on
December 31, 2010;
|
|
§
|
|
the Officers termination without cause, or constructive termination, within 12 months following a change-in-control of the Company, assuming such
termination in connection with a change-in-control of the Company occurred on December 31, 2010 and his options were assumed or substituted by the acquiring entity; and
|
|
§
|
|
the acceleration of the Officers equity awards in connection with a change-in-control of the Company, where the potential acquiring entity does
not assume or substitute the options held by the Officer and the Officers employment is continued with the Company and/or the acquiring entity, assuming such change-in-control occurred on December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Benefit
|
|
Potential payments in connection with:
|
|
Name
|
|
|
Termination
without Cause
or Constructive
Termination
|
|
|
Termination Without
Cause or a Constructive
Termination Within 12
Months Following
a
Change-in-Control
|
|
|
Equity Awards are
not Assumed or
Substituted in
Connection with a
Change-in-Control
|
|
Clifford A. Reid, Ph.D.
|
|
Salary
|
|
$
|
160,000
|
(1)
|
|
$
|
160,000
|
(1)
|
|
$
|
|
|
|
|
Benefits
|
|
|
8,976
|
(2)
|
|
|
8,976
|
(2)
|
|
|
|
|
|
|
Equity Award Acceleration
|
|
|
817,965
|
(3)
|
|
|
1,635,929
|
(4)
|
|
|
1,635,929
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
986,941
|
|
|
|
1,804,905
|
|
|
|
1,635,929
|
|
|
|
|
|
|
Ajay Bansal
(5)
|
|
Salary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Award Acceleration
|
|
|
|
|
|
|
611,840
|
(4)
|
|
|
611,840
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
611,840
|
|
|
|
611,840
|
|
|
|
|
|
|
Bruce Martin
(5)
|
|
Salary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Award Acceleration
|
|
|
|
|
|
|
|
|
|
|
411,389
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
411,389
|
|
|
|
|
|
|
Mark J. Sutherland
(5)
|
|
Salary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Award Acceleration
|
|
|
|
|
|
|
|
|
|
|
764,160
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
764,160
|
|
|
|
|
|
|
Radoje Drmanac, Ph.D.
|
|
Salary
|
|
|
125,000
|
(1)
|
|
|
125,000
|
(1)
|
|
|
|
|
|
|
Benefits
|
|
|
7,470
|
(2)
|
|
|
7,470
|
(2)
|
|
|
|
|
|
|
Equity Award Acceleration
|
|
|
572,472
|
(3)
|
|
|
1,144,945
|
(4)
|
|
|
1,144,945
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
704,942
|
|
|
|
1,277,415
|
|
|
|
1,144,945
|
|
|
|
|
|
|
R. John Curson
|
|
Salary
|
|
|
115,000
|
(1)
|
|
|
115,000
|
(1)
|
|
|
|
|
|
|
Benefits
|
|
|
1,163
|
(2)
|
|
|
1,163
|
(2)
|
|
|
|
|
|
|
Equity Award Acceleration
|
|
|
254,450
|
(3)
|
|
|
508,901
|
(4)
|
|
|
508,901
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
370,613
|
|
|
|
625,064
|
|
|
|
508,901
|
|
101
(1)
|
Represents six months of base salary.
|
(2)
|
Represents six months of health care benefits.
|
(3)
|
Represents the value of six months of vesting acceleration of unvested option awards, calculated based upon the closing market price per share of our common stock as
reported on NASDAQ on December 31, 2010 minus the exercise price.
|
(4)
|
Represents the value of the vesting acceleration of 100% of unvested option awards, calculated based upon the closing market price per share of our common stock as
reported on NASDAQ on December 31, 2010 minus the exercise price.
|
(5)
|
Executive is not party to a severance agreement.
|
Risk Analysis of Our Compensation Plans
The
compensation committee has reviewed our compensation policies generally applicable to our employees and believes that our policies do not encourage excessive and unnecessary risk-taking, and that the level of risk that they do encourage is not
reasonably likely to have a material adverse effect on us. Our compensation policies and programs are designed to encourage our employees to remain focused on both the short- and long-term goals of us. For example, while our cash bonus plans are
intended to measure performance on an annual basis, our equity awards typically vest over a number of years, which we believe encourages our employees to focus on sustained stockholder appreciation and limits the potential value of excessive
risk-taking. The committee believes that the mix of long-term equity incentive, short-term cash incentive bonus and base salary appropriately balances both the short-and long-term performance goals of us without encouraging excessive risk-related
behavior. While the compensation committee regularly evaluates its compensation programs, the committee believes that its current balance of incentives both adequately compensates its employees and does not promote excessive risk taking.
Confidentiality Information, Secrecy and Invention Agreements
Each of our named executive officers has entered into a standard form agreement with respect to confidential information, secrecy and inventions. Among other things, these agreements obligate each named
executive officer to refrain from disclosing any of our proprietary information received during the course of employment and, with some exceptions, to assign to us any inventions conceived or developed during the course of employment.
Employee Benefit and Stock Plans
2010
Equity Incentive Award Plan
In September 2010, our board of directors adopted, and, in October 2010, our stockholders approved, the
2010 Equity Incentive Award Plan, or the 2010 Plan, which became effective in November 2010 in connection with our initial public offering. The principal purpose of the 2010 Plan is to attract, retain and motivate selected employees, consultants and
directors through the granting of stock-based compensation awards and cash-based performance bonus awards. The 2010 Plan is also designed to permit us to make cash-based awards and equity-based awards intended to qualify as performance-based
compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code. The principal features of the 2010 Plan are summarized below. This summary is qualified in its entirety by reference to the text of the 2010
Plan, which is filed as an exhibit to the registration statement of which this prospectus is a part.
Share Reserve.
Under the
2010 Plan, 2,450,000 shares of our common stock were initially reserved for issuance pursuant to a variety of stock-based compensation awards, including stock options, stock appreciation rights, or SARs, restricted stock awards, restricted stock
unit awards, deferred stock awards, dividend equivalent awards, stock payment awards and performance awards and other stock-based awards, plus the 655,394 shares that remained available for awards under our 2006 Equity Incentive Plan at the
completion of our initial public offering. The number of shares initially reserved for issuance or transfer pursuant to awards under the 2010 Plan will be increased by (i) the number of shares represented by awards outstanding under our 2006
Equity Incentive Plan that are forfeited or lapse unexercised and which, following the effective date of the 2010 Plan, and (ii) an annual increase on the first day of each fiscal year, beginning in 2011 and ending in 2020, equal to the least
of:
102
|
§
|
|
4% of the shares of our common stock outstanding on the last day of the immediately preceding fiscal year; and
|
|
§
|
|
such smaller number of shares of stock as determined by our board of directors.
|
Up to the aggregate share reserve may be issued upon the exercise of incentive stock options.
The following counting provisions will be in effect for the share reserve under the 2010 Plan:
|
§
|
|
to the extent that an award terminates, expires or lapses for any reason or an award is settled in cash without the delivery of shares, any shares
subject to the award at such time will be available for future grants under the 2010 Plan;
|
|
§
|
|
to the extent shares are tendered or withheld to satisfy the grant, exercise price or tax withholding obligation with respect to any award under the
2010 Plan, such tendered or withheld shares will be available for future grants under the 2010 Plan;
|
|
§
|
|
to the extent that shares of our common stock granted under the 2010 Plan are repurchased by, and returned to, us prior to vesting, such shares will be
available for future grants under the 2010 Plan;
|
|
§
|
|
the payment of dividend equivalents in cash in conjunction with any outstanding awards will not be counted against the shares available for issuance
under the 2010 Plan; and
|
|
§
|
|
to the extent permitted by applicable law or any exchange rule, shares issued in assumption of, or in substitution for, any outstanding awards of any
entity acquired in any form of combination by us or any of our subsidiaries will not be counted against the shares available for issuance under the 2010 Plan.
|
Administration.
The compensation committee of our board of directors will administer the 2010 Plan unless our board of directors assumes authority for administration. The compensation
committee must consist of at least two members of our board of directors, each of whom is intended to qualify as an outside director, within the meaning of Section 162(m) of the Code, a non-employee director for purposes
of Rule 16b-3 under the Exchange Act and an independent director within the meaning of the rules of The NASDAQ Global Market, or other principal securities market on which shares of our common stock are traded. The 2010 Plan provides
that the compensation committee may delegate its authority to grant awards to employees other than executive officers and certain senior executives of the company to a committee consisting of one or more members of our board of directors or one or
more of our officers.
Subject to the terms and conditions of the 2010 Plan, the administrator has the authority to select the persons to whom
awards are to be made, to determine the number of shares to be subject to awards and the terms and conditions of awards, and to make all other determinations and to take all other actions necessary or advisable for the administration of the 2010
Plan. The administrator is also authorized to adopt, amend or rescind rules relating to administration of the 2010 Plan. Our board of directors may at any time remove the compensation committee as the administrator and revest in itself the authority
to administer the 2010 Plan. The full board of directors will administer the 2010 Plan with respect to awards to non-employee directors.
Eligibility.
Options, SARs, restricted stock and all other stock-based and cash-based awards under the 2010 Plan may be granted to
individuals who are then our officers, employees or consultants or are the officers, employees or consultants of certain of our subsidiaries. Such awards also may be granted to our directors. Only employees of us or certain of our subsidiaries may
be granted incentive stock options, or ISOs.
Awards.
The 2010 Plan provides that the administrator may grant or issue stock
options, SARs, restricted stock, restricted stock units, deferred stock, dividend equivalents, performance awards, stock payments and other stock-based and cash-based awards, or any combination thereof. Each award will be set forth in a separate
agreement with the person receiving the award and will indicate the type, terms and conditions of the award.
|
§
|
|
Nonqualified Stock Options
, or NQSOs, will provide for the right to purchase shares of our common stock at a specified price, which may
not be less than fair market value on the date of grant, and usually
|
|
will become exercisable (at the discretion of the administrator) in one or more installments after the grant date, subject to the participants continued employment or
service with us and/or subject to the
|
103
|
satisfaction of corporate performance targets and individual performance targets established by the administrator. NQSOs may be granted for any term specified by the administrator that does not
exceed ten years.
|
|
§
|
|
Incentive Stock Options
, or ISOs, will be designed in a manner intended to comply with the provisions of Section 422 of the Code and
will be subject to specified restrictions contained in the Code. Among such restrictions, ISOs must have an exercise price of not less than the fair market value per share of common stock on the date of grant, may only be granted to employees and
must not be exercisable after a period of ten years measured from the date of grant. In the case of an ISO granted to an individual who owns (or is deemed to own) at least 10% of the total combined voting power of all classes of our capital stock,
the 2010 Plan provides that the exercise price must be at least 110% of the fair market value per share of common stock on the date of grant and the ISO must not be exercisable after a period of five years measured from the date of grant.
|
|
§
|
|
Restricted Stock
may be granted to any eligible individual and made subject to such restrictions as may be determined by the
administrator. Restricted stock, typically, may be forfeited for no consideration or repurchased by us at the original purchase price if the conditions or restrictions on vesting are not met. In general, restricted stock may not be sold or otherwise
transferred until the restrictions are removed or expire. Purchasers of restricted stock, unlike recipients of options, will have voting rights and will have the right to receive dividends, if any, prior to the time when the restrictions lapse.
However, extraordinary dividends will generally be placed in escrow, and will not be released until the restrictions are removed or expire.
|
|
§
|
|
Restricted Stock Units
may be awarded to any eligible individual, typically without payment of consideration, but subject to vesting
conditions based on continued employment or service or on performance criteria established by the administrator. Like restricted stock, restricted stock units may not be sold, or otherwise transferred or hypothecated, until vesting conditions are
removed or expire. Unlike restricted stock, stock underlying restricted stock units will not be issued until the restricted stock units have vested, and recipients of restricted stock units generally will have no voting or dividend rights prior to
the time when vesting conditions are satisfied.
|
|
§
|
|
Deferred Stock Awards
represent the right to receive shares of our common stock on a future date. Deferred stock may not be sold or
otherwise hypothecated or transferred until issued. Deferred stock will not be issued until the deferred stock award has vested, and recipients of deferred stock generally will have no voting or dividend rights prior to the time when the vesting
conditions are satisfied and the shares are issued. Deferred stock awards generally will be forfeited, and the underlying shares of deferred stock will not be issued, if the applicable vesting conditions and other restrictions are not met.
|
|
§
|
|
Stock Appreciation Rights
, or SARs, may be granted in connection with stock options or other awards, or separately. SARs granted in
connection with stock options or other awards typically will provide for payments to the holder based upon increases in the price of our common stock over a set exercise price. The exercise price of any SAR granted under the 2010 Plan must be at
least 100% of the fair market value per share of our common stock on the date of grant. Except as required by Section 162(m) of the Code with respect to a SAR intended to qualify as performance-based compensation under Section 162(m) of
the Code, there are no restrictions specified in the 2010 Plan on the exercise of SARs or the amount of gain realizable therefrom, although restrictions may be imposed by the administrator in the SAR agreements. SARs under the 2010 Plan will be
settled in cash or shares of our common stock, or in a combination of both, at the election of the administrator.
|
|
§
|
|
Dividend Equivalents
represent the value of the dividends, if any, per share paid by us, calculated with reference to the number of
shares covered by the award. Dividend equivalents may be settled in cash or shares and at such times as determined by the compensation committee or board of directors, as applicable.
|
104
|
§
|
|
Performance Awards
may be granted by the administrator on an individual or group basis. Generally, these awards will be based upon
specific performance targets and may be paid in cash or in common stock or in a combination of both. Performance awards may include phantom stock awards that provide for payments based upon the value of our common stock. Performance
awards may also include bonuses that may be granted by the administrator on an individual or group basis and which may be payable in cash or in common stock or in a combination of both.
|
|
§
|
|
Stock Payments
may be authorized by the administrator in the form of common stock or an option or other right to purchase common stock as
part of a deferred compensation or other arrangement in lieu of all or any part of compensation, including bonuses, that would otherwise be payable in cash to the employee, consultant or non-employee director.
|
Change-in-Control.
If a change-in-control occurs where the acquiror does not assume or replace awards granted under the 2010 Plan prior to
the consummation of such transaction, then such awards will be subject to accelerated vesting such that 100% of such awards will become vested and exercisable or payable, as applicable. In addition, the administrator will also have complete
discretion to structure one or more awards under the 2010 Plan to provide that such awards will become vested and exercisable or payable on an accelerated basis if such awards are assumed or replaced with equivalent awards but the individuals
service with us or the acquiring entity is subsequently terminated within a designated period following the change in control event. The administrator may also make appropriate adjustments to awards under the 2010 Plan and is authorized to provide
for the acceleration, cash-out, termination, assumption, substitution or conversion of such awards in the event of a change in control or certain other unusual or nonrecurring events or transactions. Under the 2010 Plan, a change in control is
generally defined as:
|
§
|
|
the transfer or exchange, in a single or series of related transactions, by our stockholders of more than 50% of our voting stock to a person or group;
|
|
§
|
|
a change in the composition of our board of directors over a two-year period such that 50% or more of the members of the board were elected through one
or more contested elections;
|
|
§
|
|
a merger, consolidation, reorganization or business combination in which we are involved, directly or indirectly, other than a merger, consolidation,
reorganization or business combination which results in our outstanding voting securities immediately before the transaction continuing to represent a majority of the voting power of the acquiring companys outstanding voting securities and
after which no person or group beneficially owns 50% or more of the outstanding voting securities of the surviving entity immediately after the transaction;
|
|
§
|
|
the sale, exchange, or transfer of all or substantially all of our assets; or
|
|
§
|
|
stockholder approval of our liquidation or dissolution.
|
Adjustments of Awards.
In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, spin-off, recapitalization, distribution of our assets to
stockholders (other than normal cash dividends) or any other corporate event affecting the number of outstanding shares of our common stock or the share price of our common stock that would require adjustments to the 2010 Plan or any awards under
the 2010 Plan in order to prevent the dilution or enlargement of the potential benefits intended to be made available thereunder, the administrator will make appropriate, proportionate adjustments to:
|
§
|
|
the aggregate number and type of shares subject to the 2010 Plan;
|
|
§
|
|
the number and kind of shares subject to outstanding awards and terms and conditions of outstanding awards (including, without limitation, any
applicable performance targets or criteria with respect to such awards); and
|
|
§
|
|
the grant or exercise price per share of any outstanding awards under the 2010 Plan.
|
105
Amendment and Termination.
Our board of directors or the committee (with board approval) may
terminate, amend or modify the 2010 Plan at any time and from time to time. However, we must generally obtain stockholder approval to:
|
§
|
|
increase the number of shares available under the 2010 Plan (other than in connection with certain corporate events, as described above);
|
|
§
|
|
grant options with an exercise price that is below 100% of the fair market value per share of our common stock on the grant date;
|
|
§
|
|
extend the exercise period for an option beyond ten years from the date of grant; or
|
|
§
|
|
the extent required by applicable law, rule or regulation (including any applicable stock exchange rule).
|
Notwithstanding the foregoing, an option may be amended to reduce the per share exercise price below the per share exercise price of such option on the
grant date, and options may be granted in exchange for, or in connection with, the cancellation or surrender of options having a higher per share exercise price, without receiving additional stockholder approval.
Expiration Date.
The 2010 Plan will expire on, and no option or other award may be granted pursuant to the 2010 Plan after, the tenth
anniversary of the effective date of the 2010 Plan. Any award that is outstanding on the expiration date of the 2010 Plan will remain in force according to the terms of the 2010 Plan and the applicable award agreement.
Securities Laws.
The 2010 Plan is intended to conform to certain provisions of the Securities Act and the Exchange Act and related
regulations and rules promulgated by the SEC thereunder, including without limitation, Rule 16b-3. The 2010 Plan will be administered, and options will be granted and may be exercised, only in such a manner as to conform to such laws, rules and
regulations.
Section 409A of the Code.
Certain awards under the 2010 Plan may be considered nonqualified deferred
compensation for purposes of Section 409A of the Code, which imposes certain additional requirements regarding the payment of deferred compensation. Generally, if at any time during a taxable year a nonqualified deferred compensation plan
fails to meet the requirements of Section 409A, or is not operated in accordance with those requirements, all amounts deferred under the 2010 Plan and all other equity incentive plans for the taxable year and all preceding taxable years by any
participant with respect to whom the failure relates are includible in gross income for the taxable year to the extent not subject to a substantial risk of forfeiture and not previously included in gross income. If a deferred amount is required to
be included in income under Section 409A, the amount also is subject to interest and an additional income tax. The interest imposed is equal to the interest at the underpayment rate plus one percentage point imposed on the underpayments that
would have occurred had the compensation been includible in income for the taxable year when first deferred, or, if later, when not subject to a substantial risk of forfeiture. The additional U.S. federal income tax is equal to 20% of the
compensation required to be included in gross income. In addition, certain states, including California, have laws similar to Section 409A, which impose additional state penalty taxes on such compensation.
Section 162(m) of the Code.
In general, under Section 162(m) of the Code, income tax deductions of publicly held corporations may
be limited to the extent total compensation (including, but not limited to, base salary, annual bonus and income attributable to stock option exercises and other nonqualified benefits) for certain executive officers exceeds $1,000,000 (less the
amount of any excess parachute payments as defined in Section 280G of the Code) in any taxable year of the corporation. However, under Section 162(m), the deduction limit does not apply to certain performance-based
compensation established by an independent compensation committee that is adequately disclosed to and approved by stockholders. In particular, stock options and SARs will satisfy the performance-based compensation exception if the
awards are made by a qualifying compensation committee, the 2010 Plan sets the maximum number of shares that can be granted to any person within a specified period, and the compensation is based solely on an increase in the stock price after the
grant date. Specifically, the option exercise price must be equal to or greater than the fair market value of the stock subject to the award on the grant date. Under a Section 162(m) transition rule for compensation plans of
106
corporations which are privately held and which become publicly held in an initial public offering, the 2010 Plan will not be subject to Section 162(m) until the earlier of:
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§
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a material modification of the 2010 Plan;
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§
|
|
the issuance of all of the shares of our common stock reserved for issuance under the 2010 Plan;
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§
|
|
the expiration of the 2010 Plan; and
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§
|
|
the first meeting of our stockholders at which members of our board of directors are to be elected that occurs after the close of the third calendar
year following the calendar year in which our initial public offering occurs.
|
After the transition date, rights or awards
granted under the 2010 Plan, other than options and SARs, will not qualify as performance-based compensation for purposes of Section 162(m) unless such rights or awards are granted or vest upon pre-established objective performance
goals, the material terms of which are disclosed to and approved by our stockholders. Thus, after the transition date, we expect that such other rights or awards under the plan will not constitute performance-based compensation for purposes of
Section 162(m).
2006 Equity Incentive Plan
Our board of directors adopted, and our stockholders approved, the 2006 Equity Incentive Plan in March 2006. The 2006 Equity Incentive Plan provided for the grant of ISOs, NQSOs and stock purchase rights.
As of March 31, 2011, options to purchase 2,665,425 shares of our common stock at a weighted average exercise price per share of $1.98 remained outstanding under the 2006 Equity Incentive Plan. No stock purchase rights have been granted
under the 2006 Equity Incentive Plan. No shares of our common stock are available for future issuance pursuant to awards granted under the 2006 Equity Incentive Plan and no further awards will be granted under the 2006 Equity Incentive Plan.
However, all outstanding awards will continue to be governed by their existing terms.
Administration.
Our board of directors, or
a committee thereof appointed by our board of directors, has the authority to administer the 2006 Equity Incentive Plan and the awards granted under it.
Stock Options.
The 2006 Equity Incentive Plan provides for the grant of ISOs under the federal tax laws or NQSOs. ISOs may be granted only to employees. NQSOs and stock purchase rights may
be granted to employees, directors or consultants. The exercise price of ISOs granted to employees who at the time of grant own stock representing more than 10% of the voting power of all classes of our common stock may not be less than 110% of the
fair market value per share of our common stock on the date of grant, and the exercise price of ISOs granted to any other employees may not be less than 100% of the fair market value per share of our common stock on the date of grant. The exercise
price of NQSOs to employees, directors or consultants who at the time of grant own stock representing more than 10% of the voting power of all classes of our common stock may not be less than 110% of the fair market value per share of our common
stock on the date of grant, and the exercise price of nonstatutory stock options to all other employees, directors or consultants may not be less than 100% of the fair market value per share of our common stock on the date of grant. Shares subject
to options under the 2006 Equity Incentive Plan generally vest in a series of installments over an optionees period of service, with a minimum vesting rate of at least 20% per year over five years from the date of grant, except with
respect to options granted to officers, directors and consultants.
In general, the maximum term of options granted is ten years. The maximum
term of options granted to an optionee who owns stock representing more than 10% of the voting power of all classes of our common stock is five years. If an optionees service relationship with us terminates other than by disability or death,
the optionee may exercise the vested portion of any option in such period of time as specified in the optionees option agreement, but in no event will such period be less than 30 days following the termination of service. If an optionees
service relationship with us terminates by disability or death, the optionee, or the optionees designated beneficiary, as applicable, may exercise the vested portion of any option in such period of time as specified in the optionees
option agreement, but in no event will such period be less than 12 months following the termination of service. Shares of common stock representing any unvested portion underlying the option on
107
the date of termination will immediately cease to be issuable and will become available for future issuance under the 2006 Equity Incentive Plan. If, after termination, the optionee does not
exercise the option within the time period specified, the option will terminate and the shares of common stock covered by such option will become available for future issuance under the 2006 Equity Incentive Plan.
Stock Purchase Rights.
The 2006 Equity Incentive Plan provides that we may issue stock purchase rights alone, in addition to or in tandem
with options granted under the 2006 Equity Incentive Plan and/or cash awards made outside of the 2006 Equity Incentive Plan. Each stock purchase right will be governed by a restricted stock purchase agreement. We will have the right to repurchase
shares of common stock acquired by the purchaser upon exercise of a stock purchase right upon the termination of the purchasers status as an employee, director or consultant for any reason. The repurchase price for shares acquired by the
purchaser upon exercise of a stock purchase right will be the original price paid by the purchaser. Except with respect to shares purchased by officers, directors and consultants, the repurchase option lapses at a rate of at least 20% per year
over five years from the date of purchase. However, this lapsing does not apply to stock purchase rights granted to individuals who are tax residents of Germany. Once the stock purchase right is exercised, the purchaser will have rights equivalent
to those of our other stockholders.
Corporate Transactions.
In the event of a proposed dissolution or liquidation, the
administrator of the 2006 Equity Incentive Plan has the discretion to take one or more of the following actions:
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provide that any option or stock purchase right be made exercisable until ten days prior to such transaction; and
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§
|
|
provide that our option to repurchase any shares purchased upon exercise of an option or stock purchase right will lapse as to all such shares.
|
To the extent options and stock purchase rights have not been previously exercised, all such options and stock purchase
rights will terminate immediately prior to the consummation of the proposed transaction.
In the event of certain corporate transactions, the
administrator of the 2006 Equity Incentive Plan will adjust the number of shares of common stock that may be delivered under the 2006 Equity Incentive Plan and/or the number, class and price of shares of common stock covered by each outstanding
option or stock purchase right.
Change-in-Control.
If we undergo a change-in-control, and any surviving corporation does not
assume options or stock purchase rights under the 2006 Equity Incentive Plan, or substitute an equivalent option of the successor corporation or a parent or subsidiary of the successor corporation, then the vesting of options or stock purchase
rights held by participants in the 2006 Equity Incentive Plan will be accelerated and the options or stock purchase rights will become fully exercisable during the 15-day period specified below. The holder of such options or stock purchase rights
not assumed or substituted will be notified by the 2006 Equity Incentive Plan administrator that the option or stock purchase right is fully exercisable for a period of 15 days from the date of such notice and will be terminated if not exercised
within such 15 day period.
Employee Stock Purchase Plan
In September 2010, our board of directors adopted, and, in October 2010, our stockholders approved, an employee stock purchase plan, or the ESPP, which became effective in November 2010 in connection with
our initial public offering. The ESPP is designed to allow our eligible employees and the eligible employees of our participating subsidiaries to purchase shares of common stock, at semi-annual intervals, with their accumulated payroll deductions.
Share Reserve.
750,000 shares of our common stock were initially reserved for issuance under our ESPP. The number of shares of
common stock reserved under our ESPP will automatically increase on the first trading day of each year, beginning in 2011 and ending in 2020, by an amount equal to the least of:
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§
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|
2% of the number of shares of our common stock outstanding on the last day of the immediately preceding fiscal year; and
|
108
|
§
|
|
a lesser amount determined by our board of directors.
|
Offering Periods.
The ESPP is administered through a series of successive offering periods, with a new offering period beginning on May 15
th
and November 15
th
of each year. Unless otherwise determined by the compensation
committee, each offering period has a duration of six months.
Eligible Employees.
Our employees, and any employees of our
subsidiaries that the compensation committee designates as eligible to participate in the ESPP, who are scheduled to work more than 20 hours per week for more than five calendar months per year may join an offering period on the start date of that
period.
Payroll Deductions.
A participant may contribute from 1% to 15% of his or her compensation through payroll deductions up
to $12,500 per offering period, and the accumulated deductions will be applied to the purchase of shares on each semi-annual purchase date. The purchase price per share will be equal to 85% of the fair market value per share of our common stock on
the first trading day of an offering period in which a participant is enrolled or, if lower, 85% of the fair market value per share on the semi-annual purchase date. Semi-annual purchase dates will occur on the last trading day of each offering
period. However, not more than 3,000 shares may be purchased in total by any participant during any offering period. Our compensation committee has the authority to change these limitations for any subsequent offering period.
Change in Control.
If we are acquired by merger or sale of substantially all of our assets or we merge with another company, then all
outstanding purchase rights may either be assumed by the acquirer or be exercised at an early purchase date prior to the effective date of the acquisition. The purchase price in effect for each participant will be equal to 85% of the fair market
value per share of our common stock on the first trading date of the offering period in which the participant is enrolled at the time the acquisition occurs or, if lower, 85% of the fair market value per share on the purchase date prior to the
acquisition.
Plan Provisions.
Our board may at any time amend, suspend, terminate or discontinue the ESPP. However, certain
amendments may require stockholder approval.
401(k) Plan
We maintain a defined contribution employee retirement plan, or 401(k) Plan, for our employees. Our executive officers are also eligible to participate in the 401(k) Plan on the same basis as our other
employees. The 401(k) Plan provides that each participant may contribute up to the statutory limit, which is $16,500 for calendar year 2011. Participants that are 50 years or older can also make catch-up contributions, which in
calendar year 2011 may be up to an additional $5,500 above the statutory limit. In 2010, we did not make any contributions to the 401(k) Plan on behalf of eligible employees. The 401(k) Plan is intended to qualify under Section 401 of the
Code so that contributions by employees to the 401(k) Plan, and income earned on the 401(k) Plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan. The trustees under the 401(k) Plan may, at the direction of each
participant, invest the 401(k) Plan employee salary deferrals in selected investment options.
Limitation on Liability and Indemnification Matters
Our amended and restated certificate of incorporation contains provisions that limit the liability of our directors for monetary damages
to the fullest extent permitted by Delaware law. Consequently, our directors will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duties as directors, except liability for:
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any breach of the directors duty of loyalty to us or our stockholders;
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§
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|
any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;
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§
|
|
unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; or
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|
§
|
|
any transaction from which the director derived an improper personal benefit.
|
109
Our amended and restated certificate of incorporation and amended and restated bylaws provide that we are
required to indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law. Our amended and restated bylaws also provide that we are obligated to advance expenses incurred by a director or officer in advance of
the final disposition of any action or proceeding, and permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in that capacity regardless of whether we would
otherwise be permitted to indemnify him or her under Delaware law. We have entered and expect to continue to enter into agreements to indemnify our directors, executive officers and other employees as determined by our board of directors. With
specified exceptions, these agreements provide for indemnification for related expenses including, among other things, attorneys fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. We
believe that these bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. We also maintain directors and officers liability insurance.
The limitation of liability and indemnification provisions in our amended and restated certificate of incorporation and amended and restated bylaws may
discourage stockholders from bringing a lawsuit against our directors and officers for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if
successful, might benefit us and our stockholders. Further, a stockholders investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and officers as required by these
indemnification provisions. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised
that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. At present, there is no pending litigation or proceeding involving any of our directors, officers or
employees for which indemnification is sought, and we are not aware of any threatened litigation that may result in claims for indemnification.
Rule 10b5-1 Sales Plans
Our directors and
executive officers have adopted written plans, known as Rule 10b5-1 plans, in which they contract with a broker to buy or sell shares of our common stock on a periodic basis. Under a Rule 10b5-1 plan, a broker executes trades pursuant to
parameters established by the director or officer when entering into the plan, without further direction from the director or officer. The director or officer may amend or terminate the plan in limited circumstances. Our directors and executive
officers may also buy or sell additional shares of our common stock outside of a Rule 10b5-1 plan when they are not in possession of material, nonpublic information.
110
Certain Relationships and Related Party Transactions
We describe below each transaction, since January 1, 2008, to which we were a party or will be a party, in which:
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§
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the amounts involved exceeded or will exceed $120,000; and
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§
|
|
a director, executive officer, holder or group of holders known to us to beneficially own more than 5% of any class of our voting securities or any
member of their immediate family had or will have a direct or indirect material interest in the transaction.
|
The share
numbers and purchase prices disclosed below have been adjusted to reflect the 30:1 reverse stock split that occurred on November 13, 2009.
Initial Public Offering
In connection with our
initial public offering, the underwriters allocated an aggregate of 1,650,000 shares of our common stock in the offering to certain of our principal stockholders and/or affiliates on the same terms as the other shares that were offered and sold in
our initial public offering. These allocations are listed in the table below:
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|
|
|
|
Name
|
|
Number of shares of
common stock allocated
in connection with
initial public
offering
|
|
Caduceus Private Investments III, LP
(1)(2)
|
|
|
602,778
|
|
Essex Woodlands Health Ventures VIII, L.P
(
3)(4)
.
|
|
|
602,778
|
|
Enterprise Partners VI, L.P.
(5)(6)
|
|
|
111,111
|
|
Prospect Venture Partners III, L.P.
(7)
|
|
|
333,333
|
|
(1)
|
Includes 5,687 shares allocated to OrbiMed Associates III, LP, an affiliate of Caduceus Private Investments III, LP.
|
(2)
|
Carl L. Gordon, Ph.D., is one of our directors and is a partner of OrbiMed Advisors, LLC.
|
(3)
|
Includes 39,386 shares allocated to Essex Woodlands Health Ventures Fund VIII A, L.P. and 17,124 shares allocated to Essex Woodlands Health Ventures
FundB, L.P., each of which is an affiliate of Essex Woodlands Health Ventures VIII, L.P.
|
(4)
|
C. Thomas Caskey, M.D., is one of our directors and is an adjunct partner in Essex Woodlands Health Ventures.
|
(5)
|
Includes 111,111 shares allocated to Enterprise Partners V, L.P., an affiliate of Enterprise Partners VI, L.P.
|
(6)
|
Andrew E. Senyei, M.D., is one of our directors and is a managing director and a general partner of Enterprise Partners.
|
(7)
|
Alexander E. Barkas, Ph.D., is one of our directors and is a managing member of Prospect Management Co. III, LLC, the general partner of Prospect Venture Partners
III, L.P.
|
Preferred Stock Issuances
2010 Bridge Financing
In April, May, June and August 2010, we sold convertible
promissory notes, or the 2010 Notes, to certain of our existing investors for an aggregate purchase price of $22.2 million. The 2010 Notes accrued interest at a rate of 8% per annum and had a maturity date of the earliest of (i) a
corporate reorganization as defined in the 2010 Notes, (ii) the closing of the initial public offering of our stock, (iii) an event of default pursuant to the terms of the 2010 Notes or (iv) April 12, 2011. In August 2010, in
connection with our Series E preferred stock financing described below, the full principal amount of the 2010 Notes, along with accrued but unpaid interest thereon of $364,266, were automatically converted into an aggregate of 2,990,355 shares of
our Series E preferred stock at a conversion price of $7.56 per share. In addition, each investor who purchased 2010 Notes also received warrants to purchase a number of shares of our common stock equal to (a) the product of (i) 5% of the
principal amount of 2010 Notes purchased by such investor and (ii) the number of months between the date of issuance of the warrant and the date of our next financing (up to five months), divided by (b) $1.50, resulting in the issuance of
warrants to purchase an aggregate of 1,848,849 shares of common stock.
111
The table below sets forth the participation in the sale of the 2010 Notes by our directors, executive
officers and 5% stockholders and their affiliates.
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|
|
|
|
|
|
Name
|
|
Principal amount of
2010 Notes
purchased
|
|
|
Number of shares of
common stock underlying
warrants received in
connection
with
purchase of 2010 Notes
|
|
Caduceus Private Investments III, LP
(1)(2)
|
|
$
|
3,291,190
|
|
|
|
294,379
|
|
Essex Woodlands Health Ventures VIII, L.P.
(3)(4)
|
|
$
|
3,291,190
|
|
|
|
294,380
|
|
C. Thomas Caskey, M.D.
(4)
|
|
$
|
4,786
|
|
|
|
252
|
|
Enterprise Partners VI, L.P.
(5)(6)
|
|
$
|
2,144,834
|
|
|
|
191,844
|
|
Highland Crusader Offshore Partners, L.P.
(7)
|
|
$
|
2,049,630
|
|
|
|
176,496
|
|
OVP Venture Partners VI, L.P.
(8)(9)
|
|
$
|
2,144,820
|
|
|
|
191,841
|
|
Prospect Venture Partners III, L.P.
(10)
|
|
$
|
2,078,348
|
|
|
|
185,897
|
|
SCV-CG, LLC
|
|
$
|
7,000,000
|
|
|
|
501,667
|
|
(1)
|
Includes $31,050 in 2010 Notes and warrants to purchase 2,777 shares of common stock purchased by OrbiMed Associates III, LP, an affiliate of Caduceus Private
Investments III, LP.
|
(2)
|
Carl L. Gordon, Ph.D., is one of our directors and is a partner of OrbiMed Advisors, LLC.
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(3)
|
Includes $215,050 in 2010 Notes and warrants to purchase 19,235 shares of common stock purchased by Essex Woodlands Health Ventures Fund VIII A, L.P. and
$93,500 in 2010 Notes and warrants to purchase 8,364 shares of common stock purchased by Essex Woodlands Health Ventures FundB, L.P., each of which is an affiliate of Essex Woodlands Health Ventures VIII, L.P.
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(4)
|
C. Thomas Caskey, M.D., is one of our directors and is an adjunct partner in Essex Woodlands Health Ventures.
|
(5)
|
Includes $74,417 in 2010 Notes and warrants to purchase 7,856 shares of common stock purchased by Enterprise Partners Management, LLC and $690,167 in 2010 Notes and
warrants to purchase 55,808 shares of common stock purchased by Enterprise Partners V, L.P., each of which is an affiliate of Enterprise Partners VI, L.P.
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(6)
|
Andrew E. Senyei, M.D., is one of our directors and is a managing director and a general partner of Enterprise Partners.
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(7)
|
Includes $600,672 in 2010 Notes and warrants to purchase 51,725 shares of common stock purchased by Highland Credit Opportunities CDO, L.P., an affiliate of Highland
Crusader Offshore Partners, L.P. Highland Crusader Offshore Partners, L.P. beneficially owns more than 5% of our outstanding common stock.
|
(8)
|
Includes $35,418 in 2010 Notes and warrants to purchase 3,167 shares of common stock purchased by OVP VI Entrepreneurs Fund, L.P., an affiliate of OVP Venture
Partners VI, L.P.
|
(9)
|
Charles P. Waite, Jr., is one of our directors and is a general partner of OVP Venture Partners.
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(10)
|
Alexander E. Barkas, Ph.D., is one of our directors and is a managing member of Prospect Management Co. III, LLC, the general partner of Prospect Venture Partners
III, L.P.
|
Issuance of Series E Preferred Stock and Warrants to Purchase Common Stock
In August, September and October 2010, we issued 6,912,181 shares of Series E preferred stock at a price of $7.56 per share for gross proceeds of
approximately $52.3 million. The table below sets forth the number of shares of Series E preferred stock sold to our directors, executive officers and 5% stockholders and their affiliates, and includes the shares of Series E preferred stock issued
in connection with the conversion of the 2010 Notes, including the consideration paid for such shares by cancellation of the 2010 Notes as disclosed above.
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|
|
|
|
|
|
|
|
Name
|
|
Number of
Shares of
Series E
Preferred Stock
|
|
|
Aggregate
Purchase
Price
|
|
Caduceus Private Investments III, LP
(1)(2)
|
|
|
1,279,138
|
|
|
$
|
9,670,284
|
|
Essex Woodlands Health Ventures VIII, L.P.
(3)(4)
|
|
|
1,279,137
|
|
|
$
|
9,670,276
|
|
C. Thomas Caskey, M.D.
(4)
|
|
|
1,844
|
|
|
$
|
13,940
|
|
Enterprise Partners VI, L.P.
(5)(6)
|
|
|
833,601
|
|
|
$
|
6,302,023
|
|
Highland Crusader Offshore Partners, L.P.
(7)
|
|
|
796,420
|
|
|
$
|
6,020,935
|
|
OVP Venture Partners VI, L.P.
(8)(9)
|
|
|
833,596
|
|
|
$
|
6,301,986
|
|
Prospect Venture Partners III, L.P.
(10)
|
|
|
807,760
|
|
|
$
|
6,106,665
|
|
SCV-CG, LLC
|
|
|
938,957
|
|
|
$
|
7,098,515
|
|
Wall Family Investment Partnership, Ltd.
(11)
|
|
|
50,000
|
|
|
$
|
378,000
|
|
(1)
|
Includes 12,068 shares held by OrbiMed Associates III, LP, an affiliate of Caduceus Private Investments III, LP.
|
(2)
|
Carl L. Gordon, Ph.D., is one of our directors and is a partner of OrbiMed Advisors, LLC.
|
112
(3)
|
Includes 83,580 shares purchased by Essex Woodlands Health Ventures Fund VIIIA, L.P. and 36,339 shares purchased by Essex Woodlands Health Ventures
FundB, L.P., each of which is an affiliate of Essex Woodlands Health Ventures VIII, L.P.
|
(4)
|
C. Thomas Caskey, M.D., is one of our directors and is an adjunct partner of Essex Woodlands Health Ventures.
|
(5)
|
Includes 27,049 shares purchased by Enterprise Partners Management, LLC and 259,458 shares purchased by Enterprise Partners V, L.P., each of which is an affiliate of
Enterprise Partners VI, L.P.
|
(6)
|
Andrew E. Senyei, M.D., is one of our directors and is a managing director and a general partner of Enterprise Partners.
|
(7)
|
Includes 233,402 shares purchased by Highland Credit Opportunities CDO, L.P., an affiliate of Highland Crusader Offshore Partners, L.P. Highland Crusader Offshore
Partners, L.P. beneficially owns more than 5% of our outstanding common stock.
|
(8)
|
Includes 4,767 shares purchased by OVP VI Entrepreneurs Fund, L.P., an affiliate of OVP Venture Partners VI, L.P.
|
(9)
|
Charles P. Waite, Jr., is one of our directors and is a general partner of OVP Venture Partners.
|
(10)
|
Alexander E. Barkas, Ph.D., is one of our directors and is a managing member of Prospect Management Co. III, LLC, the general partner of Prospect Venture Partners
III, L.P.
|
(11)
|
Robert T. Wall is one of our directors and maintains dispositive power over the shares held by the Wall Family Investment Partnership, Ltd.
|
2009 Bridge Financing
In February 2009, April 2009, June 2009 and August 2009, we sold convertible promissory notes, or the 2009 Notes, to certain of our existing investors for an aggregate purchase price of $14.7
million. The 2009 Notes accrued interest at a rate of 8% per annum and had a maturity date of the earliest of (i) a change of control as defined in our certificate of incorporation, (ii) an event of default pursuant to the terms of
the 2009 Notes or (iii) on or after December 31, 2009, within five business days after our receipt of written notice from the investors holding at least 51% of the principal amount of the 2009 Notes. In August 2009, in connection with our
Series D preferred stock financing described below, the full principal amount of the 2009 Notes, along with accrued but unpaid interest thereon of $329,393, were automatically converted into an aggregate of 1,991,325 shares of our Series D preferred
stock at a conversion price of $7.56 per share. In addition, investors who purchased 2009 Notes also received warrants to purchase up to an aggregate of 278,165 shares of our Series D preferred stock at an exercise price of $7.56 per share.
The table below sets forth the participation in the sale of the 2009 Notes by our directors, executive officers and 5% stockholders and their
affiliates.
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Principal
amount of
2009 Notes
purchased
|
|
|
Number of
shares of
Series D
preferred
stock
issued
upon
conversion
of
the
2009 Notes
|
|
|
Number of
shares of
Series D
preferred
stock
underlying
warrants
received
in
connection
with
purchase of
2009 Notes
|
|
Enterprise Partners VI, L.P.
(1)(2)
|
|
$
|
4,000,458
|
|
|
|
541,720
|
|
|
|
79,318
|
|
Highland Crusader Offshore Partners, L.P.
|
|
$
|
3,027,535
|
|
|
|
407,297
|
|
|
|
46,057
|
|
OVP Venture Partners VI, L.P.
(3)(4)
|
|
$
|
4,000,458
|
|
|
|
541,720
|
|
|
|
79,318
|
|
Prospect Venture Partners III, L.P.
(5)
|
|
$
|
3,621,549
|
|
|
|
490,422
|
|
|
|
71,872
|
|
(1)
|
Includes $1,234,762 in 2009 Notes purchased by Enterprise Partners V, L.P., an affiliate of Enterprise Partners VI, L.P., which converted into 166,700 shares of
Series D preferred stock. In connection with its purchase of the 2009 Notes, Enterprise Partners V, L.P. received warrants to purchase up to 25,639 shares of Series D preferred stock at an exercise price of $7.56 per share.
|
(2)
|
Andrew E. Senyei, M.D., is one of our directors and is a managing director and a general partner of Enterprise Partners.
|
(3)
|
Includes $59,811 in 2009 Notes purchased by OVP VI Entrepreneurs Fund, L.P., an affiliate of OVP Venture Partners VI, L.P., which converted into 8,141 shares of
Series D preferred stock. In connection with its purchase of the 2009 Notes, OVP VI Entrepreneurs Fund, L.P. received warrants to purchase up to 1,423 shares of Series D preferred stock at an exercise price of $7.56 per share.
|
(4)
|
Charles P. Waite, Jr., is one of our directors and is a general partner of OVP Venture Partners.
|
(5)
|
Alexander E. Barkas, Ph.D., is one of our directors and is a managing member of Prospect Management Co. III, LLC, the general partner of Prospect Venture Partners
III, L.P.
|
Issuance of Series D Preferred Stock
Between August 2009 and March 2010, we sold 7,310,816 shares of Series D preferred stock at a price of $7.56 per share for gross proceeds of approximately $55.3 million. The table below sets forth the
number of shares of
113
Series D preferred stock sold to our directors, executive officers and 5% stockholders and their affiliates and includes the shares of Series D preferred stock issued in connection with the
conversion of the 2009 Notes, including the consideration paid for such shares by cancellation of the 2009 Notes as disclosed above.
|
|
|
|
|
|
|
|
|
Name
|
|
Number of
shares of
Series D
preferred stock
|
|
|
Aggregate
purchase
price
|
|
Caduceus Private Investments III, LP
(1)(2)
|
|
|
2,274,354
|
|
|
$
|
17,194,116
|
|
Essex Woodlands Health Ventures VIII, L.P.
(3)(4)
|
|
|
2,274,354
|
|
|
$
|
17,194,116
|
|
C. Thomas Caskey, M.D.
(4)
|
|
|
3,307
|
|
|
$
|
25,001
|
|
Enterprise Partners VI, L.P.
(5)(6)
|
|
|
731,664
|
|
|
$
|
5,531,380
|
|
Highland Crusader Offshore Partners, L.P.
(7)
|
|
|
588,665
|
|
|
$
|
4,450,307
|
|
OVP Venture Partners VI, L.P.
(8)(9)
|
|
|
731,662
|
|
|
$
|
5,531,365
|
|
Prospect Venture Partners III, L.P.
(10)
|
|
|
674,426
|
|
|
$
|
5,098,661
|
|
(1)
|
Includes 21,456 shares held by OrbiMed Associates III, LP, an affiliate of Caduceus Private Investments III, LP.
|
(2)
|
Carl L. Gordon, Ph.D., is one of our directors and is a partner of OrbiMed Advisors, LLC.
|
(3)
|
Includes 148,608 shares purchased by Essex Woodlands Health Ventures Fund VIIIA, L.P. and 64,612 shares purchased by Essex Woodlands Health Ventures
FundB, L.P., each of which is an affiliate of Essex Woodlands Health Ventures VIII, L.P.
|
(4)
|
C. Thomas Caskey, M.D., is one of our directors and is an adjunct partner of Essex Woodlands Health Ventures.
|
(5)
|
Includes 66,138 shares purchased by Enterprise Partners Management, LLC and 176,737 shares purchased by Enterprise Partners V, L.P., each of which is an affiliate of
Enterprise Partners VI, L.P.
|
(6)
|
Andrew E. Senyei, M.D., is one of our directors and is a managing director and a general partner of Enterprise Partners.
|
(7)
|
Includes 52,969 shares purchased by Highland Credit Opportunities CDO, L.P., an affiliate of Highland Crusader Offshore Partners, L.P. Highland Crusader Offshore
Partners, L.P. beneficially owns more than 5% of our outstanding common stock.
|
(8)
|
Includes 9,477 shares purchased by OVP VI Entrepreneurs Fund, L.P., an affiliate of OVP Venture Partners VI, L.P.
|
(9)
|
Charles P. Waite, Jr., is one of our directors and is a general partner of OVP Venture Partners.
|
(10)
|
Alexander E. Barkas, Ph.D., is one of our directors and is a managing member of Prospect Management Co. III, LLC, the general partner of Prospect Venture Partners
III, L.P.
|
Issuance of Common Stock Warrants
In August and September 2010, we issued warrants to purchase up to 1,318,719 shares of our common stock at an exercise price of $2.69 per share to certain existing investors who purchased shares in our
Series E preferred stock financing. These warrants subsequently terminated and were no longer outstanding as of September 30, 2010. The table below sets forth the number of shares of common stock that were issuable upon the exercise of
these warrants, prior to their termination, that were issued to our directors, executive officers and 5% stockholders and their affiliates.
|
|
|
|
|
Name
|
|
Number of
Shares of
Common Stock
Initially
Issuable Upon
Exercise
of
Warrants
|
|
Caduceus Private Investments III, LP
(1)(2)
|
|
|
234,104
|
|
Essex Woodlands Health Ventures VIII, L.P.
(3)(4)
|
|
|
234,104
|
|
C. Thomas Caskey, M.D.
(4)
|
|
|
336
|
|
Enterprise Partners VI, L.P.
(5)(6)
|
|
|
152,563
|
|
Highland Crusader Offshore Partners, L.P.
(7)
|
|
|
145,746
|
|
OVP Venture Partners VI, L.P.
(8)(9)
|
|
|
152,562
|
|
Prospect Venture Partners III, L.P.
(10)
|
|
|
147,833
|
|
SCV-CG, LLC
|
|
|
234,739
|
|
(1)
|
Includes warrants to purchase 2,209 shares of common stock held by OrbiMed Associates III, LP, an affiliate of Caduceus Private Investments III, LP.
|
(2)
|
Carl L. Gordon, Ph.D., is one of our directors and is a partner of OrbiMed Advisors, LLC.
|
(3)
|
Includes warrants to purchase 15,297 shares of common stock held by Essex Woodlands Health Ventures Fund VIIIA, L.P. and warrants to purchase 6,651 shares of
common stock held by Essex Woodlands Health Ventures FundB, L.P., each of which is an affiliate of Essex Woodlands Health Ventures VIII, L.P.
|
(4)
|
C. Thomas Caskey, M.D., is one of our directors and is an adjunct partner of Essex Woodlands Health Ventures.
|
114
(5)
|
Includes warrants to purchase 3,835 shares of common stock held by Enterprise Partners Management, LLC and warrants to purchase 48,330 shares of common stock held by
Enterprise Partners V, L.P., each of which is an affiliate of Enterprise Partners VI, L.P.
|
(6)
|
Andrew E. Senyei, M.D., is one of our directors and is a managing director and a general partner of Enterprise Partners.
|
(7)
|
Includes warrants to purchase 42,713 shares of common stock held by Highland Credit Opportunities CDO, L.P., an affiliate of Highland Crusader Offshore Partners,
L.P. Highland Crusader Offshore Partners, L.P. beneficially owns more than 5% of our outstanding common stock.
|
(8)
|
Includes warrants to purchase 1,192 shares of common stock purchased by OVP VI Entrepreneurs Fund, L.P., an affiliate of OVP Venture Partners VI, L.P.
|
(9)
|
Charles P. Waite, Jr., is one of our directors and is a general partner of OVP Venture Partners.
|
(10)
|
Alexander E. Barkas, Ph.D., is one of our directors and is a managing member of Prospect Management Co. III, LLC, the general partner of Prospect Venture Partners
III, L.P.
|
In August 2009, we issued warrants to purchase up to an aggregate of 1,630,629 shares of our common stock at an
exercise price of $1.50 per share to certain existing investors who purchased at least $1.0 million more than their pro rata portion of our Series D preferred stock financing. The table below sets forth the number of shares of common stock issuable
upon the exercise of warrants issued to our directors, executive officers and 5% stockholders and their affiliates.
|
|
|
|
|
Name
|
|
Number of
shares of
common stock
issuable upon
exercise of
warrants
|
|
Enterprise Partners VI, L.P.
(1)(2)
|
|
|
447,724
|
|
Highland Crusader Offshore Partners, L.P.
(3)
|
|
|
329,638
|
|
OVP Venture Partners VI, L.P.
(4)(5)
|
|
|
447,725
|
|
Prospect Venture Partners III, L.P.
(6)
|
|
|
405,542
|
|
(1)
|
Includes warrants to purchase 308,930 shares of common stock held by Enterprise Partners V, L.P., an affiliate of Enterprise Partners VI, L.P.
|
(2)
|
Andrew E. Senyei, M.D., is one of our directors and is a managing director and a general partner of Enterprise Partners.
|
(3)
|
Highland Crusader Offshore Partners, L.P. beneficially owns more than 5% of our outstanding common stock.
|
(4)
|
Includes warrants to purchase 3,134 shares of common stock purchased by OVP VI Entrepreneurs Fund, L.P., an affiliate of OVP Venture Partners VI, L.P.
|
(5)
|
Charles P. Waite, Jr., is one of our directors and is a general partner of OVP Venture Partners.
|
(6)
|
Alexander E. Barkas, Ph.D., is one of our directors and is a managing member of Prospect Management Co. III, LLC, the general partner of Prospect Venture Partners
III, L.P.
|
Issuance of Series C Preferred Stock
In February 2008, we sold 166,346 shares of Series C preferred stock at a price of $159.30 per share for gross proceeds of approximately $26.5 million. In March 2008, we issued 1,004 shares of Series C
preferred stock valued at approximately $160,000 to a professional consulting services firm in exchange for their services. The table below sets forth the number of shares of Series C preferred stock sold to our directors, executive officers and 5%
stockholders and their affiliates.
|
|
|
|
|
|
|
|
|
Name
|
|
Number of
shares of
Series C
preferred stock
|
|
|
Aggregate
purchase
price
|
|
Enterprise Partners VI, L.P.
(1)
|
|
|
21,488
|
|
|
$
|
3,423,038
|
|
Highland Crusader Offshore Partners, L.P.
(2)
|
|
|
100,438
|
|
|
$
|
15,999,773
|
|
OVP Venture Partners VI, L.P.
(3)(4)
|
|
|
21,488
|
|
|
$
|
3,423,038
|
|
Prospect Venture Partners III, L.P.
(5)
|
|
|
19,482
|
|
|
$
|
3,103,483
|
|
(1)
|
Andrew E. Senyei, M.D., is one of our directors and is a managing director and general partner of Enterprise Partners.
|
(2)
|
Includes 43,941 shares held by Highland Credit Opportunities CDO, L.P., an affiliate of Highland Crusader Offshore Partners, L.P. Highland Crusader Offshore
Partners, L.P. beneficially owns more than 5% of our outstanding common stock.
|
(3)
|
Includes 429 shares held by OVP VI Entrepreneurs Fund, L.P., an affiliate of OVP Venture Partners VI, L.P.
|
(4)
|
Charles P. Waite, Jr., is one of our directors and is a general partner of OVP Venture Partners.
|
(5)
|
Alexander E. Barkas, Ph.D., is one of our directors and is a managing member of Prospect Management Co. III, LLC, the general partner of Prospect Venture Partners
III, L.P.
|
115
Investor Rights Agreement
We have entered into an investors rights agreement with the purchasers of our outstanding preferred stock and certain holders of common stock and warrants to purchase our common stock and preferred
stock, including entities with which certain of our directors are affiliated. As of April 29, 2011, the holders of 21.7 million shares of our common stock, including the shares of common stock issued upon the conversion of our preferred
stock and shares of common stock issued upon exercise of warrants, are entitled to rights with respect to the registration of their shares under the Securities Act. For a more detailed description of these registration rights, see Description
of Capital StockRegistration Rights.
Indemnification Agreements
We have entered into indemnification agreements with each of our directors and executive officers. These agreements, among other things, require us to indemnify each director and executive officer to the
fullest extent permitted by Delaware law, including indemnification of expenses such as attorneys fees, judgments, fines and settlement amounts incurred by the director or executive officer in any action or proceeding, including any action or
proceeding by or in right of us, arising out of the persons services as a director or executive officer.
Stock Options and Stock Option
Modification
We have granted stock options to our executive officers. For more information regarding these stock options, see the section
titled Executive Compensation Compensation Discussion and Analysis.
In January 2010, our board of directors approved a
stock option modification. See Managements Discussion and Analysis of Financial Condition and Results of Operations Stock Option Modification for a description of our 2010 option exchange program.
Other Transactions
In March 2006, we entered into
a licensing agreement with Callida Genomics, Inc., or Callida, for use of certain patents, patent applications, know-how and other intellectual property relating to sequencing by hybridization. See BusinessIntellectual Property. As
partial consideration for the rights acquired pursuant to the license agreement, we issued 13,333 shares of our Common Stock to Callida. Callida is owned by Radoje Drmanac, Ph.D., our Chief Scientific Officer, and his wife, Snezana Drmanac.
We have granted stock options to our executive officers and certain of our directors. For a description of these options, see Executive
Compensation Compensation Discussion and Analysis Long-Term Equity Incentives. In addition, in March 2010, we issued:
|
§
|
|
285,867 shares of common stock to our President, Chief Executive Officer and director, Clifford A. Reid, Ph.D., at a purchase price of $1.50 per share;
|
|
§
|
|
105,333 shares of common stock to R. John Curson, who was our Chief Financial Officer at the time of grant and is now our Vice President of Financial
Operations, at a purchase price of $1.50 per share; and
|
|
§
|
|
395,333 shares of common stock to our Chief Scientific Officer, Radoje Drmanac, Ph.D., at a purchase price of $1.50 per share.
|
Dr. Reid, Mr. Curson and Dr. Drmanac received bonuses of $361,615, $133,244 and $500,087, respectively, in
connection with these grants. See Executive Compensation Compensation Discussion and Analysis Long-Term Equity Incentives.
In November 2007, we entered into a consulting agreement with Mrs. Drmanac, the wife of Dr. Drmanac, our Chief Scientific Officer and one of our founders. Mrs. Drmanac provides research and
development services related to our sequencing technology as an independent contractor. Mrs. Drmanac is compensated at a rate of $150 per hour for her services. In 2009, Mrs. Drmanac was a paid a total of $150,930 for her services pursuant
to the consulting agreement. The consulting agreement is for a term of five years and can be terminated by either party with ten days written notice.
116
We have entered into indemnification agreements with each of our directors. Each of our directors who will
remain on the board following the completion of this offering, and each of our executive officers, have entered into new indemnification agreements, which will be effective immediately prior to the consummation of this offering. See Management
Limitation on Liability and Indemnification Matters.
Policies and Procedures for Related Party Transactions
Our board of directors has adopted a written related person transaction policy to set forth the policies and procedures for the review and approval or
ratification of related person transactions. This policy covers, with certain exceptions set forth in Item 404 of Regulation S-K under the Securities Act, any transaction, arrangement or relationship, or any series of similar transactions,
arrangements or relationships in which we were or are to be a participant, where the amount involved exceeds $120,000 and a related person had or will have a direct or indirect material interest, including, without limitation, purchases of goods or
services by or from the related person or entities in which the related person has a material interest, indebtedness, guarantees of indebtedness and employment by us of a related person. Our board of directors has delegated to the Audit Committee
the responsibility and authority over our related person transaction policy.
117
Principal Stockholders
The following table sets forth information known to us about the beneficial ownership of our common stock at April 29, 2011, as adjusted to reflect
the sale of the shares of common stock in this offering, by:
|
§
|
|
each person or group of affiliated persons known to us to be the beneficial owner of more than 5% of our common stock;
|
|
§
|
|
each named executive officer and each director; and
|
|
§
|
|
all of our executive officers and directors as a group.
|
The information in the table below is calculated based on 26,011,321 shares of common stock outstanding before this offering and 30,511,321 shares of common stock outstanding after this offering.
In computing the number of shares of common stock beneficially owned by a person, entity or group and the corresponding percentage ownership
of that person, entity or group, shares of common stock underlying common stock or preferred stock options and warrants that are held by that person, entity or group and that are currently exercisable or exercisable within 60 days of
April 29, 2011 are considered to be outstanding. We did not deem these shares to be outstanding, however, for the purpose of computing the percentage ownership of any other person, entity or group.
Unless otherwise noted below, the address of each beneficial owner listed on the table is c/o Complete Genomics, Inc., 2071 Stierlin Court, Mountain
View, CA 94043. We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the tables
below have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to applicable community property laws where applicable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial ownership prior to this offering
|
|
|
Beneficial ownership after
this offering
|
|
|
|
Common
stock
|
|
|
Number of
shares
exercisable
within 60 days
|
|
|
Number of
shares
beneficially
owned
|
|
|
Percentage
of
beneficial
ownership
|
|
|
Number of
shares
beneficially
owned
|
|
|
Percentage
of
beneficial
ownership
|
|
5% Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entities affiliated with OrbiMed Advisors LLC
(1)
|
|
|
4,156,270
|
|
|
|
294,379
|
|
|
|
4,450,649
|
|
|
|
16.9
|
%
|
|
|
4,450,649
|
|
|
|
14.4
|
%
|
Entities affiliated with Essex Woodlands Health Ventures
(2)
|
|
|
4,156,269
|
|
|
|
294,380
|
|
|
|
4,450,649
|
|
|
|
16.9
|
%
|
|
|
4,450,649
|
|
|
|
14.4
|
%
|
Prospect Venture Partners III, L.P.
(3)
|
|
|
2,994,358
|
|
|
|
185,897
|
|
|
|
3,180,255
|
|
|
|
12.1
|
%
|
|
|
3,180,255
|
|
|
|
10.4
|
%
|
Entities affiliated with Enterprise Partners
(4)
|
|
|
2,820,529
|
|
|
|
183,988
|
|
|
|
3,004,517
|
|
|
|
11.5
|
%
|
|
|
3,004,517
|
|
|
|
9.8
|
%
|
Entities affiliated with OVP Venture Partners
(5)
|
|
|
2,701,549
|
|
|
|
191,841
|
|
|
|
2,893,390
|
|
|
|
11.0
|
%
|
|
|
2,893,390
|
|
|
|
9.4
|
%
|
Entities affiliated with Highland Capital Management, L.P.
(6)
|
|
|
2,494,866
|
|
|
|
176,496
|
|
|
|
2,671,362
|
|
|
|
10.2
|
%
|
|
|
2,671,362
|
|
|
|
8.7
|
%
|
SCV-CG, LLC
(7)
|
|
|
938,957
|
|
|
|
501,667
|
|
|
|
1,440,624
|
|
|
|
5.4
|
%
|
|
|
1,440,624
|
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
Named Executive Officers and Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clifford A. Reid, Ph.D.
(8)
|
|
|
319,200
|
|
|
|
231,186
|
|
|
|
550,386
|
|
|
|
2.1
|
%
|
|
|
550,386
|
|
|
|
1.8
|
%
|
Ajay Bansal
(9)
|
|
|
|
|
|
|
37,582
|
|
|
|
37,582
|
|
|
|
*
|
|
|
|
37,582
|
|
|
|
*
|
|
Bruce Martin
(10)
|
|
|
54,936
|
|
|
|
24,939
|
|
|
|
79,875
|
|
|
|
*
|
|
|
|
79,875
|
|
|
|
*
|
|
Mark J. Sutherland
(11)
|
|
|
|
|
|
|
42,125
|
|
|
|
42,125
|
|
|
|
*
|
|
|
|
42,125
|
|
|
|
*
|
|
Radoje Drmanac, Ph.D.
(12)
|
|
|
441,999
|
|
|
|
171,863
|
|
|
|
613,862
|
|
|
|
2.3
|
|
|
|
613,862
|
|
|
|
2.0
|
%
|
R. John Curson
(13)
|
|
|
116,999
|
|
|
|
96,150
|
|
|
|
213,149
|
|
|
|
*
|
|
|
|
213,149
|
|
|
|
*
|
|
Alexander E. Barkas, Ph.D.
(14)
|
|
|
2,994,358
|
|
|
|
187,563
|
|
|
|
3,181,921
|
|
|
|
12.1
|
%
|
|
|
3,181,921
|
|
|
|
10.4
|
%
|
C. Thomas Caskey, M.D.
(15)
|
|
|
5,151
|
|
|
|
12,752
|
|
|
|
17,903
|
|
|
|
*
|
|
|
|
17,903
|
|
|
|
*
|
|
Carl L. Gordon, Ph.D., CFA
(16)
|
|
|
4,156,270
|
|
|
|
296,045
|
|
|
|
4,452,315
|
|
|
|
16.9
|
%
|
|
|
4,452,315
|
|
|
|
14.5
|
%
|
Lewis J. Shuster
(17)
|
|
|
|
|
|
|
12,500
|
|
|
|
12,500
|
|
|
|
*
|
|
|
|
12,500
|
|
|
|
*
|
|
Andrew E. Senyei, M.D.
(18)
|
|
|
2,820,529
|
|
|
|
185,654
|
|
|
|
3,006,183
|
|
|
|
11.5
|
%
|
|
|
3,006,183
|
|
|
|
9.8
|
%
|
Charles P. Waite, Jr.
(19)
|
|
|
2,701,549
|
|
|
|
193,507
|
|
|
|
2,895,056
|
|
|
|
11.0
|
%
|
|
|
2,895,056
|
|
|
|
9.4
|
%
|
Robert T. Wall
(20)
|
|
|
50,000
|
|
|
|
9,375
|
|
|
|
59,375
|
|
|
|
*
|
|
|
|
59,375
|
|
|
|
*
|
|
All Executive Officers and directors as a group (12 persons)
(21)
|
|
|
13,543,992
|
|
|
|
1,405,091
|
|
|
|
14,949,083
|
|
|
|
54.5
|
%
|
|
|
14,949,083
|
|
|
|
46.8
|
%
|
*
|
Represents beneficial ownership of less than 1%.
|
118
(1)
|
Includes: (i) 4,117,059 shares held, and 291,602 shares that may be acquired pursuant to the exercise of warrants held by Caduceus Private
Investments III, LP (Caduceus) and (ii) 39,211 shares held, and 2,777 shares that may be acquired pursuant to the exercise of warrants by OrbiMed Associates III, LP (OrbiMed Associates). OrbiMed Capital GP III, LP is the
general partner of Caduceus, and Samuel D. Isaly is the general partner of OrbiMed Capital GP III, LP. OrbiMed Advisors LLC (OrbiMed Advisors) is the general partner of OrbiMed Associates, and Mr. Isaly is the managing member of
OrbiMed Advisors, and Carl L. Gordon, Ph.D., a member of our board of directors, is a member of OrbiMed Advisors. Mr. Isaly is deemed to have voting and dispositive power over the shares held by Caduceus and OrbiMed Associates. The address of
OrbiMed Advisors LLC is 767 Third Avenue, 30
th
Floor, New York, New York 10017.
|
(2)
|
Includes: (i) 3,766,620 shares held, and 266,781 shares that may be acquired pursuant to the exercise of warrants by Essex Woodlands Health Ventures Fund VIII,
L.P. (Essex Woodlands Ventures Fund); (ii) 271,574 shares held, and 19,235 shares that may be acquired pursuant to the exercise of warrants by Essex Woodlands Health Ventures Fund VIIIA, L.P. (Essex Woodlands Fund
A) and (iii) 118,075 shares held, and 8,364 shares that may be acquired pursuant to the exercise of warrants by Essex Woodlands Health Ventures Fund VIIIB, L.P. (Essex Woodlands Fund B). Essex Woodlands Health
Ventures VIII, L.P. (Essex Ventures L.P.) is the general partner of each of Essex Woodlands Ventures Fund, Essex Woodlands Fund A and Essex Woodlands Fund B. Essex Woodlands Health Ventures VIII, LLC (Essex Ventures LLC) is
the general partner of Essex Ventures L.P. James Currie, Ron Eastman, Jeff Himawan, Ph.D., Guido Neels, Martin Sutter, Immanuel Thangaraj, Petri Yaino, M.D., Ph.D., and Steve Wiggans are managing directors of Essex Ventures LLC and are deemed to
have shared voting and dispositive power over the shares held by Essex Woodlands Ventures Fund, Essex Woodlands Fund A and Essex Woodlands Fund B. Each of the managing directors disclaims beneficial ownership of the shares held by these entities,
except to the extent of any pecuniary interest therein. The address of each of the entities affiliated with Essex Woodlands Health Ventures is 335 Bryant Street, Palo Alto, California 94301.
|
(3)
|
Includes 2,994,358 shares held and 185,897 shares that may be acquired pursuant to the exercise of warrants. Alexander E. Barkas, Ph.D., a member of our board of
directors, is a managing member of Prospect Management Co. III, L.L.C., the general partner of Prospect Venture Partners III, L.P. The managing members of Prospect Management Co. III, L.L.C., are deemed to have shared voting and dispositive power
over the shares held by Prospect Venture Partners III, L.P., and each disclaims beneficial ownership of these shares, except to the extent of his or her pecuniary interest therein. The address for Prospect Management Co. III, L.L.C. is 435 Tasso
Street, Suite 200, Palo Alto, California 94301.
|
(4)
|
Includes: (i) 2,052,418 shares held, and 128,180 shares that may be acquired pursuant to the exercise of warrants by Enterprise Partners VI, LP
(Enterprise VI); (ii) 667,068 shares held, and 55,808 shares that may be acquired pursuant to the exercise of warrants by Enterprise Partners V, LP (Enterprise V) and (iii) 101,043 shares held by Enterprise Partners
Management, LLC (Enterprise LLC). Andrew E. Senyei, M.D., a member of our board of directors, is a managing director of Enterprise Management Partners VI, LLC, the general partner of Enterprise VI, a managing director of Enterprise
Management Partners V, LLC, the general partner of Enterprise V and a managing director of Enterprise LLC. Dr. Senyei, together with Carl Eibl, J.D., are deemed to have shared voting and dispositive power over the shares held by each of
Enterprise VI, Enterprise V and Enterprise LLC. Each of Dr. Senyei and Mr. Eibl disclaims beneficial ownership of these shares, except to the extent of his pecuniary interest therein. The address for each of the entities affiliated with
Enterprise Partners is 2223 Avenida de la Playa, Suite 300, La Jolla, California 92037.
|
(5)
|
Includes: (i) 2,669,470 shares held, and 188,674 shares that may be acquired pursuant to the exercise of warrants by OVP Venture Partners VI, L.P. (OVP
VI) and (ii) 32,079 shares held, and 3,167 shares that may be acquired pursuant to the exercise of warrants by OVP VI Entrepreneurs Fund, L.P. (OVP Entrepreneurs Fund). Charles P. Waite, Jr., a member of our board of
directors, is a managing member of OVMC VI, LLC, the general partner of each of OVP VI and OVP Entrepreneurs Fund. Mr. Waite, together with the other managing members of OVMC VI, LLC are deemed to have shared voting and dispositive power
over the shares held by OVP VI and OVP Entrepreneurs Fund. The address of each of the entities affiliated with OVP Venture Partners is 1010 Market Street, Kirkland, Washington 98033.
|
(6)
|
Includes: (i) 1,846,375 shares held, and 124,771 shares that may be acquired pursuant to the exercise of warrants by Highland Crusader Offshore Partners, L.P.
(Highland Crusader) and (ii) 648,491 shares held, and 51,725 shares that may be acquired pursuant to the exercise of warrants by Highland Credit Opportunities CDO, L.P. (Credit Opportunities). Highland Capital
Management, L.P. (Highland) acts as investment adviser to certain funds, including Highland Crusader and Credit Opportunities. Strand Advisors, Inc. (Strand Advisors) is the general partner of Highland. James Dondero is the
President of Strand Advisors and Highland. Highland, Strand Advisors and Mr. Dondero may be deemed to have shared voting and dispositive power over the shares held by each of Highland Crusader and Credit Opportunities. The address for Highland,
Strand Advisors and Mr. Dondero is Two Galleria Tower, 13455 Noel Road, Suite 800, Dallas, Texas 75240.
|
(7)
|
Includes 938,957 shares held and 501,667 shares that may be acquired pursuant to the exercise of warrants. Charles M. Preston III is the manager of SCV-CG, LLC
and is deemed to have voting and dispositive power over the shares held by SCV-CG, LLC. The address for SCV-CG, LLC is 600 Congress Avenue, Suite 200, Austin, Texas 78701.
|
(8)
|
Consists of: (i) 319,200 shares held by the Clifford A. Reid Living Trust, dated September 3, 1997, of which Dr. Reid is trustee and (ii) 231,186
shares that may be acquired pursuant to the exercise of stock options within 60 days of April 29, 2011.
|
(9)
|
Consists of 37,582 shares that may be acquired pursuant to the exercise of stock options within 60 days of April 29, 2011.
|
(10)
|
Consists of: (i) 33,201 shares held by the Martin-Rose Revocable Trust, of which Bruce Martin is trustee and Heather Rose is trustee, (ii) 21,735 shares
held by Bruce Martin and (iii) 24,939 shares that may be acquired pursuant to the exercise of stock options within 60 days of April 29, 2011.
|
(11)
|
Consists of 42,125 shares that may be acquired pursuant to the exercise of stock options within 60 days of April 29, 2011.
|
(12)
|
Consists of: (i) 428,666 shares held by the Drmanac Family Trust, dated June 21, 2000, of which Dr. Drmanac is trustee; (ii) 171,863 shares that
may be acquired pursuant to the exercise of stock options within 60 days of April 29, 2011 and (iii) 13,333 shares held by Callida Genomics, Inc.
|
(13)
|
Consists of: (i) 116,999 shares held by The Curson Family Living Trust, dated July 30, 2001, of which Mr. Curson is trustee and (ii) 96,150
shares that may be acquired pursuant to the exercise of stock options within 60 days of April 29, 2011.
|
(14)
|
Consists of (i) the shares described in Note (3) above. Dr. Barkas disclaims beneficial ownership of the shares held by Prospect Venture Partners III,
L.P. as described in Note (3) above, except to the extent of his pecuniary interest therein and (ii) 1,666 shares that may be acquired by Dr. Barkas pursuant to the exercise of stock options within 60 days of April 29, 2011.
|
(15)
|
Consists of: (i) 5,151 shares, (ii) 252 shares that may be acquired pursuant to the exercise of warrants and (iii) 12,500 shares that may be acquired
pursuant to the exercise of stock options within 60 days of April 29, 2011.
|
119
(16)
|
Consists of (i) the shares described in Note (1) above. Dr. Gordon disclaims beneficial ownership of the shares held by the entities affiliated with
OrbiMed Advisors LLC as described in Note (1) above, except to the extent of his pecuniary interest therein and (ii) 1,666 shares that may be acquired by Dr. Gordon pursuant to the exercise of stock options within 60 days of
April 29, 2011.
|
(17)
|
Consists of 12,500 shares that may be acquired pursuant to the exercise of stock options within 60 days of April 29, 2011.
|
(18)
|
Consists of (i) the shares described in Note (4) above. Dr. Senyei disclaims beneficial ownership of the shares held by the entities affiliated with
Enterprise Partners as described in Note (4) above, except to the extent of his pecuniary interest therein and (ii) 1,666 shares that may be acquired by Dr. Senyei pursuant to the exercise of stock options within 60 days of
April 29, 2011.
|
(19)
|
Consists of (i) the shares described in Note (5) above. Mr. Waite disclaims beneficial ownership of the shares held by the entities affiliated with
OVP Venture Partners as described in Note (5) above, except to the extent of his pecuniary interest therein and (ii) 1,666 shares that may be acquired by Mr. Waite pursuant to the exercise of stock options within 60 days of
April 29, 2011.
|
(20)
|
Consists of: (i) 50,000 shares held by the Wall Family Investment Partnership, Ltd., over which Mr. Wall is deemed to having voting and dispositive power
and (ii) 9,375 shares that may be acquired pursuant to the exercise of stock options within 60 days of April 29, 2011.
|
(21)
|
Includes 13,543,992 shares held and 1,386,134 shares beneficially owned by our executive officers and directors, which includes 856,357 shares that many be acquired
pursuant to the exercise of warrants and 548,734 shares may be acquired pursuant the exercise of stock options within 60 days of April 29, 2011.
|
120
Description of Capital Stock
General
We have authorized under our amended and
restated certificate of incorporation 300,000,000 shares of common stock, $0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par value per share. As of April 29, 2011, there were outstanding:
|
§
|
|
26,011,321 shares of our common stock held by approximately 34 stockholders of record;
|
|
§
|
|
27,500 shares of common stock issuable upon vesting of restricted stock units outstanding;
|
|
§
|
|
2,165,323 shares of our common stock issuable upon exercise of outstanding warrants; and
|
|
§
|
|
4,014,727 shares of our common stock issuable upon exercise of outstanding stock options.
|
The following description of our capital stock and provisions of our amended and restated certificate of incorporation and amended and restated bylaws to
be in effect upon the completion of this offering are summaries. Copies of these documents have been filed with the SEC as exhibits to our registration statement of which this prospectus forms a part. The descriptions of the common stock and
preferred stock reflect changes to our capital structure that will occur upon the closing of this offering. Currently, there is no established public trading market for our capital stock.
Common Stock
Voting Rights
Each holder of our common stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders, including the election of directors. Our stockholders do not have cumulative
voting rights in the election of directors. Accordingly, holders of a majority of the voting shares are able to elect all of the directors.
Dividends
Subject to preferences that may be
applicable to any then outstanding preferred stock, holders of our common stock are entitled to receive dividends, if any, as may be declared from time to time by our board of directors out of legally available funds. The terms of our credit
facility currently prohibit us from paying cash dividends on our common stock.
Liquidation
In the event of our liquidation, dissolution or winding up, holders of our common stock will be entitled to share ratably in the net assets legally
available for distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any then outstanding shares of preferred stock.
Other Rights and Preferences
Holders of our
common stock have no preemptive, conversion, subscription or other rights, and there are no redemption or sinking fund provisions applicable to our common stock. The rights, preferences and privileges of the holders of our common stock are subject
to and may be adversely affected by the rights of the holders of shares of any series of our preferred stock that we may designate in the future.
Fully Paid and Nonassessable
.
All of our outstanding shares of common stock are,
and the shares of common stock to be issued in this offering will be, fully paid and nonassessable.
Preferred Stock
Our board of directors has the authority, without further action by our stockholders, to issue up to 5,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions
121
thereof. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number
of shares constituting, or the designation of, such series, any or all of which may be greater than the rights of common stock. The issuance of our preferred stock could adversely affect the voting power of holders of common stock and the likelihood
that such holders will receive dividend payments and payments upon our liquidation. In addition, the issuance of preferred stock could have the effect of delaying, deferring or preventing a change of control of our company or other corporate action.
As of March 31, 2011, no shares of preferred stock are outstanding, and we have no present plan to issue any shares of preferred stock.
Warrants
The following table sets forth
information about outstanding warrants to purchase shares of our stock as of March 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
Class of stock underlying warrants
|
|
Number of
shares
|
|
|
Exercise price
per share
|
|
|
Expiration date
|
Common Stock, par value $0.001 per share
|
|
|
1,838,733
|
|
|
$
|
1.50
|
|
|
Various dates between 4/12/2015
and 8/4/2015
|
Common Stock, par value $0.001 per share
(1)
|
|
|
3,156
|
|
|
$
|
9.50
|
|
|
9/6/2016
|
Common Stock, par value $0.001 per share
(2)
|
|
|
10,299
|
|
|
$
|
11.642
|
|
|
8/3/2017
|
Common Stock, par value $0.001 per share
(3)
|
|
|
103,173
|
|
|
$
|
7.56
|
|
|
7/30/2018
|
Common Stock, par value $0.001 per share
|
|
|
49,834
|
|
|
$
|
7.224
|
|
|
12/17/2020
|
Common Stock, par value $0.001 per share
|
|
|
160,128
|
|
|
$
|
7.495
|
|
|
3/25/2018
|
(1)
|
In connection with our initial public offering, these warrants converted from warrants to purchase Series A preferred stock into warrants to purchase shares of our
common stock.
|
(2)
|
In connection with our initial public offering, these warrants converted from warrants to purchase Series B preferred stock into warrants to purchase shares of our
common stock.
|
(3)
|
In connection with our initial public offering, these warrants converted from warrants to purchase Series D preferred stock into warrants to purchase shares of our
common stock.
|
Registration Rights
Under our amended and restated investor rights agreement, following the closing of this offering, the holders of 21.7 million shares of common stock, including shares issuable upon exercise of
warrants, or their transferees, have the right to require us to register their shares under the Securities Act so that those shares may be publicly resold, or to include their shares in any registration statement we file, in each case as described
below.
Demand Registration Rights
Based on the number of shares outstanding as of April 29, 2011, the holders of approximately 20.8 million shares of our common stock, including
shares issuable upon exercise of warrants, or their transferees, are entitled to certain demand registration rights. Beginning on May 16, 2011, the date six months following the consummation of our initial public offering, the holders of at
least 40% of these shares can, on not more than two occasions, request that we register all or a portion of their shares. Such request for registration must cover a number of shares with an anticipated aggregate offering price, net of underwriting
discounts and commissions, exceeding $5.0 million. Additionally, we will not be required to affect a demand registration during the period beginning 60 days prior to the filing and 180 days following the effectiveness of a
company-initiated registration statement relating to a public offering of our securities, provided that we have complied with certain notice requirements to the holders of these shares.
Piggyback Registration Rights
Based on the number of shares outstanding as of April 29, 2011,
in the event that we determine to register any of our securities under the Securities Act, either for our own account or for the account of other security holders, the holders of approximately 21.7 million shares of our common stock, including
shares issuable upon exercise of
122
warrants, or their transferees, will be entitled to certain piggyback registration rights allowing the holders to include their shares in such registration, subject to certain
marketing and other limitations. As a result, whenever we propose to file a registration statement under the Securities Act, other than with respect to a registration related to employee benefit plans or corporate reorganizations, the holders of
these shares are entitled to notice of the registration and have the right, subject to limitations that the underwriters may impose on the number of shares included in the registration, to include their shares in the registration.
Form S-3 Registration Rights
Based on the
number of shares outstanding as of April 29, 2011, the holders of approximately 20.8 million shares of our common stock, including shares issuable upon exercise of warrants, or their transferees, will be entitled to certain Form S-3
registration rights. The holders of at least 2.5% of these shares can make a written request that we register their shares on Form S-3 if we are eligible to file a registration statement on Form S-3 and if the aggregate price to the public
of the shares offered exceeds $5.0 million. These stockholders may make an unlimited number of requests for registration on Form S-3. However, we will not be required to affect a registration on Form S-3 if we have previously affected
two such registrations in the 12-month period preceding the request for registration. Additionally, we will not be required to affect a registration on Form S-3 during the period beginning 60 days prior to the filing and 180 days following
the effectiveness of a company-initiated registration statement relating to a public offering of our securities, provided that we have complied with certain notice requirements to the holders of these shares.
Expenses of Registration
We will pay the
registration expenses of the holders of the shares registered pursuant to the demand, piggyback and Form S-3 registration rights described above. In an underwritten offering, the managing underwriter, if any, has the right, subject to specified
conditions, to limit the number of shares such holders may include.
Expiration of Registration Rights
The demand, piggyback and Form S-3 registration rights described above will expire, with respect to any particular stockholder, five years after our
initial public offering or when that stockholder can sell all of its shares under Rule 144 of the Securities Act. In any event, all such registration rights shall expire upon the earlier of five years after the consummation of this offering or
the consummation of certain events, including the sale of all of our assets or a change in control of our company in which our stockholders receive cash or marketable securities.
Anti-Takeover Provisions
Certificate of Incorporation and Bylaws
Our amended and restated certificate of incorporation provides for our board of directors to be divided into three classes, with staggered three-year
terms. Only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms. Because our stockholders do not have cumulative voting rights,
our stockholders holding a majority of the shares of common stock outstanding will be able to elect all of our directors. Our amended and restated certificate of incorporation and amended and restated bylaws provide that all stockholder action must
be effected at a duly called meeting of stockholders and not by a written consent, and that only our board of directors, chairman of the board, chief executive officer or president (in the absence of a chief executive officer) may call a
special meeting of stockholders.
Our amended and restated certificate of incorporation requires a 66
2
/3% stockholder vote for the amendment, repeal or modification of
certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws relating to:
|
§
|
|
the classification of our board of directors;
|
|
§
|
|
the requirement that stockholder actions be effected at a duly called meeting; and
|
123
|
§
|
|
the designated parties entitled to call a special meeting of the stockholders.
|
The combination of the classification of our board of directors, the lack of cumulative voting and the 66
2
/
3
% stockholder voting requirements make it more difficult for our
existing stockholders to replace our board of directors as well as for another party to obtain control of us by replacing our board of directors. Because our board of directors has the power to retain and discharge our officers, these provisions
could also make it more difficult for existing stockholders or another party to effect a change in management. In addition, the authorization of undesignated preferred stock makes it possible for our board of directors to issue preferred stock with
voting or other rights or preferences that could impede the success of any attempt to change our control.
These provisions may
have the effect of deterring hostile takeovers or delaying changes in our control or management. These provisions are intended to enhance the likelihood of continued stability in the composition of our board of directors and its policies and to
discourage certain types of transactions that may involve an actual or threatened acquisition of us. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal. The provisions also are intended to discourage
certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for our shares or otherwise attempting to control of us, and, as a consequence, they also may inhibit
fluctuations in the market price of our shares that could result from actual or rumored takeover attempts. Such provisions may also have the effect of preventing changes in our management.
Section 203 of the Delaware General Corporation Law
We are subject to Section 203 of the Delaware General Corporation Law, 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, unless:
|
§
|
|
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 holder;
|
|
§
|
|
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 by:
|
|
§
|
|
persons who are directors and also officers; and
|
|
§
|
|
employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or
|
|
§
|
|
on or after such date, the business combination is approved by the board of directors and authorized at an annual or 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 defines business combination to include the following:
|
§
|
|
any merger or consolidation involving the corporation and the interested stockholder;
|
|
§
|
|
any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation or its majority-owned subsidiary that involves 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;
|
|
§
|
|
subject to certain exceptions, 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 loans, advances, guarantees, pledges or other financial benefits by or through the
corporation.
|
124
In general, Section 203 defines an interested stockholder as an entity or person who,
together with the persons affiliates and associates, beneficially owns, or is an affiliate or associate of the corporation and 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.
Limitations of Liability and Indemnification Matters
For a discussion of liability and indemnification, please see ManagementLimitation on Liability and Indemnification Matters.
The NASDAQ Global Market Listing
Our common stock is listed on The NASDAQ Global Market under the symbol GNOM.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is Wells Fargo Bank Minnesota, N.A. The transfer agent and
registrars address is Shareowner Services, 161 North Concord Exchange, South St. Paul, Minnesota 55075.
125
Material U.S. Federal Income Tax Consequences to Non-U.S. Holders
The following is a summary of material U.S. federal income tax consequences to non-U.S. holders (as defined below) of the
acquisition, ownership and disposition of our common stock issued pursuant to this offering. This discussion is based on the Internal Revenue Code of 1986, as amended, or the Code, Treasury Regulations promulgated thereunder, judicial decisions and
published rulings and administrative pronouncements of the Internal Revenue Service, or IRS, all as in effect as of the date of this prospectus. These authorities may change, possibly retroactively, resulting in U.S. federal income tax
consequences different from those discussed below. This discussion is not a complete analysis of all of the potential U.S. federal income tax consequences relating thereto, nor does it address any estate and gift tax consequences or any tax
consequences arising under any state, local or foreign tax laws or any other U.S. federal tax laws. No ruling has been or will be sought from the IRS with respect to the matters discussed below, and there can be no assurance that the IRS will
not take a contrary position regarding the tax consequences of the acquisition, ownership or disposition of our common stock by a non-U.S. holder, or that any such contrary position would not be sustained by a court.
This discussion is limited to non-U.S. holders who purchase our common stock issued pursuant to this offering and who hold our common stock as a
capital asset within the meaning of Section 1221 of the Code (property held for investment). This discussion does not address all of the U.S. federal income tax consequences that may be relevant to a particular holder in light
of such holders particular circumstances. This discussion also does not consider any specific facts or circumstances that may be relevant to holders subject to special rules under the U.S. federal income tax laws, including, without
limitation:
|
§
|
|
U.S. expatriates or former long-term residents of the United States;
|
|
§
|
|
partnerships or other pass-through entities classified as a partnership for U.S. federal income tax purposes;
|
|
§
|
|
real estate investment trusts;
|
|
§
|
|
regulated investment companies;
|
|
§
|
|
controlled foreign corporations, passive foreign investment companies or corporations that accumulate earnings to avoid
U.S. federal income tax;
|
|
§
|
|
banks, insurance companies or other financial institutions;
|
|
§
|
|
brokers, dealers or traders in securities, commodities or currencies;
|
|
§
|
|
tax-exempt organizations;
|
|
§
|
|
tax-qualified retirement plans;
|
|
§
|
|
persons subject to the alternative minimum tax; or
|
|
§
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persons holding our common stock as part of a hedging or conversion transaction, straddle or a constructive sale or other risk-reduction strategy.
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PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE PARTICULAR U.S. FEDERAL INCOME AND ESTATE
TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING AND DISPOSING OF OUR COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER ANY STATE, LOCAL OR FOREIGN TAX LAWS AND ANY OTHER U.S. FEDERAL TAX LAWS AND TAX TREATIES.
Definition of Non-U.S. Holder
For purposes
of this discussion, a non-U.S. holder is any beneficial owner of our common stock that is not a U.S. person or a partnership (or other entity treated as a partnership) for U.S. federal income tax purposes. A U.S. person is
any of the following:
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an individual citizen or resident of the United States;
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a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the
United States, any state therein or the District of Columbia;
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an estate the income of which is subject to U.S. federal income tax regardless of its source; or
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a trust (1) the administration of which is subject to the primary supervision of a U.S. court and all substantial decisions of which are
controlled by one or more U.S. persons or (2) that has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.
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Distributions on Our Common Stock
If we make cash or other property distributions on our common
stock, such distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts not treated
as dividends for U.S. federal income tax purposes will constitute a return of capital and will first be applied against and reduce a holders adjusted tax basis in the common stock, but not below zero. Distributions in excess of our
current and accumulated earnings and profits and in excess of a non-U.S. holders tax basis in its shares will be treated as gain realized on the sale or other disposition of the common stock and will be treated as described under
Gain on Disposition of Our Common Stock below.
Dividends paid to a non-U.S. holder of our common stock that are not effectively
connected with a U.S. trade or business conducted by such holder will be subject to U.S. federal withholding tax at a rate of 30% of the gross amount of the dividends, or such lower rate specified by an applicable income tax treaty. To receive
the benefit of a reduced treaty rate, a non-U.S. holder must furnish to us or our paying agent a valid IRS Form W-8BEN (or applicable successor form) certifying such holders qualification for the reduced rate. This certification
must be provided to us or our paying agent prior to the payment of dividends and must be updated periodically. If the non-U.S. holder holds the stock through a financial institution or other agent acting on the non-U.S. holders behalf, the
non-U.S. holder will be required to provide appropriate documentation to the agent, who then will be required to provide certification to us or our paying agent, either directly or through other intermediaries. Non-U.S. holders that do not
timely provide us or our paying agent with the required certification, but who qualify for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. Non-U.S. holders
should consult their tax advisors regarding possible entitlement to benefits under a tax treaty.
If a non-U.S. holder holds our common
stock in connection with such holders conduct of a trade or business in the United States, and dividends paid on the common stock are effectively connected with such holders U.S. trade or business, and, if required by an applicable
income tax treaty, attributable to a permanent establishment maintained by the non-U.S. holder in the U.S., the non-U.S. holder will be exempt from U.S. federal withholding tax. To claim the exemption, the non-U.S. holder must furnish
to us or our paying agent a properly executed IRS Form W-8ECI (or applicable successor form), certifying that the dividends are effectively connected with the non-U.S. holders conduct of a trade or business within the United States.
Any dividends paid on our common stock that are effectively connected with a non-U.S. holders U.S. trade or business (and, if
required by an applicable income tax treaty, attributable to a permanent establishment maintained by the non-U.S. holder in the United States) will be subject to U.S. federal income tax on a net income basis at the regular graduated U.S.
federal income tax rates in the same manner as if such holder were a resident of the United States, unless an applicable income tax treaty provides otherwise. A non-U.S. holder that is a foreign corporation also may be subject to a branch
profits tax equal to 30% (or such lower rate specified by an applicable income tax treaty) of a portion of its effectively connected earnings and profits for the taxable year, as adjusted for certain items.
Non-U.S. holders should consult their tax advisors regarding their entitlement to benefits under a relevant income tax treaty.
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Gain on Disposition of Our Common Stock
Subject to the discussion below regarding backup withholding, a non-U.S. holder generally will not be subject to U.S. federal income tax on any gain realized upon the sale or other disposition
of our common stock unless:
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the gain is effectively connected with the non-U.S. holders conduct of a trade or business in the United States, and if required by an
applicable income tax treaty, attributable to a permanent establishment maintained by the non-U.S. holder in the United States;
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the non-U.S. holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the sale
or disposition, and certain other requirements are met; or
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our common stock constitutes a United States real property interest by reason of our status as a United States real property holding
corporation, or USRPHC, for U.S. federal income tax purposes during the relevant statutory period.
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Unless an applicable
income tax treaty provides otherwise, gain described in the first bullet point above will be subject to U.S. federal income tax on a net income basis at the regular graduated U.S. federal income tax rates in the same manner as if such holder
were a resident of the United States. Further, non-U.S. holders that are foreign corporations also may be subject to a branch profits tax equal to 30% (or such lower rate specified by an applicable income tax treaty) of a portion of their
effectively connected earnings and profits for the taxable year, as adjusted for certain items. Non-U.S. holders are urged to consult their tax advisors regarding any applicable income tax treaties that may provide for different rules.
A gain described in the second bullet point above will be subject to U.S. federal income tax at a flat 30% rate (or such lower rate
specified by an applicable income tax treaty), but may be offset by U.S. source capital losses (even though the individual is not considered a resident of the United States), provided the non-U.S. holder has timely filed U.S. federal
income tax returns with respect to such losses.
With respect to the third bullet point above, we believe we are not currently and do not
anticipate becoming a USRPHC for U.S. federal income tax purposes. However, because the determination of whether we are a USRPHC depends on the fair market value of our U.S. real property interests relative to the fair market value of our other
trade or business assets and our non-U.S. real property interests, there can be no assurance that we are not a USRPHC or will not become one in the future. Even if we are or were to become a USRPHC, a gain arising from the sale or other taxable
disposition by a non-U.S. holder of our common stock will not be subject to tax if such class of stock is regularly traded, as defined by applicable Treasury Regulations, on an established securities market, and such non-U.S. holder
owned, actually or constructively, 5% or less of such class of our stock throughout the shorter of the five-year period ending on the date of the sale or other taxable disposition of the stock or the non-U.S. holders holding period for such
stock. We expect our common stock to be regularly traded on an established securities market, although we cannot guarantee it will be so traded. If a gain on the sale or other taxable disposition of our stock were subject to taxation
under the third bullet point above, the non-U.S. holder would be subject to U.S. federal income tax with respect to such gain in the same manner as a U.S. person (subject to any applicable alternative minimum tax and a special alternative minimum
tax in the case of nonresident alien individuals).
Information Reporting and Backup Withholding
We must report annually to the IRS and to each non-U.S. holder the amount of distributions on our common stock paid to such holder and the amount of any
tax withheld with respect to those distributions. These information reporting requirements apply even if no withholding was required because the distributions were effectively connected with the holders conduct of a U.S. trade or business, or
if withholding was reduced or eliminated by an applicable income tax treaty. This information also may be made available under a specific treaty or agreement with the tax authorities in the country in which the non-U.S. holder resides or is
established. Backup withholding, currently at a 28% rate, will not apply to distribution payments to a non-U.S. holder of our
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common stock provided the non-U.S. holder furnishes to us or our paying agent the required certification as to its non-U.S. status, by providing a valid IRS Form W-8BEN or IRS Form W-8ECI, as
applicable, and satisfying certain other requirements. Notwithstanding the foregoing, backup withholding may apply if either we have or our paying agent has actual knowledge, or reason to know, that the holder is a U.S. person that is not an exempt
recipient.
Unless a non-U.S. holder complies with certification procedures to establish that it is not a U.S. person, information returns may
be filed with the IRS in connection with, and the non-U.S. holder may be subject to backup withholding on the proceeds from, a sale or other disposition of our common stock. The certification procedures described in the above paragraph will satisfy
these certification requirements as well.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding
rules may be allowed as a refund or a credit against a non-U.S. holders U.S. federal income tax liability, provided the required information is timely furnished to the IRS. Backup withholding and information reporting rules are complex.
Non-U.S. holders are urged to consult their tax advisors regarding the application of these rules to them.
New Legislation Relating to Foreign
Accounts
Newly enacted legislation may impose withholding taxes on certain types of payments made to foreign financial
institutions (as specially defined under these rules) and certain other non-U.S. entities. Under this legislation, the failure to comply with additional certification, information reporting and other specified requirements could result in
withholding tax being imposed on payments of dividends and sales proceeds to foreign intermediaries and certain non-U.S. holders. The legislation imposes a 30% withholding tax on dividends on, or gross proceeds from the sale or other disposition of,
our common stock paid to a foreign financial institution or to a foreign non-financial entity, unless (i) the foreign financial institution undertakes certain diligence and reporting obligations or (ii) the foreign non-financial entity
either certifies it does not have any substantial U.S. owners or furnishes identifying information regarding each substantial U.S. owner. If the payee is a foreign financial institution, it must enter into an agreement with the U.S. Treasury
requiring, among other things, that it undertake to identify accounts held by certain U.S. persons or U.S.-owned foreign entities, annually report certain information about such accounts, and withhold 30% on payments to account holders whose actions
prevent it from complying with these reporting and other requirements. The legislation would apply to payments made after December 31, 2012. Prospective investors should consult their tax advisors regarding this legislation.
The foregoing discussion of U.S. federal income tax considerations is for general information purposes only and is not tax or legal advice.
Accordingly, you should consult your own tax advisor as to the particular tax consequences to you of purchasing, owning and disposing of our common stock, including the applicability and effect of any U.S. federal, state or local or non-U.S. tax
laws, and of any changes or proposed changes in applicable law.
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Underwriting
We are offering the shares of our common stock described in this prospectus through the underwriters named below. Jefferies & Company, Inc. and
UBS Securities LLC are the book-running managers of this offering and the representatives of the underwriters. We have entered into an underwriting agreement with the underwriters. Subject to the terms and conditions of the underwriting agreement,
each of the underwriters has severally agreed to purchase the number of shares of common stock listed next to its name in the following table.
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Underwriter
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Number of
shares
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Jefferies & Company, Inc.
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UBS Securities LLC
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Robert W. Baird & Co. Incorporated
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Cowen and Company, LLC
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Total
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4,500,000
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The underwriting agreement provides that the underwriters must buy all of the shares if they buy any of them. However, the
underwriters are not required to take or pay for the shares covered by the underwriters over-allotment option described below.
Our
common stock is offered subject to a number of conditions, including:
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receipt and acceptance of our common stock by the underwriters; and
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the underwriters right to reject orders in whole or in part.
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In connection with this offering, certain of the underwriters or securities dealers may distribute prospectuses electronically.
Over-Allotment Option
We have granted the underwriters an option to buy up to an aggregate of
675,000 additional shares of our common stock. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with this offering. The underwriters have 30 days from the date of this
prospectus to exercise this option. If the underwriters exercise this option, they will each purchase additional shares approximately in proportion to the amounts specified in the table above.
Commissions and Discounts
Shares sold by the
underwriters to the public will initially be offered at the public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to
$ per share from the public offering price.
Sales of shares made
outside the United States may be made by affiliates of the underwriters. If all the shares are not sold at the public offering price, the representatives may change the offering price and the other selling terms. Upon execution of the underwriting
agreement, the underwriters will be obligated to purchase the shares at the prices and upon the terms stated therein.
The following table
shows the per share and total underwriting discounts and commissions we will pay to the underwriters assuming both no exercise and full exercise of the underwriters option to purchase additional shares of our common stock.
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No exercise
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Full exercise
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Per share
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$
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$
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Total
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$
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$
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We estimate that the total expenses of this offering payable by us, not including the underwriting
discounts and commissions, will be approximately $900,000.
No Sales of Similar Securities
We, our executive officers and directors and certain holders of shares our common stock and warrants to purchase shares of our common stock have entered
into lock-up agreements with the underwriters. Under these agreements, subject to certain exceptions, we and each of these persons may not, without the prior written approval of Jefferies & Company, Inc. and UBS Securities LLC, offer, sell,
contract to sell or otherwise dispose of, directly or indirectly, or hedge our common stock or securities convertible into or exchangeable or exercisable for our common stock. These restrictions will be in effect for a period of 90 days after
the date of this prospectus. At any time and without public notice, Jefferies & Company, Inc. and UBS Securities LLC may, in their sole discretion, release some or all of the securities from these lock-up agreements.
If:
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during the period that begins on the date that is 15 calendar days plus 3 business days before the last day of the 90-day lock-up period and ends on
the last day of the 90-day lock-up period,
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we issue an earnings release; or
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material news or a material event relating to us occurs; or
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prior to the expiration of the 90-day lock-up period, we announce that we will release earnings results during the 16-day period beginning on the last
day of the 90-day lock-up period,
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then the 90-day lock-up period will be extended until the expiration of the date that is
15 calendar days plus 3 business days after the date on which the issuance of the earnings release or the material news or material event occurs.
Indemnification
We have agreed to indemnify the
underwriters and their controlling persons against certain liabilities, including certain liabilities under the Securities Act. If we are unable to provide this indemnification, we have agreed to contribute to payments the underwriters may be
required to make in respect of those liabilities.
NASDAQ Global Market Listing
Our common stock is listed on The NASDAQ Global Market under the trading symbol GNOM.
Price
Stabilization, Short Positions, Passive Market Making
In connection with this offering, the underwriters may engage in activities that
stabilize, maintain or otherwise affect the price of our common stock, including:
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stabilizing transactions;
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purchases to cover positions created by short sales;
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imposition of penalty bids;
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syndicate covering transactions; and
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Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of our common stock
while this offering is in progress. These transactions may also include making short sales of our common stock, which involve the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this
offering, and purchasing shares of common
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stock on the open market to cover positions created by short sales. Short sales may be covered short sales, which are short positions in an amount not greater than the
underwriters over-allotment option referred to above, or may be naked short sales, which are short positions in excess of that amount.
The underwriters may close out any covered short position either by exercising their over-allotment option, in whole or in part, or by purchasing shares in the open market. In making this determination,
the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option.
Naked short sales are short sales made in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing
shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who
purchased in this offering.
The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the
underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of that underwriter in stabilizing or short covering transactions.
As a result of these activities, the price of our common stock may be higher than the price that otherwise might exist in the open market. If these
activities are commenced, they may be discontinued by the underwriters at any time. The underwriters may carry out these transactions on The NASDAQ Global Market, in the over-the-counter market or otherwise.
In addition, in connection with this offering certain of the underwriters (and selling group members) may engage in passive market making transactions in
our common stock on The NASDAQ Global Market prior to the pricing and completion of this offering. Passive market making consists of displaying bids on The NASDAQ Global Market no higher than the bid prices of independent market makers and making
purchases at prices no higher than these independent bids and effected in response to order flow. Net purchases by a passive market maker on each day are generally limited to a specified percentage of the passive market makers average daily
trading volume in the common stock during a specified period and must be discontinued when such limit is reached. Passive market making may cause the price of our common stock to be higher than the price that otherwise would exist in the open market
in the absence of these transactions. If passive market making is commenced, it may be discontinued at any time.
Affiliations
Certain of the underwriters and their affiliates may from time to time in the future provide certain commercial banking, financial advisory, investment
banking and other services for us for which they will be entitled to receive separate fees. The underwriters and their affiliates may from time to time in the future engage in transactions with us and perform services for us in the ordinary course
of their respective businesses.
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Notice to Investors
Notice to Prospective Investors in the European Economic Area
In relation to each Member State of the European Economic Area, or EEA, which has implemented the Prospectus Directive (each, a Relevant Member State), with effect from, and including, the
date on which the Prospectus Directive is implemented in that Relevant Member State (the Relevant Implementation Date), an offer to the public of our securities which are the subject of the offering contemplated by this prospectus may
not be made in that Relevant Member State, except that, with effect from, and including, the Relevant Implementation Date, an offer to the public in that Relevant Member State of our securities may be made at any time under the following exemptions
under the Prospectus Directive, if they have been implemented in that Relevant Member State:
a) to legal
entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in our securities;
b) to any legal entity which has two or more of: (1) an average of at least 250 employees during the last (or, in
Sweden, the last two) financial year(s); (2) a total balance sheet of more than 43,000,000 and (3) an annual net turnover of more than 50,000,000, as shown in its last (or, in Sweden, its last two) annual or consolidated
accounts;
c) to fewer than 100 natural or legal persons (other than qualified investors as defined in the
Prospectus Directive), subject to obtaining the prior consent of the representatives for any such offer; or
d)
in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of our securities shall result in a requirement for the publication by us or any underwriter or agent of a prospectus pursuant to Article
3 of the Prospectus Directive.
As used above, the expression offered to the public in relation to any of our securities in any
Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and our securities to be offered so as to enable an investor to decide to purchase or subscribe for our securities, as the
same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State; and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant
implementing measure in each Relevant Member State.
The EEA selling restrictions are in addition to any other selling restrictions set forth
in this prospectus.
Notice to Prospective Investors in the United Kingdom
This prospectus is being distributed only to and is only directed at: (1) persons who are outside the United Kingdom; (2) investment professionals falling within Article 19(5) of the Financial
Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Order) or (3) high net worth companies, and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all
such persons falling within (1) through (3) together being referred to as relevant persons). The shares are available only to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such shares will
be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this prospectus or any of its contents.
Notice to Prospective Investors in Switzerland
This prospectus does not constitute an issue prospectus pursuant to Article 652a or Article 1156 of the Swiss Code of Obligations (CO), and
the shares will not be listed on the SIX Swiss Exchange. Therefore, this prospectus may not comply with the disclosure standards of the CO and/or the listing rules (including any prospectus schemes) of the SIX Swiss Exchange. Accordingly, the shares
may not be offered to the public in or from Switzerland, but only to a selected and limited circle of investors, which do not subscribe to the shares with a view to distribution.
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Notice to Prospective Investors in Australia
This prospectus is not a formal disclosure document and has not been, nor will be, lodged with the Australian Securities and Investments Commission. It does not purport to contain all information that an
investor or his, her or its professional advisers would expect to find in a prospectus or other disclosure document (as defined in the Corporations Act 2001 (Australia)) for the purposes of Part 6D.2 of the Corporations Act 2001 (Australia) or in a
product disclosure statement for the purposes of Part 7.9 of the Corporations Act 2001 (Australia), in either case, in relation to the securities.
The securities are not being offered in Australia to retail clients as defined in sections 761G and 761GA of the Corporations Act 2001 (Australia). This offering is being made in Australia
solely to wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Australia), and, as such, no prospectus, product disclosure statement or other disclosure document in relation to the securities has been, or will
be, prepared.
This prospectus does not constitute an offer in Australia other than to wholesale clients. By submitting an application for our
securities, you represent and warrant to us that you are a wholesale client for the purposes of section 761G of the Corporations Act 2001 (Australia). If any recipient of this prospectus is not a wholesale client, no offer of, or invitation to apply
for, our securities shall be deemed to be made to such recipient and no applications for our securities will be accepted from such recipient. Any offer to a recipient in Australia, and any agreement arising from acceptance of such offer, is personal
and may only be accepted by the recipient. In addition, by applying for our securities, you undertake to us that, for a period of 12 months from the date of issue of the securities, you will not transfer any interest in the securities to any person
in Australia other than to a wholesale client.
Notice to Prospective Investors in Hong Kong
Our securities may not be offered or sold in Hong Kong by means of this prospectus or any document other than (1) to professional
investors within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder, (2) in circumstances which do not constitute an offer to the public within the meaning of the Companies
Ordinance (Cap.32, Laws of Hong Kong) or (3) in other circumstances which do not result in the document being a prospectus within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong). No advertisement, invitation or
document relating to our securities may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere) which is directed at, or the contents of which are likely to be accessed or read
by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to the securities which are, or are intended to be, disposed of only to persons outside Hong Kong or only to professional
investors within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.
Notice to
Prospective Investors in Japan
Our securities have not been and will not be registered under the Financial Instruments and Exchange Law of
Japan (the Financial Instruments and Exchange Law), and our securities will not be offered or sold, directly or indirectly, in Japan, or to, or for the benefit of, any resident of Japan (which term, as used herein, means any person
resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan, or to a resident of Japan, except pursuant to an exemption from the
registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan.
Notice to Prospective Investors in Singapore
This document has not been registered as a prospectus
with the Monetary Authority of Singapore, and, in Singapore, the offer and sale of our securities is made pursuant to exemptions provided in sections 274 and 275 of the Securities and Futures Act, Chapter 289 of Singapore (SFA).
Accordingly, this prospectus and any other
134
document or material in connection with the offer or sale, or invitation for subscription or purchase, of our securities may not be circulated or distributed, nor may our securities be offered or
sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore, other than (1) to an institutional investor as defined in Section 4A of the SFA pursuant to
Section 274 of the SFA; (2) to a relevant person as defined in section 275(2) of the SFA pursuant to Section 275(1) of the SFA, or any person pursuant to Section 275(1A) of the SFA, and in accordance with the conditions specified
in Section 275 of the SFA or (3) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA, in each case subject to compliance with the conditions (if any) set forth in the SFA. Moreover,
this document is not a prospectus as defined in the SFA. Accordingly, statutory liability under the SFA in relation to the content of prospectuses would not apply. Prospective investors in Singapore should consider carefully whether an investment in
our securities is suitable for them.
Where our securities are subscribed for or purchased under Section 275 of the SFA by a relevant
person, which is:
(a) a corporation (which is not an accredited investor as defined in Section 4A of the
SFA) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or
(b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each
beneficiary of the trust is an individual who is an accredited investor, shares of that corporation or the beneficiaries rights and interest (howsoever described) in that trust shall not be transferable for six months after that corporation or
that trust has acquired the shares under Section 275 of the SFA, except:
(1) to an institutional investor
(for corporations under Section 274 of the SFA) or to a relevant person defined in Section 275(2) of the SFA, or to any person pursuant to an offer that is made on terms that such shares of that corporation or such rights and interest in
that trust are acquired at a consideration of not less than 200,000 Singapore dollars (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid in cash or by exchange of securities or other assets, and further
for corporations, in accordance with the conditions, specified in Section 275 of the SFA;
(2) where no
consideration is given for the transfer; or
(3) where the transfer is by operation of law.
In addition, investors in Singapore should note that securities acquired by them are subject to resale and transfer restrictions specified under
Section 276 of the SFA, and they, therefore, should seek their own legal advice before effecting any resale or transfer of their securities.
135
Legal Matters
The validity of our common stock offered by this prospectus will be passed upon for us by Latham & Watkins LLP, Menlo Park, California. Certain
attorneys and investment funds affiliated with the firm own 36,862 shares of our common stock and warrants to purchase 1,800 shares of our common stock. Dewey & LeBoeuf LLP, New York, New York, is counsel for the underwriters in connection
with this offering.
Experts
The financial statements as of December 31, 2009 and 2010 and for each of the three years in the period ended December 31, 2010, included in this prospectus, have been so included in reliance on
the report (which contains an explanatory paragraph relating to the Companys ability to continue as a going concern as described in Note 1 to the financial statements) of PricewaterhouseCoopers LLP, an independent registered public accounting
firm, given on the authority of such firm as experts in auditing and accounting.
Where You Can Find
Additional Information
We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the
Securities Act relating to the shares of our common stock we are offering. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. Some items are
omitted in accordance with the rules and regulations of the SEC. For further information with respect to us and the common stock we are offering, we refer you to the registration statement and its exhibits and schedules. Statements contained in this
prospectus as to the contents of any contract, agreement or other document are summaries of the material terms of that contract, agreement or other document, and we refer you to a copy of the entire contract, agreement or other document that we have
filed as an exhibit to the registration statement. A copy of the registration statement, and its exhibits and schedules, may be inspected without charge at the public reference facilities maintained by the SEC at 100 F Street, N.E.,
Washington, D.C. 20549. Copies of these materials may be obtained by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on
the operation of the public reference facility. The SEC maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the SECs
website is http://www.sec.gov.
We are subject to the information and periodic reporting requirements of the Exchange Act and file periodic
reports, proxy statements and other information with the SEC. Such periodic reports, proxy statements and other information will be available for inspection and copying at the public reference facility and web site of the SEC referred to above. We
maintain a website at www.completegenomics.com. You may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements on Schedule 14A and amendments to those reports free of charge at our
website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The reference to our website address does not constitute incorporation by reference of the information contained in, or that can be
accessed through, our website.
136
Complete Genomics, Inc.
Financial Statements Index
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Complete Genomics, Inc.
In our opinion, the accompanying balance sheets and the related statements of operations, of convertible preferred stock and stockholders equity (deficit) and of cash flows present fairly, in all
material respects, the financial position of Complete Genomics, Inc. (the Company) at December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31,
2010 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 of the financial statements, the Company has incurred reoccurring losses from operations. The Companys ability to continue to
meet its obligations and achieve its business objectives is dependent, among other things, on its ability to raise additional capital and/or generate sufficient revenues.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 30, 2011 except for the second paragraph of Note 1 to the Financial Statements as to which the date is May 9, 2011.
F-2
Complete Genomics, Inc.
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands, except share and
per share amounts)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,765
|
|
|
$
|
68,918
|
|
|
$
|
68,791
|
|
Accounts receivable
|
|
|
1,288
|
|
|
|
4,943
|
|
|
|
7,385
|
|
Inventory
|
|
|
354
|
|
|
|
3,980
|
|
|
|
3,176
|
|
Prepaid expenses
|
|
|
5,156
|
|
|
|
1,101
|
|
|
|
770
|
|
Other current assets
|
|
|
456
|
|
|
|
78
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
15,019
|
|
|
|
79,020
|
|
|
|
80,176
|
|
Property and equipment, net
|
|
|
14,864
|
|
|
|
23,843
|
|
|
|
24,256
|
|
Other assets
|
|
|
395
|
|
|
|
297
|
|
|
|
657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
30,278
|
|
|
$
|
103,160
|
|
|
$
|
105,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities, Convertible Preferred Stock and Stockholders Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,281
|
|
|
$
|
3,066
|
|
|
$
|
3,256
|
|
Accrued liabilities
|
|
|
2,032
|
|
|
|
3,102
|
|
|
|
3,788
|
|
Notes payable, current
|
|
|
4,440
|
|
|
|
5,780
|
|
|
|
1,412
|
|
Deferred revenue
|
|
|
1,302
|
|
|
|
5,739
|
|
|
|
7,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
12,055
|
|
|
|
17,687
|
|
|
|
15,477
|
|
Notes payable, net of current
|
|
|
3,510
|
|
|
|
7,521
|
|
|
|
22,724
|
|
Deferred rent, net of current
|
|
|
5,017
|
|
|
|
4,316
|
|
|
|
4,132
|
|
Convertible preferred stock warrant liability
|
|
|
1,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
22,135
|
|
|
|
29,524
|
|
|
|
42,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.001no shares authorized or outstanding at December 31, 2009; 5,000,000 shares authorized
and no shares outstanding at December 31, 2010 and March 31, 2011 (unaudited), respectively
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock, par value $0.0016,933,332 shares authorized and 6,472,996 shares issued and outstanding at
December 31, 2009 (liquidation value$127,721 at December 31, 2009); no shares authorized or outstanding at December 31, 2010 and March 31, 2011, respectively
|
|
|
85,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value13,333,334 shares authorized and 94,281 shares issued and outstanding at December 31,
2009; 300,000,000 shares authorized and 25,922,627 and 25,988,934 shares issued and outstanding at December 31, 2010 and March 31, 2011 (unaudited), respectively
|
|
|
|
|
|
|
26
|
|
|
|
26
|
|
Additional paid-in capital
|
|
|
3,471
|
|
|
|
212,458
|
|
|
|
214,039
|
|
Accumulated deficit
|
|
|
(81,161
|
)
|
|
|
(138,848
|
)
|
|
|
(151,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
(77,690
|
)
|
|
|
73,636
|
|
|
|
62,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, convertible preferred stock and stockholders equity
(deficit)
|
|
$
|
30,278
|
|
|
$
|
103,160
|
|
|
$
|
105,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-3
Complete Genomics, Inc.
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
Three months ended
March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
(in thousands)
|
|
Revenue
|
|
$
|
|
|
|
$
|
623
|
|
|
$
|
9,389
|
|
|
$
|
336
|
|
|
$
|
6,833
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,582
|
|
Start-up production costs
|
|
|
|
|
|
|
5,033
|
|
|
|
19,895
|
|
|
|
4,077
|
|
|
|
|
|
Research and development
|
|
|
23,633
|
|
|
|
22,424
|
|
|
|
21,691
|
|
|
|
6,169
|
|
|
|
6,808
|
|
General and administrative
|
|
|
3,179
|
|
|
|
4,953
|
|
|
|
9,345
|
|
|
|
3,099
|
|
|
|
2,780
|
|
Sales and marketing
|
|
|
1,045
|
|
|
|
1,798
|
|
|
|
6,111
|
|
|
|
1,226
|
|
|
|
2,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
27,857
|
|
|
|
34,208
|
|
|
|
57,042
|
|
|
|
14,571
|
|
|
|
18,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(27,857
|
)
|
|
|
(33,585
|
)
|
|
|
(47,653
|
)
|
|
|
(14,235
|
)
|
|
|
(12,037
|
)
|
Interest expense
|
|
|
(974
|
)
|
|
|
(3,465
|
)
|
|
|
(2,827
|
)
|
|
|
(311
|
)
|
|
|
(340
|
)
|
Interest and other income (expense), net
|
|
|
437
|
|
|
|
1,101
|
|
|
|
(7,207
|
)
|
|
|
210
|
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(28,394
|
)
|
|
|
(35,949
|
)
|
|
|
(57,687
|
)
|
|
|
(14,336
|
)
|
|
|
(12,461
|
)
|
Deemed dividend related to beneficial conversion feature of Series E convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
(405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributed to common stockholders
|
|
$
|
(28,394
|
)
|
|
$
|
(35,949
|
)
|
|
$
|
(58,092
|
)
|
|
$
|
(14,336
|
)
|
|
$
|
(12,461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributed to common stockholdersbasic and diluted
|
|
$
|
(369.36
|
)
|
|
$
|
(386.56
|
)
|
|
$
|
(13.60
|
)
|
|
$
|
(51.15
|
)
|
|
$
|
(0.48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding used in computing net loss per share attributed to common
stockholdersbasic and diluted
|
|
|
76,873
|
|
|
|
92,998
|
|
|
|
4,271,176
|
|
|
|
280,283
|
|
|
|
25,959,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of these financial statements.
F-4
Complete Genomics, Inc.
Statement of Convertible Preferred Stock and Stockholders Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
preferred stock
|
|
|
|
|
|
Common stock
|
|
|
Additional
paid-in
capital
|
|
|
Accumulated
deficit
|
|
|
Total
stockholders
equity
(deficit)
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except
share and per share amounts)
|
|
|
|
|
|
(in thousands, except
share and per share amounts)
|
|
Balances at December 31, 2007
|
|
|
341,592
|
|
|
$
|
20,223
|
|
|
|
|
|
|
|
91,665
|
|
|
|
|
|
|
$
|
(303
|
)
|
|
$
|
(16,818
|
)
|
|
$
|
(17,121
|
)
|
Issuance of Series C convertible preferred stock for cash at $159.30 per share, net of issuance costs of $1,101
|
|
|
166,346
|
|
|
|
25,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series C convertible preferred stock as issuance costs at $159.30 per share
|
|
|
1,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
284
|
|
|
|
|
|
|
|
284
|
|
Nonemployee stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
52
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,160
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
25
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,394
|
)
|
|
|
(28,394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
|
508,942
|
|
|
|
45,622
|
|
|
|
|
|
|
|
93,825
|
|
|
|
|
|
|
|
58
|
|
|
|
(45,212
|
)
|
|
|
(45,154
|
)
|
Issuance of Series D convertible preferred stock for cash at $7.56 per share, net of issuance costs of $2,879
|
|
|
3,972,729
|
|
|
|
27,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series D convertible preferred stock upon conversion of promissory notes and accrued interest at $7.56 per
share
|
|
|
1,991,325
|
|
|
|
15,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock warrants in connection with Series D convertible preferred stock
|
|
|
|
|
|
|
(1,999
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,999
|
|
|
|
|
|
|
|
1,999
|
|
Employee stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,142
|
|
|
|
|
|
|
|
1,142
|
|
Nonemployee stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
268
|
|
|
|
|
|
|
|
268
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
456
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,949
|
)
|
|
|
(35,949
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009
|
|
|
6,472,996
|
|
|
|
85,833
|
|
|
|
|
|
|
|
94,281
|
|
|
|
|
|
|
|
3,471
|
|
|
|
(81,161
|
)
|
|
|
(77,690
|
)
|
Issuance of Series D convertible preferred stock for cash at $7.56 per share, net of issuance costs of $233
|
|
|
1,346,762
|
|
|
|
9,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to founders at $2.34 per share for services rendered
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
786,533
|
|
|
|
1
|
|
|
|
1,839
|
|
|
|
|
|
|
|
1,840
|
|
Issuance of common stock warrants in connection with promissory notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,389
|
|
|
|
|
|
|
|
5,389
|
|
Issuance of Series E convertible preferred stock upon conversion of promissory notes and accrued interest at $7.56 per
share
|
|
|
2,990,355
|
|
|
|
15,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series E convertible preferred stock for cash in at $7.56 per share, net of issuance costs of $187
|
|
|
2,284,516
|
|
|
|
17,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock warrants in connection with sale of Series E convertible preferred stock
|
|
|
|
|
|
|
(882
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,020
|
|
|
|
|
|
|
|
2,020
|
|
Issuance of purchase rights for Series E convertible preferred stock
|
|
|
|
|
|
|
(1,144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-5
Complete Genomics, Inc.
Statement of Convertible Preferred Stock and Stockholders Equity (Deficit)(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
preferred stock
|
|
|
|
|
|
Common stock
|
|
|
Additional
paid-in
capital
|
|
|
Accumulated
deficit
|
|
|
Total
stockholders
equity
(deficit)
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except
share and per share amounts)
|
|
|
|
|
|
(in thousands, except
share and per share amounts)
|
|
Beneficial conversion feature embedded in Series E convertible preferred stock issued for cash
|
|
|
|
|
|
|
(405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
405
|
|
|
|
|
|
|
|
405
|
|
Recognition of conversion feature embedded in Series E convertible preferred stock issued for cash
|
|
|
|
|
|
|
405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(405
|
)
|
|
|
|
|
|
|
(405
|
)
|
Reclassification of preferred stock purchase right liability to additional paid in capital upon exercise of those
rights
|
|
|
|
|
|
|
9,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series E convertible preferred stock for cash at $7.56 per share, net of issuance cost of $9
|
|
|
1,637,310
|
|
|
|
12,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock warrants for cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
413,398
|
|
|
|
1
|
|
|
|
619
|
|
|
|
|
|
|
|
620
|
|
Conversion of preferred stock into common stock immediately prior to initial public offering
|
|
|
(14,731,939
|
)
|
|
|
(147,765
|
)
|
|
|
|
|
|
|
17,445,662
|
|
|
|
17
|
|
|
|
147,748
|
|
|
|
|
|
|
|
147,765
|
|
Net exercise of preferred and common stock warrants immediately prior to initial public offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,065,394
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Reclassification of preferred stock warrant liability into additional paid-in capital upon initial public
offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,277
|
|
|
|
|
|
|
|
2,277
|
|
Issuance of common stock in initial public offering at $9.00 per share, net of issuance costs of $6,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000,000
|
|
|
|
6
|
|
|
|
47,169
|
|
|
|
|
|
|
|
47,175
|
|
Employee stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,630
|
|
|
|
|
|
|
|
1,630
|
|
Nonemployee stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121
|
|
|
|
|
|
|
|
121
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,359
|
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
176
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57,687
|
)
|
|
|
(57,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2010
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
25,922,627
|
|
|
$
|
26
|
|
|
$
|
212,458
|
|
|
$
|
(138,848
|
)
|
|
$
|
73,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-6
Complete Genomics, Inc.
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
Three months ended
March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
(in thousands)
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(28,394
|
)
|
|
$
|
(35,949
|
)
|
|
$
|
(57,687
|
)
|
|
$
|
(14,336
|
)
|
|
$
|
(12,461
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,795
|
|
|
|
5,240
|
|
|
|
8,018
|
|
|
|
1,309
|
|
|
|
2,544
|
|
Amortization of debt issuance costs
|
|
|
226
|
|
|
|
259
|
|
|
|
410
|
|
|
|
65
|
|
|
|
|
|
Writedown of inventory
|
|
|
|
|
|
|
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
Increase in inventory reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
Issuance of common stock to founders
|
|
|
|
|
|
|
|
|
|
|
1,840
|
|
|
|
1,840
|
|
|
|
|
|
Change in fair value of convertible preferred stock warrant liability and stock purchase right
|
|
|
(65
|
)
|
|
|
(1,088
|
)
|
|
|
7,211
|
|
|
|
(209
|
)
|
|
|
96
|
|
Stock-based compensation
|
|
|
336
|
|
|
|
1,410
|
|
|
|
1,751
|
|
|
|
540
|
|
|
|
494
|
|
Noncash interest expense related to the promissory notes and notes payable
|
|
|
|
|
|
|
2,113
|
|
|
|
1,485
|
|
|
|
43
|
|
|
|
27
|
|
Loss on the disposal of property and equipment
|
|
|
506
|
|
|
|
31
|
|
|
|
109
|
|
|
|
33
|
|
|
|
7
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
|
|
|
|
(1,288
|
)
|
|
|
(3,655
|
)
|
|
|
(72
|
)
|
|
|
(2,442
|
)
|
Inventory
|
|
|
|
|
|
|
(354
|
)
|
|
|
(3,774
|
)
|
|
|
(364
|
)
|
|
|
772
|
|
Prepaid expenses
|
|
|
(231
|
)
|
|
|
(4,688
|
)
|
|
|
4,055
|
|
|
|
4,616
|
|
|
|
331
|
|
Other current assets
|
|
|
(190
|
)
|
|
|
110
|
|
|
|
119
|
|
|
|
63
|
|
|
|
24
|
|
Other assets
|
|
|
27
|
|
|
|
(143
|
)
|
|
|
(53
|
)
|
|
|
28
|
|
|
|
(110
|
)
|
Accounts payable
|
|
|
(30
|
)
|
|
|
1,078
|
|
|
|
481
|
|
|
|
401
|
|
|
|
96
|
|
Accrued liabilities
|
|
|
717
|
|
|
|
288
|
|
|
|
788
|
|
|
|
500
|
|
|
|
590
|
|
Deferred revenue
|
|
|
|
|
|
|
1,302
|
|
|
|
4,437
|
|
|
|
1,484
|
|
|
|
1,282
|
|
Deferred rent
|
|
|
|
|
|
|
5,017
|
|
|
|
(701
|
)
|
|
|
(166
|
)
|
|
|
(184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(24,303
|
)
|
|
|
(26,662
|
)
|
|
|
(35,018
|
)
|
|
|
(4,225
|
)
|
|
|
(8,902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(7,419
|
)
|
|
|
(9,654
|
)
|
|
|
(18,802
|
)
|
|
|
(10,172
|
)
|
|
|
(2,870
|
)
|
Purchase of patents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(7,419
|
)
|
|
|
(9,654
|
)
|
|
|
(18,802
|
)
|
|
|
(10,172
|
)
|
|
|
(3,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from promissory notes and notes payable
|
|
|
13,194
|
|
|
|
14,725
|
|
|
|
36,243
|
|
|
|
|
|
|
|
20,000
|
|
Repayment of notes payable
|
|
|
(4,970
|
)
|
|
|
(3,990
|
)
|
|
|
(8,643
|
)
|
|
|
(1,065
|
)
|
|
|
(8,205
|
)
|
Proceeds from issuance of convertible preferred stock, net of issuance costs
|
|
|
25,399
|
|
|
|
27,156
|
|
|
|
39,402
|
|
|
|
10,060
|
|
|
|
|
|
Proceeds from issuance of common stock in initial public offering, net of issuance costs
|
|
|
|
|
|
|
|
|
|
|
47,175
|
|
|
|
|
|
|
|
|
|
Exercise of stock options and common stock warrants
|
|
|
25
|
|
|
|
4
|
|
|
|
796
|
|
|
|
8
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
33,648
|
|
|
|
37,895
|
|
|
|
114,973
|
|
|
|
9,003
|
|
|
|
11,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
1,926
|
|
|
|
1,579
|
|
|
|
61,153
|
|
|
|
(5,394
|
)
|
|
|
(127
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
4,260
|
|
|
|
6,186
|
|
|
|
7,765
|
|
|
|
7,765
|
|
|
|
68,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
6,186
|
|
|
$
|
7,765
|
|
|
$
|
68,918
|
|
|
$
|
2,371
|
|
|
$
|
68,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-7
Complete Genomics, Inc.
Statements of Cash Flows(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
|
Three months
ended March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
(in thousands)
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
349
|
|
|
$
|
1,068
|
|
|
$
|
1,198
|
|
|
$
|
199
|
|
|
$
|
315
|
|
Supplemental disclosure of noncash investing and financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants for convertible preferred stock in connection with promissory notes
|
|
$
|
779
|
|
|
$
|
1,541
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Issuance of warrants for common stock in connection with convertible preferred stock financings
|
|
|
|
|
|
|
1,999
|
|
|
|
2,020
|
|
|
|
|
|
|
|
|
|
Conversion of promissory notes and interest into convertible preferred stock
|
|
|
|
|
|
|
15,054
|
|
|
|
15,403
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment under accounts payable
|
|
|
|
|
|
|
2,458
|
|
|
|
1,696
|
|
|
|
1,440
|
|
|
|
94
|
|
Issuance of warrants for common stock in connection with notes payable
|
|
|
|
|
|
|
|
|
|
|
5,671
|
|
|
|
|
|
|
|
987
|
|
Issuance of purchase rights for Series E convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
2,666
|
|
|
|
|
|
|
|
|
|
Reclassification of purchase right liability to preferred stock upon exercise
|
|
|
|
|
|
|
|
|
|
|
9,153
|
|
|
|
|
|
|
|
|
|
Reclassification of warrant liability to additional paid-in capital upon initial public offering
|
|
|
|
|
|
|
|
|
|
|
2,277
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock into common stock upon initial public offering
|
|
|
|
|
|
|
|
|
|
|
147,765
|
|
|
|
|
|
|
|
|
|
Deemed dividend related to the beneficial conversion feature of Series E convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
405
|
|
|
|
|
|
|
|
|
|
Issuance of convertible preferred stock as payment for costs associated with issuance of Series C preferred convertible
stock
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying
notes are an integral part of these financial statements.
F-8
Complete Genomics, Inc.
Notes to Financial Statements
1.
|
Organization and description of business
|
Complete
Genomics, Inc., (the Company) is a human genome sequencing company that has developed and commercialized a DNA sequencing platform for complete human genome sequencing and analysis. The Companys Complete Genomics Analysis Platform
(CGA Platform) combines its proprietary human sequencing technology with its advanced informatics and data management software and its end-to-end outsourced service model to provide customers with data that is immediately ready to be
used for genome-based research. The Companys solution provides academic and biopharmaceutical researchers with complete human genomic data and analysis without requiring them to invest in in-house sequencing instruments, high-performance
computing resources and specialized personnel. In the DNA sequencing industry, complete human genome sequencing is generally deemed to be coverage of at least 90% of the nucleotides in the genome. The Company was incorporated in Delaware on
June 14, 2005 and began operations in March 2006. Since inception, the Company has been engaged in developing its complete human genome sequencing technology, raising capital and recruiting personnel. In May 2010, the Company commenced full
commercial operations.
These financial statements are prepared on a going concern basis that contemplates the realization of assets and
discharge of liabilities in their normal course of business. The Company has incurred net operating losses and negative cash flows from operations during every year since inception. At March 31, 2011, the Company had an accumulated deficit of
$151.3 million (unaudited). Operating losses and negative cash flows may continue for the foreseeable future so failure to generate sufficient revenues, raise additional funds through public or private financings, or other arrangements, or reduce
certain discretionary spending could have a material adverse effect on the Companys ability to achieve its intended business objectives. There can be no assurance that such additional financings, if needed, will be available on terms
attractive to the Company, if at all. The Companys failure to raise capital when needed could have a material adverse effect on its business, financial condition and operating results. If additional funds are raised through the issuance of
equity securities, the percentage ownership of the Companys then-current, stockholders would be reduced. Furthermore, such equity securities may have rights, preferences or privileges senior to those of the Companys currently outstanding
common stock.
On November 16, 2010, the Company closed the initial public offering of its common stock (the IPO) and sold
6,000,000 shares of its common stock at a public offering price of $9.00 per share. The Company received gross proceeds of approximately $54.0 million from this transaction, before underwriting discounts and commissions and offering
expenses.
2.
|
Summary of significant accounting policies
|
Basis of Presentation and Use of Estimates
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and include all adjustments
necessary for the fair presentation of the Companys financial position, results of operations and cash flows for the periods presented. In preparing the financial statements, management must make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates include
assumptions made in the liability for warrants to purchase common stock and stock-based compensation. Actual results could differ from those estimates.
Stock Split
The Company initiated a 30-for-1 reverse stock split effective November
2009. All share and per share amounts in these financial statements have been retroactively adjusted to give effect to the reverse stock split.
F-9
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
Segment Information
The Company operates in one segment. Management uses one measure of profitability and does not segment its business for internal reporting. All of the Companys assets are located in the United
States.
Revenue Recognition
The Company generates revenue from selling its human genome sequencing services under purchase orders or contracts. Revenue is recognized when all of the following criteria are met: persuasive evidence of
an arrangement exists, title has transferred, the price is fixed or determinable and collectability is reasonably assured. Upon completion of the sequencing process, the Company ships the research-ready genomic data to the customer. The Company uses
shipping documents and third-party evidence to verify shipment of the data. In order to determine whether collectability is reasonably assured, the Company assesses a number of factors, including past transaction history with the customer and the
creditworthiness of the customer. If the Company determines that collectability is not reasonably assured, the Company defers the recognition of revenue until collectability becomes reasonably assured. The Company also receives down payments from
customers prior to the commencement of the genome sequencing process.
For revenue generated under purchase orders, the Company has established
standard terms and conditions that are specified for all orders. The Company uses the purchase order to establish persuasive evidence of an arrangement and whether there is a fixed and determinable price for the order. Revenue is recognized based
upon the shipment of individual genomic data to customers and satisfaction of related terms and conditions contained in the purchase order. Any down payments received are recorded as deferred revenue until the Company meets all revenue recognition
criteria.
For revenue generated under contracts, the Company considers each contracts terms and conditions to determine its obligations
associated with the contract. The Company will defer revenue until individual genomic data has been shipped to customers and related significant obligations, as defined in the contract, have been met. Any down payments received are recorded as
deferred revenue until the Company meets all revenue recognition criteria.
Concentration of Credit Risk and Other Risks and
Uncertainties
The Company is subject to all of the risks inherent in an early-stage company developing a new approach to DNA
sequencing. These risks include, but are not limited to, significant capital resources, limited management resources, intense competition, dependence upon consumer acceptance of the products in development and the changing nature of the DNA
sequencing industry. The Companys operating results may be materially affected by the foregoing factors.
The Company depends on a
limited number of suppliers, including single-source suppliers, of various critical components in the sequencing process. The loss of these suppliers, or their failure to supply the Company with the necessary components on a timely basis, could
cause delays in the sequencing process and adversely affect the Company.
The Company derives accounts receivable from direct sales and amounts
contractually due, but not received, under contracts. The Company reviews its exposure to accounts receivable and generally requires no collateral for any of its accounts receivable. The allowance for doubtful accounts is the Companys best
estimate of the amount of expected credit losses existing in accounts receivable and is based upon specific customer issues that have been identified. As of December 31, 2009, 2010 and March 31, 2011, the Company has not recorded any
allowance for doubtful accounts.
The Companys allocates its revenues to individual countries based on the primary locations of its
customers.
F-10
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
Customers representing greater than 10% of accounts receivable were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
Customer
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Customer A
|
|
|
43
|
%
|
|
|
*
|
|
|
|
17
|
%
|
Customer K
|
|
|
20
|
%
|
|
|
*
|
|
|
|
*
|
|
Customer H
|
|
|
*
|
|
|
|
27
|
%
|
|
|
25
|
%
|
Customer L
|
|
|
*
|
|
|
|
*
|
|
|
|
18
|
%
|
Customer M
|
|
|
*
|
|
|
|
16
|
%
|
|
|
*
|
|
Customers representing
greater than 10% of revenue were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
Customer
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Customer A
|
|
|
16
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
34
|
%
|
Customer B
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
18
|
%
|
Customer C
|
|
|
*
|
|
|
|
*
|
|
|
|
30
|
%
|
|
|
*
|
|
Customer D
|
|
|
*
|
|
|
|
*
|
|
|
|
30
|
%
|
|
|
*
|
|
Customer E
|
|
|
*
|
|
|
|
*
|
|
|
|
30
|
%
|
|
|
*
|
|
Customer F
|
|
|
16
|
%
|
|
|
11
|
%
|
|
|
*
|
|
|
|
*
|
|
Customer G
|
|
|
16
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Customer H
|
|
|
13
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Customer I
|
|
|
16
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Customer J
|
|
|
17
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Countries representing
greater than 10% of revenue were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
Country
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Belgium
|
|
|
16
|
%
|
|
|
11
|
%
|
|
|
*
|
|
|
|
|
|
United States
|
|
|
84
|
%
|
|
|
71
|
%
|
|
|
70
|
%
|
|
|
70
|
%
|
The Netherlands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
%
|
Canada
|
|
|
*
|
|
|
|
|
|
|
|
30
|
%
|
|
|
|
|
The Company did not
recognize revenue during the year ended December 31, 2008.
Fair Value of Financial Instruments
Carrying amounts of certain of the Companys financial instruments, including cash and cash equivalents, prepaid expenses and other current assets,
accounts payable and accrued liabilities, approximate fair value due to short maturities. Based on borrowing rates currently available to the Company for promissory notes, notes payable and term loans with similar terms, the carrying value of
promissory notes, notes payable and term loans approximate their fair value.
F-11
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash and cash equivalents are deposited in a demand account at two
financial institutions and a money market fund. At times, such deposits may be in excess of federally insured limits.
Property and Equipment, Net
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of property and equipment is
computed using the straight-line method over their estimated useful lives as follows:
|
|
|
|
|
Computer equipment
|
|
|
3 years
|
|
Computer software
|
|
|
3 years
|
|
Furniture and fixtures
|
|
|
5 years
|
|
Machinery and equipment
|
|
|
3 years
|
|
Leasehold improvements are amortized
over the shorter of the useful life or the remaining term of the lease. Upon retirement or sale, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operations. Maintenance
and repairs are charged to operations as incurred.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability is measured by comparison of the carrying amount to the future net cash flows which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset. There have been no such impairments of long-lived assets to date.
Inventories
Inventories consist
of chemical reagents and sequencing supplies that are stated at the lower of cost or market value. Cost is determined using standard costs, which approximate actual costs on a first-in, first-out basis. Market value is determined as the lower of
replacement cost or net realizable value.
Start-up Production Costs
Start-up production costs are incurred during the period of development and validation of the production process and include the costs associated with commercialization of the sequencing process. The
Companys start-up production costs primarily consist of costs related to the acceptance testing of customer genomic samples, sample sequencing preparation, sample sequencing, the processing of data generated by the prototype sequencing
instruments, continued validation of the production process and optimization of instrument performance. These costs primarily include salaries and benefits and stock-based compensation expenses, chemical reagents and engineering materials and
supplies, consultant fees, depreciation of equipment and facilities-related costs.
Research and Development
Research and development costs are charged to operations as incurred. Research and development costs include, but are not limited to, salaries and
benefits and stock-based compensation expenses, laboratory supplies, consulting costs and other overhead expenses.
F-12
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
Government Grant
The Company accounts for its government grant as a reduction of expense related to either research and development or general and administrative expense. The allocation is based on the grant agreement and
the related expense reimbursed. Total reimbursement of expenses by the government grant is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
(in thousands)
|
|
Research and development expense
|
|
$
|
773
|
|
|
$
|
800
|
|
|
$
|
687
|
|
General and administrative expense
|
|
|
250
|
|
|
|
213
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,023
|
|
|
$
|
1,013
|
|
|
$
|
859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation
The Company accounts for stock-based compensation arrangements with employees using a fair value method which requires the recognition of compensation expense for costs related to all stock-based
payments, including stock options and restricted stock units. The fair value method requires the Company to estimate the fair value of stock-based payment awards on the date of grant using an option pricing model for stock options. The Company uses
the Black-Scholes pricing model to estimate the fair value of options granted. The fair value of stock options and restricted stock units is expensed on a straight-line basis over the vesting period.
The Company accounts for stock options issued to nonemployees based on the estimated fair value of the awards using the Black-Scholes option pricing
model. The measurement of stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest, and the resulting change in value, if any, is recognized in the Companys statements of operations during the
period the related services are rendered.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires, among other things, that deferred income taxes be provided for temporary differences between the tax basis of
the Companys assets and liabilities and their financial statement reported amounts. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards. A
valuation allowance is provided against deferred tax assets unless it is more likely than not that they will be realized.
Effective
January 1, 2007, the Company adopted the accounting guidance for uncertainties in income taxes, which prescribes a recognition threshold and measurement process for recording uncertain tax positions taken, or expected to be taken, in a tax
return in the financial statements. Additionally, the guidance also prescribes new treatment for the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The Company accrues for the
estimated amount of taxes for uncertain tax positions if it is more likely than not that the Company would be required to pay such additional taxes. An uncertain tax position will not be recognized if it has a less than 50% likelihood of being
sustained.
Recent accounting pronouncements
In October 2009, the Financial Accounting Standards Board (FASB) issued a new accounting standard that changes the accounting for revenue arrangements with multiple deliverables. Specifically, the new
accounting standard requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In addition, the new standard eliminates the use of the residual
F-13
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
method of allocation and requires the relative-selling-price method in all circumstances in which an entity recognizes revenue for an arrangement with multiple deliverables. The Company adopted
this standard effective in the first quarter of 2011 and does not believe the adoption will have a significant impact on its financial statements.
In October 2009, the FASB also issued a new accounting standard that changes revenue recognition for tangible products containing software and hardware elements. Specifically, if certain requirements are
met, revenue arrangements that contain tangible products with software elements that are essential to the functionality of the products will be accounted for under these new accounting standards, rather than the existing software revenue recognition
accounting guidance. The Company adopted this standard effective in the first quarter of 2011 and does not believe the adoption will have a significant impact on its financial statements.
In January 2010, the FASB issued an amendment to an accounting standard which requires new disclosures for fair value measurements and provides clarification for existing disclosure requirements.
Specifically, this amendment requires an entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers; and to disclose separately
information about purchases, sales, issuances and settlements in the reconciliation for fair value measurements using significant unobservable inputs, or Level 3 inputs. This amendment clarifies existing disclosure requirements for the level of
disaggregation used for classes of assets and liabilities measured at fair value and requires disclosure about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2
and Level 3 inputs. The Company has adopted this guidance and has provided the additional disclosures.
In April 2010, the FASB issued an
accounting standard update which provides guidance on the criteria to be followed in recognizing revenue under the milestone method. The milestone method of recognition allows a vendor who is involved with the provision of deliverables to recognize
the full amount of a milestone payment upon achievement, if, at the inception of the revenue arrangement, the milestone is determined to be substantive as defined in the standard. The Company adopted this standard effective in the first quarter of
2011 and does not believe the adoption will have a significant impact on its financial statements.
Basic net loss per share is
computed by dividing net loss attributed to common stockholders by the weighted-average number of common shares outstanding during the period, excluding shares subject to repurchase. The Companys potential dilutive shares, which include
outstanding common stock options and restricted stock units, unvested common shares subject to repurchase, convertible preferred stock and warrants, have not been included in the computation of diluted net loss per share for all the periods as the
result would be anti-dilutive. Such potentially dilutive shares are excluded when the effect would be to reduce the net loss per share.
F-14
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss
per share follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
Three months ended
March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands except share and per share amounts)
|
|
Historical net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(28,394
|
)
|
|
$
|
(35,949
|
)
|
|
$
|
(57,687
|
)
|
|
$
|
(14,336
|
)
|
|
$
|
(12,461
|
)
|
Deemed dividend related to beneficial conversion feature of Series E convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
(405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributed to common stockholders
|
|
$
|
(28,394
|
)
|
|
$
|
(35,949
|
)
|
|
$
|
(58,092
|
)
|
|
$
|
(14,336
|
)
|
|
$
|
(12,461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
92,549
|
|
|
|
94,242
|
|
|
|
4,271,176
|
|
|
|
280,283
|
|
|
|
25,959,929
|
|
Less: Weighted-average shares subject to repurchase
|
|
|
(15,676
|
)
|
|
|
(1,244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted net loss per share
|
|
|
76,873
|
|
|
|
92,998
|
|
|
|
4,271,176
|
|
|
|
280,283
|
|
|
|
25,959,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share attributed to common stockholders
|
|
$
|
(369.36
|
)
|
|
$
|
(386.56
|
)
|
|
$
|
(13.60
|
)
|
|
$
|
(51.15
|
)
|
|
$
|
(0.48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following outstanding shares of potentially dilutive securities were excluded from the computation of diluted net loss
per share for the periods presented because including them would have had an anti-dilutive effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Options to purchase common stock
|
|
|
105,920
|
|
|
|
1,535,469
|
|
|
|
2,869,747
|
|
|
|
2,430,287
|
|
|
|
2,875,125
|
|
Restricted stock units for common stock
|
|
|
|
|
|
|
|
|
|
|
27,500
|
|
|
|
|
|
|
|
27,500
|
|
Common stock subject to repurchase
|
|
|
7,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants to purchase convertible preferred stock
|
|
|
7,710
|
|
|
|
384,153
|
|
|
|
|
|
|
|
384,153
|
|
|
|
|
|
Warrants to purchase common stock
|
|
|
|
|
|
|
1,630,629
|
|
|
|
2,007,455
|
|
|
|
1,630,629
|
|
|
|
2,165,323
|
|
Convertible preferred stock (on an as-if converted basis)
|
|
|
3,222,674
|
|
|
|
9,186,728
|
|
|
|
|
|
|
|
10,533,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,343,769
|
|
|
|
12,736,979
|
|
|
|
4,904,702
|
|
|
|
14,978,559
|
|
|
|
5,067,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Fair value measurement
|
Assets and liabilities
recorded at fair value in the financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels which are directly related to the amount of subjectivity associated
with the inputs to the valuation of these assets or liabilities are as follows:
Level 1:
Observable inputs, such as quoted prices in
active markets for identical assets or liabilities.
Level 2:
Observable inputs, other than Level 1 prices, such as quoted prices for
similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3:
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or
liabilities.
F-15
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
The following table sets forth the Companys financial instruments that are measured at fair value
on a recurring basis and by level within the fair value hierarchy. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The
Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.
As of December 31, 2009, the Companys fair value hierarchy for its financial assets and financial liabilities that are carried at fair value
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
(in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market fund (included in Cash and cash equivalents)
|
|
$
|
6,120
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,120
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock warrant liability
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,553
|
|
|
$
|
1,553
|
|
As of December 31, 2010, the
Companys fair value hierarchy for its financial assets and financial liabilities that are carried at fair value was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
(in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market fund (included in Cash and cash equivalents)
|
|
$
|
50,623
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
50,623
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
282
|
|
|
$
|
282
|
|
As of March 31, 2011, the
Companys fair value hierarchy for its financial assets and financial liabilities that are carried at fair value was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
(in thousands)
(unaudited)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market fund (included in Cash and cash equivalents)
|
|
$
|
40,634
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
40,634
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
378
|
|
|
$
|
378
|
|
The Company valued its warrant
liabilities using the Black-Scholes option pricing model. The expected term for these warrants is based on the remaining contractual life of these warrants. The expected volatility assumption was determined by examining the historical volatility for
industry peers, as the Company did not have a sufficient trading history for its common stock. The risk-free interest rate assumption is based on U.S. Treasury investments whose term is consistent with the expected term of the warrants and
purchase rights. The expected dividend assumption is based on the Companys history and expectation of dividend payouts. Details of the assumptions are discussed in Note 11.
F-16
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
The change in the fair value of the convertible preferred stock warrant and purchase right liability is
summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Fair value at December 31, 2008
|
|
$
|
1,100
|
|
Issuance of convertible preferred stock warrants
|
|
|
1,541
|
|
Increase in the fair value recorded in interest and other income (expense), net
|
|
|
(1,088
|
)
|
|
|
|
|
|
Fair value at December 31, 2009
|
|
|
1,553
|
|
Issuance of convertible preferred stock purchase rights
|
|
|
2,666
|
|
Issuance of warrants to purchase common stock
|
|
|
282
|
|
Increase in the fair value of convertible preferred stock purchase rights recorded in interest and other income (expense),
net
|
|
|
7,211
|
|
Reclassification of value of convertible preferred stock purchase rights to additional paid-in capital upon
exercise
|
|
|
(9,153
|
)
|
Reclassification of value of convertible preferred stock warrants to additional paid-in capital upon initial public
offering
|
|
|
(2,277
|
)
|
|
|
|
|
|
Fair value at December 31, 2010
|
|
|
282
|
|
Increase in the fair value recorded in interest and other income (expense), net (unaudited)
|
|
|
96
|
|
|
|
|
|
|
Fair value at March 31, 2011 (unaudited)
|
|
$
|
378
|
|
|
|
|
|
|
The Company valued the convertible stock purchase rights using the Black-Scholes option pricing model. Details of stock
purchase rights are discussed in Note 8.
5.
|
Balance Sheet Components
|
Inventory
Inventory consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Raw materials
|
|
$
|
237
|
|
|
$
|
1,426
|
|
|
$
|
944
|
|
Work-in-progress
|
|
|
38
|
|
|
|
1,917
|
|
|
|
1,559
|
|
Finished goods
|
|
|
79
|
|
|
|
637
|
|
|
|
673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
354
|
|
|
$
|
3,980
|
|
|
$
|
3,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
Property and Equipment, Net
Property and equipment, net, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
(in thousands)
|
|
Computer equipment
|
|
$
|
5,107
|
|
|
$
|
7,519
|
|
|
$
|
7,688
|
|
Computer software
|
|
|
1,390
|
|
|
|
1,857
|
|
|
|
1,863
|
|
Furniture and fixtures
|
|
|
341
|
|
|
|
354
|
|
|
|
354
|
|
Machinery and equipment
|
|
|
7,612
|
|
|
|
19,362
|
|
|
|
20,402
|
|
Leasehold Improvements
|
|
|
6,064
|
|
|
|
7,024
|
|
|
|
7,301
|
|
Equipment under construction
|
|
|
1,451
|
|
|
|
37
|
|
|
|
1,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,965
|
|
|
|
36,153
|
|
|
|
39,110
|
|
Less: Accumulated depreciation and amortization
|
|
|
(7,101
|
)
|
|
|
(12,310
|
)
|
|
|
(14,854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,864
|
|
|
$
|
23,843
|
|
|
$
|
24,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the years ended December 31, 2008, 2009 and 2010 was $2.8 million, $5.2
million and $8.0 million, respectively. Depreciation and amortization expense for the three months ended March 31, 2010 and 2011 was $1.3 million and $2.5 million, respectively.
Accrued Liabilities
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
(in thousands)
|
|
Accrued professional fees
|
|
$
|
205
|
|
|
$
|
42
|
|
|
$
|
|
|
Accrued compensation and benefits
|
|
|
987
|
|
|
|
1,934
|
|
|
|
2,164
|
|
Accrued interest
|
|
|
69
|
|
|
|
|
|
|
|
|
|
Deferred rent, current
|
|
|
341
|
|
|
|
702
|
|
|
|
719
|
|
Warrants to purchase common stock
|
|
|
|
|
|
|
282
|
|
|
|
378
|
|
Other
|
|
|
430
|
|
|
|
142
|
|
|
|
527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,032
|
|
|
$
|
3,102
|
|
|
$
|
3,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Commitments and contingencies
|
Operating
Lease Obligations
In October 2007, the Company entered into an agreement for office facilities consisting of approximately 10,560
square feet under an operating lease, which began on January 1, 2008 and expired in December 2010. This agreement was amended and now expires in June 2011.
In October 2008, the Company entered into an agreement for office facilities consisting of approximately 66,096 square feet under an operating lease, which began on March 1, 2009 and expires in
August 2016.
The Company recognizes rent expense on a straight-line basis over the non-cancellable lease term and records the difference
between cash rent payments and the recognition of rent expense as a deferred rent liability. Where leases contain escalation clauses, rent abatements and/or concessions, such as rent holidays and landlord or tenant incentives or allowances, the
Company applies them in the determination of straight-line rent expense over the lease term. Rent expense for the years ended December 31, 2008, 2009 and 2010 was $0.9 million, $1.9 million and $2.0 million, respectively.
F-18
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
Future minimum lease payments under these non-cancellable operating leases as of December 31, 2010
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Years Ending December 31,
|
|
|
|
|
2011
|
|
$
|
2,599
|
|
2012
|
|
|
2,588
|
|
2013
|
|
|
2,668
|
|
2014
|
|
|
2,747
|
|
2015
|
|
|
2,826
|
|
Thereafter
|
|
|
1,936
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
15,364
|
|
|
|
|
|
|
Secured Equipment Loan Agreements
In July 2008, the Company entered into a secured equipment loan agreement (Loan) for $13.0 million with SVB, Leader Equity LLC and Oxford Finance Corporation. The Loan was drawn in four
tranches between July and December 2008. The interest rate for each tranche drawn under the Loan was set at the greater of 10.50% or the prime rate plus 8.03%, as determined at the time of the draw of each tranche. The interest rate on each of the
tranches under the Loan ranged between 10.50% and 11.04%. The Loan required a termination payment be made with the final loan payment under each tranche. The termination payment was 4% of each of the drawn tranche amounts, which caused the loans to
have effective interest rates ranging between 12.81% and 13.34%. Repayment of the Loan began one month after the first draw and continued for 36 equal monthly installments. In connection with the Loan, the Company issued warrants to purchase
the Companys Series D convertible preferred stock, which converted into warrants to purchase shares of the Companys common stock immediately prior to the consummation of the Companys IPO, as discussed in Note 8. The Company pledged
as collateral all property and equipment purchased pursuant to the Loan. There are no financial covenants in the Loan. At December 31, 2009, $8.0 million was outstanding under the loans. In connection with the term loans entered into with
Comerica and Atel on December 17, 2010, the amount outstanding under the Loan of $4.0 million was repaid. The Company also paid a prepayment penalty of $0.2 million which is recorded in interest expense.
Loan Agreements
On
December 17, 2010, the Company entered into loan and security agreements with each of Comerica Bank (Comerica) and Atel Ventures, Inc. (Atel). On March 25, 2011, the Company entered into a new loan and security
agreement with Oxford Finance Corporation (Oxford), a portion of the proceeds of which were used to repay the outstanding balance on the Comerica Loan Agreement (as defined below).
Comerica Loan Agreement
The loan and security
agreement with Comerica (the Comerica Loan Agreement) consists initially of a term loan of $8.0 million. A portion of the borrowings under the Comerica Loan Agreement was used to repay the outstanding balance of $4.0 million on the
Companys then existing secured equipment loan agreement with Silicon Valley Bank, Leader Equity LLC and Oxford Finance Corporation, including certain pre-payment expenses. The loan initially provided for repayment in 36 equal monthly payments
of principal and interest. Interest accrues on the term loan at a rate equal to the Prime Referenced Rate plus 3.25% per annum. The Prime Referenced Rate is equal to the prime rate established by Comerica plus 2.5% (but in no event shall the
Prime Referenced Rate be lower than the Daily Adjusting LIBOR Rate plus 2.5%). The interest rate at December 31, 2010 was 6.5%.
F-19
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
The Comerica Loan Agreement also required that the Company repay a minimum of $2.0 million of the term
loan and, at such time, the repaid balance of the term loan will automatically convert into a line of credit. The Company also had the ability to elect to repay up to the entire remaining term loan balance and convert up to the entire repaid balance
to a line of credit. Advances under the line of credit are limited to the lesser of (i) 80% of eligible domestic accounts receivable or (ii) the actual amount converted on April 1, 2011, up to $8.0 million. Amounts borrowed under the
line of credit were required to be repaid and reborrowed at any time prior to the October 1, 2012 maturity date, at which time all advances under the line of credit shall be due and payable. Outstanding borrowings under the line of credit incur
interest at a rate equal to the Prime Reference Rate plus 2.50% per annum. Upon conversion of a portion of the term loan to the line of credit, the remaining term loan balance that is not converted will be re-amortized and repaid in 32 equal
monthly payments of principal and interest.
Borrowings under the Comerica Loan Agreement were collateralized by a senior priority on all of
the Companys assets, excluding the Companys intellectual property and those assets securing borrowings under the Atel Loan Agreement (as defined below). In addition, the Company has agreed not to pledge its intellectual property to
another entity without Comericas approval or consent. The entire loan amount was paid off on March 25, 2011 when the Company entered into the Oxford Loan Agreement (discussed below).
Atel Loan Agreement
The loan and security agreement with Atel (the Atel Loan Agreement)
consists of a $6.0 million term loan for equipment purchases. Under the terms of the Atel Loan Agreement, the term loan balance is being repaid in 36 equal monthly payments of principal and interest. Interest accrues on the term loan at a rate of
11.26% per annum. The outstanding borrowings under the term loan are collateralized by a senior priority interest in certain of the Companys current property and equipment, and all property and equipment that is purchased during the term
of the Atel Loan Agreement.
In connection with the Atel Loan Agreement, the Company issued to Atel a warrant to purchase 49,834 shares of the
Companys common stock at an exercise price of $7.224 per share, as discussed in Note 10.
Future loan payments under the Comerica and
Atel loan agreements as of December 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Years Ending December 31,
|
|
|
|
|
2011
|
|
$
|
6,789
|
|
2012
|
|
|
4,442
|
|
2013
|
|
|
3,963
|
|
|
|
|
|
|
Total Payments
|
|
|
15,194
|
|
Less:
|
|
|
|
|
Interest expense
|
|
|
1,611
|
|
Unamortized portion of value of warrants issued in connection with Atel loan
|
|
|
282
|
|
|
|
|
|
|
Total principal payments
|
|
|
13,301
|
|
Less: notes payable, current
|
|
|
5,780
|
|
|
|
|
|
|
Notes payable, net of current
|
|
$
|
7,521
|
|
|
|
|
|
|
The Comerica Loan Agreement and Atel Loan Agreement each contain customary representations and warranties, covenants, closing
and advancing conditions, events of defaults and termination provisions by, among and for the benefit of the parties. The affirmative covenants include, among other things, that the Company maintain liability and other insurance and pledge security
interests in any ownership interest of a future subsidiary. The negative covenants preclude, among other things, disposing of certain assets, engaging in any
F-20
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
merger or acquisition, incurring additional indebtedness, encumbering any collateral, paying dividends or making prohibited investments, in each case, without the prior consent of Comerica and
Atel. The Comerica Loan Agreement also requires at any time the Companys total cash is greater than $10.0 million, the Company shall maintain its primary depository and operating accounts with Comerica. At any time when the Companys
total cash is less than $10.0 million, the Company shall maintain its depository and operating accounts with Comerica or its affiliates. As of December 31, 2010 and March 31, 2011, the Company was in compliance with all the covenants.
Oxford Loan Agreement
On March 25, 2011, the Company entered into a loan and security agreement (the Oxford Loan and Security Agreement) with Oxford Finance
Corporation (Oxford). The Oxford Loan Agreement provides for a term loan of $20.0 million. The outstanding balance of the term loan must be repaid in full by October 1, 2014 (the Maturity Date). Under the terms of the
Oxford Loan Agreement, the outstanding balance accrues interest at a rate of 9.80% per annum. Until May 1, 2012 (the Amortization Date), the Company is required to make monthly payments equal to the accrued interest on the
outstanding loan balance, and, following the Amortization Date through the Maturity Date the outstanding loan balance will be repaid in thirty (30) equal monthly payments of principal and interest.
As a condition to the Oxford Loan Agreement, a portion of the term loan was used to repay the remaining balance of $7.4 million on the Companys
existing loan agreement with Comerica. Following repayment of the outstanding indebtedness, the Loan and Security Agreement with Comerica was terminated. The remainder of the term loan will be used to fund the Companys working capital
requirements.
The term loan is secured by a senior priority on all of the Companys assets, excluding the Companys intellectual
property and those assets securing borrowings under the Loan and Security Agreement with Atel. In addition, the Company has agreed not to pledge its intellectual property to another entity without Oxfords approval or consent.
In connection with the entry into the Oxford Loan Agreement, the Company issued to Oxford warrants to purchase an aggregate of 160,128 shares of common
stock at an exercise price of $7.495 per share, as discussed in Note 10. The warrants expire on the seventh anniversary of the issuance date. The Company also agreed to provide Oxford certain registration rights covering the warrants.
The Oxford Loan Agreement contains customary representations and warranties, covenants, closing and advancing conditions, events of defaults and
termination provisions by, among and for the benefit of the parties. The affirmative covenants include, among other things, that the Company timely file taxes, maintain certain operating accounts subject to control agreements in favor of Oxford,
maintain liability and other insurance, and pledge security interests in any ownership interest of a future subsidiary. The negative covenants preclude, among other things, disposing of certain assets, engaging in any merger or acquisition,
incurring additional indebtedness, encumbering any collateral, paying dividends or making prohibited investments, in each case, without the prior consent of Oxford. The Oxford Loan Agreement provides that an event of default will occur if
(1) there is a material adverse change in the Companys business, operations or condition (financial or otherwise), (2) there is a material impairment in the prospects of the Company repaying any portion of its obligations under the
term loan, (3) there is a material impairment in the value of the collateral pledged to secure the Companys obligations under the agreement or in Oxfords perfection or priority over the collateral, (4) the Company defaults in
the payment of any amount payable under the agreement when due, or (5) the Company breaches any negative covenant or certain affirmative covenants in the agreement (subject to a grace period in some cases). The repayment of the term loan is
accelerated following the occurrence of an event of default or otherwise, requiring the Company to immediately pay to Oxford an amount equal to the sum of: (i) all
F-21
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
outstanding principal plus accrued but unpaid interest, (ii) the prepayment fee, (iii) the final payment, plus (iv) all other sums, that shall have become due and payable but have
not been paid, including interest at the default rate with respect to any past due amounts. As of March 31, 2011, the Company was in compliance with all the covenants.
The Company paid to Oxford an aggregate of approximately $100,000 in commitment fees in connection with the Oxford Loan Agreement. In connection with the entry into the Oxford Loan Agreement, the Company
and Atel amended the Atel Loan Agreement for certain technical and administrative amendments.
Promissory Notes
In April, May and June 2010, the Company issued promissory notes to certain of its existing investors for an aggregate principal amount of $22.1 million.
The principal amount of the promissory notes accrued interest at an annual rate of 8%. In the event that the Company issued shares of a new series of preferred stock with aggregate gross cash proceeds in excess of $17.0 million, the outstanding
principal and interest of the promissory notes would automatically convert into that series of preferred stock at the lowest price paid by any investor in the financing (not to exceed $7.56 per share). In August 2010, the promissory notes converted
into Series E convertible preferred stock, as discussed in Note 7. In connection with the issuance of the promissory notes, the Company issued warrants to purchase the Companys common stock to the purchasers of the promissory notes, as
discussed in Note 10.
Intellectual Property Agreement
In March 2006, the Company entered into an intellectual property agreement, as discussed in Note 12, with Callida Genomics, Inc. for licenses related to the Companys core technology. Under the
agreement, the Company will make annual payments of $250,000 for a duration of six years starting in March 2006.
Purchase Commitments
As of December 31, 2010, the Company had outstanding purchase commitments related to its data center and non-cancellable orders
for sequencing components of $5.9 million.
Contingencies
The Company is subject to claims and assessments from time to time in the ordinary course of business. The Companys management does not believe that any such matters, individually or in the
aggregate, will have a material adverse effect on the Companys business, financial condition, results of operations or cash flows.
Indemnification
In the normal
course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Companys exposure under these agreements is unknown because it involves
claims that may be made against the Company in the future, but that have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may
record charges in the future as a result of these indemnification obligations.
In accordance with its Certificate of Incorporation and bylaws,
the Company has indemnification obligations to its officers and directors for certain events or occurrences, subject to certain limits, while they are serving at the Companys request in such capacity. There have been no claims to date, and the
Company has director and officer insurance that enables it to recover a portion of any amounts paid for future potential claims.
F-22
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
Legal Proceedings
On August 3, 2010, a patent infringement lawsuit was filed against the Company by Illumina, Inc. and Solexa, Inc. (an entity acquired by Illumina) (the Plaintiffs), in the U.S District Court in
Delaware. The case caption is
llumina, Inc. and Solexa, Inc. v. Complete Genomics, Inc.
, Civil Action No. 10-649. The complaint alleges that the Companys Complete Genomics Analysis Platform, and in particular its combinatorial
probe anchor ligation technology, infringes upon three patents held by Illumina and Solexa. The Plaintiffs seek unspecified monetary damages and injunctive relief. If the Company is found to infringe one or more valid claims of a patent-in-suit and
if the district court grants an injunction, the Company may be forced to redesign portions of its sequencing process, seek a license or cease the infringing activity. On September 23, 2010, the Company filed its answer to the complaint as well
as its counterclaims against the plaintiffs. On November 9, 2010, the U.S. District Court in Delaware granted the Companys motion to transfer the case to the Northern District of California. On May 5, 2011, the Court entered a stipulated
order to dismiss two patents from the lawsuit. The dismissal is without prejudice but includes conditions on the ability to file lawsuits on these patents, including a limitation that Illumina may not re-file such lawsuits against the Company until
the later of (1) August 1, 2012, or (2) the exhaustion of all appeal rights in both (a) the pending reexaminations in the U.S. Patent and Trademark Office and (b) the pending civil litigation in which these patents are also asserted,
Life
Technologies Corp. v. Illumina
, Case No. 11-CV703 (S.D. Cal.). The Company believes it has substantial and meritorious defenses to these claims and intends to vigorously defend its position; however, a negative outcome in this matter could have
a material adverse effect on the Companys financial position, results of operations, cash flows and business. The Company is not currently able to estimate the potential loss, if any, that may result from this claim.
From time to time, the Company may become involved in other legal proceedings and claims arising in the ordinary course of its business. Other than as
described above, the Company is not currently a party to any legal proceedings the outcome of which, if determined adversely to the Company, would individually or in the aggregate have a material adverse effect on its business, operating results,
financial condition or cash flows.
The Companys Certificate of
Incorporation, as amended in November 2010, authorizes the Company to issue 5,000,000 shares of $0.001 par value preferred stock. There was no preferred stock issued or outstanding at December 31, 2010, and at March 31, 2011 (unaudited).
As of December 31, 2009, the convertible preferred stock consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
Shares
authorized
|
|
|
Shares
issued and
outstanding
|
|
|
Liquidation
amount
|
|
|
Proceeds,
net of
issuance
costs
|
|
|
|
|
|
(in thousands, except share amounts)
|
|
A
|
|
|
138,658
|
|
|
|
137,972
|
|
|
$
|
6,050
|
|
|
$
|
5,866
|
|
B
|
|
|
205,758
|
|
|
|
203,620
|
|
|
|
14,050
|
|
|
|
13,871
|
|
C
|
|
|
167,357
|
|
|
|
167,350
|
|
|
|
39,989
|
|
|
|
25,399
|
|
D
|
|
|
6,421,559
|
|
|
|
5,964,054
|
|
|
|
67,632
|
|
|
|
40,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,933,332
|
|
|
|
6,472,996
|
|
|
$
|
127,721
|
|
|
$
|
85,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In February and March 2010, the Company sold 1,346,762 shares of Series D convertible preferred stock at $7.56 per share to
existing investors for net proceeds of $9.9 million.
In August and September 2010, the Company sold 2,284,516 shares of Series E convertible
preferred stock at $7.56 per share to existing investors for net proceeds of $17.1 million. The shares sold in the Series E convertible preferred stock financing contained an embedded beneficial conversion feature which was measured as the
difference between the proceeds received from the sale of a share of Series E convertible preferred stock and the
F-23
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
value of a share of common stock. The beneficial conversion feature was valued at an aggregate of $0.4 million and recorded by the Company as a credit to additional paid-in capital. The
beneficial conversion feature was recognized on the date the Series E convertible preferred stock was issued as a result of the Series E convertible preferred stock being convertible at the election of the holder. In addition, in conjunction with
the Series E convertible preferred stock financing, the $22.6 million of principal and accrued interest on the Companys convertible promissory notes converted into 2,990,355 shares of Series E convertible preferred stock.
On October 6 and 14, 2010, the holders of the Series E convertible preferred stock purchase rights exercised their rights and purchased 1,398,580 and
238,730 shares of Series E convertible preferred stock, respectively, at $7.56 per share, as discussed Note 8.
The total gross proceeds
from the Series E financing, including the conversion of the convertible promissory notes and interest, were $52.3 million.
Each share of
Series A, B, C, D and E preferred stock was convertible, at the option of the holder, into that number of fully paid and nonassessable shares of common stock that is equal to $43.85, $69.00, $159.30, $7.56 and $7.56, respectively (as adjusted for
stock splits, combinations, reorganizations and the like), divided by the conversion price of $9.50, $11.64, $19.33, $7.56 and $7.56, respectively, (as adjusted for stock splits, combinations, reorganizations and the like).
On November 10, 2010, the holders of more than 60% of the outstanding convertible preferred stock agreed to the automatic conversion of each of the
outstanding shares of convertible preferred stock into 17,445,662 shares of common stock at the applicable conversion price effective immediately prior to the consummation of the Companys IPO.
8.
|
Warrants and Purchase Rights for Convertible Preferred Stock
|
As of December 31, 2009, the Company had the following unexercised warrants for convertible preferred stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Underlying Stock
|
|
Exercise
price per
share
|
|
|
Shares as of
December 31,
2009
|
|
|
Fair value as of
December 31,
2009
|
|
|
|
|
|
(in thousands, except share and per share amounts)
|
|
Series A
|
|
$
|
43.85
|
|
|
|
684
|
|
|
$
|
5
|
|
Series B
|
|
$
|
69.00
|
|
|
|
2,131
|
|
|
|
21
|
|
Series D
|
|
$
|
7.56
|
|
|
|
381,338
|
|
|
|
1,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
384,153
|
|
|
$
|
1,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, the outstanding warrants for convertible preferred stock were revalued using the Black-Scholes
option pricing model with the following assumptions: remaining contractual term ranging from 2.15 to 8.58 years; volatility ranging from 71.98% to 91.55%; 0% dividend rate; and a risk-free interest rate ranging from 1.38% to 3.33%.
As of December 31, 2010 and March 31, 2011, the Company had no warrants or purchase rights for convertible preferred stock outstanding.
Series A
In 2006, the Company
issued warrants to purchase 684 shares of Series A convertible preferred stock at an exercise price of $43.85 per share. These warrants were issued in connection with a secured equipment loan agreement with SVB. The initial fair value of the
warrants of $36,000 was recorded as a credit to warrant liability and a discount to the carrying value of the debt. The discount was fully amortized in 2008. Immediately prior to the consummation of Companys IPO, these convertible preferred
stock warrants converted to warrants for 3,156 shares of common stock with an exercise price of $9.50 per share.
F-24
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
Series B
In 2007, the Company issued warrants to purchase 393 shares of Series B convertible preferred stock at an exercise price of $69.00 per share. These warrants were issued in connection with promissory
notes. The initial fair value of the warrants of $25,000 was recorded as a credit to warrant liability and a discount to the carrying value of the debt. The discount on the debt was fully amortized to interest expense upon conversion of the debt in
2007. These warrants automatically expired immediately prior to the consummation of the Companys IPO.
In 2007, the Company issued
warrants to purchase 1,738 shares of Series B convertible preferred stock at an exercise price of $69.00 per share. These warrants were issued in connection with the August 2007 secured equipment loan with SVB and Gold Hill. The initial fair value
of the warrants of $172,000 was recorded as a credit to warrant liability and an issuance cost of the debt. The issuance cost of the debt was fully amortized in 2008. Immediately prior to the consummation of Companys IPO, these convertible
preferred stock warrants converted to warrants for 10,299 shares of common stock with an exercise price of $11.64 per share.
Series C
converted into Series D
In 2008, the Company issued warrants to purchase 4,895 shares of Series C convertible preferred stock at an
exercise price of $159.30 per share. These warrants were issued in connection with the July 2008 secured equipment loan. The exercise price and number of warrants were subject to change upon the closing of a Series D convertible preferred stock
financing agreement. In conjunction with the Series D convertible preferred stock financing in August 2009, the warrants became exercisable for Series D convertible preferred stock. The conversion resulted in warrants to purchase 103,173 shares of
Series D convertible preferred stock with an exercise price of $7.56. The initial fair value of the warrants of $0.8 million was recorded as a credit to warrant liability and an issuance cost of the debt. The issuance cost of the debt was amortized
to interest expense over the life of the debt. In 2010, 2009 and 2008, the Company had amortized debt issuance costs of $410,000, $259,000 and $108,000, respectively. For the period from June 14, 2005 (date of inception) to December 31,
2010, amortized debt issuance costs amounted to $0.8 million. Immediately prior to the consummation of the Companys IPO, the convertible preferred stock warrants converted to warrants for 103,173 shares of common stock with an exercise price
of $7.56 per share.
Series D
In 2009, the Company issued warrants to purchase 278,165 shares of Series D convertible preferred stock at an exercise price of $7.56 per share. These warrants were issued in connection with promissory
notes. The initial fair value of the warrants of $1.5 million was recorded as a credit to warrant liability and a discount to the carrying value of the promissory note. The discount on the promissory notes was amortized to interest expense over the
life of the debt in 2009. In August 2009, the discount was fully amortized upon the conversion of the promissory notes. These warrants automatically net exercised into shares of common stock immediately prior to the consummation of the
Companys IPO.
Series E
In August and September 2010, the Company issued purchase rights for an aggregate of 1,587,302 shares of Series E convertible preferred stock to the purchasers of its Series E convertible preferred stock.
The purchase rights allowed each holder to purchase a pro-rata portion of additional shares of Series E convertible preferred stock at $7.56 per share in the second and third closings of the Series E convertible preferred stock financing. Pursuant
to the terms of the Series E convertible preferred stock purchase agreement, the second and third closings must occur by December 31, 2010 and 2011, respectively, or an initial public offering, in each case whichever occurs earlier. The initial
value of the purchase rights was determined to be an aggregate of $2.7
F-25
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
million of which $1.5 million was recorded as a reduction to the net book value of the Series E convertible preferred stock issued upon conversion of the promissory notes in August 2010 and $1.1
million was recorded as a reduction to the net book value of the Series E convertible preferred stock sold for cash in August and September 2010. The initial valuation of the Series E purchase rights was calculated using the Black-Scholes option
pricing model with the following assumptions: contractual term ranging from 0.4 to 1.40 years; volatility ranging from 59.52% to 70.10%; 0% dividend rate; and a risk-free interest rate ranging from 0.19% to 0.25%.
On October 6, 2010, the Series E convertible preferred stock purchase agreement was amended to, among other matters, accelerate the timing of the
second and third closings and increase the number of shares to be sold during these closings to an aggregate of 1,637,310 shares. Subsequently, on October 6 and 14, 2010, the holders of the Series E convertible preferred stock purchase rights
exercised their rights and purchased 1,398,580 and 238,730 shares of Series E convertible preferred stock, respectively, at $7.56 per share for total gross proceeds of $12.4 million. Upon exercise of the Series E convertible preferred stock purchase
rights, the Company reclassified the value of these rights to preferred stock.
The Companys Certificate of
Incorporation, as amended in November 2010, authorizes the Company to issue 300,000,000 shares of $0.001 par value common stock.
On
March 10, 2010, the Company granted 786,533 shares of common stock to its founders. The Company recorded the common stocks fair value of $1.8 million as an expense, of which $0.9 million was recorded in general and administrative expense
and $0.9 million in research and development expense.
On November 16, 2010, the Company closed its IPO of 6,000,000 shares of common
stock at an offering price of $9.00 per share, resulting in net proceeds of approximately $47.2 million, after deducting underwriting discounts, commissions and offering expenses. Immediately prior to the consummation of the Companys IPO, all
outstanding shares of preferred stock were converted into common stock, and the associated liquidation preference rights were terminated. In addition, certain of the Companys outstanding preferred and common stock warrants were automatically
exercised on a net basis and the remaining outstanding convertible preferred stock warrants automatically converted into warrants to purchase 116,628 shares of common stock, as discussed in Note 8.
10.
|
Warrants for Common Stock
|
On August 12, 2009,
the Company issued warrants to purchase 1,630,629 shares of common stock at an exercise price of $1.50 per share. These warrants were issued in connection with the Companys Series D convertible preferred stock offering. The initial fair value
of the warrants was calculated using the Black-Scholes option pricing model with the following assumptions: seven-year contractual term; 105.56% volatility; 0% dividend rate; and a risk-free interest rate of 3.21%. The fair value of $2.0 million was
allocated to the warrants and recorded as a credit to additional paid-in capital and as a reduction of the proceeds from Series D convertible preferred stock. During November 2010, warrants for 405,542 shares were exercised for cash. Immediately
prior to the consummation of the Companys IPO, the remaining outstanding warrants were exercised on a net basis into shares of common stock.
In connection with the issuance of promissory notes in the second and third quarters of 2010, the Company issued warrants to purchase a number of shares of common stock equal to the product of 5% of the
principal amount of the promissory notes and the number of months between the date of issuance of the warrant and the date of the next financing (up to five months), divided by $1.50. Consequently, contingent warrants to purchase up to an aggregate
of 3,707,130 shares of common stock were issued (assuming the full five months). The warrants have an exercise price of $1.50 per share and expire upon the fifth anniversary of their issuance date
F-26
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
which is the same date as the issue date of the relevant promissory notes. The initial value of the contingent warrants was calculated using the Black-Scholes option pricing model with the
following assumptions: five-year contractual term; volatility ranging from 80.87% to 81.43%; 0% dividend rate; and a risk-free interest rate ranging from 1.76% to 2.58%. The fair value of the contingent warrants in the amount of $5.4 million was
recorded as a credit to additional paid-in capital and as a discount on the proceeds of the promissory notes. The fair value of the warrants was being amortized to interest expense using the effective interest rate method over the term of the
promissory notes. On August 6, 2010, upon conversion of the promissory notes into Series E convertible preferred stock, the remaining value of the debt discount of $4.5 million was recorded as an issuance cost of the Series E convertible
preferred stock. In connection with the conversion of the promissory notes into Series E convertible preferred stock, the Company determined the actual number of shares of common stock underlying the warrants previously contingently exercisable to
be 1,848,849 shares. During November 2010, warrants for 7,856 shares were exercised for cash. As of December 31, 2010, warrants for 1,840,993 shares of common stock remain outstanding.
During August and September 2010, each investor in Series E convertible preferred stock received common stock warrants for 25% of the number of shares of Series E convertible preferred stock purchased by
each investor. Contingent warrants to purchase an aggregate of 1,318,719 shares of common stock were issued. The warrants had an exercise price of $2.69 per share and were to expire on the fifth anniversary of their issuance date, which was the
Series E convertible preferred stock purchase date, if not terminated earlier. The warrants were exercisable only if the Company failed to ship genomic data for at least 369 genomes between May 1, 2010 and September 30, 2010. The initial
value of the contingent warrants was calculated using the Black-Scholes option pricing model with the following assumptions: five-year contractual term; volatility ranging from 80.71% to 80.87%; 0% dividend rate; and a risk-free interest rate
ranging from 1.41% to 1.51%. The value of the warrants was determined to be $2.0 million of which $1.1 million was recorded as a reduction of the net book value of the Series E convertible preferred stock issued upon conversion of the promissory
notes in August 2010 and $0.9 million was recorded as a reduction of the net book value of the Series E convertible preferred stock sold for cash in August and September 2010. On September 29, 2010, the Companys Board determined that the
Company had shipped genomic data for at least 369 genomes between May 1, 2010 and September 30, 2010. Pursuant to their terms the warrants were subsequently terminated and are no longer outstanding as of December 31, 2010.
On November 16, 2010, certain of the Companys outstanding convertible preferred stock warrants automatically converted into warrants to
purchase 116,628 shares of common stock, as discussed in Note 8.
In December 2010, the Company issued a warrant to purchase 49,834 shares of
common stock at an exercise price of $7.224 per share in connection with the Atel Loan Agreement. The warrant expires on the tenth anniversary of its issuance date. The initial fair value of the warrant was calculated using the Black-Scholes option
pricing model with the following assumptions: 10-year contractual term; 76.2% volatility; 0% dividend rate; and a risk-free interest rate of 3.33%. The value of the warrant was determined to be $282,000 and was recorded as liability and a discount
to the carrying value of the loan. The value of the warrant was recorded as a liability due to certain mandatory redemption features at the option of the holder. The discount is being amortized to interest expense using the effective interest rate
method over the three-year term of the loan. These warrants will be marked to market each reporting period and the fair value will be impacted in part by the change in the Companys stock price, among other factors.
In March 2011, the Company issued a warrant to purchase 160,128 shares of common stock at an exercise price of $7.494 per share in connection with the
Oxford Loan Agreement. The warrant expires on the seventh anniversary of its issuance date. The initial fair value of the warrant was calculated using the Black-Scholes option pricing model with the following assumptions: seven year contractual
term; 75.01% volatility; 0% dividend rate; and a risk-free interest rate of 2.87%. The fair value of the warrant was determined to be $987,000
F-27
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
and was recorded as equity in additional paid-in capital and a discount to the carrying value of the loan. The discount is being amortized to interest expense using the effective interest rate
method over the 42-month term of the loan.
In 2006, the Company adopted the
2006 Equity Incentive Plan (the 2006 Plan) which provides for the granting of stock options to employees, directors and consultants of the Company. In September 2010, the Board approved the 2010 Equity Incentive Award Plan (the
2010 Plan) and the Employee Stock Purchase Plan (the ESPP), and in October 2010, the Companys stockholders approved the 2010 Plan and ESPP. The 2006 Plan was terminated and no further stock awards will be granted out of
the 2006 Plan as of the effectiveness of the 2010 Plan. Outstanding stock options granted under the 2006 Plan will continue to be governed by the provisions of the 2006 Plan until the earlier of the stock options expiration or exercise.
Equity Incentive Awards
The 2010 Plan has a reserve of 2,450,000 shares. In addition to the shares currently reserved under the 2010 Plan, the shares available under the 2006 Plan as of the 2010 Plans effective date, which
was 655,394 shares, were added to the 2010 Plan reserve. Upon cancellation of any options outstanding under the 2006 Plan, subsequent to the 2010 Plans effective date, the shares underlying such options will also be added to the 2010 Plan
reserve. On the first day of each year, beginning in 2011 and ending in 2020, the 2010 Plan reserve will be increased by the lesser of (i) 7,000,000 shares, (ii) 4% of the shares of common stock outstanding on the last date of the
preceding year and (iii) such smaller number of shares of common stock as determined by the Board. Notwithstanding the foregoing, no more than 75,907,243 shares of common stock may be issued upon the exercise of incentive stock options under
the 2010 Plan. The number of shares reserved under the 2010 Plan increased by 1,036,905 shares (unaudited), effective January 1, 2011. As of December 31, 2010 and March 31, 2011, there were 2,971,894 and 3,938,944 (unaudited) shares,
respectively, available to be granted under the 2010 Plan.
Under the 2010 Plan, the Board, or a committee of the Board, may grant incentive
and nonqualified stock options, stock appreciation rights, restricted stock units, or restricted stock awards to employees, directors and consultants to the Company or any subsidiary of the Company. The purpose of the 2010 Plan is to promote the
success and enhance the value of the Company by linking the personal interests of the members of the Board, employees and consultants to those of Company stockholders and by providing such individuals with an incentive for outstanding performance to
generate superior returns to Company stockholders.
Under both the 2006 and 2010 Plans, options to purchase the Companys common stock may
be granted at a price not less than the fair market value (FMV) on the grant date, except for an incentive stock option grant to an employee who owns more than 10% of the voting power of all classes of stock of the Company, in which case
the exercise price shall be no less than 110% of the FMV per share on the grant date. The Company has historically granted options that vest over a four-year period. Options expire as determined by the Board of Directors, but not more than ten years
after the date of grant.
F-28
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
The following table summarizes stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
Aggregate
intrinsic
value
|
|
|
Weighted
average
remaining
contractual
life (years)
|
|
|
|
Number of
shares
|
|
|
Weighted
average
exercise
price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
1,535,469
|
|
|
$
|
3.47
|
|
|
$
|
754
|
|
|
|
|
|
Options granted
|
|
|
1,650,195
|
|
|
|
2.68
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(117,359
|
)
|
|
|
1.50
|
|
|
|
280
|
|
|
|
|
|
Options forfeited
|
|
|
(76,687
|
)
|
|
|
1.50
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
(121,871
|
)
|
|
|
1.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
2,869,747
|
|
|
|
2.19
|
|
|
|
15,166
|
|
|
|
9.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest
|
|
|
2,619,459
|
|
|
|
2.18
|
|
|
|
13,885
|
|
|
|
9.03
|
|
Options vested and exercisable
|
|
|
996,495
|
|
|
$
|
1.57
|
|
|
$
|
6,669
|
|
|
|
8.66
|
|
Valuation of Stock Option
Grants to Employees
The Company estimates the fair value of its stock options to employees on the grant date, using the Black-Scholes
option valuation model. The fair value of employee stock options is being amortized on a straight-line basis over the requisite service period of the awards. The fair value of employee stock options was estimated using the following assumptions:
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2009
|
|
2010
|
Expected term
|
|
5.3 - 6.1 years
|
|
5.5 years
|
Expected volatility
|
|
74.0 - 92.4%
|
|
79.0 - 80.8%
|
Expected dividend rate
|
|
0%
|
|
0%
|
Risk-free interest rate
|
|
1.8 - 2.7%
|
|
1.5 - 2.8%
|
Risk-Free Interest
Rate:
The Company determined the risk-free interest rate by using a weighted average assumption equivalent to the expected term based on the U.S. Treasury constant maturity rate as of the date of grant.
Expected Volatility:
Prior to the consummation of its IPO on November 16, 2010, the Company determined its future stock
price volatility based on the average historical stock price volatility of comparable peer companies. After the consummation of its IPO, the Company used a blend of the historical stock price volatility of comparable peer companies and the
historical stock price volatility of the Companys own common stock.
Expected Term:
Due to the limited
exercise history of the Companys own stock options, the Company determined the expected term based on the term used by companies that are in a similar industry and life cycle and have comparable revenue and market capitalization.
Expected Dividend Rate:
The Company has not paid and does not anticipate paying any dividends in the near future.
Restricted Stock Units
During the fourth quarter of 2010, the Company granted 27,500 restricted stock units to members of its board of directors. The weighted-average grant date
fair value of the restricted stock units is $7.75 per share. The restricted stock units vest annually over three years. None had vested as of December 31, 2010 or March 31, 2011 (unaudited). During the three months ended March 31, 2010 and
2011, the Company did not grant any restricted stock units.
F-29
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
Valuation of Stock Option Grants to Nonemployees
Total options outstanding as of December 31, 2010 include 88,987 options that were granted to nonemployees, of which 13,421 options were unvested.
The Company mainly grants stock options to nonemployees on its scientific advisory board. Stock based compensation expense related to stock options granted to nonemployees is recognized as the stock option is earned. The Company believes that the
estimated fair value of the stock options is more readily measurable than the fair value of the services rendered. The fair value of the stock options granted to nonemployees is calculated at each reporting date using the Black-Scholes options
pricing model with the following assumptions:
|
|
|
|
|
|
|
December 31,
|
|
|
2009
|
|
2010
|
Remaining contractual term
|
|
6.5 10 years
|
|
6.9 9.7 years
|
Expected volatility
|
|
104.2 - 111.5%
|
|
75.5 - 76.6%
|
Expected dividends
|
|
0%
|
|
0 %
|
Risk-free interest rate
|
|
2.8 - 3.4%
|
|
1.8 - 3.2%
|
Compensation
Expense
The Company granted stock options to employees and nonemployees to purchase common stock as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
|
Three months ended
March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands, except share and per share amounts)
|
|
Number of options granted to nonemployees
|
|
|
|
|
|
|
155,711
|
|
|
|
37,500
|
|
|
|
|
|
|
|
|
|
Number of options granted to employees
|
|
|
38,090
|
|
|
|
1,307,910
|
|
|
|
1,612,695
|
|
|
|
915,189
|
|
|
|
103,700
|
|
Weighted-average grant date fair value per share of options granted to employees
|
|
$
|
42.60
|
|
|
$
|
1.70
|
|
|
$
|
2.15
|
|
|
$
|
1.70
|
|
|
$
|
4.99
|
|
Total fair value of options granted to employees which vested
|
|
$
|
201
|
|
|
$
|
898
|
|
|
$
|
749
|
|
|
$
|
177
|
|
|
$
|
309
|
|
The following table summarizes the
stock-based compensation expense from stock option and restricted stock unit grants to employees and nonemployees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
|
Three months ended
March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Employee grants
|
|
$
|
284
|
|
|
$
|
1,142
|
|
|
$
|
1,630
|
|
|
$
|
473
|
|
|
$
|
476
|
|
Nonemployee grants
|
|
|
52
|
|
|
|
268
|
|
|
|
121
|
|
|
|
21
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total compensation expense
|
|
$
|
336
|
|
|
$
|
1,410
|
|
|
$
|
1,751
|
|
|
$
|
494
|
|
|
$
|
540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, the Company had unrecognized stock-based compensation expense related to unvested stock
options and restricted stock units granted to employees of $3.7 million, which is expected to be recognized over the remaining weighted-average vesting period of 2.8 years. As of March 31, 2011, the Company had unrecognized stock-based
compensation expense related to unvested stock options and restricted stock units granted to employees of $3.9 million (unaudited), which is expected to be recognized over the remaining weighted-average vesting period of 2.8 years (unaudited).
F-30
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
Stock Option Modifications
In December 2009, the Company modified the vesting schedule of 731,944 options originally granted in November 2009 to approximately 100 employees. The modification did not change the number of options
granted, and it did not have a significant impact on the compensation expense recognized in the statement of operations for the year ended December 31, 2009.
In January 2010, the Company modified stock options to purchase 85,477 shares of the Companys common stock held by 106 employees and consultants. The modification did not change any of the other
terms or conditions of the options, and it did not have a significant impact on the compensation expense recognized in the statement of operations for the year ended December 31, 2010.
Employee Stock Purchase Plan
The 2010 ESPP became effective on November 16,
2010 and has a reserve of 750,000 shares of common stock for issuance thereunder. On the first day of each year, beginning in 2011 and ending in 2020, the ESPP reserve will be increased by the lesser of (i) 2,800,000 shares, (ii) 2% of the
shares of common stock outstanding on the last day of the preceding year or (iii) such other number as is determined by the Board. Notwithstanding the foregoing, the reserve may not exceed 28,750,000 shares. Subject to certain limitations, the
Companys employees may elect to have 1% to 15% of their compensation withheld through payroll deductions to purchase shares of common stock under the ESPP. Employees purchase shares of common stock at a price per share equal to 85% of the
lower of the fair market value at the start or end of the six-month offering period. The first offering period under the 2010 ESPP will start May 15, 2011. The number of shares reserved for issuance under the ESPP increased by 518,452 shares
(unaudited) effective January 1, 2011. As of December 31, 2010 and March 31, 2011, 750,000 and 1,268,452 (unaudited) shares, respectively, of common stock are available for issuance under the ESPP.
12.
|
Related Party Transactions
|
On March 28, 2006,
the Company entered into an intellectual property license agreement (the Agreement) with Callida Genomics Inc. (Callida), a company owned by the Companys Chief Scientific Officer, for use of certain patents, patent
applications, know-how and other intellectual property relating to the Companys core technology. As consideration for the rights and licenses granted in this agreement, the Company issued 13,333 shares of common stock to Callida on
March 28, 2006, which was recorded at its fair market value as research and development expense. The Company agreed to pay Callida a cash payment of $250,000 on a yearly basis until the earlier of: (i) six years from the date of the
agreement of March 28, 2006, (ii) a sale, or other similar liquidity event, of Callida, for consideration equal to, or exceeding, $2.0 million, (iii) the registration, listing and trading of the Companys securities on an
established stock exchange or national market system or (iv) the fair market value of the common shares issued to Callida becoming equal to, or exceeding, $2.0 million. The agreement also required the Company to pay Callida a cash payment of
$1.0 million, which was paid in November 2008 and was recorded as a research and development expense. Additionally, the Company reimbursed Callida $50,000 for the cost of patent prosecution incurred through the date of the agreement.
The intellectual property license agreement with Callida includes several termination provisions, including: any time after 15 months
from the contract date until the expiration of the contract term the Company may terminate the agreement for any reason, or no reason, by giving Callida written notice of termination. Upon termination of this Agreement, the Companys obligation
to make any further payments, including those referred to in the paragraph above, and the Companys right to use any items covered in the license agreement, are both cancelled.
During the years ended December 31, 2008, 2009 and 2010, the aggregate expenses under the license agreement recorded in research and development expense were $1.3 million , $250,000 and $250,000,
respectively. In 2011,
F-31
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
the Company exited the development stage. Accordingly, the $250,000 licensing payment made in March 2011 is recorded as intangible assets in Other Assets. The intangible assets have an estimated
useful life of five years and as of March 31, 2011, there was no accumulated amortization recorded.
On February 21, 2007, the
Company entered into promissory notes with entities affiliated with OVP Partners and Enterprise Partners (existing investors). The borrowing was for an aggregate principal amount of up to $2,000,000, plus simple interest on the outstanding principal
amount, at the annual rate of 6%. The Company drew down on the notes for a total of $1,000,000 during the year ended December 31, 2007. The outstanding balance plus interest on the balance was converted into Series B convertible preferred
stock during 2007. In connection with the notes, the Company issued warrants to purchase shares of the Companys Series B convertible preferred stock as discussed in Note 8.
In November 2007, the Company entered into a consulting agreement with Snezana Drmanac, the wife of Dr. Drmanac, the Companys Chief Scientific Officer and one of its founders. Mrs. Drmanac
provides research and development services related to the Companys sequencing technology as an independent contractor. Mrs. Drmanac is compensated at a rate of $150 per hour for her services. In 2008, 2009 and 2010, Mrs. Drmanac was
a paid a total of approximately $177,000, $150,000 and $151,000, respectively, for her services pursuant to the consulting agreement. The consulting agreement is for a term of five years and can be terminated by either party with ten days written
notice.
On February 13, 2009, the Company entered into promissory notes with various holders of the Companys preferred stock. The
borrowings were for an aggregate principal amount of up to $14.7 million, plus simple interest on the outstanding principal amount, at the annual rate of 8%. The Company drew down on the notes for the full principal amount during 2009. The
outstanding balance plus interest on the balance was converted into Series D convertible preferred stock during 2009. In connection with the notes, the Company issued warrants to purchase shares of the Companys Series D convertible preferred
stock as discussed in Note 8.
The Company has not recorded any
income tax expense for the years ended December 31, 2008, 2009 and 2010 due to its history of operating losses. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
13,370
|
|
|
$
|
23,797
|
|
|
$
|
43,164
|
|
Research and development credits
|
|
|
1,484
|
|
|
|
2,406
|
|
|
|
2,912
|
|
Capitalized start-up costs
|
|
|
4,071
|
|
|
|
4,119
|
|
|
|
3,467
|
|
Accruals and reserves
|
|
|
221
|
|
|
|
2,347
|
|
|
|
2,546
|
|
Fixed assets and depreciation
|
|
|
143
|
|
|
|
261
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
19,289
|
|
|
|
32,930
|
|
|
|
52,340
|
|
Valuation allowance
|
|
|
(19,289
|
)
|
|
|
(32,930
|
)
|
|
|
(52,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has established a full valuation allowance against its deferred tax assets due to the uncertainty surrounding
realization of these assets. The valuation allowance increased $12.1 million, $13.6 million and $19.4 million during the years ended December 31, 2008, 2009 and 2010, respectively.
As of December 31, 2010, the Company had net operating loss carryforwards of approximately $108.5 million and $107.7 million available to reduce future taxable income, if any, for federal and
California state income tax
F-32
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
purposes, respectively. The federal net operating loss carryforward begins expiring in 2026, if not utilized, and the state net operating loss carryforward begins expiring in 2016, if not
utilized. The net operating loss related deferred tax assets do not include excess tax benefits from employee stock option exercises.
As of
December 31, 2010, the Company had research and development credit carryforwards of approximately $2.4 million and $2.7 million available to reduce taxable income, if any, for federal and California state income tax purposes, respectively. The
federal credit carryforwards begin expiring in 2026, and the state credit carryforwards do not expire. Because of net operating loss and credit carryforwards, all of the Companys tax years, dating to inception in 2005 remain open to federal
tax examinations. Most state jurisdictions have four open tax years at any point in time.
Utilization of net operating loss and tax credit
carryforwards is subject to ownership change rules as provided under the Internal Revenue Code and similar state provisions. The Company has performed an analysis to determine whether an ownership change has occurred from inception to
December 31, 2010. The analysis has determined that two ownership changes have occurred during that period. Due to the ownership changes, the utilization of these net operating losses and research credits are subject to annual limitation.
However, the Company believes that as of December 31, 2010, no net operating losses or research and development credits will expire before utilization due to these ownership changes. In the event the Company has a subsequent change in
ownership, net operating loss and research and development credit carryovers could be further limited and may expire unutilized.
Effective
January 1, 2007, the Company adopted the provisions of the FASBs guidance on accounting for uncertainty in income taxes. These provisions provide a comprehensive model for the recognition, measurement and disclosure in financial
statements of uncertain income tax position that a company has taken or expects to take on a tax return. Under these provisions, a company can recognize the benefit of an income tax position only if it is more likely than not (greater than 50%) that
the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit can be recognized. Assessing an uncertain tax position begins with the initial determination of the
sustainability if the position and is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed.
Additionally, companies are required to accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. The cumulative effect of this adoption is recorded
as an adjustment to the opening balance of its retained deficit on the adoption date.
As a result of the implementation of these provisions,
the Company recognized a $40,000 increase in its unrecognized tax benefits. There was no increase in the January 1, 2007 balance of retained deficit since the benefit relates to attribute carryovers for which the related deferred tax asset was
subject to a full valuation allowance. At the adoption date of January 1, 2007 and as of December 31, 2010, the Company had no accrued interest or penalties related to the tax contingencies. Since the unrecognized tax benefit relates to
attribute carryovers for which the related deferred tax asset was subject to a full valuation allowance, the recognition of the unrecognized tax benefits will not affect the Companys effective tax rate. The Company has elected to include
interest and penalties as a component of tax expense. The Company does not anticipate that the amount of unrecognized tax benefits relating to tax positions existing at December 31, 2010 will significantly increase or decrease within the next
12 months.
F-33
Complete Genomics, Inc.
Notes to Financial Statements(Continued)
The aggregate changes in the balance of gross unrecognized tax benefits
were as follows:
|
|
|
|
|
|
|
(in thousands)
|
|
January 1, 2007
|
|
$
|
40
|
|
Increases in balances related to tax positions taken during the current period
|
|
|
164
|
|
|
|
|
|
|
December 31, 2007
|
|
|
204
|
|
Increases in balances related to tax positions taken during the current period
|
|
|
395
|
|
|
|
|
|
|
December 31, 2008
|
|
|
599
|
|
Increases in balances related to tax positions taken during the current period
|
|
|
370
|
|
|
|
|
|
|
December 31, 2009
|
|
|
969
|
|
Increases in balances related to tax positions taken during the current period
|
|
|
300
|
|
|
|
|
|
|
December 31, 2010
|
|
$
|
1,269
|
|
|
|
|
|
|
14.
|
Subsequent Events (unaudited)
|
On May 5, 2011, the
Companys Board of Directors approved the filing of a Registration Statement on Form S-1 with the Securities and Exchange Commission.
F-34
Part II
Information not required in prospectus
Item 13. Other Expenses of Issuance and Distribution
The expenses relating to the registration of the shares of common stock being offered hereby, other than underwriting discounts and
commissions, will be borne by us. Such expenses are estimated to be as follows:
|
|
|
|
|
|
|
Amount to
be Paid
|
|
Securities and Exchange Commission registration fee
|
|
$
|
8,631
|
|
FINRA filing fee
|
|
|
7,934
|
|
NASDAQ Global Market listing fee
|
|
|
51,750
|
|
Blue Sky fees and expenses
|
|
|
5,000
|
|
Printing and engraving expenses
|
|
|
100,000
|
|
Legal fees and expenses
|
|
|
350,000
|
|
Accounting fees and expenses
|
|
|
150,000
|
|
Transfer Agent and Registrar fees
|
|
|
5,000
|
|
Miscellaneous expenses
|
|
|
221,685
|
|
|
|
|
|
|
Total
|
|
$
|
900,000
|
|
|
|
|
|
|
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify its directors and officers from certain expenses in connection with legal proceedings and permits a
corporation to include in its charter documents, and in agreements between the corporation and its directors and officers, provisions expanding the scope of indemnification beyond that specifically provided by this section.
The Registrants amended and restated certificate of incorporation provides for the indemnification of directors to the fullest extent permissible
under Delaware law.
The Registrants amended and restated bylaws provide for the indemnification of officers, directors and third parties
acting on the Registrants behalf if such persons act in good faith and in a manner reasonably believed to be in and not opposed to the Registrants best interest, and, with respect to any criminal action or proceeding, such indemnified
party had no reason to believe his or her conduct was unlawful.
The Registrant is entering into indemnification agreements with each of its
directors and executive officers, in addition to the indemnification provisions provided for in its charter documents, and the Registrant intends to enter into indemnification agreements with any new directors and executive officers in the future.
The underwriting agreement (filed as Exhibit 1.1 hereto) will provide for indemnification by the underwriters of the Registrant and the
Registrants executive officers and directors, and indemnification of the underwriters by the Registrant, for certain liabilities, including liabilities arising under the Securities Act of 1933, as amended, in connection with matters
specifically provided in writing by the underwriters for inclusion in the registration statement.
The Registrant intends to purchase and
maintain insurance on behalf of any person who is or was a director or officer against any loss arising from any claim asserted against him or her and incurred by him or her in that capacity, subject to certain exclusions and limits of the amount of
coverage.
II-1
Item 15. Recent Sales of Unregistered Securities
The following information sets forth information regarding all unregistered securities sold by the Registrant since January 1, 2008 and give effect to the 1:30 reverse stock split effected in
November 2009:
1.
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In February 2008 and March 2008, in a series of closings, the Registrant issued and sold an aggregate of 167,350 shares of its Series C preferred stock at a price of
$159.30 per share, for aggregate gross consideration of $26.7 million, to eleven accredited investors.
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2.
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In July 2008, the Registrant issued warrants to purchase an aggregate of 4,895 shares of Series C preferred stock at an exercise price of $159.30 per share, which were
subsequently converted in August 2009 into warrants to purchase an aggregate of 103,173 shares of Series D preferred stock at an exercise price of $7.56 per share, to financial institution lenders in connection with the entry into a credit
facility. The warrants may be exercised at any time prior to their termination dates, which are ten years from the date of issuance.
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3.
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In February 2009 through August 2009, in a series of closings, the Registrant issued warrants to purchase an aggregate of 278,165 shares of its Series D preferred stock
at an exercise price of $7.56 per share to nine accredited investors in connection with a bridge loan financing. The warrants may be exercised at any time prior to their terminate dates, which are five years from the date of issuance.
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4.
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In August 2009, the Registrant issued and sold an aggregate of 5,964,054 shares of its Series D preferred stock at a price of $7.56 per share for a combination of cash
and conversion of $15.05 million in convertible debt, for aggregate gross consideration of $45.1 million, to fourteen accredited investors, and issued warrants to purchase an aggregate of 1,630,629 shares of its common stock at an exercise price of
$1.50 per share to six accredited investors each of which also purchased Series D preferred stock.
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5.
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In February 2010 and March 2010, in a series of closings, the Registrant issued and sold an aggregate of 1,346,762 shares of its Series D preferred stock at price of
$7.56 per share, for aggregate gross consideration of $10.2 million, to nineteen accredited investors.
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6.
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In March 2010, the Registrant issued and sold an aggregate of 786,533 shares of its common stock at a price of $1.50 per share, for aggregate gross consideration of
$1.18 million, to three of its executive officers: R. John Curson, Radoje Drmanac, Ph.D. and Clifford A. Reid, Ph.D. Each of the executives purchased with and holds their respective shares in the name of a trust.
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7.
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From April 2010 through August 2010, in a series of closings, the Registrant issued and sold an aggregate of $22,242,892 in principal amount of convertible notes
and warrants to purchase an aggregate of 1,848,849 shares of its common stock at an exercise price of $1.50 per share to 20 accredited investors. The warrants may be exercised at any time prior to their termination dates, which are five
years from the date of issuance.
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8.
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In August, September and October 2010, in a series of closings, the Registrant issued and sold an aggregate of 6,912,181 shares of its Series E preferred stock at
a price of $7.56 per share for a combination of cash and the conversion of $22.6 million in convertible debt and accrued interest, for aggregate gross consideration of $52.3 million, to 21 accredited investors, and issued warrants to
purchase an aggregate of 1,318,719 shares of its common stock at an exercise price of $2.69. The warrants issued in connection with the Series E preferred stock financing were subsequently terminated and are no longer outstanding as of
September 30, 2010.
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9.
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From January 1, 2008 through November 17, 2010, the Registrant has granted stock options to purchase 3,151,383 shares of its common stock at exercise prices
ranging from $1.50 to $76.20 per share to a total of 207 employees, consultants and directors under its 2006 Equity Incentive Plan.
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10.
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From January 1, 2008 through November 17, 2010, the Registrant has issued and sold an aggregate of 110,769 shares of its common stock to employees and
consultants at prices ranging from $1.50 to $35.40 per share pursuant to the exercise of options granted under its 2006 Equity Incentive Plan.
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II-2
11.
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In November 2010, the Registrant issued an aggregate of 413,398 shares of its common stock to two accredited investors pursuant to the exercise of warrants to purchase
the Registrants common stock, each with an exercise price of $1.50 per share, for total cash proceeds of $620,097.
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12.
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In November 2010, the Registrant issued an aggregate of 1,225,087 shares of its common stock to five accredited investors pursuant to the cashless net exercise of
warrants to purchase the Registrants common stock in connection with its initial public offering pursuant to the terms of the warrants, each with an exercise price of $1.50 per share.
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13.
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In November 2010, the Registrant issued an aggregate of 278,165 shares of its common stock to nine accredited investors pursuant to the cashless net exercise of
warrants to purchase the Registrants common stock in connection with its initial public offering pursuant to the terms of the warrants, each with an exercise price of $7.56 per share.
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14.
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In December 2010, the Registrant issued a warrant to purchase 49,834 shares of its common stock to Atel Ventures, Inc. in connection with the entry into a loan and
security agreement, with an exercise price of $7.224 per share and an expiration date of December 17, 2020.
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15.
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In March 2011, the Registrant issued warrants to purchase an aggregate of 160,128 shares of its common stock to Oxford Finance Corporation in connection with the entry
into a loan and security agreement, with an exercise price of $7.494 per share and an expiration date of March 25, 2018.
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The
issuance of securities described above in Item 15 paragraphs (1) (8) and (11) (15) were exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(2) of the Securities Act
of 1933, as amended, and Regulation D promulgated thereunder, as transactions by an issuer not involving any public offering. The purchasers of the securities in these transactions represented that they were accredited investors and that they
were acquiring the securities for investment only and not with a view toward the public sale or distribution thereof. Such purchasers received written disclosures that the securities had not been registered under the Securities Act of 1933, as
amended, and that any resale must be made pursuant to a registration statement or an available exemption from registration. All purchasers either received adequate financial statement or non-financial statement information about the Registrant or
had adequate access, through their relationship with the Registrant, to financial statement or non-financial statement information about the Registrant. The sale of these securities was made without general solicitation or advertising.
The issuance of securities described above in Item 15 paragraphs (9) and (10) were exempt from registration under the Securities Act of
1933, as amended, in reliance on either (1) Rule 701 or Regulation S under the Securities Act of 1933, as amended, pursuant to compensatory benefit plans or agreements approved by the Registrants board of directors or
(2) Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder, as transactions by an issuer not involving any public offering. The recipients of securities in each of these transactions
represented their intention to acquire the securities for investment only and not with view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in such
transactions. All recipients had adequate access, through their relationships with us, to information about us.
All certificates representing
the securities issued in these transactions described in this Item 15 included appropriate legends setting forth that the securities had not been offered or sold pursuant to a registration statement and describing the applicable restrictions on
transfer of the securities. There were no underwriters employed in connection with any of the transactions set forth in this Item 15.
II-3
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
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Exhibit
Number
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Exhibit Description
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Incorporated by Reference
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Filed
Herewith
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Form
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Date
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Number
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1.1
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Form of Underwriting Agreement.
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X
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3.1
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Amended and Restated Certificate of Incorporation of Complete Genomics, Inc.
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8-K
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11/16/2010
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3.1
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3.2
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Amended and Restated Bylaws of Complete Genomics, Inc.
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S-1/A
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10/04/2010
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3.4
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4.1
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Reference is made to exhibits 3.1 and 3.2.
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4.2
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Specimen Common Stock Certificate.
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S-1/A
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10/20/2010
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4.2
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4.3
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Form of Warrant to purchase shares of Common Stock issued in connection with the 2010 convertible bridge loan financing transaction.
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S-1
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07/30/2010
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4.4
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4.4
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Form of Warrant to issued in connection with the Loan and Security Agreement, dated September 21, 2006.
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S-1
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07/30/2010
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4.5
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4.5
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Form of Warrant issued in connection with the Loan and Security Agreement, dated August 3, 2007.
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S-1
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07/30/2010
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4.7
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4.6
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Form of Warrant issued in connection with the Loan and Security Agreement, dated July 30, 2008.
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S-1
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07/30/2010
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4.9
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4.7
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Warrant to purchase shares of Common Stock issued in connection with the Loan and Security Agreement with Atel Ventures, Inc., dated December 17, 2010.
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10-K
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03/30/2011
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4.7
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4.8
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Form of warrant to purchase shares of Common Stock issued in connection with the Loan and Security Agreement with Oxford Finance Corporation, dated March 25, 2011.
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10-K
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03/30/2011
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4.8
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5.1
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Opinion of Latham & Watkins LLP.
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X
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10.1
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Fourth Amended and Restated Investor Rights Agreement, dated August 6, 2010, between Complete Genomics, Inc. and certain of its stockholders.
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S-1/A
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09/10/2010
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10.1
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10.2+
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Form of Indemnity Agreement for directors and officers.
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S-1/A
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10/04/2010
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10.2
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10.3a
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Intellectual Property License Agreement by and between Callida Genomics, Inc. and Complete Genomics, Inc. effective as of March 28, 2006.
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S-1
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07/30/2010
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10.3a
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10.3b
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Amendment to the Intellectual Property License Agreement, effective as of December 17, 2008, by and between Callida Genomics, Inc. and Complete Genomics, Inc.
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S-1
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07/30/2010
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10.3b
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10.4a
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Loan and Security Agreement, dated July 30, 2008, by and among Silicon Valley Bank, Oxford Finance Corporation, Leader Lending LLCSeries A, Leader Lending
LLCSeries B and Complete Genomics, Inc.
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S-1
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07/30/2010
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10.4a
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10.4b
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Loan and Security Agreement, dated December 17, 2010, by and between Comerica Bank and Complete Genomics, Inc.
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10-K
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03/30/2011
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10.4b
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10.4c
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Loan and Security Agreement, dated December 17, 2010, by and between Atel Ventures, Inc. and Complete Genomics, Inc.
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10-K
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03/30/2011
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10.4c
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II-4
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Exhibit
Number
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Exhibit Description
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Incorporated by Reference
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Filed
Herewith
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Form
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Date
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Number
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10.4d
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First Amendment to the Loan and Security Agreement dated December 17, 2010 by and between Atel Ventures, Inc. and Complete Genomics, Inc. dated March 25, 2011.
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10-K
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03/30/2011
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10.4d
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10.4e
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Loan and Security Agreement, dated March 25, 2011, by and between Oxford Finance Corporation and Complete Genomics, Inc.
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10-K
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03/30/2011
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10.4e
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10.5
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Lease Agreement by and between Britania Hacienda VIII, LLC and Complete Genomics, Inc., dated October 31, 2008.
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S-1
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07/30/2010
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10.5
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10.6a+
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Complete Genomics, Inc. 2006 Equity Incentive Plan, as amended.
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S-1
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07/30/2010
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10.6a
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10.6b+
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Complete Genomics, Inc. 2006 Equity Incentive Plan, as amended.
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S-1
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07/30/2010
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10.6b
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10.7a+
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Complete Genomics, Inc. 2010 Equity Incentive Award Plan.
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S-1/A
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10/20/2010
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10.7a
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10.7b+
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Form of Stock Option Grant Notice and Stock Option Agreement under the 2010 Equity Incentive Award Plan.
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S-1/A
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10/20/2010
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10.7b
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10.8+
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Offer letter employment agreement, by and between Complete Genomics, Inc. and Bruce Martin, dated March 26, 2010.
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S-1
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07/30/2010
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10.8
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10.9+
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Offer letter employment agreement, by and between Complete Genomics, Inc. and Mark J. Sutherland, dated March 11, 2010.
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S-1
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07/30/2010
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10.9
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10.10+
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Offer letter employment agreement, by and between Complete Genomics, Inc. and Ajay Bansal, dated May 7, 2010.
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S-1
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07/30/2010
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10.10
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10.11a+
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Severance Agreement, by and between Complete Genomics, Inc. and Clifford A. Reid, Ph.D., dated March 28, 2006.
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S-1
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07/30/2010
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10.11a
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10.11b+
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Amendment to Severance Agreement, by and between Complete Genomics, Inc. and Clifford A. Reid, Ph.D., dated December 31, 2008.
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S-1
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07/30/2010
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10.11b
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10.12a+
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Severance Agreement, by and between Complete Genomics, Inc. and R. John Curson, dated March 28, 2006.
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S-1
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07/30/2010
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10.12a
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10.12b+
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Amendment to Severance Agreement, by and between Complete Genomics, Inc. and R. John Curson, dated December 31, 2008.
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S-1
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07/30/2010
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10.12b
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10.13a+
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Severance Agreement, by and between Complete Genomics, Inc. and Radoje Drmanac, Ph.D., dated March 28, 2006.
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S-1
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07/30/2010
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10.13a
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10.13b+
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Amendment to Severance Agreement, by and between Complete Genomics, Inc. and Radoje Drmanac, Ph.D., dated December 31, 2008.
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S-1
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07/30/2010
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10.13b
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10.14+
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Complete Genomics, Inc. Non-Employee Director Compensation Policy.
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S-1/A
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10/04/2010
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10.14
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10.15+
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Complete Genomics, Inc. Employee Stock Purchase Plan.
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S-1/A
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10/20/2010
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10.15
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23.1
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Consent of Independent Registered Public Accounting Firm.
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X
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23.2
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Consent of Latham & Watkins LLP.
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X
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(1)
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24.1
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Power of Attorney.
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X
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(2)
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+
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Indicates management contract or compensatory plan.
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Confidential treatment has been granted for certain portions of this exhibit. Omitted information has been filed separately with the SEC.
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(1)
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Included in exhibit 5.1 hereto.
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(2)
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Included in the signature page hereto.
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II-5
(b)
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Financial Statement Schedules
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The
following documents are filed as part of this report:
(1)
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Financial Statements and Report of Independent Registered Public Accounting Firm
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Audited financial statements of Complete Genomics, Inc.
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Report of Independent Registered Public Accounting Firm
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Financial Statements
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Balance Sheets
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Statements of Operations
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Statements of Convertible Preferred Stock and Stockholders Equity (Deficit)
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Statements of Cash Flows
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Notes to Financial Statements
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(2)
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Financial Statement Schedules
|
All schedules are omitted because they are not required information or the required information is in the financial statements or notes
thereto.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities
Act of 1933, as amended, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of
the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933, as amended, and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1)
|
For purposes of determining any liability under the Securities Act of 1933, as amended, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933, as amended, shall be deemed to be part of
this registration statement as of the time it was declared effective.
|
(2)
|
For the purpose of determining any liability under the Securities Act of 1933, as amended, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
|
II-6
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Mountain View, State of California, on the 9
th
day of May, 2011.
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|
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COMPLETE GENOMICS, INC.
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By:
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/
S
/ C
LIFFORD
A.
R
EID
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Clifford A. Reid, Ph.D.
President and Chief Executive Officer
|
Signatures and Power of Attorney
Each person whose individual signature appears below hereby authorizes and appoints Clifford A. Reid, Ph.D. and Ajay Bansal, and each of
them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of such
person, individually and in each capacity stated below, and to file any and all amendments to this Registration Statement, including any and all post-effective amendments and amendments thereto, and any registration statement relating to the same
offering as this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents
or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements
of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities indicated below on the dates indicated.
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Signature
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Title
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Date
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/S/ C
LIFFORD
A.
R
EID
Clifford A. Reid, Ph.D.
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Chairman, President and Chief Executive Officer (Principal Executive Officer)
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May 9, 2011
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/S/ A
JAY
B
ANSAL
Ajay Bansal
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Chief Financial Officer (Principal Financial and Accounting Officer)
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May 9, 2011
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/S/ A
LEXANDER
E. B
ARKAS
Alexander E. Barkas, Ph.D.
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Director
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May 9, 2011
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/S/ C. T
HOMAS
C
ASKEY
C. Thomas Caskey, M.D.
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Director
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May 9, 2011
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/S/ C
ARL
L. G
ORDON
Carl L. Gordon, Ph.D., CFA
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Director
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May 9, 2011
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/S/ A
NDREW
E. S
ENYEI
Andrew E. Senyei, M.D.
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Director
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May 9, 2011
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/S/ L
EWIS
J. S
HUSTER
Lewis J. Shuster
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Director
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May 9, 2011
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/S/ C
HARLES
P. W
AITE
,
J
R
.
Charles P. Waite, Jr.
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Director
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May 9, 2011
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/S/ R
OBERT
T. W
ALL
Robert T. Wall
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Director
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May 9, 2011
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II-7
Exhibit Index
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Exhibit Number
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Exhibit Description
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Incorporated by Reference
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Filed
Herewith
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Form
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Date
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Number
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1.1
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Form of Underwriting Agreement.
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X
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3.1
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Amended and Restated Certificate of Incorporation of Complete Genomics, Inc.
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8-K
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11/16/2010
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3.1
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3.2
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Amended and Restated Bylaws of Complete Genomics, Inc.
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S-1/A
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10/04/2010
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3.4
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4.1
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Reference is made to exhibits 3.1 and 3.2.
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4.2
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Specimen Common Stock Certificate.
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S-1/A
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10/20/2010
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4.2
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4.3
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Form of Warrant to purchase shares of Common Stock issued in connection with the 2010 convertible bridge loan financing transaction.
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S-1
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07/30/2010
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4.4
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4.4
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Form of Warrant to purchase shares of Series A preferred stock issued in connection with the Loan and Security Agreement, dated September 21, 2006.
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S-1
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07/30/2010
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4.5
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4.5
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Form of Warrant to purchase shares of Series B preferred stock issued in connection with the Loan and Security Agreement, dated August 3, 2007.
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S-1
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07/30/2010
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4.7
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4.6
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Form of Warrant to purchase shares of Series D preferred stock issued in connection with the Loan and Security Agreement, dated July 30, 2008.
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S-1
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07/30/2010
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4.9
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4.7
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Warrant to purchase shares of Common Stock issued in connection with the Loan and Security Agreement with Atel Ventures, Inc., dated December 17, 2010.
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10-K
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|
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03/30/2011
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4.7
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|
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|
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|
|
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4.8
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Form of Warrant to purchase shares of Common Stock issued in connection with the Loan and Security Agreement with Oxford Finance Corporation, dated March 25, 2011.
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10-K
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03/30/2011
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4.8
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|
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10.1
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Fourth Amended and Restated Investor Rights Agreement, dated August 6, 2010, between Complete Genomics, Inc. and certain of its stockholders.
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S-1/A
|
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|
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09/10/2010
|
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10.1
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|
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|
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5.1
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Opinion of Latham & Watkins LLP.
|
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|
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X
|
|
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|
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10.2+
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Form of Indemnity Agreement for directors and officers.
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S-1/A
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10/04/2010
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10.2
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10.3a
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Intellectual Property License Agreement by and between Callida Genomics, Inc. and Complete Genomics, Inc. effective as of March 28, 2006.
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S-1
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07/30/2010
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10.3a
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10.3b
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Amendment to the Intellectual Property License Agreement, effective as of December 17, 2008, by and between Callida Genomics, Inc. and Complete Genomics, Inc.
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S-1
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|
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07/30/2010
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10.3b
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10.4a
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Loan and Security Agreement, dated July 30, 2008, by and among Silicon Valley Bank, Oxford Finance Corporation, Leader Lending LLCSeries A, Leader Lending
LLCSeries B and Complete Genomics, Inc.
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S-1
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07/30/2010
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10.4
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10.4b
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Loan and Security Agreement, dated December 17, 2010, by and between Comerica Bank and Complete Genomics, Inc.
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10-K
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|
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03/30/2011
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10.4b
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Exhibit Number
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Exhibit Description
|
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Incorporated by Reference
|
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Filed
Herewith
|
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Form
|
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Date
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Number
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10.4c
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Loan and Security Agreement, dated December 17, 2010, by and between Atel Ventures, Inc. and Complete Genomics, Inc.
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10-K
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|
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03/30/2011
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10.4c
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10.4d
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First Amendment to the Loan and Security Agreement dated December 17, 2010, by and between Atel Ventures, Inc. and Complete Genomics, Inc. dated March 25, 2011.
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10-K
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03/30/2011
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10.4d
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10.4e
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Loan and Security Agreement, dated March 25, 2011, by and between Oxford Finance Corporation and Complete Genomics, Inc.
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10-K
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03/30/2011
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10.4e
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10.5
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Lease Agreement by and between Britania Hacienda VIII, LLC and Complete Genomics, Inc., dated October 31, 2008.
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S-1
|
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07/30/2010
|
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10.5
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10.6a+
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Complete Genomics, Inc. 2006 Equity Incentive Plan, as amended.
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S-1
|
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07/30/2010
|
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10.6a
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10.6b+
|
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Complete Genomics, Inc. 2006 Equity Incentive Plan, as amended.
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S-1
|
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07/30/2010
|
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10.6b
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10.7a+
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Complete Genomics, Inc. 2010 Equity Incentive Award Plan.
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S-1/A
|
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10/20/2010
|
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10.7a
|
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10.7b+
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Form of Stock Option Grant Notice and Stock Option Agreement under the 2010 Equity Incentive Award Plan.
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S-1/A
|
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|
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10/20/2010
|
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10.7b
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10.8+
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Offer letter employment agreement, by and between Complete Genomics, Inc. and Bruce Martin, dated March 26, 2010.
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S-1
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07/30/2010
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10.8
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10.9+
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Offer letter employment agreement, by and between Complete Genomics, Inc. and Mark J. Sutherland, dated March 11, 2010.
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S-1
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07/30/2010
|
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10.9
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10.10+
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Offer letter employment agreement, by and between Complete Genomics, Inc. and Ajay Bansal, dated May 7, 2010.
|
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S-1
|
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|
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07/30/2010
|
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10.10
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10.11+
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Severance Agreement, by and between Complete Genomics, Inc. and Clifford A. Reid, Ph.D., dated March 28, 2006.
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S-1
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07/30/2010
|
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10.11a
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10.11b+
|
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Amendment to Severance Agreement, by and between Complete Genomics, Inc. and Clifford A. Reid, Ph.D., dated December 31, 2008.
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S-1
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07/30/2010
|
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10.11b
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10.12a+
|
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|
Severance Agreement, by and between Complete Genomics, Inc. and R. John Curson, dated March 28, 2006.
|
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S-1
|
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|
|
07/30/2010
|
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10.12a
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10.12b+
|
|
|
Amendment to Severance Agreement, by and between Complete Genomics, Inc. and R. John Curson, dated December 31, 2008.
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S-1
|
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|
07/30/2010
|
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10.12b
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10.13a+
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|
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Severance Agreement, by and between Complete Genomics, Inc. and Radoje Drmanac, Ph.D., dated March 28, 2006.
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S-1
|
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07/30/2010
|
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10.13a
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|
|
Exhibit Number
|
|
|
Exhibit Description
|
|
Incorporated by Reference
|
|
|
Filed
Herewith
|
|
|
|
Form
|
|
|
Date
|
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|
Number
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|
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10.13b+
|
|
|
Amendment to Severance Agreement, by and between Complete Genomics, Inc. and Radoje Drmanac, Ph.D., dated December 31, 2008.
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S-1
|
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|
07/30/2010
|
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10.13b
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10.14
|
|
|
Complete Genomics, Inc. Non-Employee Director Compensation Policy.
|
|
|
S-1/A
|
|
|
|
10/04/2010
|
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10.14
|
|
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|
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10.15
|
|
|
Complete Genomics, Inc. Employee Stock Purchase Plan.
|
|
|
S-1/A
|
|
|
|
10/20/2010
|
|
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10.15
|
|
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|
23.1
|
|
|
Consent of Independent Registered Public Accounting Firm.
|
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|
X
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23.2
|
|
|
Consent of Latham & Watkins LLP.
|
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|
X
|
(1)
|
|
|
|
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|
|
24.1
|
|
|
Power of Attorney.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
(2)
|
+
|
Indicates management contract or compensatory plan.
|
|
Confidential treatment has been granted for certain portions of this exhibit. Omitted information has been filed separately with the SEC.
|
(1)
|
Included in exhibit 5.1 hereto.
|
(2)
|
Included in the signature page hereto.
|
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