As
filed with the Securities and Exchange Commission on January 7,
2011
Registration
No. 333-169703
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Amendment
No. 3 to
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
ATOSSA
GENETICS INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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3841
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26-4753208
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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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Seattle
Life Sciences Building
1124
Columbia Street, Suite 621
Seattle,
Washington 98104
(206)
325-6086
(Address,
including zip code, and telephone number, including area code of registrant’s
principal executive offices)
Steven
C. Quay, M.D., Ph.D.
Chairman
and Chief Executive Officer
Seattle
Life Sciences Building
1124
Columbia Street, Suite 621
Seattle,
Washington 98104
(206)
325-6086
(Name,
address, including zip code, and telephone number, including area code, of agent
for service)
Copies
to:
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Ryan Murr
Maggie
Wong
Goodwin Procter LLP
3 Embarcadero Center, 24th Floor
San Francisco, California 94111
Phone: (415) 733-6000
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Kyle Guse
K. Amar Murugan
McDermott Will & Emery LLP
275 Middlefield Road
Menlo Park, California 94025
Phone: (650) 815-7400
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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. ¨
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
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 registration statement for the same offering.
¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
number of the earlier effective registration statement for the same offering.
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions “large accelerated filer,” “accelerated file,”
and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer ¨
Accelerated filer ¨ Non-accelerated
filer ¨
Smaller reporting company x
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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.
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The information contained
in this prospectus is not complete and may be changed. A registration
statement relating to these securities
has been filed with the Securities and Exchange Commission and these securities
may not be sold until that registration statement becomes effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these
securities in any state where the offer or sale is not permitted
..
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PRELIMINARY
PROSPECTUS
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SUBJECT
TO COMPLETION
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DATED
JANUARY 7, 2011
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3,000,000
Units
Comprised
of Common Stock, Class A Warrants and Class B Warrants
This is
the initial public offering of our Units. We are offering 3,000,000 Units,
with each Unit consisting of: (i) one share of common stock, (ii) two Class A
Warrants and (iii) one Class B Warrant.
Each
Class A Warrant will be exercisable, for a period of 10 days beginning on the
sixth trading day after the separation of the securities underlying the Units as
described below, to acquire one share of common stock on a cashless, net
exercise basis at a price of $0.05 per share. Each Class B Warrant
will be exercisable for a period of five years beginning on the date one
year after the Class B Warrants are separated from the Units, to acquire one
share of common stock at a price equal to 55% of the Unit offering price.
We will have the right to redeem the Class B Warrants at $0.25 per share of
common stock underlying the Class B Warrants in the event (i) the average
of the closing price of our common stock exceeds 200% of the exercise price for
10 consecutive trading days while the warrants are exercisable and
(ii) there is then an effective registration statement with a current
prospectus on file with the Securities and Exchange Commission, or the
SEC.
We expect
the initial public offering price will be between $5.00 and $7.00 per
Unit. Currently, no public market exists for our securities. We
intend to apply for listing of the Units on the NYSE Amex under the symbol
“ATOSU.” The securities underlying the Units will separate from the Units
on the 90th day
after the date of this prospectus, unless Dawson James Securities, Inc., the
representative of the underwriters, determines that an earlier separation date
is acceptable based on its assessment of the relative strengths of the
securities markets and small capitalization companies in general, and the
trading pattern of, and demand for, our securities in particular. We
intend to issue a press release announcing when such separation will
occur. Once the securities comprising the Units separate, the Units will
automatically cease trading and be cancelled, and the common stock and Class B
Warrants underlying the Units are expected to be listed on the NYSE Amex under
the symbols “ATOS” and “ATOSW,” respectively. The Class A Warrants will
not be listed for trading.
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Per Unit
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Total
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|||||||
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Public
offering price
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$ | $ | ||||||
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Underwriting
discount (1)
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$ | $ | ||||||
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Proceeds,
before expenses, to Company
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$ | $ | ||||||
(1) Does not include a
non-accountable expense reimbursement fee in the amount of up to 3% of the
gross proceeds of this offering.
Investing
in these securities involves a high degree of risk.
See
“Risk Factors” contained in this prospectus beginning on page 7.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
We have
granted the underwriter an option for a period of 45 days to purchase from us,
on the same terms and conditions set forth above, up to an additional 450,000
Units to cover overallotments.
The
date of this prospectus is __________, 2011.
DAWSON
JAMES SECURITIES, INC.
TABLE
OF CONTENTS
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Page
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Prospectus
Summary
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1
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Risk
Factors
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7
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Forward-Looking
Statements
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19
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Use
of Proceeds
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20
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Dividend
Policy
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21
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Capitalization
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21
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Dilution
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22
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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24
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| Scientific and Industry Background |
29
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Business
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33
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Management
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57
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Director
Compensation
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59
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Executive
Compensation
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62
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Certain
Relationships and Related Transactions
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67
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Principal
Stockholders
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68
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Description
of Securities
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69
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Shares
Eligible for Future Sale
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77
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U.S.
Federal Income Tax Considerations
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78
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Underwriting
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84
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Legal
Matters
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88
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Experts
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88
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Additional
Information
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88
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89
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No
dealer, salesperson or other person is authorized to give any information or to
represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an
offer to sell only the Units and underlying securities offered hereby, but only
under circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its
date.
Unless
the context requires otherwise, in this prospectus the terms “we,” “us” and
“our” as well as the “Company” refer to Atossa Genetics Inc.
This
summary highlights some information from this prospectus. It may not
contain all the information important to making an investment decision.
You should read the following summary together with the more detailed
information regarding our company and the securities being sold in this
offering, including “Risk Factors” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our financial statements and
related notes, included elsewhere in this prospectus.
The
Company
We are
a development-stage healthcare company focused on the commercialization of a
cellular and molecular diagnostic risk assessment product and related service
for the detection of pre-cancerous conditions in nipple aspirate fluid, or NAF,
that could lead to breast cancer, and on the development of second-generation
products and services. Our primary focus is the commercialization of the
Mammary Aspirate Specimen Cytology Test, which we call the MASCT System, our
patented and U.S. Food and Drug Administration, or FDA, cleared product and
related testing and analysis services for breast conditions, including
cancer. Although current mammography procedures can detect cancer
already present in the breast, academic studies indicate that
pre-cancerous cellular changes in NAF, specifically atypical ductal
hyperplasia, can be detected up to eight years before cancer is diagnosed by
mammography. This information may allow for the implementation of
preventive measures such as lifestyle changes and pharmaceutical interventions
that may prevent breast cancer from developing or treat breast cancer earlier,
if it develops. At this
time, however, Medicare and certain insurance carriers will not reimburse the
costs of the NAF collection procedure, citing insufficient clinical evidence to
support medical efficacy, better clinical decision-making, or a reduction in
breast cancer mortality. To
date, we have not generated revenues from the sale of any product, and we do not
expect to generate any significant revenues unless and until we begin our
commercial launch of the MASCT System. Our ability to launch the
MASCT System is substantially dependent on the successful completion of this
offering. We have incurred net operating losses of $93,105 and $744,356
for our fiscal year ended December 31, 2009 and for the nine months ended
September 30, 2010, respectively. Our current operations are funded by a
$500,000 line of credit from our founder and chief executive officer, Dr. Steven
C. Quay, M.D., Ph.D., under which $420,000 currently remains available, and if
we are unable to complete this offering successfully, we may be forced to
curtail our operations.
The
MASCT System is a device and method for the collection, shipment and clinical
laboratory analysis of nipple aspirate fluid, or NAF. A number
of medical devices have been designed by others for the collection of
NAF, which contains cells and molecular diagnostic biomarkers. The
clinical analysis by qualified pathologists, whether or not affiliated with us,
of the biomarkers contained in NAF, whether collected using the
MASCT System or by other means, is useful in detecting breast cancer and
cellular changes that may be precursors to breast cancer. We intend to
offer each component of the MASCT System for sale separately. The product
components of the MASCT System consist of a reusable hand-held pump for the
collection of NAF, single-use patient kits that include two NAF sample vials per
kit, and shipment kits for the transportation of NAF samples to our specialized
cytology and molecular diagnostics laboratory to be established in Seattle,
Washington. Through our laboratory, if successfully established, we intend
to provide the MASCT System services, which would consist of receiving and
accessioning the two NAF samples from each patient, preparing routine and
immunohistochemistry, or IHC, staining of slides from the NAF samples, and
generating a report of the findings. We expect that by selling the MASCT System
under limited “collection
only”
licenses, purchasers will be required under our patent rights to submit the NAF
samples gathered with our system to our laboratory for screening. Our
patents do not, however, prevent physicians from collecting NAF using a
different technology or system and independently performing comparable
diagnostic analysis on the fluid sample.
We have
entered into a lease for laboratory space in Seattle, Washington and expect our
laboratory to be operational in the first quarter of 2011. We have also
engaged a contract manufacturer to produce 20 MASCT System pumps and 10,000
testing kits, which we intend to field test for purposes of confirming the
proper operation of the device and its ability to collect adequate NAF
samples in the first quarter of 2011. We intend to commence
commercial manufacturing of the MASCT System components following the completion
of this offering and to begin our commercial launch of the MASCT System in the
second quarter of 2011. We cannot be certain, however, that our
initial field testing of the MASCT System will be successful or that we will be
able to engage one or more large-volume medical device manufacturers to produce
the MASCT System on terms acceptable to us within our anticipated timelines, or
at all. In addition, because our commercial launch of the MASCT System is
dependent on the timing and amount of proceeds received from this offering, our
product launch may be delayed if we are unable to complete this offering in the
planned timeframe.
We
anticipate that the MASCT System will be used initially in conjunction with
standard mammography or cervical Pap smear exams and has the potential to become
a critical assessment tool for identifying women at high risk for breast
cancer. Our MASCT System NAF collection procedure takes about five
minutes, was painless in clinical testing, and does not use any
radiation. In a
study published in November 2010, the lifetime risk for women 40 to 74 years of
age of developing cancer from the radiation in normal mammograms was found to be
86 per 100,000 women. We
currently intend to price our NAF sample collection device at approximately $200
per device, our patient kits at approximately $50 per kit, and the cytology and
molecular diagnostics testing and analysis at the 2010 national Medicare
reimbursement rates of between $106 and $1,202 per patient, depending on the
complexity of the analysis performed and without taking into account any patient
reimbursement from third-party insurers. Market conditions at or
after launch, however, including general economic conditions and changes in
third-party reimbursement policies, may prevent us from pricing the MASCT System
and our services as currently planned.
1
Our
founder and chief executive officer, Steven C. Quay, M.D., Ph.D., invented the
MASCT System. Dr. Quay is a board-certified anatomic pathologist who
completed both an internship and residency in anatomic pathology at the
Massachusetts General Hospital, a Harvard Medical School teaching hospital,
and is a former faculty member of the pathology department of Stanford
University School of Medicine. We acquired from Ensisheim Partners LLC, or
Ensisheim, all of the ownership rights to five U.S. and eight foreign patents
(in the European Union, Canada, Australia, Hong Kong, Switzerland, Germany,
France and the United Kingdom) covering the manufacture, use and sale of the
MASCT System, pending patent applications for improvements, as well as the FDA
marketing authorization for the MASCT System. Ensisheim is a limited
liability company solely owned by Dr. Quay and his wife, Dr. Shu-Chih Chen, who
is our chief scientific officer and a member of our board of
directors.
We have
experienced operating losses since inception. We have not yet received any
revenues and will not be in a position to expect revenues until we are able to
produce and sell the MASCT System. We anticipate that we will incur
additional losses while establishing the manufacturing of the MASCT Systems and
while we build our laboratory and hire and train personnel for our laboratory
and our sales force. In addition, Medicare and certain private insurance
carriers currently do not reimburse for the NAF collection procedure that will
be used with the MASCT System, which could delay or prevent commercial adoption
of the MASCT System and our services as the absence of Medicare or insurance
coverage will require patients to fully bear the costs of the sample
acquisition. We intend to seek reimbursement for the MASCT System from
third-party payors and plan to apply for a Current Procedural Terminology, or
CPT, code from the American Medical Association, or AMA, for the procedure
of collecting NAF with our device, to enable reimbursement of the collection
procedure, but we cannot be certain that we will be successful in these
efforts.
The
MASCT System
The MASCT
System is intended to supplement, and not replace, mammography and is primarily
a risk assessment tool for identifying women at risk for developing breast
cancer. Using the MASCT System’s NAF collection device, a nurse or
physician’s assistant can collect a sample of NAF, which may contain cells and
molecular diagnostic biomarkers that are useful in detecting cancers and
pre-cancerous cellular changes. These changes include atypical ductal
hyperplasia, or ADH, a condition in which the cells lining the milk ducts of the
breast experience abnormal, premalignant growth, which confers a higher risk of
developing breast cancer. Analysis of the collected fluid can enable
physicians to determine and/or differentiate among normal versus premalignant
versus malignant cells. Pre-cancerous cytology changes in NAF have been
shown to occur up to eight years before cancerous changes can be detected by
mammography. Although the MASCT is intended to be an adjunctive procedure
to mammography, some physicians may view both the MASCT System and mammography
as screening tools for existing breast cancer, which could cause the MASCT
System to be deemed directly competitive with mammography, an established
procedure.
In a
study of women with normal mammograms who were undergoing breast reduction
surgery, which was conducted at the Virginia Mason Medical Center in Seattle,
Washington and published in Plastic and Reconstructive
Surgery in October 2009, the incidence of ADH was found to be 4.4%.
A separate study conducted in 2007 of 4,970 women found an incidence of ADH of
4.0% by biopsy. ADH can be definitively diagnosed only by NAF analysis or
a breast tissue biopsy. In a study of approximately 2.5 million screening
mammograms done between 1996 and 2005 and collected from mammography registries
participating in the Breast Cancer Surveillance Consortium, the incidence of
biopsy-proven ADH was 0.4%, suggesting that mammography fails to detect ADH
in over 90% of patients.
A number
of medical devices have been designed over the years that apply negative
pressure to the nipple to induce the expression of NAF, which is then collected
by carefully touching a capillary tube to any apparent drops of
NAF. Published literature suggests that in general, these
devices are successful in obtaining NAF from about 39% to 66% of all patients,
and that this sample collection variability has prevented the routine adoption
of NAF cytology for breast cancer screening. The MASCT System was designed
to overcome this shortcoming by placing a hydrophilic, or water seeking,
membrane in contact with the nipple during the cycles of negative pressure to
“wick” fluid from the orifice of the ducts by capillary action, thereby
increasing the frequency of obtaining NAF in women. The results of a
clinical trial sponsored by Nastech Pharmaceutical Company, Inc. of 31 women
conducted in 2003 demonstrated that the MASCT System was able to collect
measurable NAF in 97% (30) of the women tested. The NAF samples collected
in this study ranged from less than one to 37 microliters, with an average of
seven microliters, and all samples collected were deemed to be clinically
useful. No adverse events were reported in the study.
2
The MASCT
System also requires no use of radiation. A study that analyzed the
results of six peer-reviewed medical research publications reported in December
2009 that low dose radiation from mammograms can increase cancer incidence by
1.5 to 2.5 fold in high-risk women, increasing the complexity of managing
high-risk patients. Unlike a biopsy, the MASCT System is a non-invasive
and painless procedure.
Commercialization
Strategy
We
believe that commercialization of the MASCT System will provide us with two main
revenue sources: (i) sales-based revenue from the sale of the MASCT System
device and patient kits to physicians, breast health clinics, and mammography
clinics and (ii) service, or use-based, revenue from the preparation and
interpretation of the NAF samples sent to our laboratory for
analysis.
We intend
to market the MASCT System to physicians, as well as breast health and
mammography clinics, for use in conjunction with other health screening
examinations, including annual physical examinations and regularly scheduled
cervical Pap smears and mammograms. We plan to hire a direct sales force
of approximately eight people initially to commercialize the MASCT System and
our services in the Northwestern United States, where there are approximately
290 mammography clinics. According to the FDA, each mammography
clinic registered in the United States performs an average of 4,500 mammograms
per year. Based on the use of the MASCT System as an adjunct to the
approximately 1.3 million mammograms done in Northwestern United States, we
believe the total addressable market for products and services for the
collection and analysis of NAF in conjunction with mammography in this
region could exceed $100 million, of which we will seek to capture a
portion. This estimate, however, is not intended, and should not be
considered, to be a projection of our revenues, which will be impacted by
various factors described under “Risk Factors” and elsewhere in this
prospectus. Assuming a successful regional launch, we plan to
expand nationally during the first half of 2012 and intend to grow our sales
force to approximately 100 people in the United States. We currently
have no sales personnel, however, and we cannot be certain that we will be able
to build a sales force adequate either to complete our regional launch of the
MASCT System or to address the national market.
Our
ability to commercially launch the MASCT System is substantially dependent on
the success of this offering. With the exception of a $500,000 line of
credit from our chief executive officer, under which $420,000 currently remains
available, we have not identified alternative sources of funding should
this offering be unsuccessful.
We
believe that by maintaining our own clinical laboratory, we will be able to
generate additional service revenues through cytology and molecular diagnostic
testing, in addition to the sale of our MASCT Systems. We have leased
a facility for our clinical laboratory in Seattle, Washington and intend to
establish and qualify the operations and procedures of our laboratory in the
first quarter of 2011. We will submit applications for accreditation
by the College of American Pathologists and for licensure by state and federal
agencies in order to allow the preparation, screening and interpretation of
cytology and for the molecular diagnostics testing of NAF patient samples at our
facility. If we experience delays or encounter difficulties in the
application and accreditation process, we may not be able to establish or
qualify our laboratory as currently planned, which would impair our ability to
generate revenues from testing services.
Trading
Market
Currently,
there is no trading market for our securities. We intend to apply for
listing of the Units, our common stock and the Class B Warrants on the NYSE Amex
under the symbols “ATOSU,” “ATOS” and “ATOSW,” respectively. The
Class A Warrants will not be listed for trading.
Risk
Factors
Our
business is subject to numerous risks as discussed more fully in the section
entitled “Risk Factors” beginning on page 7. Principal risks of our
business include, but are not limited to, the following:
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·
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we
will need significant additional capital to execute our business strategy
as currently contemplated and have not identified significant alternative
sources of funding should this offering be
unsuccessful;
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3
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·
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we
have a history of operating losses, expect to incur losses for the
foreseeable future and may never achieve
profitability;
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·
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The MASCT System and second-generation risk assessment tools, diagnostic tests and other predictive and personalized medicine products that the Company may develop may never achieve significant commercial market acceptance; |
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we
are dependent on the commercial success of the MASCT
System;
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·
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we
have not yet engaged any manufacturers for the production of the MASCT
System in commercial quantities, and any inability to engage manufacturers
for such production at acceptable quantities, costs or timelines could
delay or prevent our commercial launch of the MASCT
System;
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·
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we
may not be successful in commercializing the MASCT System because
physicians and clinicians may be slow to adopt our
product;
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·
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our
ability to commercialize the MASCT System may be limited because Medicare
and certain insurance carriers are not expected to provide reimbursement
for use of our product;
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·
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we
may encounter difficulties in registering or becoming certified under
state and/or federal laboratory regulations for our cytology and molecular
diagnostics laboratory for the testing and analysis of NAF samples;
and
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·
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we
may not be able to hire, train or maintain the sales force necessary to
market and sell the MASCT System and our services as
planned.
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Company
Information
We were
incorporated in Delaware in April 2009. Our principal executive offices
are located at Seattle Life Sciences Building, 1124 Columbia Street, Suite 621,
Seattle, Washington 98104, and our telephone number is (206) 325-6086. Our
website is located at www.atossagenetics.com.
Information contained on, or that can be accessed through, our website is not a
part of this prospectus.
MASCT,
Oxy-MASCT and our name and logo are our trademarks. This prospectus also
includes additional trademarks, trade names and services marks, which are the
property of their respective owners.
Our
company name comes from Queen Atossa, daughter of Cyrus the Great and wife of
Darius I, the King of the Achaemenid Empire. In about 470 BC, she became
the first woman in recorded history to be diagnosed with breast cancer, of which
she died.
4
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Securities offered by us
:
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3,000,000
units, or the Units. Each Unit consists of:
·
one share of our common stock;
·
two Class A Warrants, each exercisable for one share of our common
stock on a cashless, net exercise basis for a period of 10 days beginning
on the sixth trading day after the separation of the securities underlying
the Units at an exercise price of $0.05 per share; and
·
one Class B Warrant exercisable for one share of common stock
commencing on the first anniversary of the date of this prospectus, and
remaining exercisable until the fifth anniversary of the separation
of the Class B Warrants from the Units at an exercise price equal to
55% of the Unit offering price. We will have the right to
redeem the Class B Warrants at $0.25 per share of common stock underlying
the Class B Warrants in the event (i) the average of the closing price of
our common stock exceeds 200% of the exercise price for 10 consecutive
trading days while the warrants are exercisable and (ii) there is then an
effective registration statement with a current prospectus on file with
the SEC.
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Use
of proceeds:
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We
intend to use the net proceeds from this offering to engage one or more
contract manufacturers to produce the MASCT System in commercial
quantities, to establish a cytology and molecular diagnostics laboratory
focused on breast cancer and to launch the MASCT System in the
Northwestern United States, including hiring and training sales
personnel. We also intend to use a portion of the proceeds from this
offering to develop a second generation of the MASCT System, to develop
additional laboratory biomarker tests and to launch a national roll-out of
the MASCT System.
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NYSE
Amex Market trading Symbols:
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We
intend to apply for listing of our common stock, the Units and the Class B
Warrants on the NYSE Amex under the symbols, “ATOS,” “ATOSU” and “ATOSW,”
respectively. The Class A Warrants will not be listed for
trading.
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Capitalization:
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6,000,067
shares of common stock outstanding before the offering (1).
15,000,067
shares of common stock outstanding after the offering and assuming full
exercise of the Class A Warrants
(1).
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(1) The number of shares of our common
stock to be outstanding before the offering is based on 6,000,067 shares of
common stock outstanding as of September 30, 2010, and excludes 1,000,000 shares
of common stock reserved for future issuance under our 2010 Stock Option and
Incentive Plan. We have assumed that all Class A Warrants issued in
connection with the Units in this offering will be exercised because the Class A
Warrants have a nominal exercise price of $0.05 per share and are exercisable
under a cashless, or net exercise feature that provides for the rounding up of
fractional shares issued upon such net exercise.
Unless
otherwise indicated, all information in this prospectus assumes that the
underwriters do not exercise their right to purchase up to 450,000 additional
Units to cover overallotments, if any.
5
SUMMARY
FINANCIAL DATA
The
following summary financial data should be read together with our financial
statements and the related notes and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” appearing elsewhere in this
prospectus. The summary financial data in this section is not intended to
replace our financial statements and the related notes. Our historical
results are not necessarily indicative of the results to be expected for any
future period.
We were
incorporated on April 30, 2009. The following statement of operations
data, including share data, for the year ended December 31, 2009 have been
derived from our audited financial statements and related notes included
elsewhere in this prospectus. The statement of operations data, including
share data, for the nine months ended September 30, 2010 and the period
from April 30, 2009 (inception) through September 30, 2009, and the balance
sheet data as of September 30, 2010 have been derived from our unaudited
financial statements included elsewhere in this prospectus. The unaudited
interim financial statements have been prepared on the same basis as the audited
financial statements and reflect all adjustments necessary to fairly state our
financial position as of September 30, 2010 and results of operations for the
nine months ended September 30, 2010 and the period from April 30, 2009
(inception) through September 30, 2009. The operating results for any
period are not necessarily indicative of financial results that may be expected
for any future period.
|
April 30, 2009
(Inception) through
December 31, 2009
|
Nine Months Ended
September 30, 2010
|
April 30, 2009
(Inception) through
September 30, 2009
|
||||||||||
|
Statement
of Operations Data:
|
(Unaudited)
|
|||||||||||
|
Operating
expenses:
|
||||||||||||
|
Research
and development
|
$ | 21,250 | $ | 1,306 | $ | 17,500 | ||||||
|
General
and administrative
|
101,607 | 738,251 | 75,605 | |||||||||
|
Other
operating income:
|
- | - | ||||||||||
|
Interest
income
|
— | 455 | - | |||||||||
|
Interest
expense
|
- | (5,129 | ) | - | ||||||||
|
Income
taxes
|
— | 125 | 125 | |||||||||
|
Net
loss
|
$ | (122,857 | ) | $ | (744,231 | ) | $ | (93,105 | ) | |||
|
Net
loss per share—basic and diluted
|
$ | (0.03 | ) | $ | (0.13 | ) | $ | (0.02 | ) | |||
|
Weighted-average
number of shares used in share calculation—basic and
diluted
|
4,037,847 | 5,914,204 | 3,993,093 | |||||||||
|
As
of December 31, 2009
|
As of September 30, 2010
|
|||||||||||
|
Actual
|
Actual
|
As-adjusted
|
||||||||||
|
(Unaudited)
|
||||||||||||
|
Balance
Sheet Data:
|
||||||||||||
|
Total
assets
|
$ | 85,464 | $ | 32,253 | $ | 16,502,253 | ||||||
|
Total
liabilities
|
53,781 | 558,882 | 558,882 | |||||||||
|
Stockholders’
(deficit) equity:
|
||||||||||||
|
Common
Stock, $0.001 par value, 75,000,000 shares authorized, 4,899,882
and 6,000,067 shares outstanding, actual, as of December 31, 2009 and
September 30, 2010, respectively and 15,000,067 shares outstanding,
as-adjusted, as of September 30, 2010
|
4,900 | 6,000 | 15,000 | |||||||||
|
Additional
paid-in capital
|
149,640 | 334,585 | 16,795,585 | |||||||||
|
Accumulated
deficit
|
(122,857 | ) | (867,214 | ) | (867,214 | ) | ||||||
|
Total
stockholders' (deficit) equity
|
31,683 | (526,629 | ) | 15,943,371 | ||||||||
|
Total
liabilities & stockholders' equity
|
$ | 85,464 | $ | 32,253 | $ | 16,502,253 | ||||||
The
September 30, 2010 as-adjusted balance sheet data reflects the sale
of 3,000,000 Units in this offering at an assumed initial public offering
price of $6.00 per Unit, which is the mid-point of the price range listed
on the cover page of this prospectus, after deducting 10% estimated underwriting
discounts and commissions and estimated offering expenses payable by us, and
assuming the full exercise of the Class A Warrants on a cashless, or net
exercise basis, at an exercise price of $0.05 per share.
6
A
purchase of the Units is an investment in the Company’s securities and involves
a high degree of risk. You should consider carefully the following
information about these risks, together with the other information contained in
this prospectus, before purchasing our securities. If any of the following
risks actually occur, the business, financial condition or results of operations
of the Company would likely suffer. In that case, the value of our
securities, including the market price of the common stock, Units, Class A
Warrants or Class B Warrants could decline, and you may lose part or all of your
investment in our company.
Risks
Relating to the Company
The
Company has limited operating history and as such an investor cannot assess its
profitability or performance based on past results.
The
Company is a development stage company founded in April 2009 and as such has
limited operating history. The Company’s operations to date have consisted
primarily of securing laboratory and office space, hiring laboratory personnel,
ordering equipment and supplies, engaging a third-party vendor for the
manufacture of the MASCT System in quantities sufficient for initial field
testing, securing patent rights and assignments, filing new patent applications,
acquiring FDA market clearances, and securing development bids to complete
preparation for manufacturing the MASCT System. The Company requires
significant additional capital to achieve its business objectives, and the
inability to obtain such financing on acceptable terms or at all could lead to
closure of the business.
The
Company’s revenue and income potential is uncertain. Any evaluation of the
Company’s business and prospects must be considered in light of these factors
and the risks and uncertainties often encountered by companies in the
development stage. Some of these risks and uncertainties include the
Company’s ability to:
|
|
·
|
execute its business plan and
commercialization strategy;
|
|
|
·
|
engage one or more contract
manufacturers to produce the MASCT System in commercial
quantities;
|
|
|
·
|
create brand
recognition;
|
|
|
·
|
respond effectively to
competition;
|
|
|
·
|
manage growth in its
operations;
|
|
|
·
|
respond to changes in applicable
government regulations and
legislation;
|
|
|
·
|
access additional capital when
required; and
|
|
|
·
|
attract and retain key
personnel.
|
The
Company’s independent auditors have issued a report questioning the Company’s
ability to continue as a going concern.
The
report of the Company’s independent auditors contained in the Company’s
financial statements explains that the Company has not yet established an
ongoing source of revenues sufficient to cover its operating costs and allow it
to continue as a going concern. The ability of the Company to continue as
a going concern is dependent on the Company obtaining adequate capital to fund
operating losses until it becomes profitable. If the Company is unable to
obtain adequate capital, it could be forced to cease
operations.
7
We
will depend on the proceeds from this offering to commence the commercial launch
of the MASCT System, and we do not have specific plans to obtain funding from
alternative sources; if the proceeds from this offering are insufficient
to effect the commercial launch of the MASCT System, the Company may be required
to cease operations.
The
Company expects to spend substantial amounts of capital to:
|
|
·
|
launch
and commercialize the MASCT System, including contracting for the
manufacture of the device in commercial quantities and building an
internal sales force to address certain
markets;
|
|
|
·
|
establish,
qualify and maintain laboratory facilities for the Company’s testing and
analytical services;
|
|
|
·
|
continue
its research and development activities to advance its product
pipeline.
|
The
Company expects that it will require additional capital beyond the proceeds from
this offering to complete the commercialization of the MASCT System in the
United States and may need to raise additional funds if it encounters delays or
problems in the production of the MASCT System device in commercial quantities,
or the establishment of its sales force or laboratory facilities. The
Company has not identified sources for such additional funding and cannot be
certain that additional funding will be available on acceptable terms, or at
all. The Company has secured a $500,000 line of credit from its chief
executive officer, pursuant to which $420,000 currently remains available and
under which the Company continues to fund its current operations, but
the Company currently has no specific plans in place to obtain funding from
alternative sources. If the Company is unable to raise additional capital
in sufficient amounts or on acceptable terms, it may have to significantly
delay, scale back or discontinue the commercialization of the MASCT System or
its research and development activities, which could force the Company to cease
its operations.
Failure
to raise additional capital as needed could adversely affect the Company and its
ability to grow.
The
Company will need considerable amounts of capital to develop its business.
It may raise funds through public or private equity offerings or debt
financings. If the Company cannot raise funds on acceptable terms when
needed, it may not be able to grow or maintain the business. Furthermore,
such lack of funds may inhibit the Company’s ability to respond to competitive
pressures or unanticipated capital needs, or may force the Company to reduce
operating expenses, which could significantly harm the business and development
of operations. Because the Company’s independent auditors have expressed
doubt as to the Company’s ability to continue as a “going concern,” as reported
in the financial statements of the Company, its ability to raise capital may be
severely hampered. Similarly, the Company’s ability to borrow any such
capital may be more expensive and difficult to obtain until this “going concern”
issue is eliminated.
The
Company has a history of operating losses and expects to continue to incur
losses in the future.
The
Company has a limited operating history and has incurred net operating losses of
$867,214 since its inception from April 30, 2009 through September 30,
2010. The Company has not yet received any revenues and will not be
in a position to generate revenues until it is able to produce and sell the
MASCT System. The Company will incur additional losses in connection with
engaging one or more contract manufacturers to produce the MASCT System for
commercial sale, building a sales force for the product and establishing its
laboratory facilities for the testing and analysis of NAF samples, and may never
achieve profitability.
Raising
funds by issuing equity, or debt securities, could dilute the value of the
common stock and impose restrictions on the Company’s working
capital.
If the
Company were to raise additional capital by issuing equity securities, the book
value of the then outstanding common stock would be reduced unless the
additional equity securities were issued at a price equal to or greater than the
market value of the common stock at the time of issuance of the new
securities. If the additional equity securities were issued at a per share
price less than the per share value of the outstanding shares, then all of the
outstanding shares would suffer a dilution in value with the issuance of such
additional shares. Further, the issuance of debt securities in order to
raise additional funds may impose restrictions on the Company’s operations and
may impair the Company’s working capital as it services any such debt
obligations.
8
The
MASCT System and second-generation risk assessment tools, diagnostic tests and
other predictive and personalized medicine products that the Company may develop
may never achieve significant commercial market acceptance.
The
Company may not succeed in achieving commercial market acceptance of any of its
products and services. In order to market the MASCT System and to gain
market acceptance for the MASCT System and the Company’s services, the Company
will need to demonstrate to physicians and other healthcare professionals the
benefits of the MASCT System and its practical and economic application for
their particular practice. Despite FDA clearance for the MASCT System,
many physicians and healthcare professionals are hesitant to introduce new
services, or techniques, into their practice for many reasons, including the
learning curve associated with the adoption of such new services or techniques
into already established procedures and the uncertainty of the applicability or
reliability of the results of a new product. In addition, the availability
of full or even partial payment for the Company’s products and tests, whether by
third-party payors (e.g. insurance companies), or the patients themselves, will
likely heavily influence physicians’ decisions to recommend or use the Company’s
products.
The Company may not be able to
establish its cytology and molecular diagnostics laboratory for the performance
of its planned testing and analytical services or may encounter difficulties in
operating or maintaining this laboratory facility, which could cause delays and
unexpected problems.
The
Company has only begun to establish its laboratory and will rely on a single
physical facility in Seattle, Washington for the testing of NAF samples.
The Company plans to submit applications to obtain certification for its
laboratory under CLIA and Washington state regulations and apply to become
accredited by the College of American Pathologists, and must meet various
standards imposed by both federal and state regulatory authorities. There
is no guarantee that the Company’s facility will be adequate or that the Company
will obtain Washington state or federal CLIA certification for this facility as
planned. The Company’s management team does not have significant prior
experience with establishing this type of laboratory facility. In
addition, if established, this facility and certain pieces of laboratory
equipment required for the performance of the Company’s testing and analytical
services would be expected to be difficult and costly to replace and may require
significant replacement lead-time. In the event that the Company is unable
to establish its intended laboratory facility or, if after completion, such
laboratory or equipment is adversely affected by periodic malfunctions or
man-made, or natural disasters, the Company may be unable to conduct its
business and meet potential customer demands for a significant period of
time.
The
loss of the services of the Company’s chief executive officer could adversely
affect its business.
The
Company’s success is dependent in large part upon its ability to execute its
business plan, manufacture the MASCT System, establish its clinical and
diagnostic laboratory, and to attract and retain highly skilled professional,
sales and marketing personnel. In particular, due to the relatively early
stage of the Company’s business, its future success is highly dependent on the
services of Dr. Quay, its chief executive officer and founder, to provide the
necessary experience to execute the Company’s business plan. The Company
does not currently maintain “key man” insurance with respect to Dr. Quay.
The loss of his services for any reason could impede the Company’s ability to
achieve its objectives, such as the commercialization of the MASCT System and
the development of a core of healthcare professionals who use the MASCT System,
particularly initially, as the Company seeks to build a reputation among
physicians and clinicians.
The
Company may experience difficulty in locating, attracting, and retaining
experienced and qualified personnel, which could adversely affect its
business.
The
Company will need to attract, retain, and motivate experienced anatomic
pathologists, cytologists, histotechnologists, skilled laboratory and
information technology staff, experienced sales representatives, and other
personnel, particulary in the Greater Seattle area as it commences its initial
launch of the MASCT System. These employees may not be available in this
geographic region. In addition, competition for these employees is intense
and recruiting and retaining skilled employees is difficult, particularly for a
development-stage organization such as the Company. If the Company is not
able to attract and retain qualified personnel, revenues and earnings may be
adversely affected.
9
The Company has no prior experience
with commercializing any products or services, and it will need to establish a
sophisticated sales and marketing organization in order to successfully
commercialize the MASCT System.
The
Company intends to build a direct sales force to be comprised initially of eight
sales professionals to target physicians and mammography clinics in the
Northwestern United States and plans eventually to expand its sales team to
include sales professionals nationwide. Marketing the MASCT System to
physicians and healthcare professionals will require the Company to educate them
on the comparative advantages of the MASCT System over other methods currently
used for the detection and diagnosis of breast cancer. Experienced sales
representatives may be difficult to locate and all sales representatives will
need to undergo training. The Company will need to incur significant costs
to build its internal sales force. Based on its current operating plan,
the Company expects to incur costs of approximately $3.5 million in connection
with initial hiring and building its national sales force. The Company
cannot be certain that it will be able to recruit sufficiently skilled sales
representatives, or that any new sales representatives will ultimately become
productive. If the Company is unable to recruit, train and retain
qualified and productive sales personnel, its ability to commercialize the MASCT
System and any second generation products and to generate revenues will be
impaired.
The
Company will need to engage third-party suppliers for the production of the
MASCT System in commercial quantities, and the inability to find such suppliers,
or to maintain relationships with them, could adversely affect the Company’s
business.
The
Company does not currently have any long-term contracts or arrangements with any
laboratory equipment and disposable reagent suppliers, or any device or kit
manufacturers for the production of the MASCT System and its components in
commercial quantities. While the Company has entered into a short-term
contract with a third party medical device manufacturer to produce limited
quantities of the MASCT System to permit the Company to perform field testing
prior to commercial launch, there can be no assurance that commercial quantities
of the MASCT System can be manufactured by this supplier. The Company
anticipates that it will need to rely on third-party suppliers for the continued
manufacture and supply of the MASCT System, NAF collection device and patient
collection kits and for the laboratory instruments, equipment, consumable
supplies, and other materials necessary to perform the specialized diagnostic
tests. If the Company is unable to identify third-party suppliers to
produce the MASCT System in quantities sufficient for the Company’s planned
product launch on acceptable terms, or at all, the Company will not be able to
commercialize the MASCT System and generate revenues from its sales as
planned. In addition, if at any time after commercialization of the MASCT
System, the Company is unable to secure essential equipment or supplies in a
timely, reliable and cost-effective manner, it could experience disruptions in
its services that could adversely affect anticipated results.
Currently
Medicare and certain insurance carriers will not reimburse for the NAF
collection procedure, which could slow or limit adoption of the MASCT System or
prevent the Company from pricing the MASCT System at desired
levels.
The HALO
System, an NAF collection device similar to the MASCT System, is being sold by
Neomatrix, Inc., or Neomatrix, of Irvine, California. Previously, Cytyc,
Inc., or Cytyc, of Marlboro, Massachusetts, marketed FirstCyte, a device to
collect NAF by ductal lavage. Certain insurance carriers do not currently
reimburse for the HALO System or FirstCyte procedures. For
example, in September 2010, United Healthcare published a policy statement
indicating that it would not cover the costs of these procedures because it
believes there is insufficient clinical evidence to support medical efficacy,
based on its conclusion that there is inadequate clinical evidence that
automated nipple aspiration either allows for better clinical decision-making or
reduces breast cancer mortality. United Healthcare also recommended
further studies to determine the efficacy of cytological examination of ductal
fluid in detecting atypical cells to identify women at increased risk of breast
cancer, as well as comparisons of the results to established methods of
detecting and diagnosing breast cancer. Similarly, Medicare does
not reimburse for the NAF collection procedure. Lack of Medicare or
insurance coverage will require patients to bear the full costs of the NAF
sample acquisition process used with the MASCT System. As a result, and
particularly in light of healthcare reform and cost-containment initiatives
being undertaken widely across the United States, physicians and other
healthcare professionals may be slow to adopt the MASCT System and may not
recommend its use in patients. The Company may be forced to reduce the
price of the MASCT System components in response to low demand or to provide
discounted pricing arrangements in order to secure contracts, or may not be able
to sell the product and services components of the MASCT System at acceptable
margins, which would severely limit the Company’s ability to generate
revenues.
Competitive
bidding practices under Medicare and healthcare reform generally may prevent us
from furnishing services to certain patients or medical providers and bidding
pressures may negatively affect our future revenues and potential
profitability.
The
Company expects to bill the Medicare program directly for services we perform
for Medicare patients. In 2003, Congress required the Centers for
Medicare & Medicaid Services, or CMS, to conduct a demonstration program on
using competitive bidding for clinical lab tests that are furnished without a
face-to-face encounter between the individual and the entity performing the
test, to determine whether competitive bidding could be used to provide lab
services at reduced cost to Medicare, while continuing to maintain quality and
access to care. Although this requirement was repealed by Congress in
2008, the reintroduction and widespread use of competitive bidding, if
implemented for clinical lab services, could have a significant effect on the
clinical laboratory industry in general and on the Company’s business in
particular. The Company could be precluded from furnishing certain
clinical laboratory services to Medicare beneficiaries if the Company is not the
successful bidder or, as part of the competitive bidding process, the Company
could be required to bill at significantly lower rates than currently projected
in order to participate in the Medicare program. In addition, states
could initiate efforts to establish competitive bidding processes for the
provision of clinical laboratory services under the state Medicaid
program.
Additionally,
the Company could face pricing pressures under the recently enacted Patient
Protection and Affordable Care Act, as amended by the Health Care and Education
Affordability Reconciliation Act, or the PPACA. The PPACA is expected
to substantially change the way healthcare is financed by both governmental and
private payors. The PPACA provides for changes to extend medical
benefits to those who currently lack insurance coverage, encourages improvements
in the quality of health care items and services, and significantly impacts the
U.S. medical industry in a number of ways. By extending coverage
to a larger population, the PPACA may substantially change the structure of the
health insurance system and the methodology for reimbursing medical services,
drugs and devices. These structural changes could entail
modifications to the existing system of private payors and government programs,
such as Medicare, Medicaid and State Children’s Health Insurance Program, as
well as the creation of a government-sponsored healthcare insurance source, or
some combination of both. Such restructuring of the coverage of
medical care in the United States could impact the extent of reimbursement for
medical devices and services, including the Company’s planned laboratory
services.
In
addition, both the federal and state governmental authorities in the United
States continue to propose and pass new legislation affecting coverage and
reimbursement policies, which are designed to contain or reduce the cost of
healthcare. Further federal and state proposals and healthcare reforms are
likely, which could limit the prices that can be charged for the products and
services and may further limit our commercial opportunity. There may be future
changes that result in reductions in current coverage and reimbursement levels
for current and future products and services, and the Company cannot predict the
scope of any future changes or the impact that those changes would have on its
operations or potential profitability. All of these changes could
negatively affect the Company’s future revenues and potential
profitability.
The
Company’s intended business to sell predictive medical products exposes the
Company to possible litigation and product liability claims.
The
Company’s business exposes it to potential product liability risks from the
MASCT System inherent in the testing, marketing and processing of predictive, or
personalized medical products. Product liability risks may arise from, but
are not limited to:
10
|
|
·
|
the inability of the MASCT System
to extract a sufficient NAF sample from the breast, which may lead to an
NAF sample size that is inadequate for proper processing at the Company’s
laboratory and insufficient for screening, which could lead to an
inaccurate assessment of the health of the
patient;
|
|
|
·
|
failure by healthcare
professionals to properly safeguard NAF samples collected using the MASCT
System;
|
|
|
·
|
the potential loss, mislabeling
or misplacement of NAF sample shipments and test
kits;
|
|
|
·
|
the MASCT System is a manually
operated device, and, as a result, human error due to fatigue or
distraction by the healthcare professional may result in improper
collection of NAF or application of the MASCT
System;
|
|
|
·
|
inadequate cleaning of the
collection pump between patients resulting in mixing of NAF samples from
two patients or NAF samples attributed to the wrong
patient;
|
|
|
·
|
improper fitting of the MASCT
System device to the breast;
and
|
|
|
·
|
inadequate cleaning of the breast
prior to applying the MASCT
System.
|
A
successful product liability claim, or the costs and time commitment involved in
defending against a product liability claim, could have a material adverse
effect on the Company’s business. Any successful product liability claim
may prevent the Company from obtaining adequate product liability insurance, in
the future, on commercially desirable or reasonable terms. An inability to
obtain sufficient insurance coverage at an acceptable cost, or otherwise, to
protect against potential product liability claims could prevent or inhibit the
commercialization of the Company’s products.
The
Company will need to establish and operate a CLIA-certified laboratory to
analyze and read NAF samples collected using the MASCT System, and intends
to report the results to referring healthcare professionals, researchers
and potential collaborators worldwide. The Company may be subject to
claims by an affected patient, healthcare provider, researcher or collaborator
if laboratory personnel make any of the following mistakes, by way of
example:
|
|
·
|
errors in the analysis of the NAF
tests;
|
|
|
·
|
incorrect aggregation,
categorization or labeling of NAF
data;
|
|
|
·
|
improper, incorrect or inaccurate
development of a computer database which categorizes, analyzes, or
compares NAF test data; or
|
|
|
·
|
misinterpretation of the results
of the test or collected
data.
|
We intend
to maintain insurance to protect the Company against such suits, but we cannot
be certain that the insurance will be sufficient to cover potential
damages, or that it will be cost-effective for us to maintain such a
policy. Any outcome against the Company could involve significant monetary
judgments and could severely impact the Company’s financial resources and would
be expected to impair the ability of the Company in the future to obtain
malpractice, or other insurance, for its laboratory services.
11
If
the Company’s patent positions do not adequately protect its products, others
could compete with the Company more directly, which would adversely affect its
business.
The
Company’s commercial success will depend in part on its ability to obtain new
patents and enforce its existing patents, as well as its ability to maintain
adequate protection of other intellectual property for its technologies and
products in the United States and abroad. If the Company does not
adequately protect its intellectual property, competitors may be able to use its
technologies and erode or negate any competitive advantage it may have, which
could adversely affect its business, negatively affect its position in the
marketplace and limit its ability to commercialize its products. The laws
of some foreign countries do not protect the Company’s proprietary rights to the
same extent as the laws of the United States, and the Company may encounter
significant problems in protecting its proprietary rights in these
countries.
The
patent positions of diagnostic and medical device companies, including ours,
involve complex legal and factual questions, and, therefore, validity and
enforceability cannot be predicted with certainty, nor can we be certain that we
are not infringing the patents of others. Our patents may be challenged,
deemed unenforceable, invalidated or circumvented. The Company will be
able to protect its proprietary rights from unauthorized use by third parties
only to the extent that its proprietary technologies, existing products and any
future products are covered by valid and enforceable patents or are effectively
maintained as trade secrets, and the Company is willing and has the resources to
take enforcement action against such unauthorized use by third
parties.
The
degree of future protection for the Company’s proprietary rights is uncertain,
and the Company cannot ensure that:
|
|
·
|
it
was the first to make the inventions covered by each of its patents and
pending patent applications;
|
|
|
·
|
it
was the first to file patent applications for these
inventions;
|
|
|
·
|
others
will not independently develop similar, or alternative technologies, or
duplicate any of the Company’s
technologies;
|
|
|
·
|
any
of the Company’s pending patent applications will result in issued
patents;
|
|
|
·
|
any
of the Company’s issued patents will be valid or
enforceable;
|
|
|
·
|
any
patents issued to the Company will provide a basis for commercially viable
products, will provide the Company with any competitive advantages or will
not be challenged by third parties;
|
|
|
·
|
the
Company will develop additional proprietary technologies or products that
are patentable; or
|
|
|
·
|
the
patents of others will not have an adverse effect on the Company’s
business.
|
The
Company may be unable to adequately prevent disclosure of trade secrets and
other proprietary information.
The
Company relies on trade secrets to protect its proprietary know-how and
technological advances, particularly where it does not believe patent protection
is appropriate or obtainable. However, trade secrets are difficult to
protect. The Company relies in part on confidentiality agreements with its
employees, consultants, outside scientific collaborators and other advisors to
protect its trade secrets and other proprietary information. These
agreements may not effectively prevent disclosure of confidential information
and may not provide an adequate remedy in the event of unauthorized disclosure
of confidential information. In addition, others may independently
discover the Company’s trade secrets and proprietary information. Costly
and time-consuming litigation could be necessary to enforce and determine the
scope of the Company’s proprietary rights. Failure to obtain, or maintain,
trade secret protection could enable competitors to use the Company’s
proprietary information to develop products that compete with the Company’s
products or cause additional, material adverse effects upon the Company’s
competitive business position.
12
The
Company’s current patent portfolio may not include all patent rights needed for
the full development and commercialization of the Company’s products. The
Company cannot be sure that patent rights it may need in the future will be
available for license on commercially reasonable terms, or at all.
Although
the Company’s patents may prevent others from making, using or selling similar
products, they do not ensure that the Company will not infringe the patent
rights of third parties. The Company may not be aware of all patents or
patent applications that may impact its ability to make, use or sell the MASCT
System or its other proposed product or service offerings. Furthermore,
the Company may not be aware of published or granted conflicting patent
rights. Any conflicts resulting from patent applications and patents of
others could significantly reduce the coverage of its patents and limit its
ability to obtain meaningful patent protection. If others obtain patents
with conflicting claims, the Company may need to obtain licenses to these
patents or to develop or obtain alternative technology.
The
Company may not be able to obtain any licenses or other rights to patents,
technology or know-how from third parties necessary to conduct its business as
described in this prospectus and such licenses, if available at all, may not be
available on commercially reasonable terms. Any failure to obtain such
licenses could delay or prevent the Company from developing or commercializing
its proposed products and services, which would harm its business. Litigation or
patent interference proceedings need to be brought against third parties, as
discussed below, to enforce any of the Company’s patents or other proprietary
rights, or to determine the scope and validity or enforceability of the
proprietary rights of such third parties.
Litigation
regarding patents, patent applications and other proprietary rights may be
expensive and time consuming. If the Company is involved in such
litigation, it could cause delays in bringing product or service candidates to
market and harm its ability to operate.
The
Company’s commercial success will depend in part on its ability to manufacture,
use and sell products and services without infringing patents or other
proprietary rights of third parties. Third parties may challenge or
infringe upon our, or our licensors’ existing, or future patents.
Although the Company is not currently aware of any pending or actual
litigation, or other proceedings, or third-party claims of intellectual property
infringement related to the MASCT System or its product candidates, the medical
device and diagnostic industry is characterized by extensive litigation
regarding patents and other intellectual property rights. Other parties
may obtain patents in the future and allege that the use of the Company’s
technologies infringes these patent claims or that it is employing their
proprietary technology without authorization.
Legal proceedings involving the
Company’s patents or patent applications, or those of others, could result in
adverse decisions regarding the patentability of its inventions relating to its
products or the enforceability, validity or scope of protection offered by its
patents.
Even if
the Company is successful in proceedings involving its intellectual property
rights or those of others, it may incur substantial costs and divert management
time and attention in pursuing these proceedings. If the Company is unable to
avoid infringing the patent rights of others, it may be required to seek a
license, defend an infringement action, or challenge the validity of the patents
in court. Patent litigation is costly and time-consuming and the
Company may not have sufficient resources to bring enforcement actions to a
successful conclusion. In addition, if the Company does not obtain a
license, develop or obtain non-infringing technology, fail to defend an
infringement action successfully or have infringed patents declared invalid, the
Company may incur substantial monetary damages; encounter significant delays in
bringing its product candidates to market; or be precluded from participating in
the manufacture, use or sale of its product candidates or methods of treatment
requiring licenses.
13
Risks
Related to the Company’s Industry
The
inadvertent or unintentional failure to comply with the complex government
regulations concerning privacy of medical records could impact the Company with
fines and adversely affect its reputation.
The
federal privacy regulations, among other things, restrict the Company’s ability
to use or disclose protected health information in the form of
patient-identifiable laboratory data, without written patient authorization, for
purposes other than payment, treatment, or healthcare operations (as defined
under the Health Insurance Portability and Accountability Act, or HIPAA) except
for disclosures for various public policy purposes and other permitted purposes
outlined in the privacy regulations. The privacy regulations provide
for significant fines and other penalties for wrongful use or disclosure of
protected health information, including potential civil and criminal fines and
penalties. Although the HIPAA statute and regulations do not
expressly provide for a private right of damages, the Company could incur
damages under state laws to private parties for the wrongful use or disclosure
of confidential health information or other private personal
information.
The
Company intends to implement policies and practices that it believes will make
it compliant with the privacy regulations. However, the documentation
and process requirements of the privacy regulations are complex and subject to
interpretation. Failure to comply with the privacy regulations could
subject the Company to sanctions or penalties, loss of business, and negative
publicity.
The HIPAA
privacy regulations establish a “floor” of minimum protection for patients as to
their medical information and do not supersede state laws that are more
stringent. Therefore, the Company is required to comply with both
HIPAA privacy regulations and various state privacy laws. The failure
to do so could subject it to regulatory actions, including significant fines or
penalties, and to private actions by patients, as well as to adverse publicity
and possible loss of business. In addition, federal and state laws
and judicial decisions provide individuals with various rights for violation of
the privacy of their medical information by healthcare providers such as the
Company.
Changes
in regulations, policies, or payor mix may adversely affect reimbursement for
laboratory services and could have a material adverse impact on the Company’s
revenues and profitability.
Most of
the Company’s services will be billed to a party other than the physician who
ordered the test. Reimbursement levels for healthcare services are
subject to continuous and often unexpected changes in
policies. Changes in governmental and third-party reimbursement may
result from statutory and regulatory changes, retroactive rate adjustments,
administrative rulings, competitive bidding initiatives, and other policy
changes. Uncertainty also exists as to the coverage and reimbursement
status of new services. Government payors and insurance companies
have increased their efforts to control the cost, utilization, and delivery of
healthcare services. For example, at least yearly, Congress has
considered and enacted changes in the Medicare fee schedule in conjunction with
budgetary legislation. Further reductions of reimbursement for
Medicare services or changes in policy regarding coverage of tests may be
implemented from time to time. The payment amounts under the Medicare
fee schedules are often used as a reference for the payment amounts set by other
third-party payors. As a result, a reduction in Medicare
reimbursement rates could result in a corresponding reduction in the
reimbursements the Company will receive from such third-party
payors. Changes in test coverage policies of other third-party payors
may also occur. Such reimbursement and coverage changes in the past
have resulted in reduced prices, added costs and reduced accession volume, and
have imposed more complex regulatory and administrative
burdens. Further changes in federal, state, and local third-party
payor laws, regulations, or policies may have a material adverse impact on the
Company’s business.
Failure
to participate as a provider with payors, or operating as a non-contracting
provider, could have a material adverse effect on revenues.
The
healthcare industry has experienced a trend of consolidation among healthcare
insurers, resulting in fewer but larger insurers with significant bargaining
power in negotiating fee arrangements with healthcare providers, including
laboratories. Managed care providers often restrict their contracts
to a small number of laboratories that may be used for tests ordered by
physicians in the managed care provider’s network. If the Company
does not have a contract with a managed care provider, it may be unable to gain
those physicians as clients. In cases in which it will contract with
a specified insurance company as a participating provider, it will be considered
“in-network,” and the reimbursement of third-party payments is governed by
contractual relationships. The Company’s in-network services will be
primarily negotiated on a fee-for-service basis at a discount from the Company’s
patient fee schedule, which could result in price erosion that would adversely
affect revenues. The Company’s failure to obtain managed care
contracts, or participate in new managed care networks, could adversely affect
revenues and profitability. In cases in which the Company does not
have a contractual relationship with an insurance company, or is not an approved
provider for a government program, it will have no contractual right to collect
for services and such payors may refuse to reimburse it for services, which
could lead to a decrease in accession volume and a corresponding decrease in
revenues. As an out-of-network provider, reductions in reimbursement
rates for non-participating providers could also adversely affect the
Company. Third-party payors, with whom the Company does not
participate as a contracted provider, may also require that it enter into
contracts, which may have pricing and other terms that are materially less
favorable to the Company than the terms under which it intends to
operate. While accession volume may increase as a result of these
contracts, revenues per accession may decrease.
14
Use of
the Company’s laboratory services as a non-participating provider is also
expected to result in greater copayments for the patient unless the Company
elects to treat them as if it were a participating provider in accordance with
applicable law. Treating such patients as if the Company were a
participating provider may adversely impact results of operations because it may
be unable to collect patient copayments and deductibles. In some states,
applicable law prohibits the Company from treating these patients as if it were
a participating provider. As a result, referring physicians may avoid use of the
Company’s services which could result in a decrease in accession volume and
adversely affect revenues.
Changes
in FDA policies regarding the “home brew” exception from FDA review for
laboratory-developed tests and reagents could adversely affect the Company’s
business and results of operations.
Laboratory
diagnostic tests developed and validated by a laboratory for its own use, also
known as laboratory developed tests, which are referred to as LDTs or “home
brew” tests, are subject to regulation under the federal Food, Drug
and Cosmetic Act, or FDCA. To date, the FDA has decided, as a matter
of enforcement discretion, not to exercise its authority with respect to most
“home brew” tests performed by high complexity laboratories certified under
CLIA, which is the type of laboratory that the Company intends to
establish. The Company does not believe that the cytology or IHC
testing of NAF samples in the MASCT System are LDTs; however, the Company’s
second generation biomarker tests will be LDTs for which it does not currently
intend to apply for FDA premarket notification or approval. In
addition, manufacturers and suppliers of analyte specific reagents, or ASRs,
which the Company may utilize for use in its LDTs, are required to register with
the FDA, conform manufacturing operations to the FDA’s Quality System
Regulation, or QSR, and comply with certain reporting and other record keeping
requirements. The FDA regularly considers the application of
additional regulatory controls over the development and use of LDTs by
laboratories. It is possible that the FDA will require premarket
notification or approval for LDT diagnostic tests that the Company may develop
and perform in the future. The FDA held public hearings in the third
quarter of 2010 to discuss how it will oversee LDTs. No definitive
recommendations or findings have yet come from these hearings, but it is likely
that the FDA will impose additional or new regulations affecting LDTs, including
requiring premarket notification or approval for these tests. Any
premarket notification or approval requirements could restrict or delay the
Company’s ability to provide specialized diagnostic services and may adversely
affect its business. FDA regulation of LDTs, or increased regulation
of the various medical devices used in laboratory-developed testing, could
increase the regulatory burden and generate additional costs and delays in
introducing new tests.
The
failure to comply with complex federal and state laws and regulations related to
submission of claims for services could result in significant monetary damages
and penalties and exclusion from the Medicare and Medicaid
programs.
If the
Company is successful in obtaining reimbursement from government healthcare
program, the Company will be subject to extensive federal and state laws and
regulations relating to the submission of claims for payment for services,
including those that relate to coverage of services under Medicare, Medicaid,
and other governmental healthcare programs, the amounts that may be billed for
services, and to whom claims for services may be submitted, such as billing
Medicare as the secondary, rather than the primary, payor. The
failure to comply with applicable laws and regulations, for example, enrollment
in PECOS, the Medicare Provider Enrollment, Chain and Ownership
System, could result in the Company’s inability to receive payment for its
services or attempts by third-party payors, such as Medicare and Medicaid, to
recover payments from the Company that have already been made. Submission of
claims in violation of certain statutory or regulatory requirements can result
in penalties, including civil money penalties of up to $10,000 for each item or
service billed to Medicare in violation of the legal requirement, and exclusion
from participation in Medicare and Medicaid. Government authorities
may also assert that violations of laws and regulations related to submission of
claims violate the federal False Claims Act or other laws related to fraud and
abuse, including submission of claims for services that were not medically
necessary. The Company will be generally dependent on independent
physicians to determine when its services are medically necessary for a
particular patient. Nevertheless, the Company could be adversely
affected if it was determined that the services it provided were not medically
necessary and not reimbursable, particularly if it were asserted that the
Company contributed to the physician’s referrals to it of unnecessary services.
It is also possible that the government could attempt to hold the Company liable
under fraud and abuse laws for improper claims submitted by an entity for
services that it performed, if it were found to have knowingly participated in
the arrangement that resulted in submission of the improper
claims.
15
The
Company’s business is subject to rapid technological innovation, and the
development by third parties of new or improved diagnostic testing technologies
or information technology systems could have a material adverse effect on the
Company’s business.
The
anatomic pathology industry is characterized by rapid changes in technology,
frequent introductions of new diagnostic tests, and evolving industry standards
and client demands for new diagnostic technologies. Advances in technology may
result in the development of more point-of-care testing equipment that can be
operated by physicians or other healthcare providers in their offices, or by
patients themselves, without the services of freestanding laboratories and
pathologists, thereby reducing demand for the Company’s services. In addition,
advances in technology may result in the creation of enhanced diagnostic tools
that enable other laboratories, hospitals, physicians, patients, or third
parties to provide specialized laboratory services superior to the Company’s or
that are more patient-friendly, efficient, or cost-effective. The
Company’s success depends upon its ability to acquire or license on favorable
terms or develop new and improved technologies for early diagnosis before its
competitors and to obtain appropriate reimbursement for diagnostic tests using
these technologies. Introduction of prophylactic treatments or cures
for breast cancer could substantially reduce or eliminate demand for its
services.
Risks
Related to This Offering, the Securities Markets and Investment in the Company’s
Securities
There
has been no prior public market for the Company’s securities and the lack of
such a market may make resale of the securities difficult.
No prior
public market has existed for the Company’s securities and the Company cannot
assure any investor that a market will develop subsequent to this
offering. The Company intends to apply for listing of its common
stock, the Units and the Class B Warrants on the NYSE
Amex. However, it does not know whether a market for the Company’s
securities will ever develop or continue. If the Company’s securities
are not listed on the NYSE Amex, or a public trading market does not otherwise
develop, you may have difficulty selling your Units, common stock or Class B
Warrants. If the Company is not successful in listing on the NYSE
Amex, it may then apply for listing of its securities on the NASDAQ Capital
Market, or have its securities quoted on the OTC Bulletin Board, or the Pink OTC
Market, Inc., an Internet-based quotation service for over-the-counter
securities. The OTC Bulletin Board and Pink OTC Markets generally
have lower trading volume and liquidity, which could result in lower trading
prices and a decreased ability to sell securities.
The Class A Warrants to be issued in
this offering will not be listed on a securities exchange, are exercisable for a
period of only 10 days beginning on the sixth trading day after separation of
the securities underlying the Units and may lose all value if the trading price
of the Company’s common stock
drops below $0.05 per share.
Although
the Company intends to apply for the listing of its common stock, Units and
Class B Warrants on the NYSE Amex, it does not plan to list the Class A Warrants
on any securities exchange. There may be little or no secondary
market for the Class A Warrants. Even if there is a secondary market,
it may not provide enough liquidity to allow you to trade or sell the warrants
easily. Accordingly, you will need to exercise the Class A Warrants
for common stock in order to convert them into securities listed for trading on
an exchange. In addition, the Class A Warrants must be exercised
within 10 days beginning on the sixth trading day after the date on which the
securities underlying the Units separate, and will expire if not exercised
during that ten-day period. The Company intends to issue a press
release announcing the date on which separate trading of the common stock and
Class B Warrants underlying the Units will begin and the date by which the Class
A Warrants must be exercised. If you do not exercise your Class A
Warrants on or before the expiration date, you will lose all value of the Class
A Warrants. Additionally,
because the Class A warrants have an exercise price of $0.05 per share, if our
stock price was to drop to or below $0.05 per share prior to exercising the
warrants, these warrants could not be exercised to acquire a share and the Class
A warrants would expire without value.
16
Purchasers
of Units will be entitled to exercise the Class A Warrants and the Class B
Warrants only if they hold the Units through the dates on which the Class A
Warrants and the Class B Warrants become exercisable.
The
Company intends to apply for the listing of the Units on the NYSE Amex so that
the Units will be tradable upon the completion of this offering. The
securities underlying the Units will separate from the Units on the 90th day
after the date of this prospectus, unless Dawson James Securities, Inc.
determines that an earlier separation date is acceptable based on its assessment
of the relative strengths of the securities markets and small capitalization
companies in general, and the trading pattern of, and demand for, the Company’s
securities in particular. Each Class A Warrant will be exercisable
for a period of 10 days beginning on the sixth trading day after the separation
of the securities underlying the Units, and each Class B Warrant will be
exercisable for a period of five years after the separation of the securities
underlying the Units. Because the Class A Warrants and the Class B
Warrants will not be exercisable until the separation of the Units as described
above, purchasers of Units will be required to hold the Units through the
respective dates on which the Class A Warrants and the Class B Warrants become
exercisable in order to have the ability to exercise these
warrants.
Holders
of the Company’s common stock will incur substantial dilution as a result of the
exercise of the Class A Warrants and other issuances of securities by the
Company.
The
Company anticipates that upon the completion of this offering, it will issue
3,000,000 shares of common stock underlying the Units. An additional
6,000,000 shares of common stock are expected to be issued within 10 days after
the sixth trading day following separation of the Units as investors exercise
their Class A Warrants, which are exercisable on a cashless, net exercise basis
at a price of $0.05 per share. The issuance of additional securities
by the Company upon the exercise of these warrants, as well as stock options
that the Company has issued or may issue to employees, officers, directors and
consultants, would result in substantial dilution to the Company’s stockholders
and could adversely affect the trading price for the Company’s common
stock.
The
Company does not expect to receive any proceeds from the exercise of the Class A
Warrants and may not receive any proceeds from the exercise of the Class B
Warrants to be issued in this offering.
Because
the exercise price of the Class A Warrants is $0.05 per share and because these
warrants are exercisable on a cashless, net exercise basis, the Company expects
to receive no proceeds from any exercises of these warrants. The
Class B Warrants have an exercise price equal to 55% of the Unit price in this
offering, and will be exercisable commencing on the first anniversary of
the date of this prospectus and remaining exercisable until the fifth
anniversary of the separation of the Class B Warrants from the
Units. The Company’s stock price may trade below the Class B Warrant
exercise price, in which case the holders would not exercise the
warrants. Even if the Company’s stock price trades above the warrant
exercise price, the warrant holders may choose not to exercise these warrants
for a period of several years, or at all, or they may elect the exercise the
Class B Warrants pursuant to the cashless, or net exercise provisions in the
warrants, in which case the Company would not receive any cash proceeds from the
exercise. In addition, the Company has the right to redeem the Class
B Warrants at $0.25 per share of common stock underlying the Class B Warrants in
the event (i) the average of the closing price of the Company’s common stock
exceeds 200% of the exercise price for 10 consecutive trading days while the
warrants are exercisable and (ii) there is then an effective registration
statement with a current prospectus on file with the SEC. As a
result, the Company may not receive any proceeds from the exercise of the Class
B Warrants for several years, if at all.
The
ownership of the Company’s common stock is concentrated among a small number of
stockholders, and if its principal stockholders, directors and officers choose
to act together, they may be able to control the Company’s management and
operations, which may prevent the Company from taking actions that may be
favorable to you.
The
Company’s ownership is concentrated among a small number of stockholders,
including our founders, directors, officers and entities related to these
persons. Upon the completion of this offering, and after giving
effect to the expected full exercise of the Class A Warrants, the Company’s
directors, officers and entities affiliated with them will beneficially own
approximately 29.4% of the outstanding voting securities of the
Company. Accordingly, these stockholders, acting together, will have
the ability to exert substantial influence over all matters requiring approval
by the Company’s stockholders, including the election and removal of directors
and any proposed merger, consolidation or sale of all or substantially all of
its assets. In addition, they could dictate the management of our
business and affairs. This concentration of ownership could have the
effect of delaying, deferring or preventing a change in control of the Company
or impeding a merger or consolidation, takeover or other business combination
that could be favorable to you.
17
Anti-takeover
provisions in the Company’s charter documents and Delaware law could delay or
prevent a change in control which could limit the market price of the Company’s
common stock and could prevent or frustrate attempts by the Company’s
stockholders to replace or remove current management and the current board of
directors.
The
Company’s amended and restated certificate of incorporation and amended and
restated bylaws, which are to become effective upon the completion of this
offering, contain provisions that could delay or prevent a change in control of
the Company or changes in the board of directors of the Company that our
stockholders might consider favorable. For more information about these
anti-takeover provisions as well as anti-takeover provisions under the Delaware
General Corporation Law, please see “Description of Securities—Anti-Takeover
Devices.” These and other provisions in the Company’s corporate
documents and Delaware law might discourage, delay or prevent a change in
control or changes in the board of directors of the Company. These
provisions could also discourage proxy contests and make it more difficult for
an investor and other stockholders to elect directors and cause the Company to
take other corporate actions. Furthermore, the existence of these
provisions, together with Delaware law, might hinder or delay an attempted
takeover other than through negotiations with the board of
directors.
The
Company does not expect to pay dividends in the future, which means that
investors may not be able to realize the value of their shares except through
sale.
The
Company has never and does not anticipate that it will declare or pay a cash
dividend. The Company expects to retain earnings, if any, for its
business and does not anticipate paying dividends on common stock at any time in
the foreseeable future. Because it does not anticipate paying
dividends in the future, the only opportunity to realize the value of the common
stock will likely be through a sale of those shares.
18
FORWARD-LOOKING
STATEMENTS
This
prospectus contains, in addition to historical information, certain information,
assumptions and discussions that may constitute forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially than those projected, or anticipated. Actual
results could differ materially from those projected in the forward-looking
statements. Although we believe our assumptions underlying the forward-looking
statements are reasonable, we cannot assure you that the forward-looking
statements set out in this prospectus will prove to be accurate. We
typically identify these forward-looking statements by the use of
forward-looking words such as “expect,” “potential,” “continue,” “may,” “will,”
“should,” “could,” “would,” “seek,” “intend,” “plan,” “estimate,” “anticipate”
or the negative version of those words or other comparable
words. Forward looking statements contained in this prospectus
include, but are not limited to, statements about:
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our
ability to engage third-party suppliers to manufacture the MASCT System
and its components at quantities and costs acceptable to
us;
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our
ability to satisfy ongoing FDA requirements for the MASCT System and to
obtain regulatory approvals for our other products and services in
development;
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the
benefits and clinical accuracy of the MASCT System and our services, and
whether any product or service that we commercialize is safer or more
effective than competing products and
services;
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our
ability to establish and maintain intellectual property rights covering
the MASCT System and our services;
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the
willingness of insurance companies and other third-party payors to approve
our products and services for coverage and
reimbursement;
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our
ability to establish and maintain a sales force to market the MASCT System
and other products and services that we may
develop;
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our
ability to sell the MASCT System and our services at prices acceptable to
us;
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our
expectations regarding, and our ability to satisfy, federal, state and
foreign regulatory
requirements;
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the
accuracy of our estimates of the size and characteristics of the markets
that the MASCT System and our services may
address;
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our
expectations as to future financial performance, expense levels and
liquidity sources; and
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our
ability to attract and retain key
personnel.
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This
prospectus also contains estimates and other statistical data made by
independent parties and by us relating to market size and growth and other
industry data. These and other forward-looking statements made in
this prospectus are presented as of the date on which the statements are made.
We have included important factors in the cautionary statements included in this
prospectus, particularly in the section entitled “Risk Factors,” that we believe
could cause actual results or events to differ materially from the
forward-looking statements that we make. Our forward-looking statements do not
reflect the potential impact of any new information, future events or
circumstances that may affect our business. Except as required by
law, we do not intend to update any forward-looking statements after the date on
which the statement is made, whether as a result of new information, future
events or circumstances or otherwise.
19
We
estimate that the net proceeds of the sale of the Units that we are offering
will be approximately $16.0 million, or approximately $18.3 million if the
underwriters exercise their over-allotment option in full, assuming an initial
public offering price of $6.00 per Unit, which is the midpoint of the range
listed on the cover page of this prospectus, and after deducting estimated
underwriting discounts and commissions, underwriter expense reimbursement
obligations and estimated offering expenses that we must pay.
A $1.00
increase (decrease) in the assumed initial public offering price of $6.00 per
Unit would increase (decrease) the net proceeds to us from this offering by
approximately $2.7 million, assuming the number of Units offered by us, as set
forth on the cover page of this prospectus, remains the same and after deducting
estimated underwriting discounts and commissions and estimated offering expenses
payable by us.
The
principal purposes of this offering are to obtain additional working capital to
fund anticipated operating expenses, establish a public market for
our common stock and facilitate future access to the public
markets. We estimate that we will use the net proceeds from this
offering primarily for the following purposes:
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up
to approximately $750,000 of these net proceeds to establish a cytology
and molecular diagnostics laboratory focused exclusively on breast
cancer;
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up
to approximately $1.5 million of these net proceeds to manufacture MASCT
System units needed to launch the MASCT System in Northwestern United
States as the initial market for the distribution of the
product;
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up
to approximately $3.5 million of these net proceeds to hire and train
sales and marketing personnel for initial regional marketing and
subsequent national distribution;
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up
to approximately $3.2 million of these net proceeds to develop and
commence manufacturing and commercialization of the Oxy-MASCT System, a
second-generation version of the MASCT System;
and
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up
to approximately $3.0 million to develop second generation biomarker tests
for tumor-related indications and complementary molecular diagnostic
assays.
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We
anticipate using the remaining approximately $4.0 million in net proceeds,
assuming an initial public offering price of $6.00 per Unit and no exercise of
the underwriters’ over-allotment option, for general corporate purposes,
such as general and administrative expenses, capital expenditures, working
capital, prosecution and maintenance of our intellectual property, repayment of
outstanding indebtedness to Dr. Quay (the terms of which are described below),
as well as the potential investment in technologies or products that complement
our business. We expect these expenses to include the repayment of current
liabilities of $558,882 through September 30, 2010, including accrued payroll of
$166,071, accrued expenses of $285,811 and repayment of loans to related parties
of $107,000, although the allocation of the remainder of the $4.0 million in net
proceeds among the purposes described in the preceding sentence cannot be
determined at this time.
We
have borrowed an aggregate of $105,000 from Dr. Quay pursuant to two promissory
notes that were callable by Dr. Quay starting on December 31,
2010. As of the date of this prospectus, Dr. Quay has not called the
notes. The notes bear an annual interest rate of 10% accruing from
June 30, 2010 and carry a pass-through loan origination fee of
$4,000. Additionally, we issued a third promissory note to Dr. Quay
in November 2010 in connection with a $500,000 line of credit extended us by Dr.
Quay. Pursuant to the terms of the note, all principal amounts
borrowed under the line of credit bear interest at an annual rate of 10%, and
all principal and accrued interest will be due and payable in full on December
31, 2011. As of the date of this prospectus, we have borrowed $80,000
under the line of credit. All amounts that have been borrowed from
Dr. Quay have been used to provide general working capital and to fund our
operations to date.
Although
we currently anticipate that we will use the net proceeds as described above,
there may be circumstances in which a reallocation of funds may be necessary, or
the proceeds may not be sufficient to achieve our business goals as currently
planned. The amount, timing and allocation of our actual expenditures
will depend on numerous factors, including the relative costs of commercial
production of the MASCT System, hiring and training our sales and marketing
personnel, establishing our planned laboratory and developing and testing
additional applications of the MASCT System, as well as the timing of our
planned commercial launch and the level of market demand for the MASCT System in
the Northwestern United States at the time of launch. If the costs to
establish our laboratory, to engage manufacturers for the commercial production
of the MASCT System or to hire and train our sales and marketing personnel
exceed our current estimates, we may, for example, allocate more of the proceeds
to these uses and defer development of the Oxy-MASCT System.
A portion
of the net proceeds may be used to acquire or invest in complementary
businesses, technologies, services or products in the event that we identify
opportunities for such acquisitions, or investments that we believe are in the
best interests of our stockholders. We have no current plans,
agreements or commitments with respect to any such acquisition or investment,
and we are not currently engaged in any negotiations with respect to any such
transaction.
Management
will retain broad discretion in the allocation of the net proceeds of this
offering. An investor will not have the opportunity to evaluate the
economic, financial or other information on which we base our decisions on how
to use the proceeds.
20
The
Company does not anticipate that it will declare dividends in the foreseeable
future but rather intends to retain any future earnings for the development of
the business. Payment of future cash dividends, if any, will be at
the discretion of the board of directors of the Company after taking into
account various factors, including the Company’s financial condition, operating
results, current and anticipated cash needs, outstanding indebtedness and plans
for expansion and restrictions imposed by lenders, if any.
CAPITALIZATION
The
following table sets forth the Company’s capitalization as of September 30, 2010
on:
|
|
·
|
an
actual basis; and
|
|
|
·
|
an
as-adjusted basis to reflect the receipt of the net proceeds from the sale
of Units in this offering at an assumed initial public offering price of
$6.00 per Unit, which is the midpoint of the range set forth on
the cover page of this prospectus, after deducting the estimated
underwriting discounts and commissions and estimated offering expenses,
and assuming the full exercise of the Class A
Warrants.
|
A
potential investor should read this capitalization table together with the
financial statements and the related notes appearing elsewhere in this
prospectus, as well as “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and other financial information included in
this prospectus.
|
As of September 30, 2010
|
||||||||
|
Actual
|
As Adjusted
|
|||||||
|
(unaudited)
|
||||||||
|
Common
Stock, $0.001 par value, 75,000,000 shares authorized and 6,000,067 and
15,000,067 shares outstanding, actual and as-adjusted, respectively
(1)
|
6,000 | 15,000 | ||||||
|
Additional
paid-in capital
|
334,585 | 16,170,085 | ||||||
|
Deficit
accumulated during development stage
|
(867,214 | ) | (867,214 | ) | ||||
|
Total
stockholders’ (deficit) equity
|
(526,629 | ) | 15,308,871 | |||||
|
(1)
|
The number of shares of the
Company’s common stock to be outstanding before the offering is based on
6,000,067 shares of common stock outstanding as of September 30,
2010, and excludes 1,000,000 shares of common stock reserved for future
issuance under our 2010 Stock Option and Incentive Plan. We
have assumed that all Class A Warrants issued in connection with the Units
in this offering will be exercised because the Class A Warrants have a
nominal exercise price of $0.05 per share and are exercisable under a
cashless, or net exercise feature that provides for the rounding up of
fractional shares issued upon such net
exercise.
|
21
Our net
tangible book value as of September 30, 2010 was $(526,629), or $(0.09) per
share of common stock. Net tangible book value per share represents
the amount of our total tangible assets less our total liabilities, divided by
the number of shares of common stock outstanding as of September 30,
2010. After giving effect to the sale by us of 3,000,000 shares
of common stock underlying the Units being sold in this offering at an assumed
initial public offering price of $6.00 per share, which is the midpoint of the
range listed on the cover page of this prospectus, and issuance of 6,000,000
shares of common stock underlying the Class A Warrants at an assumed exercise
price of $0.05 per share, and after deducting the 10% estimated underwriting
discounts and commissions, underwriter expense reimbursement obligations and
estimated offering expenses payable by us, our pro forma net tangible book value
as of September 30, 2010 would have been approximately $15.3 million,
or approximately $1.02 per share. This amount represents an immediate
increase in net tangible book value of $1.11 per share to our existing
stockholders and an immediate dilution in net tangible book value of
approximately $4.98 per share to new investors.
The
following table illustrates this hypothetical per-share dilution:
| $ | 6.00 | |||||||
|
Net
tangible book value per share as of September 30, 2010
|
$ | (0.09 | ) | |||||
|
Increase
in net tangible book value per share attributed to new investors
purchasing shares in this offering
|
1.11 | |||||||
|
As-adjusted
net tangible book value per share after this offering
|
1.02 | |||||||
|
Dilution
per share to new investors
|
$ | (4.98 | ) | |||||
A $1.00
increase (decrease) in the assumed initial public offering price of $6.00 per
Unit would increase (decrease) our adjusted net tangible book value per share
after this offering by approximately $0.18 and would increase (decrease)
dilution per share to new investors by approximately $0.82, assuming that the
number of shares offered by us, as set forth on the cover page of this
prospectus, remains the same and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by
us. In addition, to the extent any outstanding options or warrants
are exercised, you will experience further dilution.
The
following table summarizes, as of September 30, 2010, the number of shares
purchased from us, the total consideration paid or to be paid to us, and the
average price per share paid or to be paid to us by existing stockholders and
new investors purchasing a total of 9,000,000 shares of our common stock, which
represents 3,000,000 shares underlying the Units at an assumed offering price of
$6.00 per share, which is the midpoint of the price range listed on the cover
page of this prospectus, and 6,000,000 shares issuable upon exercise of the
Class A Warrants on a cashless, or net exercise basis, at an exercise price of
$0.05 per share, before deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us.
|
Shares Purchased
|
Total
Consideration
|
Average
|
||||||||||||||||||
|
Number
|
Percent
|
Amount
|
Percent
|
Price
Per Share
|
||||||||||||||||
|
Existing
stockholders (after giving effect to reverse stock split)
|
6,000,067 | 40 | % | $ | 327,540 | 2 | % | $ | 0.05 | |||||||||||
|
New
investors
|
9,000,000 | 60 | % | 17,595,000 | 98 | % | 1.96 | |||||||||||||
|
Total
|
15,000,067 | 100 | % | $ | 17,922,540 | 100 | % | $ | 1.19 | |||||||||||
A $1.00
increase (decrease) in the assumed initial public offering price of $6.00 per
Unit would increase (decrease) the total consideration paid by new investors by
$3.0 million and increase (decrease) the percent of total consideration paid by
new investors by 0.26% assuming that the number of shares offered by us, as set
forth on the cover of this prospectus, remains the same and after deducting
estimated underwriting discounts and commissions, underwriter expense
reimbursement obligations and estimated offering expenses payable by
us.
22
Assuming the underwriters’
over-allotment option is exercised in full, sales by us in this offering will
reduce the percentage of shares held by existing stockholders
to approximately 39% and will increase the number of shares held by our new
investors to approximately 9,450,000, or 61%.
The
number of shares of our common stock to be outstanding after this offering is
based on 6,000,067 shares of our common stock outstanding as of September 30,
2010 and excludes:
|
|
·
|
3,000,000
shares of common stock issuable upon exercise of the Class B Warrants,
having an exercise price equal to 55% of the Unit offering price;
and
|
|
|
·
|
1,000,000 shares
of common stock reserved for future issuance under our 2010 Stock Option
and Incentive Plan, which will become effective upon the completion of
this offering.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
The
following discussion of the financial condition and results of operations should
be read in conjunction with the “Summary Financial Information” and the
financial statements and the related notes included elsewhere in this
prospectus. This discussion contains forward-looking statements, which are based
on assumptions about the future of the Company's business. The actual results
will likely differ materially from those contained in the forward-looking
statements. Please read “Forward-Looking Statements” included elsewhere in this
prospectus for additional information regarding forward-looking statements used
in this prospectus.
Overview
We are a
development-stage healthcare company focused on the commercialization of
cellular and molecular diagnostic risk assessment products and related services
for the detection of pre-cancerous conditions that could lead to breast cancer,
and on the development of second-generation products and services. Although
current mammography procedures can detect cancer already present in the breast,
academic studies indicate that pre-cancerous cytological changes in NAF can be
detected up to eight years before cancer is detected by mammography. This
information allows for the implementation of preventive measures such as
lifestyle changes and pharmaceutical interventions that may prevent breast
cancer from developing or treat breast cancer earlier, if it develops. Our
primary focus is the commercialization of our patented and FDA-cleared product
and related testing and analysis services for breast cancer, the MASCT
System.
Current
Operations
We were
incorporated in Delaware in April 2009 and have experienced operating losses
since inception. Our operations to date have consisted primarily of securing
laboratory and office space, hiring laboratory personnel, ordering equipment and
supplies, engaging a third-party vendor for the manufacture of the MASCT System
in limited quantities for field testing, securing patent rights, filing new
patent applications, acquiring FDA market clearances and securing development
bids to complete preparation for manufacturing the MASCT System in commercial
quantities. We have no other operations and have not received any revenues, nor
will we be in a position to expect revenues until we are able to produce and
sell the MASCT System. We expect to select a large volume contract medical
device manufacturer to begin manufacturing the MASCT System for
commercialization in the first quarter of 2011 at an estimated cost of
approximately $1.5 million.
In
September 2010, we entered into a month-to-month lease for approximately 1,300
square feet of laboratory space at a monthly rent of $3,657. We intend to use
this space for the initial development of a laboratory for the testing and
analysis of NAF samples collected using the MASCT System and believe that this
facility will be sufficient for our planned operations over the next 12
months. We expect that we will need to establish additional office
and laboratory space in the Greater Seattle area in the second half of
2011.
We
believe that commercialization of the MASCT System will provide us with two main
revenue sources: (i) sales-based revenue from the sale of the product component
of the MASCT System to physicians, breast health clinics, and mammography
clinics and (ii) service, or use-based, revenue from the preparation and
interpretation of the NAF samples sent to our laboratory for
analysis.
We plan
to develop a specialty trained sales force to market the MASCT System on a
localized territorial basis, thereby developing personal relationships with the
healthcare professionals to whom our sales personnel can provide service and
support. We intend to develop a specialized laboratory for the processing and
analysis of the MASCT System tests submitted by client healthcare professionals.
We anticipate that we will need to develop a staff of anatomic pathologists to
read the test results. In addition to Dr. Quay, we intend to hire other
board-certified pathologists to assist in the interpretation of the NAF
samples.
24
In order
to execute on our long-range plans, we will use a portion of the proceeds raised
in this offering to produce and market the MASCT System. We are developing a
laboratory that will initially have only a minimal staff until such time, if
ever, that the sales of the MASCT System and demand for laboratory
interpretations can justify additional laboratory staff and sales
personnel. If funds from this offering are not sufficient to produce
the MASCT System or to develop the laboratory, we anticipate that we will have
to cease operations if we cannot obtain funds from other
sources. While we may seek to raise additional funds through the
issuance of additional equity or debt securities, short-term or long-term
borrowings or strategic partnerships, we currently do not have any specific
plans to obtain funding from alternative sources.
Critical Accounting Policies and
Estimates
Our
management’s discussion and analysis of our financial condition and results of
operations is based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States,
or GAAP. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities
and expenses. On an ongoing basis, we evaluate these estimates and judgments,
including those described below. We base our estimates on our historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances. These estimates and assumptions form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results and experiences may
differ materially from these estimates.
While our
significant accounting policies are more fully described in Note 3 to our
financial statements included at the end of this prospectus, we believe that the
following accounting policies are the most critical to aid you in fully
understanding and evaluating our reported financial results and affect the more
significant judgments and estimates that we use in the preparation of our
financial statements.
Revenue
Recognition
Although
we have yet to generate any revenues, we expect that we will recognize product
and service revenue when the following fundamental criteria are met: (i)
persuasive evidence of an arrangement exists, (ii) delivery has occurred or the
service has been performed, (iii) our price to the customer is fixed or
determinable and (iv) collection of the resulting accounts receivable is
reasonably assured. We will recognize revenue for product sales upon transfer of
title to the customer. We will recognize revenue for services upon performance
of the service. Customer purchase orders and/or contracts will generally be used
to determine the existence of an arrangement. Shipping documents and the
completion of any customer acceptance requirements, when applicable, will be
used to verify product delivery or that services have been rendered. We will
assess whether a price is fixed or determinable based upon the payment terms
associated with the transaction and whether the sales price is subject to refund
or adjustment. We will record reductions to revenue for estimated product
returns and pricing adjustments in the same period that the related revenue is
recorded. These estimates will based on industry-based historical data,
historical sales returns, if any, analysis of credit memo data, and other
factors known at the time.
Cash
and Cash Equivalents
Cash and
cash equivalents include cash and all highly liquid instruments with original
maturities of three months or less.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions 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 reporting period. Accordingly, actual results could differ from those
estimates.
Research
and Development Expenses
Research
and development costs are generally expensed as incurred. Our research and
development expenses consist of costs incurred for internal and external
research and development.
25
Share Based
Payments
In
December 2004, the Financial Accounting Standards Board, or the FASB, issued the
Statement of Financial Accounting Standards, or SFAS, No. 123(R), “Share-Based
Payment”, which replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS
No. 123(R) is now included in the FASB’s ASC Topic 718, “Compensation — Stock
Compensation.” Under SFAS No. 123(R), companies are required to measure the
compensation costs of share-based compensation arrangements based on the
grant-date fair value and recognize the costs in the financial statements over
the period during which employees or independent contractors are required to
provide services. Share-based compensation arrangements include stock options
and warrants, restricted share plans, performance-based awards, share
appreciation rights and employee share purchase plans. In March 2005, the SEC
issued Staff Accounting Bulletin No. 107, or SAB 107, which expresses views of
the staff regarding the interaction between SFAS No. 123(R) and certain SEC
rules and regulations and provides the staff’s views regarding the valuation of
share-based payment arrangements for public companies. SFAS No. 123(R) permits
public companies to adopt its requirements using one of two methods. On April
14, 2005, the SEC adopted a new rule amending the compliance dates for SFAS No.
123(R). Companies may elect to apply this statement either prospectively, or on
a modified version of retrospective application under which financial statements
for prior periods are adjusted on a basis consistent with the pro forma
disclosures required for those periods under SFAS No. 123.
We have
fully adopted the provisions of FASB ASC 718 and related interpretations as
provided by SAB 107. As such, compensation cost is measured on the date of grant
as the fair value of the share-based payments. Such compensation amounts, if
any, are amortized over the respective vesting periods of the option
grant.
Results
of Operations
Discussion
of Fiscal Year Ended December 31, 2009
For the
year ended December 31, 2009, we had no revenues and total expenses of $122,857,
consisting of $21,250 in expenses for research and development, or R&D, and
$101,607 in expenses for general and administrative, or G&A,
costs. The R&D expenses included $16,250 paid to Ensisheim in
royalties pursuant to an exclusive license agreement for the patents and patent
applications covering the MASCT System, as well as $5,000 paid to an unrelated
party for prototype development for the MASCT System. The G&A expenses
included $1,348 paid to Ensisheim for rent for our office space and $88,522 for
legal and professional fees related to company incorporation, initial set-up,
patent prosecution and maintenance fees and financial accounting and auditing
fees. Our license agreement with Ensisheim was terminated in June
2010.
We have
yet to generate any revenues since our inception on April 30, 2009.
Comparison
of the Nine Months Ended September 30, 2010 and the Period from April 30, 2009
(inception) through September 30, 2009
As
discussed below, we expect that our R&D and G&A expenses will continue
to increase in the foreseeable future, and that if we successfully complete this
offering and launch the MASCT System and our related laboratory service
offerings, we would also begin to incur sales and marketing expenses as we build
a regional and ultimately national sales force. We may limit our fixed sales and
marketing costs initially by employing temporary workers or those who are
compensated on a commission basis. However, we expect our expenditures to
increase significantly in future periods.
Research and Development
Expenses. We had R&D expenses of $1,306 for the nine
months ended September 30, 2010, and $17,500 for the period from April 30, 2009
through September 30, 2009. We expect that R&D expenses will
increase as we finalize the product design for the first-generation MASCT System
and develop a second-generation system and related technologies.
26
General and Administrative
Expenses. G&A expenses for the nine months ended September
30, 2010 were $738,251, primarily consisting of $331,863 in legal and
professional services in connection with our preparation for this offering,
$194,116 in salary expense, $90,614 in outside consulting in connection with our
preparation for this offering, $52,500 for website development and internet
services, and $12,204 in advertising and promotion. G&A expenses
for the period from April 30, 2009 through September 30, 2009 were $90,105,
related principally to legal and professional expenses related to this offering.
The increase in expenses was attributed to the longer period in 2010 and an
increase in business activity in preparation for this offering. We
expect that our G&A expenses will continue to increase if we successfully
complete this offering as we add full-time accounting and finance personnel and
incur additional costs as a publicly traded company. Additionally,
G&A costs will rise as we increase headcount to coordinate the production
and manufacture of the MASCT System and to build a sales force.
Liquidity
and Capital Resources
To
date, we have funded our operations primarily through private placements of
common stock and loans from Dr. Quay, our Chairman and Chief Executive
Officer. As of September 30, 2010, we had received net proceeds of
approximately $256,540 from the sale of equity securities and, as of that date,
we had approximately $29,531 of cash and cash equivalents. We issued a
promissory note for $100,000 in principal to Dr. Quay on June 30, 2010, under
which the principal amount of the loan was funded to us on July 12, 2010.
This note matured and became callable on December 31, 2010. To date, Dr.
Quay has not demanded repayment of this note. On November 3, 2010, the Company
issued a promissory note to Dr. Quay in connection with a $500,000 line of
credit extended to the Company by Dr. Quay. Pursuant to the terms of
the note, all principal amounts borrowed under the line of credit bear interest
at a rate of 10% per annum, and all principal and accrued interest will be due
and payable in full on December 31, 2011. As of the date of this
prospectus, the Company has borrowed $80,000 under the line of
credit.
We have a
history of operating losses because we have yet to establish an ongoing source
of revenues sufficient to cover our operating costs. The report of
our independent auditors contained in our financial statements as of and for the
year ended December 31, 2009 expresses substantial doubt about our ability to
continue as a going concern. Our ability to continue as a going
concern is dependent on our obtaining adequate capital to fund operating losses
until we become profitable. If we are unable to obtain adequate
capital, we could be forced to cease operations.
Cash
Flows
For the
nine months ended September 30, 2010, we incurred a net loss of $744,356. Net
cash used in operating activities was approximately $256,833. Net cash provided
by financing activities was approximately $202,000 and consisted of private
placements of our common stock, through which we received net proceeds of
$102,000, and a promissory note for $100,000 in principal to Dr. Quay. For the
year ended December 31, 2009, we incurred a net loss of $122,857, and net cash
used in operating activities was approximately $75,176. During the year ended
December 31, 2009, net cash provided by financing activities was approximately
$159,540, of which $154,540 was raised through private placements of our common
stock.
Funding
Requirements
We expect
to incur substantial expenses and generate ongoing operating losses for the
foreseeable future as we prepare for the manufacturing and launch of the MASCT
System and build and operate our planned diagnostics laboratory. To fund our
operations for at least the next 12 months under our current business plan, we
estimate that we would need between $10 million and $12 million of additional
capital. If we are unable to raise this amount of capital, we could be forced to
curtail or cease operations. Our future capital uses and requirements depend on
numerous forward-looking factors. These factors include the following, among
others:
|
|
·
|
the
amount of capital raised in this offering and whether investors exercise
the Class B Warrants for cash, thereby providing additional
capital;
|
|
|
·
|
the
time and expense needed to complete the design and manufacturing of the
MASCT System and the design and build-out of our planned
laboratory;
|
|
|
·
|
the
expense associated with engaging one or more third-party contractors
to manufacture the MASCT System in commercial
quantities;
|
|
|
·
|
the
expense associated with building a sales force to market the MASCT System;
and
|
27
|
|
·
|
the
degree of patient and physician acceptance of the MASCT System and the
degree to which third-party payors approve the MASCT System and laboratory
analysis for reimbursement.
|
To date,
we have not generated any revenues. We do not expect to generate revenue unless
or until we are able to manufacture and launch the MASCT System and build and
operate our planned laboratory. We expect our continuing operating losses to
result in increases in cash used in operations over at least the next year. We
expect the proceeds of this offering, together with our existing resources as of
the date of this prospectus, to be sufficient to fund our planned operations for
at least the next 12 months. However, we may require additional funds earlier
than we currently expect to successfully manufacture and commercialize the MASCT
System or build and operate our laboratory. Because of the numerous risks and
uncertainties associated with the development and commercialization of the MASCT
System and our services, we are unable to estimate the amounts of increased
capital outlays and operating expenditures associated with our current and
anticipated research and development activities.
Additional
funding may not be available to us on acceptable terms or at all. In addition,
the terms of any financing may adversely affect the holdings or the rights of
our stockholders. For example, if we raise additional funds by issuing equity
securities or by selling debt securities, if convertible, further dilution to
our existing stockholders may result. To the extent our capital resources are
insufficient to meet our future capital requirements, we will need to finance
our future cash needs through public or private equity offerings, collaboration
agreements, debt financings or licensing arrangements.
If
adequate funds are not available, we may be required to terminate, significantly
modify or delay our development programs, reduce our planned commercialization
efforts, or obtain funds through collaborators that may require us to relinquish
rights to our technologies or product candidates that we might otherwise seek to
develop or commercialize independently. We may elect to raise additional funds
even before we need them if the conditions for raising capital are
favorable.
Off-Balance
Sheet Arrangements
We do not
currently have, nor have we ever had, any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. In addition, we do not engage in trading activities involving
non-exchange traded contracts.
Recent
Accounting Pronouncements
The
Company has adopted all recently issued accounting pronouncements that
management believes to be applicable to the Company. The adoption of these
accounting pronouncements, including those not yet effective, is not anticipated
to have a material effect on the financial position or results of operations of
the Company.
28
SCIENTIFIC
AND INDUSTRY BACKGROUND
Breast
Anatomy and Nipple Aspirate Fluid Collection
The
female breast has two main components: milk-producing, or glandular, tissue
(lobes and ducts) and connective/fatty tissue. The breast is divided
into 15 to 20 lobes that extend outward from the nipple and contain
clusters of milk-producing glands. The lobes are further divided into
smaller compartments called lobules. Each cluster drains into a duct,
which connects the lobules and the nipple. In the ducts, cells
closest to the outer portions of the lobules are called luminal cells and those
deeper in the duct wall are called basal cells. The
molecular-based determination of whether cells are luminal or basal in origin
aids in the sub-typing of pre-cancerous changes and
cancers. The breast is held together by fatty connective
tissue, which provides support and contains nerves as well as blood and
lymphatic vessels.
Since the
early studies conducted in the 1950s by Dr. George Papanicolaou, the inventor of
the “Pap smear” for cervical cancer, it has been understood that adult
non-pregnant, non-lactating women continuously secrete fluid into the milk ducts
of the breast. This fluid does not normally escape because the nipple
orifices are occluded by smooth muscle contraction, and dried
secretions. This fluid contains several cell types, including
breast duct cells that are shed, which may be normal, hyperplastic,
atypical, or even malignant. The fluid also contains molecular
diagnostic biomarkers, including associated proteins, complex lipids, RNA and
DNA.
A number
of medical devices have been designed over the years that apply negative
pressure to the nipple to induce the expression of NAF, which is then collected
by carefully touching a capillary tube to any apparent drops of
NAF. The medical literature reports that in general, these devices
are successful in obtaining NAF from 39% to 66% of all patients, and that this
sample collection variability has prevented the routine adoption of NAF cytology
for breast cancer screening.
29
The MASCT
System was designed to overcome this shortcoming by placing a hydrophilic, or
water seeking, membrane in contact with the nipple during the cycles of negative
pressure to “wick” fluid from the orifice of the ducts by capillary action,
thereby increasing the frequency of obtaining NAF in women.
Breast
Cancer and Atypical Ductal Hyperplasia
Atypical
ductal hyperplasia, or ADH, is a condition in which the cells lining the breast
duct grow excessively and abnormally. Without other risk factors, it
produces up to a five-fold increased risk of breast cancer. With a
family history of breast cancer, a diagnosis of ADH increases the risk of breast
cancer 11 to 22-fold, and in one study, one-third of the women with a biopsy of
ADH had an occult cancer growing nearby. Another study examined
changes in chromosome markers in ADH that are typical for invasive ductal cancer
to determine if ADH was monoclonal for these changes, as expected of cancer, or
polyclonal, as expected of hyperplasia, or excessive cell
proliferation. The results of this study showed that 40% of ADH was
monoclonal and had the hallmarks of a cancerous growth.
The
analysis of NAF for these chromosomal changes and the changes in expression of
related proteins may help determine the malignant or non-malignant properties of
ADH in a particular patient and thus provide information allowing a personalized
medicine therapeutic approach.
The
Role of Immunohistochemistry (IHC) in the Molecular Classification of Breast
Cancer and Pre-Cancerous Lesions
Standard
pathology and cytology criteria to classify breast cancer and pre-cancerous
changes have limitations in predicting tumor behavior, sensitivity to molecular
targeted treatments, such as Herceptin (trastuzumab), or the development of drug
resistance. A method of predicting tumor behavior and treatment
response that involves identifying molecular biomarkers in breast tissue is
immunohistochemistry, or IHC. IHC is the process of localizing
antigens (e.g. proteins) in cells of a tissue section exploiting the principle
of antibodies binding specifically
to antigens in cells. Specific molecular markers are
characteristic of particular cellular events such as proliferation or cell
death. Visualizing an antibody-antigen interaction can be
accomplished in a number of ways. In the most common instance, an
antibody is conjugated to an enzyme, such as peroxidase, that can catalyze a
color-producing reaction. The use of IHC has become standard of care
in many clinical settings, for example, the measurement of estrogen or
progesterone receptors or HER2 antigens in breast cancer.
In May
2010, an international study from 21 academic institutions involving 42
investigators was published, describing the IHC-based molecular sub-typing of
breast cancers from 10,159 women and the correlation with survival over 15
years. Five IHC biomarkers were used to identify six molecular
sub-types. The five IHC markers were: the estrogen receptor and the
progesterone receptors (two hormone receptors expressed by luminal cells), the
human epidermal growth factors receptor-2 (HER2, a protein marker used to select
specific adjuvant therapies), and cytokeratin 5/6 (CK5/6) and EGFR (proteins
expressed by basal cells). The incidence of each sub-type, and the
treatment options available, are shown in the following
table:
|
Molecular Subtype
|
|
Incidence
|
|
Treatment Options
|
|
Luminal
1, Basal Negative
|
60%
|
Tamoxifen,
Raloxifene
|
||
|
Luminal
1, Basal Positive
|
6%
|
Tamoxifen,
Raloxifene, EGFR inhibitors
|
||
|
Luminal
2, Basal Negative
|
6%
|
Tamoxifen,
Raloxifene, Trastuzumab
|
||
|
Non-Luminal
HER2+
|
6%
|
Trastuzumab
|
||
|
Core
Basal Subgroup
|
9%
|
EGFR
inhibitors
|
||
|
Five
Negative Phenotype
|
|
7%
|
|
Non-receptor
targeted
chemotherapy
|
30
The six
IHC molecular subtypes had very different five and 15 year survival
rates.
These and
other findings indicate that the six subtypes of breast cancer defined by the
expression of five immunohistochemical markers have distinct biological
characteristics that are associated with important differences in short-term and
long-term outcomes. The application of these markers in the clinical
setting could improve the targeting of adjuvant therapies to those women most
likely to benefit.
These
same markers have been studied in pre-cancerous changes and have been found
useful in distinguishing future biological behavior of otherwise cytologically
indistinct samples. For example, CK5/6 expression in usual ductal
hyperplasia is associated with an increased risk of later development of
cancer. Similarly, estrogen or progesterone receptor, HER2, and EGFR
expression in a setting of hyperplasia are found in lesions that more frequently
progress to breast cancer. In fact, ADH and usual ductal hyperplasia
can be distinguished by IHC staining in cases where the cytology is
indistinguishable. Thus, IHC testing on NAF samples with
pre-cancerous changes can provide information about the possibility of future
progression to breast cancer.
The
Role of NAF Cytology in the Diagnosis and Treatment of Atypical Ductal
Hyperplasia
In a
study of women with normal mammograms who were undergoing breast reduction
surgery, which was conducted at the Virginia Mason Medical Center in Seattle,
Washington and published in Plastic and Reconstructive
Sugery in October 2009, the incidence of ADH was found to be
4.4%. A
separate study conducted in 2007 of 4,970 women found an incidence of ADH of
4.0% by biopsy. ADH can be definitively diagnosed only by NAF
analysis or a breast tissue biopsy. In a study of approximately 2.5
million screening mammograms done between 1996 and 2005 and collected from
mammography registries participating in the Breast Cancer Suveillance
Consortium, the incidence of biopsy-proven ADH was 0.4%, suggesting that the use
of biopsies in conjunction with screening mammography fails to detect ADH in
over 90% of patients.
A
comprehensive study of the predictive value of NAF cytology for identifying
women at risk for breast cancer was conducted at the University of California at
San Francisco over a 19 year period. This study, conducted by
Margaret Wrensch and others at the University of California San Francisco,
showed in two studies, the first with a sample size of 4,046 women and the
second with a sample size of 3,627, that women with abnormal cytology in breast
fluid obtained by nipple aspiration had an increased relative risk of breast
cancer compared with women from whom fluid was not obtained and with women whose
fluid had normal cytology. The nipple aspirate fluids were collected
from women in the San Francisco Bay Area during the period from 1972 through
1991, classified the women according to the most severe epithelial cytology
observed in fluid specimens, and determined breast cancer incidence through
March 1999. The groups were stratified into women with acellular, normal,
hyperplasia, or atypical NAF cytology and the incidence of breast cancer
determined in the two groups over an average of 21 and nine years follow-up,
respectively. The incidence of hyperplasia by NAF cytology was 13.6%
and the incidence of ADH was 1.6%. Breast cancer occurred in 3.7% of
the women with acellular cytology and in 8.2% and 11.0% of the women with
hyperplasia and atypia, respectively.
Drug
therapy clinical trials for preventing breast cancer in high risk women are
called chemoprevention trials. In a five year chemoprevention study
of over 19,700 women with ADH or other factors that placed them at a high risk
for invasive breast cancer, the use of either tamoxifen or raloxifene, drugs
that block or interfere with the actions of estrogen receptors, reduced the
incidence of breast cancer by approximately 50%. Side effects were
higher with tamoxifen compared to raloxifene. A separate study of
raloxifene vs. placebo showed a 72% reduction in cancer incidence at four years
and a 66% reduction at eight years.
31
In a
study of NAF specimens in 33 women at the start and six months after taking
either tamoxifen or raloxifene, NAF cytology was unchanged in 85%, worsened in
4%, and improved in 11% while the biomarker PSA, which has been shown to be
controlled by sex hormones and inversely associated with breast cancer,
increased from abnormally low (37 ng/L) to within the normal range (112 ng/L)
during treatment. United States patent 7,128,877, owned by the
Company, covers the testing of NAF for the biomarker PSA. Other
classes of drugs, including inhibitors of aromatase, an enzyme involved in
making estrogen, are being tested or considered for testing in breast cancer
chemoprevention trials. The Company believes that increased use of
pharmaceutical treatments with chemopreventive agents in high risk women will
lead to more NAF cytology studies to both diagnose ADH and follow the effects of
treatment.
Finally,
changes in diet and/or the use of dietary supplements are considered to have a
possible impact on breast cancer occurrence and can potentially change the
cytology or the presence of biomarkers in NAF. A study of the effect
of dietary intervention in 71 women over a one year period was
conducted. The probability of obtaining a cellular NAF cytology
increased with dietary fat intake, reaching over seven-fold increase for the
highest to lowest quartile of fat intake. Furthermore, cellular NAF
decreased with increasing plasma levels of dietary supplement antioxidants,
lutein and alpha-carotene. The National Cancer Institute, or NCI, is
currently sponsoring seven studies of the use of NAF sample collection and
analysis of cytology and molecular biomarkers as study endpoints to monitor the
efficacy of chemoprevention clinical trials using pharmaceuticals or dietary
supplements. The Company believes the successful outcome of one or
more of these studies could increase the use of NAF analysis.
The
Role of NAF Cytology and Molecular Diagnostic Biomarkers in Screening for Breast
Cancer
The
sensitivity of a test for detecting an abnormality is an important measure in
screening populations for the presence of occult disease. With
mammography as the well accepted standard for the detection of breast cancer, a
comparison of the sensitivity of NAF cytology and molecular diagnostic
biomarkers for detecting cancer against the sensitivity of mammography suggests
that the MASCT System could also serve as a screening tool for breast cancer, in
addition to ADH and other pre-cancerous conditions.
The
following table shows the relative sensitivity of mammography and NAF cytology
and biomarkers for detecting cancers, confirmed by needle biopsy.
|
Test
|
Sensitivity
|
|||
|
Mammography:
40-64 years of age (1)
|
77-78%
|
|||
|
NAF
biomarkers: DNA Methylation PCR (2)
|
82%
|
|||
|
Mammography:
dense breasts (1)
|
68%
|
|||
|
NAF
biomarker: SELDI-TOF Proteomics (3)
|
75-84%
|
|||
|
Mammography:
under 40 years of age (1)
|
54%
|
|||
|
NAF
cytology (4)
|
36%
|
|||
|
(1)
|
Reflects
sensitivity of mammography for the detection of breast cancer in a review
of 183,134 screening mammograms in Albuquerque, New
Mexico.
|
|
(2)
|
Reflects
sensitivity of DNA methylation-specific PCR for the detection of breast
cancer in NAF, in a study of specimens of tumor, normal tissue and NAF
collected from 22 breast cancer patients with ductal carcinoma in situ or stage I
cancer.
|
|
(3)
|
Reflects
sensitivity of proteomic analysis for the detection of breast cancer in
NAF, in a study of 20 subjects with breast
cancer.
|
|
(4)
|
Reflects
sensitivity of NAF cytology alone for the detection of residual breast
cancer, as reflected in the results of a study of 70 subjects with ductal
carcinoma in situ
or stage I cancer published in the British Journal of Cancer in
2001.
|
While NAF
cytology seems well suited to identifying ADH, the sensitivity of NAF cytology
alone for detecting cancer is not ideal. However, when its use
is combined with other scientific collection and biomarker methods, which
include DNA methylation and SELDI-TOF proteomics, sensitivity levels are
comparable to those found in mammography. This suggests that NAF
cytology, in combination with other biomarker tests, could serve as an
alternative testing and screening methodology which may be less painful and less
invasive to women than mammography and biopsy and require no exposure to
radiation. Assuming the successful completion of this offering, the
Company intends to explore the development of such biomarker tests beginning in
2011 (See “Business—Research and Development”).
32
Overview
The
Company is a development-stage healthcare company focused on the
commercialization of cellular and molecular diagnostic risk assessment products
and related services for the detection of pre-cancerous conditions that could
lead to breast cancer, and on the development of second-generation products and
services. The Company’s primary focus is the commercialization of the MASCT
System, a patented, FDA-cleared cellular and molecular diagnostic risk
assessment product and related testing and analysis services for the detection
of breast cancer. The Company owns all proprietary rights for the
development, manufacture, use and commercialization of the MASCT System and
holds the FDA marketing authorization. To date, the Company has not
commenced the sale or marketing of the MASCT System, nor has it begun providing
laboratory services.
The
MASCT System is a device and method for the collection, shipment and clinical
analysis of NAF. A number
of medical devices have been designed by others for the collection of
NAF, which contains cells and molecular diagnostic biomarkers. The
clinical analysis by qualified pathologists, whether or not affiliated with
the Company, of the biomarkers contained in NAF, whether
collected using the MASCT System or by other means, is useful in detecting
breast cancer and cellular changes that may be precursors to breast
cancer. The
Company intends to offer each component of the MASCT System for sale
separately. The product components of the MASCT System consist of a
reusable hand-held pump for the collection of NAF, a patient kit that includes
two NAF sample vials, and a shipment kit for the transportation of NAF samples
to a specialized cytology and molecular diagnostics laboratory that the Company
intends to establish. Through this laboratory, if successfully
established, the Company intends to provide the MASCT System services, which
would consist of receiving and accessioning the two NAF samples from each
patient, preparing routine and specially-stained slides from the NAF
samples, and generating a report of the findings. The Company plans to establish
its laboratory in the first quarter of 2011 and, subject
to the successful completion of this offering, to commence its commercial
launch of the MASCT System in the second quarter of 2011. The Company
has not commenced any operations at its laboratory facility other than the
occupancy of office space and minor tenant improvements at this time.
Because
the Company’s commercial launch of the MASCT System is dependent on the timing
and amount of proceeds received from this offering, the Company’s product launch
may be delayed if it is unable to complete this offering in the planned
timeframe.
Although
current mammography procedures can detect cancer already present in the breast,
academic studies indicate that pre-cancerous cellular changes in NAF can be
detected up to eight years before cancer is detected by mammography. This
information allows for the implementation of preventive measures such as
lifestyle changes and pharmaceutical interventions that may prevent breast
cancer from developing or treat breast cancer earlier, if it develops. At this
time, however, Medicare and certain insurance carriers will not reimburse the
costs of the NAF collection procedures, citing insufficient clinical evidence to
support medical efficacy, better clinical decision-making, or a reduction in
breast cancer mortality. The Company anticipates that the MASCT System
will initially be used in conjunction with standard mammography exams and has
the potential to become a significant assessment tool for identifying women
at risk for breast cancer. Although
the MASCT System is intended to be an adjunctive procedure to mammography, some
physicians may view both the MASCT System and mammography as screening tools for
existing breast cancer, which could cause the MASCT System to be deemed directly
competitive with mammography, an established procedure. This could limit market
adoption of the MASCT System.
The MASCT
System NAF
collection procedure takes about five minutes, was painless in clinical testing,
and does not use radiation. The Company expects to price its NAF sample
collection device at approximately $200 per device, its patient kits at
approximately $50 per kit, and the cytology and molecular diagnostics testing
and analysis at between $106 and $1,202 per patient, depending on the complexity
of the analysis performed and without taking into account any patient
reimbursement from third-party payors. Market conditions at or after
launch, however, including general economic conditions and changes in
third-party reimbursement policies, may prevent the Company from pricing the
MASCT System and its services as currently planned.
Effective
testing and analysis of the NAF samples collected using the MASCT System
requires both highly skilled pathologists and other medical personnel with
specialized expertise and laboratory facilities with the necessary testing
procedures and equipment. The Company intends to register under the CLIA
regulations for the performance of so-called “complex” tests. Because NAF
samples are among the smallest medical samples handled by clinical laboratories,
specialized procedures, protocols and equipment will be required to maximize the
diagnostic value of each sample. The Company anticipates that it will use both
conventional cytology and advanced molecular diagnostic technologies in its
laboratory and engage a staff of professional medical personnel to deliver
accurate and comprehensive diagnostic reports.
The MASCT
System requires no use of radiation. In a
study published in November 2010, the lifetime risk for women 40 to 74 years of
age of developing cancer from the radiation in normal mammograms was found to be
86 per 100,000 women. Unlike
a biopsy, the MASCT System is a non-invasive and painless
procedure.
33
The
Company estimates that there are over 8,600 mammography clinics, as well as
dedicated breast health clinics, and obstetrics/gynecology medical practices in
the United States that can utilize the MASCT System. The Company intends to
build an internal sales force to market the MASCT System to physicians and
clinics specializing in women’s health. The Company plans to hire a direct
sales force of approximately eight people initially to commercialize the MASCT
System in the Northwestern United States, where there are approximately 290
mammography clinics registered with the FDA. If this regional launch
is successful, the Company anticipates expanding nationally during the first
half of 2012 and grow its sales force to approximately 100 people in the United
States. The
Company currently has no sales personnel, and there is no assurance that the
Company will be able to recruit and retain the sales force necessary to meet
anticipated demand.
MASCT
System Development and Ownership History
Atossa
Healthcare, Inc. was incorporated in 1998 by Dr. Quay to conduct research on
breast cancer diagnostic tests, from which the MASCT System was
invented. Nastech Pharmaceutical Company, Inc., or Nastech, a company
developing nasal drug delivery products, acquired Atossa Healthcare, Inc. in
August 2000, and Dr. Quay became chairman, chief executive officer and president
of Nastech. In 2003, Nastech conducted clinical trials of the MASCT
System for the collection of NAF for cytological testing, and the product
received FDA clearance in May 2003.
After
receiving FDA clearance, Nastech, which changed its name to MDRNA, Inc., and
recently to Marina Biotech, Inc., did not engage in any further development of
the MASCT System. In January 2009, Ensisheim acquired from Nastech
five issued U.S. patents covering the MASCT System, as well as the FDA marketing
authorization, for cash and the assumption of debt related to unpaid patent
expenses, in an amount of approximately $50,000.
The
Company was incorporated in April 2009 as a Delaware corporation and
subsequently acquired from Ensisheim all ownership and commercialization rights
relating to the MASCT System, including the five issued U.S.
patents, and eight foreign patents (in the European Union, Canada,
Australia, Hong Kong, Switzerland, Germany, France and the United Kingdom)
covering the manufacture, use and sale of the MASCT System, pending patent
applications for improvements, and the FDA marketing authorization for the MASCT
System. In connection with the contribution of these assets by
Ensisheim, the Company issued shares of its common stock to
Ensisheim. The Company has no royalty or other ongoing obligations to
Ensisheim relating to the acquired assets.
Design
of the MASCT System
The MASCT
System is a specially engineered, hand-held, manual breast pump with unique
features that include the ability to wick fluids out of the breast in a very
short period of time (approximately five minutes), as well as a proprietary
collection system that sanitarily captures NAF produced from the breast
ducts. The MASCT System is constructed from injection molded plastic
components with standard material gaskets and parts. The membrane
filter material that makes contact with the nipple is available from multiple
domestic suppliers. In July 2010, the Company entered into an
agreement with a leading medical device design company to produce 20 MASCT
System pumps and 10,000 patient kits for field testing by the
Company. The Company intends to commence field testing in the first
quarter of 2011.
Clinical
Development of the MASCT System
Under the
direction of Dr. Quay, a clinical trial of the MASCT System was conducted at the
State University of New York, Stony Brook, New York in 2003 to test the
efficiency of NAF collection in normal women. Thirty-one healthy,
non-pregnant, pre-menopausal female volunteer subjects were tested with the
MASCT System device for the ability to collect NAF samples and to
observe the morphology of breast gland cells in the NAF (cytological
examination), using the NAF cytology classification system of the College of
American Pathologists, or CAP, as described in the table
below.
34
|
Category
|
|
Interpretation
|
|
Cytology Characteristics
|
|
Category
0
|
Scant
ductal epithelial cells and negative for atypical or malignant
cells
|
No
or <10 ductal cells.
|
||
|
Category
I
|
Normal
ductal cytology
|
Normal
ductual epithelial cells.
|
||
|
Category
II
|
Usual
ductal hyperplasia
|
Cell
groups with >10-50 cells.
|
||
|
Category
III
|
Atypical
ductal hyperplasia
|
Distinct
large nuclei with irregular nuclear borders.
|
||
|
Category
IV
|
|
Suspicious
for malignancy
|
|
Single
cells and groups of cells suspicious for
cancer.
|
Of the 31
subjects, 30, or 97%, had measurable NAF; 24 from both breasts and six from only
one breast. NAF samples ranged from less than one to 37 microliters,
with an average of seven microliters, and all samples collected were deemed to
be clinically useful. 58 of 60 NAF samples were reported as cytology
Category I, and two of 60 were reported as cytology Category II under the CAP’s
classification system for NAF cytology. No adverse events were
reported in the study. Based on the results of the study, a premarket
notification for the intended use of the MASCT System for the collection of NAF
for cytological testing was submitted to the FDA and subsequently cleared by the
FDA, indicating that the NAF collected using the MASCT System can be used in the
determination and/or differentiation of normal versus premalignant versus
malignant cells.
35
The Market
United
States Laboratory Testing Market
Anatomic
Pathology. Anatomic pathology involves the diagnosis of cancer
and other medical conditions through the examination of tissues (biopsies) and
the analysis of cells (cytology) taken from patients. Generally, the
anatomic pathology process involves the preparation of slides by trained
histo-technologists or cytologists and the review of those slides by anatomic
pathologists. Although anatomic pathologists do not treat patients,
they establish a definitive diagnosis and may also consult with the referring
physician. As a result of the greater degree of complexity and
sophistication in anatomic pathology services, 2010 Medicare reimbursement rates
for the anatomic pathology services of the type that the Company expects to
perform are between $106 and $1,202 per patient. The patient fee
schedule for self-pay or private payors for these tests can range from two to
more than three times the Medicare reimbursement rate.
Molecular
Diagnostics. Molecular diagnostics typically involve unique
and complex genetic and molecular tests performed by skilled personnel using
sophisticated instruments. As a result, molecular diagnostics are
typically offered by a limited number of commercial
laboratories. According to PriceWaterhouseCoopers, molecular
diagnostics represents one of the fastest growing segments of the $37 billion
market for in vitro
diagnostics, which includes test tube diagnostics such as glucose monitoring for
diabetes care but excludes diagnostics for research use. The Medicare
reimbursement rate in 2010 for microarray-based molecular diagnostics tests is
$1,250 while the reimbursement rate for fluorescent cellular probe-based tests
is $479 per probe. This market segment is expected to grow 14%
annually between 2007 and 2012, from $2.6 billion to $5.0 billion.
Clinical Pathology. The
clinical pathology market generally involves chemical testing and analysis of
body fluids using standardized laboratory tests. These tests
typically do not require the interpretive expertise of a pathologist and are
frequently routine, automated, and performed by large national or regional
clinical laboratory companies and hospital laboratories. The Company
currently does not intend to offer routine, automated, standardized laboratory
tests.
United
States Market for MASCT System Procedures and Laboratory Tests
Testing
in Women at High Risk for Breast Cancer
The
Company expects that the MASCT System will initially be adopted by physicians
and other healthcare professionals for use in women at high risk for breast
cancer. The Company believes, based on the assumptions described
below, that up to approximately 52.6 million MASCT System studies could be
conducted annually in women at high risk for breast cancer in conjunction with
mammography under current American Cancer Society, or ACS, recommendations for
screening mammography.
Women Undergoing Diagnostic
Mammograms. Breast cancer screening by mammography involves
performing a screening mammogram and typically reviewing the mammogram while the
patient is still present in the clinic. If the screening mammogram
shows suspicious changes, a more extensive diagnostic mammogram is performed,
usually on the same day. In an audit of 46,857 consecutive mammograms
performed in the radiology department at the University of California, San
Francisco between 1997 and 2000, 10,007, or 21%, were diagnostic
mammograms. The audit also documented an increased incidence of
future cancer in those women who underwent a diagnostic mammogram, regardless of
the diagnosis at the time. Applying this frequency to the estimated
38.9 million total mammograms performed each year in the United States yields
approximately 8.1 million diagnostic mammograms. The Company believes
all women undergoing a diagnostic mammogram, who may be at higher risk of
developing breast cancer in the future, would be candidates for MASCT System
testing.
Breast Cancer Survivors.
Women who have had breast cancer are at a higher risk for the
recurrence of cancer or for a new malignancy. The ACS has estimated
that in 2010, there were more than 2.5 million breast cancer survivors in the
United States. The Company believes these women would be candidates
for regular MASCT System screening.
36
Post Menopausal Breast
Cancer. There is substantial evidence that post menopausal
breast cancer is linked to high levels of estrogen, which induces cancer related
biomarkers such as Cathepsin D. In December 2002, the National
Institute of Environmental Health Sciences added estrogen to its list of known
cancer-causing agents. The Cathepsin D gene, coding for a ubiquitous
lysosomal aspartyl protease, is overexpressed in aggressive human breast
cancers, and its transcription is induced by estrogens in hormone-responsive
breast cancer cells. Since the serum levels of estrogen drop
significantly when the ovaries stop producing it at menopause, the source of the
hormone in breast cancer was not understood. In 2006, investigators
at Northwestern University demonstrated that NAF contains estrogen and related
sex hormones, that there is no correlation between serum and the concentrations
of these hormones in NAF, preventing serum tests from identifying these high
risk patients, and that the likely source is synthesis within the breast
itself. The authors concluded that measuring female sex hormone
biomarkers like Cathepsin D in NAF may be useful in identifying post menopausal
women at high risk for breast cancer and in monitoring chemoprevention trials,
since the mechanism of action in these current therapies is interference with
female sex hormone activity. The Company has an issued U.S. patent
covering the testing of NAF for the biomarker Cathepsin D. There are
approximately 52 million women age 50 and over, and therefore peri- or
post-menopausal, in the United States, and the Company believes NAF sex hormone
screening could help identify women who have high levels of these hormones in
the breast and are thus at high risk.
High Risk Women.
The Breast Cancer Risk Assessment Tool (based on the Gail model) has been
established by the NCI and the National Surgical Adjuvant Breast and Bowel
Project, or NSABP, to identify women with an increased risk of breast
cancer. The risk factors included in the test are: personal history
of breast abnormalities, age, age at first menarche, age at first live birth,
breast cancer among first-degree relatives (sisters, mother, or daughters),
breast biopsies, obesity and race. Approximately 12 million women in
the United States are in the high risk group. A study of 6,904 women
for an average follow up of 14.6 years demonstrated that NAF cytology may be
most useful for women at highest absolute risk by the Risk Assessment Tool
because modest differences in relative risk are amplified. In this
group, the incidence of breast cancer by NAF cytology ranged from 5.3 to 10.3
per 1,000 women (non-yielder to hyperplasia/atypia).
Testing
in Normal Risk Women
The
Company believes that if it is able to develop, produce and successfully market
the MASCT System for use as an additional test in conjunction with all
mammography and all cervical cancer screenings (Pap smear), the potential annual
U.S. market size would be between 38.9 million and 55 million
women. This conclusion is based on the following data:
MASCT System in conjunction with
mammography, all ages. According to the Mammography Quality
Standards Act (MQSA) National Statistics, as of October 1, 2010, 38.9 million
mammograms are performed annually in the United States.
MASCT System in conjunction with
cervical cancer screening (Pap smear), all ages. According to
the National Cancer Institute, approximately 55 million Pap smear examinations
were performed in 2009, of which about 3.5 million, or 6%, were
abnormal.
Commercialization
Strategy
The
Company’s commercialization strategy is based on creating two main revenue
sources: (i) product sales-based revenue from the sale of the MASCT System
to physicians, breast health clinics, and mammography clinics and
(ii) service-based revenue for the preparation and interpretation of the
NAF samples sent to the Company’s laboratory. This is intended to
result in revenues from both the sale and the use of the MASCT
System.
In order
to achieve its two-pronged revenue base, the Company will need to manufacture,
through medical device suppliers, the MASCT System components, i.e., the
collection device and patient NAF specimen kits and will need to establish a
direct sales force to call on physicians and breast health and mammography
clinics to market and sell the MASCT System. The collection device is
reusable when sanitized between patients. The kit contains the
patient contact materials, preservative fluid for the collected samples, and
bar-coded patient identification labeling. The kit components are
designed to work properly with the collection device and the Company is not
aware of any commercially available parts or components which could be
substituted for the Company’s kits.
37
The
Company intends to use funds raised from this offering to select and engage an
established medical device contract manufacturer to produce commercial
quantities of the MASCT System during the first quarter of 2011 and to commence
such commercial manufacture and production of the MASCT System during the second
quarter of 2011. The Company also plans to begin certification of its
laboratory facility for the analysis of NAF samples during the first quarter of
2011 and to begin developing an internal sales and marketing force by the second
quarter of 2011.
Manufacture
of MASCT System
In July
2010, the Company entered into an agreement with a contract manufacturer to
produce 20 MASCT System pumps and 10,000 patient kits for field testing by the
Company to confirm the proper operation of the MASCT System device and its
ability to collect adequate NAF samples during the first quarter of
2011. The Company has also received a proposal for completion of the
Computer Aided Design, or CAD, files that will permit high volume, low cost
manufacturing of the MASCT System. The Company plans to
select one or more established medical device contract manufacturers
and commence manufacturing of its MASCT System devices in commercial quantities
during the first quarter of 2011 following the completion of field
testing. There can
be no assurance that the Company will be able to enter into agreements for the
production of commercial quantities of the MASCT System on acceptable terms, or
at all.
Specialty
Sales Team
To market
the MASCT System and its related laboratory diagnostic services, the Company
will need to hire sales representatives with technical knowledge in, for
example, molecular diagnostics, mammography, obstetrics/gynecology office
practices, and women’s health clinics. As a result, the Company will
expect its sales representatives to develop long-lasting, consultative
relationships with the referring physicians they serve. Similarly,
the Company anticipates that each of its client service associates will provide
dedicated support services to its physician clients. The Company
intends to hire representatives who will provide physician clients and their
office staff with a knowledgeable and consistent point of contact, thereby
strengthening the Company’s client relationships.
The
Company will focus its marketing and sales efforts on encouraging physicians and
breast health and mammography clinics to use the MASCT System in conjunction
with other health screening examinations, including annual physical examinations
and regularly scheduled cervical Pap smears and mammograms. The sales
representatives will concentrate on a geographic area based on the number of
physician clients and prospects, which will be identified using several national
physician databases that provide address information, patient demographic
information, and other data. The Company will also use the FDA
website containing contact information on the approximately 8,600 Mammography
Quality Standards Act (MQSA)-certified clinics to identify potential
clients.
Company
Laboratory
The
Company has entered into a lease for a laboratory facility and intends to
establish a clinical laboratory at this facility in the first quarter of 2011
for the cytology and molecular diagnostics testing and reading of results of
collected NAF samples. The Company believes that by maintaining its
own clinical laboratory, it will be positioned to generate substantial
additional service revenues through cytology and molecular diagnostic testing,
in addition to the sale of the MASCT System pumps and patient
kits. The
Company is in the process of acquiring the laboratory equipment necessary to
begin operations and has begun limited operations of the laboratory
facility consisting of the occupancy of office space and conducting minor tenant
improvements. The Company intends to register under the Washington
state Medical Tests Site (MTS) and federal CLIA certification programs in the
first quarter of 2011. Registration
is mandatory before seeking Medicare reimbursement for services.
Before registration, the Company must also apply for out-of-state
licenses, and laboratory standard operating procedures will need to be
established. Following registration, inspections by state and federal
agencies to CLIA-standards must be completed successfully for certification,
which could take up to 12 months. However,
once the Company’s laboratory is registered with the MTS and CLIA, the Company
may begin to process patient samples and bill for services (prior to the receipt
of certification). Although
the Company can process patient samples and bill for its services prior to
receipt of certification, there can be no assurance that the Company will
be able to successfully qualify its laboratory within the Company’s intended
timeframes, or at all.
The
Company intends to establish a comprehensive quality assurance program for its
laboratory, designed to drive accurate and timely test results and to ensure the
consistent high quality of its testing services. In addition to the
compulsory proficiency programs and external inspections required by CMS and
other regulatory agencies, the Company intends to develop a variety of internal
systems and procedures to emphasize, monitor, and continuously improve the
quality of its operations.
38
The
Company intends to participate in externally administered quality surveillance
programs, and seek accreditation of its laboratory by the College of Anatomic
Pathology, or CAP. The CAP accreditation program involves both
unannounced on-site inspections of laboratories and participation in CAP’s
ongoing proficiency testing program. CAP is an independent, non-governmental
organization of board-certified pathologists that accredits laboratories
nationwide on a voluntary basis and that has been accredited by CMS to inspect
laboratories to determine adherence to the CLIA standards. A
laboratory’s receipt of accreditation by CAP satisfies the Medicare requirement
for participation in proficiency testing programs administered by an external
source, one of Medicare’s requirements for reimbursement
eligibility.
MASCT
System NAF Sample Collection and Testing Process
By
focusing on NAF samples and the cytology and molecular diagnostic technologies
utilizing NAF, the entire process from specimen collection to delivery of the
comprehensive patient diagnoses using the MASCT System will be tailored to the
specific needs of the Company’s referring physicians. When a nurse or
physician’s assistant uses the MASCT System to take a NAF specimen from a
patient for diagnostic testing, he or she will complete a requisition form
(either by hand or electronically, via electronic medical records, or EMR,
technology or via an EMR web interface), attach a bar-coded label to each NAF
specimen from the requisition, and package the specimen for shipment to the
Company.
The
Company will supply physicians with pre-addressed packaging for added
convenience. The Company intends to schedule daily specimen
collections from its referring physicians, which creates reliability and
convenience and relieves referring physicians of the administrative burden and
cost of handling logistical details. Once the specimen arrives in the
Company’s laboratory, the Company will scan the bar coded label on the
requisition and enter all pertinent information about the specimen, including
patient billing information, into a work-flow software system. A
cytotechnologist will then prepare the specimen for
interpretation. It is preferable to prepare NAF slides with
liquid-based cytology technique, using cellular concentration and monolayer
slide method. This approach aids interpretation, because it optimizes
cellularity. The prepared specimen will be delivered to one of the
Company’s pathologists for analysis. After diagnosis, the pathologist
will use an off-the-shelf software system to prepare a comprehensive report,
which might include any relevant images from the NAF. The diagnostic
report will then be delivered to the physician via secure Internet software,
remote printer, fax or mail. Should the physician have questions, the
Company’s pathologists will be available for consultations.
The Company has not purchased or
developed the technology necessary to support these products and services,
including electronic requisition forms and work-flow software, but intends to do
so following completion of this offering.
The
practice of anatomic pathology requires a pathologist to make a specific
diagnosis, which referring physicians rely on to determine appropriate treatment
plans and monitor the effectiveness of treatment. In addition to Dr.
Quay, the Company intends to hire other board-certified pathologists and
cytotechnologists to assist in the interpretation of the NAF
samples.
Growth
Strategy
The
Company intends to launch the MASCT System in the second quarter of 2011 near
its headquarters in Seattle and initially to focus its sales and marketing
efforts in Washington, Oregon, and Idaho. The
Company will market to both mammography clinics and physicians’ offices
initially in the region. The Company will collect information about
the ease or difficulty of adoption of the MASCT System in each location, the
number of sales calls needed to receive the first orders and the growth of
sales of kits on a monthly basis. The outcome of the Company’s
initial marketing efforts in this region could impact the Company’s national
marketing strategies, for example, by changing its emphasis from mammography
clinics to physicians’ offices. These three states have approximately
290 mammography clinics registered with the FDA that perform approximately 1.2
million mammograms per year. The Company believes that this would
represent a total addressable market for products and services for the
collection and analysis of NAF in conjunction with mammography of over $100
million annually. While this estimate is not intended, and should not be
considered, to be a projection of the Company’s revenues, the Company will seek
to capture a portion of this market.
The
Company plans to market the MASCT System nationally after its regional
marketing and selling effort, if successful, and after it has established
the operation of its clinical and diagnostic laboratory. This will
provide it with experience and knowledge of the issues and problems that may
arise as it markets the MASCT System and the facilities to provide the testing
and reading of the samples. Assuming a successful regional launch,
the Company intends to commence its national launch of the MASCT System during
the first quarter of 2012.
39
Research
and Development
We
intend to use a portion of the proceeds from this offering to develop the next
generation of the MASCT System as well as new biomarker tests for the analysis
of NAF samples. We refer to these as our “second-generation” products
and services, which are described more fully below. Because
of limited resources, we have spent only $1,306 on research and development for
the nine months ended September 30, 2010 and will not be able to conduct any
further research and development activities until this offering is completed.
The
further research activities necessary for the Company to fully develop and seek
marketing approval for these products depend substantially on the successful
completion of this offering. If the Company is unable to raise
sufficient funds from the proceeds of this offering, it will not be able to
further develop, obtain marketing approval for, or commercialize any of its
second-generation products.
Second
Generation Oxy-MASCT Product Development
In 2001,
Dr. Quay discovered that administration of a synthetic version of a natural
hormone, oxytocin, increases the production of NAF and was named as the inventor
on U.S. patent number 6,689,073 for this finding. The Company
anticipates that it will develop a second generation product, Oxy-MASCT Ô , based on this
research. The Oxy-MASCT System will include a single dose formulation
of oxytocin to increase the amount of NAF collected, to be given to the patient
before NAF collection, and the pump and collection kit of the first generation
MASCT System. The increase in NAF could permit the Company to perform both
cellular examination and biomarker studies on the same
sample. The Oxy-MASCT technology is covered by three U.S. and eight
foreign patents owned by the Company. The Company plans to initiate
clinical trials of the Oxy-MASCT System for the collection of NAF during the
fourth quarter of 2011, and, if the results of these trials are favorable, to
file with the FDA for market clearance of the Oxy-MASCT System as a Class III
medical device in 2013. If the Company is successful in developing
and obtaining marketing approval for a product based on the Oxy-MASCT
technology, it may market the Oxy-MASCT product to the core of healthcare
professionals who use the MASCT System.
Second
Generation Biomarker Test Development
The
Company intends to engage in research activities relating to the study and
analysis of NAF samples to develop molecular diagnostic biomarkers for breast
health and disease. The Company believes that some of these tests may
be developed to serve the growing worldwide personalized medicine market, which
is estimated to reach $50 billion in 2012. Personalized medicine is a medical
model that emphasizes the systematic use of genetic and other molecular
diagnostic information about an individual patient to select or optimize that
patient’s preventative or therapeutic care.
The
Company’s patents and patent applications provide the basis for its research
efforts. These patents and patent applications are directed to over
60 specific individual biomarkers that have been identified in NAF from patients
with breast cancer. The Company conducted only limited research and
development activities in 2010. To date, the Company has not
conducted any research or development activities with respect to second generation
biomarker tests, other than obtaining patents and filing patent
applications.
The
Company believes that each of the stages of breast cancer, from normal growth,
to hyperplasia, to ADH, to early-stage cancer, and finally to invasive cancer is
associated with specific biomarker patterns. As a result, the Company
intends to develop second generation biomarker tests involving DNA methylation
patterns, mass spectrometry proteomics, and other microarray-based biomarker
panels using a multi-phased clinical development platform, which it intends to
fund through additional equity and/or debt financings, as well as revenue-based
earnings from sales of the MASCT System. This clinical development
platform, if established, would consist of:
|
|
·
|
a
clinical research phase, in which the Company would establish a research
plan, conduct literature reviews to form the basis of clinical research,
secure access to archival tumor or pre-cancerous biopsy samples and
conduct feasibility studies on these samples with the goal of identifying
patterns and changes that occur in pre-cancerous hyperplasia compared to
normal tissue and that correlate with the later development of
cancer;
|
|
|
·
|
a
development phase, in which the Company would conduct additional clinical
studies to refine the biomarker set in a specific patient population of
interest, with the goal of developing a final biomarker panel and testing
and verifying assay chemistry, automation and analysis
specifications;
|
|
|
·
|
a
validation phase, in which the Company would conduct one or more
validation studies with prospectively designed endpoints to test its
candidate biomarker panel and the corresponding quantitative expression
score; and
|
|
|
·
|
a
commercialization and product expansion phase, in which the Company would
perform additional studies designed to support a commercialized test’s
clinical utility and potentially to broaden its use in additional patient
populations or for additional
indications.
|
40
Billing
and Reimbursement
Billing
for the MASCT System Medical Device and Patient Kits and the NAF Collection
Procedure
Currently
Medicare and certain insurance carriers do not cover the cost of collecting the
NAF sample. The Company intends to work with physicians and other
interest groups to obtain coverage for the procedures but this process can be
lengthy, costly, and might not be successful. Failure to receive
reimbursement could limit the adoption and utilization of the MASCT
System. Because the process can be done by a nurse or physician’s
assistant, takes less than five minutes, and the MASCT System supplies will
contain everything to obtain, label, and ship the NAF samples, the charge for
collecting NAF samples should be below the average cost of a
mammogram.
Billing for
Diagnostic Services
Billing
for diagnostic services is generally complex. As a result, the
Company intends to rely on a third-party billing company to perform most of its
billing and collection services. Laboratories must bill various payors, such as
private insurance companies, managed care companies, governmental payors such as
Medicare and Medicaid, physicians, hospitals, and employer groups, each of whom
may have different billing requirements. The Company expects to be obligated to
bill in the specific manner prescribed by the various payors. Additionally, the
audit requirements that must be met to ensure compliance with applicable laws
and regulations, as well as internal compliance policies and procedures, add
further complexity to the billing process. Other factors that complicate billing
include:
|
|
·
|
additional
billing procedures required by government payor
programs;
|
|
|
·
|
variability
in coverage and information requirements among various
payors;
|
|
|
·
|
missing,
incomplete or inaccurate billing information provided by referring
physicians;
|
|
|
·
|
billings
to payors with whom the Company does not have
contracts;
|
|
|
·
|
disputes
with payors as to who is responsible for
payment;
|
|
|
·
|
disputes
with payors as to the appropriate level of
reimbursement;
|
|
|
·
|
training
and education of employees and
clients;
|
|
|
·
|
compliance
and legal costs; and
|
|
|
·
|
cost
related to, among other factors, medical necessity denials and the absence
of advance beneficiaries’ notices.
|
In
general, the Company expects to perform the requested tests and report test
results even if the billing information is incorrect or missing. The Company
will subsequently attempt to obtain any missing information and correct
incomplete or erroneous billing information received from the healthcare
provider. Missing or incorrect information on requisitions adds complexity to
and slows the billing process, creates backlogs of unbilled requisitions, and
generally increases the aging of accounts receivable. When all issues relating
to the missing or incorrect information are not resolved in a timely manner, the
related receivables will be written off to the allowance for doubtful
accounts.
Reimbursement
Depending
on the billing arrangement and applicable law, the party that reimburses the
Company for its services will be (i) a third party who provides coverage to the
patient, such as an insurance company, managed care organization, or a
governmental payor program; (ii) the physician or other authorized party (such
as another laboratory) who ordered the test or otherwise referred the test to
us; or (iii) the patient. A large percentage of revenues are likely to be
derived from Medicare, so Medicare coverage and reimbursement rules will be
significant to the Company’s operations.
41
Reimbursement
for services under the Medicare program is based principally on two sets of fee
schedules. Generally, anatomic pathology services, including most of the
services the Company provides, are paid based on the Medicare physician fee
schedule. The physician fee schedule is designed to set compensation
rates for those medical services provided to Medicare beneficiaries that require
a degree of physician supervision. Clinical laboratory tests that are not
physician pathology services, such as most blood and urine tests, are paid by
Medicare based on the clinical laboratory fee schedule. Outpatient diagnostic
laboratory tests are typically paid according to the laboratory fee
schedule.
For the
anatomic pathology services that the Company will provide, it will be reimbursed
under the Medicare physician fee schedule, and beneficiaries are responsible for
applicable coinsurance and deductible amounts. The physician fee schedule is
based on assigned relative value units for each procedure or service, and an
annually determined conversion factor is applied to the relative value units to
calculate the reimbursement. The formula used to calculate the fee schedule
conversion factor has resulted in significant decreases in payment levels in
recent years, and for the 2011 final rule, mandates a reduction of approximately
23%.
Future
decreases in the Medicare physician fee schedule are expected unless Congress
acts to change the fee schedule methodology or mandates freezes or increases
each year. Because the vast majority of the Company’s laboratory services will
be reimbursed based on the physician fee schedule, changes to the
physician fee schedule could result in a greater impact on the Company’s
revenues than changes to the Medicare laboratory fee schedule.
The
Company expects to bill the Medicare program directly. Generally, it
will be permitted to directly bill the Medicare beneficiary for clinical
laboratory tests only when the service is considered not medically necessary and
the patient has signed an Advanced Beneficiary Notice, or ABN, reflecting
acknowledgment that Medicare is likely to deny payment for the service. In most
situations, the Company is required to rely on physicians to obtain an ABN from
the patient. When the Company is not provided an ABN, it is generally
unable to recover payment for a service for which Medicare has denied payment
for lack of medical necessity.
In
billing Medicare, the Company is required to accept the lowest of: its actual
charge, the fee schedule amount for the state or local geographical area, or a
national limitation amount, as payment in full for covered tests performed on
behalf of Medicare beneficiaries. Payment under the laboratory fee
schedule has been limited by Congressional action such as freezes on the
otherwise applicable annual Consumer Price Index, or CPI, update to the fee
schedule amount. The CPI update of the laboratory fee schedule for
2010 was minus 1.9%.
The
Medicare statute permits CMS to adjust statutorily prescribed fees for some
medical services, including clinical laboratory services, if the fees are
“grossly excessive.” Medicare regulations provide that if CMS or a
carrier determines that an overall payment adjustment of less than 15% is needed
to produce a realistic and equitable payment amount, then the payment amount is
not considered “grossly excessive or deficient.” However, if a determination is
made that a payment adjustment of 15% or more is justified, CMS could provide an
adjustment of 15% or less, but not more than 15%, in any given year. The Company
cannot provide any assurance that fees payable by Medicare for clinical
laboratory services could not be reduced as a result of the application of this
rule or that the government might not assert claims for recoupment of previously
paid amounts by retroactively applying these principles.
The
payment amounts under the Medicare fee schedules are important not only for
reimbursement under Medicare, but also because the schedule is often used as a
reference for the payment amounts set by other third-party
payors. For example, state Medicaid programs are prohibited from
paying more than the Medicare fee schedule limit for laboratory services
furnished to Medicaid recipients, and insurance companies and managed care
organizations typically reimburse at a percentage of the Medicare fee
schedule.
The
Company’s reimbursement rates will also vary depending on whether it is
considered an “in-network,” or participating, provider. If it enters
into a contract with an insurance company, the Company’s reimbursement will be
governed by its contractual relationship, and it will typically be reimbursed on
a fee-for-service basis at a discount from the patient fee
schedule. If the Company does not have a contract with an insurance
company, it will be classified as “out-of-network,” or as a non-participating
provider. In such instances, it would have no contractual right to
reimbursement for services.
42
Reimbursement
Strategy
Significance
of CPT Codes
Reimbursement
for medical procedures and laboratory services is based on obtaining a Current
Procedural Terminology, or CPT, code from the AMA. CPT is a listing
of descriptive terms and identifying codes for reporting medical services and
procedures. The purpose of CPT is to provide a uniform and accurate
description of medical, surgical and diagnostic services, thereby serving as a
means for reliable nationwide communication among physicians and other
healthcare providers, patients and third parties.
CPT
descriptive terms and identifying codes currently serve a wide variety of
important functions. This system of terminology is the most widely
accepted medical nomenclature used to report medical procedures and services
under public and private health insurance programs. CPT is also used
for administrative management purposes such as claims processing and developing
guidelines for medical care review.
Category
I CPT Codes
Category
I CPT codes describe a procedure or service identified with a five-digit CPT
code and descriptor nomenclature. The inclusion of a descriptor and
its associated specific five-digit identifying code number in this category of
CPT codes is generally based upon the procedure being consistent with
contemporary medical practice and being performed by many physicians in clinical
practice in multiple locations.
In
developing new and revised regular CPT codes the Advisory Committees and the
Editorial Panel require:
|
|
·
|
that
the service/procedure has received approval from the FDA for the specific
use of devices or drugs;
|
|
|
·
|
that
the suggested procedure/service is a distinct service performed by many
physicians/practitioners across the United
States;
|
|
|
·
|
that
the clinical efficacy of the service/procedure is well established and
documented in U.S. peer review
literature;
|
|
|
·
|
that
the suggested service/procedure is neither a fragmentation of an existing
procedure/service nor currently reportable by one or more existing codes;
and
|
|
|
·
|
that the suggested
service/procedure is not requested as a means to report extraordinary
circumstances related to the performance of a procedure/service already
having a specific CPT code.
|
Category
III CPT Codes – Emerging Technology
Category
III CPT codes are a temporary set of tracking codes for new and emerging
technologies. These codes are intended to facilitate data collection
on and assessment of new services and procedures. The Category III codes are
intended for data collection purposes in the FDA approval process or to
substantiate widespread usage. As such, the Category III codes may
not conform to the usual CPT code requirements for Category I. The
Panel has established the following criteria for evaluating Category III code
requests, any one of which is sufficient for consideration by the Editorial
Panel:
|
|
·
|
a
protocol for a study of procedures being
performed;
|
|
|
·
|
support
from the specialties who would use the
procedure;
|
|
|
·
|
availability
of U.S. peer-reviewed literature;
and
|
|
|
·
|
descriptions
of current United States trials outlining the efficacy of the
procedure.
|
43
In
general, these codes will be assigned a numeric-alpha identifier (eg,
1234T). These codes will be located in a separate section of CPT,
following the "Category II" section. Introductory language in this
code section explains the purpose of the Category III codes.
Since
Category III CPT codes are intended to be used for data collection purposes to
substantiate widespread usage or in the FDA approval process, they are not
intended for services/procedures that are not accepted by the Editorial Panel
because the proposal was incomplete, more information is needed, or the Advisory
Committee did not support the proposal.
Category
III CPT codes are not referred to the AMA / Specialty RVS Update Committee, or
RUC, for valuation because no relative value units, or RVUs, will be
assigned. Payment for these services/procedures is based on the
policies of payors and local Medicare carriers, although most payers deny
coverage for services reported under Category III codes.
CPT Code for
MASCT System NAF Collection Procedure
The NAF
collection procedure of the MASCT System does not currently have a
procedure-specific Category I CPT code, which is important for reimbursement by
Medicare for eligible patients, and which is part of the basis by which
insurance companies make reimbursement decisions. A non-specific
Category I CPT code, 19499 (unlisted procedure, breast), can be used initially
by physicians and insurance carriers will often pay for such procedures with
proper documentation. Medicare does not typically reimburse for CPT
19499 procedures.
Beginning
in the first quarter of 2011, the Company expects to begin the process of
obtaining a Category III CPT code with which to collect clinical data to support
a Category I CPT code application for the use of NAF collection as an adjunct to
mammography. It is expected it may take 12 months to obtain the
Category III CPT code and up to two years to collect data to make an application
to the AMA for a Category I CPT code. The Company expects physicians
will be able to use either the non-specific Category I CPT code 19499 with
documentation or the MASCT System specific Category III code to obtain
reimbursement.
CPT
Code for Cytology and IHC Biomarker Testing
Category
I laboratory procedure codes for cytology, IHC biomarker tests, microarray-based
analysis of molecular probes, and in situ hybridization of DNA and RNA probes
currently exist and it is expected that reimbursement for these codes by
Medicare will be at the established rates shown in the following
table:
|
2010 CPT Code
|
Description
|
2010 Medicare
National
Reimbursement
Rate (Per Patient)
(1)
|
||||
|
88161
|
Cytopathology,
smears; preparation, screening and interpretation
|
$ | 106.20 | |||
|
88162
|
Cytopathology,
smears; extended study involving over 5 slides and/or multiple
stains
|
$ | 151.18 | |||
|
88360
|
Morphometric
analysis, tumor immunohistochemistry (eg, Her-2/neu, estrogen
receptor/progesterone receptor), quantitative or semiquantitative, each
antibody; manual
|
$ | 240.42 | |||
|
88360
(5)
|
Morphometric
analysis, tumor immunohistochemistry (eg, Her-2/neu, estrogen
receptor/progesterone receptor), quantitative or semiquantitative, five
antibody panel; manual
|
$ | 1,202.10 | |||
|
88342
|
Immunohistochemistry
(including tissue immunoperoxidase), each antibody
|
$ | 200.58 | |||
|
88342
(5)
|
Immunohistochemistry
(including tissue immunoperoxidase), five antibody panel
|
$ | 1,002.50 | |||
|
88385
|
Array-based
evaluation of multiple molecular probes; 51 through 250
probes
|
$ | 1,250.00 | |||
|
88367
|
Morphometric
analysis, in situ hybridization (quantitative or
semi-quantitative) each probe; using computer-assisted
technology
|
$ | 479.34 | |||
44
(1) Assumes
two samples from each patient.
Laboratories
typically set patient fee schedules at two to four times the Medicare
reimbursement rate for the same procedure.
Intellectual
Property
The
Company owns five issued U.S. patents and eight corresponding issued patents in
Australia, Canada, the European Union, Hong Kong and Japan as well as pending
patent applications in the U.S., Europe and Japan. The patents cover
both the MASCT System and the Company’s proposed Oxy-MASCT
System. The patented technology of the MASCT System encompasses the
invention of a proprietary, patented process for obtaining fluid and cells from
within the breast, in a reproducible and non-invasive method, through a device
that allows pressure to be applied to the nipple, thereby increasing
the amount of fluid that is extracted from the ducts and lobules of the
breast. The Oxy-MASCT System, a second generation product in
development, is derived from additional patented technologies (under patents
filed in 2001) in which samples of breast fluid, containing cancer markers,
abnormal cells and malignant cells, are obtained from the breast nipple
following administration of oxytocin, a brain pituitary
hormone. Third-party studies conducted in Europe in 2007 have shown
that oxytocin administration increases NAF by as much as 10-fold. The
Company has also patented its test kit collection system, which will allow the
company to have the fluids processed exclusively by its own
laboratory.
As of
September 30, 2010, the Company owned 13 issued patents (five U.S. and
eight foreign) and six pending applications (one U.S. and five foreign),
including one expired patent issued in the EU, now entering national
phase. The Company owns patents and patent applications covering the
development, manufacture, use and sale of the MASCT System and the Oxy-MASCT
System, as well as breast cancer biomarkers.
|
United
States
|
Foreign
|
|||||||||||||||||||||||
|
Description
|
Issued
|
Expiration
|
Pending
|
Issued
|
Expiration
|
Pending
|
||||||||||||||||||
|
MASCT
System
|
5
|
2016-2020 |
4
|
8
|
2016-2020 |
5
|
|
|||||||||||||||||
|
Oxy-MASCT
System
|
|
3
|
2016-2020 |
3
|
8
|
2016-2020 |
5
|
|||||||||||||||||
|
Breast
cancer biomarkers
|
3
|
|
2016-2020 |
2
|
8
|
2016-2020 |
5
|
|||||||||||||||||
|
Total
(1)
|
5
|
2016-2020 |
4
|
8
|
2016-2020 |
5
|
||||||||||||||||||
(1)
Certain of the Company’s patents and pending patent applications contain claims
covering one or more of the MASCT System, the Oxy-MASCT System and breast cancer
biomarkers. Some pending applications, if issued, would expire in
2029.
The
Company has applied with the United States Patent and Trademark Office for
registration of the use of the marks Atossa (and design), MASCT, and
Oxy-MASCT.
The
technologies and products covered by the Company’s patents can be summarized
as:
|
|
·
|
MASCT
System collection device for NAF;
|
|
|
·
|
The
method of making a diagnosis from NAF, using “whole cells, cell fragments,
cell membranes, a protein, a peptide, a glycoprotein, a lipid, a
glycolipid, a DNA polynucleotide, an RNA polynucleotide, or a combination
thereof;” and
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The use of the drug oxytocin or
oxytocin analogues to increase the amount of NAF
produced.
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The
Company believes that its patents also provide protection against third party
laboratories providing diagnostic services with NAF samples collected with the
MASCT System and technology. Specifically, the MASCT System
collection kits to be provided by the Company are protected under an issued U.S.
patent owned by the Company and will be sold under a limited “collection only”
patent license (specifically, claims 1–15 of US Patent 6,689,073), which will
permit physicians to collect NAF samples but will not allow for assessing,
transferring, and processing samples within the vial. Certain claims
under the same U.S. patent 6,689,073, owned by the Company,
protect those processes of assessing, transferring and processing samples to
detect or quantify breast disease markers and the detection of these biomarkers,
which will not be licensed with the sale of the MASCT System. The
foreign patent counterparts contain similar claims. The
Company expects that it will be able to monitor compliance with the license
terms by tracking the receipt of samples from purchasers of kits. To
the extent that kits are being sold where there is not a corresponding number of
samples being returned, that would serve as a "red flag" that the purchaser may
be violating the terms of the patent license. The Company expects to
monitor compliance with these license terms and enforce the Company's patent
rights. At the present time, the Company does not expect to offer
kits for sale under a more liberal license, although we may choose to do so at a
later time. Parties violating the terms of our patent may be subject
to damages and an injunction barring further violations. Our
patents do not, however, prevent physicians from collecting NAF using a
different technology or system and independently performing comparable
diagnostic analysis on the fluid sample.
45
Competition
The
Company believes that the MASCT System for NAF collection will compete in the
medical device product industry with Neomatrix and with academic scientists and
physicians who use “homemade” NAF fluid collection systems for research
purposes. The Neomatrix device is automated and provides warmth and nipple
aspiration simultaneously and is
the only non-“homemade” NAF collection system of which the Company is currently
aware. The
advantages of the MASCT System compared to the Neomatrix device include a lower
acquisition cost and portability. The disadvantages of the MASCT
System compared to the Neomatrix device include the requirement that a nurse or
other healthcare provider manually operate the device, which may result in
increased risks of human error and improper sample collection, and the reduced
availability of experience with the device among the medical
community.
The
Company believes it will compete in the anatomic pathology laboratory industry
based on the patent portfolio for the MASCT System, the technical expertise
provided by the Company’s focus on diagnoses utilizing NAF, service-focused
relationships with referring physicians, and its advanced technology. The
Company does not believe that its competitors can transport or process NAF
samples collected with the MASCT System without infringing the Company’s patent
estate.
Laboratories that could
process NAF samples not collected with the MASCT System include thousands of
local and regional pathology groups, national laboratories, hospital
pathologists, and academic laboratories. The largest such competitors include
Laboratory Corporation of America and Quest Diagnostics
Incorporated.
Characteristics
of each source of competition include:
Local and
Regional Pathology Groups. Local and
regional pathology groups focus on servicing hospitals, often maintaining a
staff of pathologists on site that can provide support in the interpretation of
certain results. The business models of these laboratories tend to be focused on
the efficient delivery of individual tests for a multitude of diseases rather
than the comprehensive assessment of only NAF samples, and their target groups
tend to be hospital pathologists as opposed to community
physicians.
National
Laboratories.
National laboratories typically offer a full suite of tests for a
variety of medical professionals, including general practitioners, hospitals,
and pathologists. Their emphasis on providing a broad product portfolio of
commoditized tests at the lowest possible price often limits such laboratories’
ability to handle difficult or complex specimens requiring special attention,
such as NAF samples. In addition, national laboratories typically do not provide
ready access to a specialized pathologist for interpretation of test
results.
Hospital
Pathologists.
Pathologists working in a hospital traditionally provide most of the
diagnostic services required for hospital patients and sometimes also serve
non-hospital patients. Hospital pathologists typically have close
interaction with treating physicians, including face-to-face contact.
However, hospital pathologists often do not have the depth of experience,
specialization, and expertise necessary to perform the specialized services
needed for NAF samples.
Academic
Laboratories.
Academic laboratories generally offer advanced technology and know-how. In
fact, the vast majority of NAF sample processing over the last years has been in
academic laboratories primarily for research purposes. These laboratories
typically pursue multiple activities and goals, such as research and education,
or are generally committed to their own hospitals. Turn-around time for
specimen results reporting from academic laboratories is often slow. This limits
the attractiveness of academic laboratories to outside physicians who tend to
have focused specialized needs and require results to be reported in a timely
manner.
Alternative Diagnostic
Tools. The Company also anticipates that the MASCT System will face
challenges in market adoption due to the reliance of physicians and other
medical professionals on existing diagnostic tools for breast cancer, including
mammograms, ultrasound examinations, magnetic resonance imaging (MRI), fine
needle aspiration and core biopsies, among others. These methods are
currently more widely used and accepted by physicians, and may continue to be
more widely used than the Company’s proposed products and services because they
are currently reimbursed by third-party payors. In
addition, physicians and other medical professionals may view the MASCT System
as a screening tool for existing breast cancer, like mammography, rather than as
an adjunctive procedure to mammography. As a result, the MASCT System
could be deemed to compete directly with mammography, an established procedure,
which could impair market adoption of the MASCT System. The
advantages of the MASCT System compared to ultrasound, mammography, or magnetic
resonance imaging include obtaining cytology and molecular information, the ease
and simplicity of the procedure, and the cost, especially compared to
MRI. The disadvantages of the MASCT System compared to ultrasound,
mammography, and MRI include a lower sensitivity to detection of
cancer. The advantage of the MASCT System compared to fine needle
aspiration and core biopsies include the ease and simplicity of the procedure,
the cost, and the patient comfort. The disadvantages of the MASCT
System compared to fine needle aspiration and core biopsies include the reduced
sample size and the consequent limitation of the range of molecular studies that
can be conducted.
46
Information
Systems
The
Company will need to acquire, develop and implement laboratory information
management systems, or LIMS, that support the Company’s operations and physician
services. There are a number of commercial vendors of LIMS for anatomic
pathology laboratories, and the Company intends initially to use such
third-party supplied products for its laboratory operations. Its
information systems, to the extent such systems hold or transmit patient medical
information, must be capable of being operated in compliance with state and
federal laws and regulations relating to the privacy and security of patient
medical information, including a comprehensive federal law and regulations
referred to as HIPAA. While the Company intends to establish its
information systems to be compliant with such laws, including HIPAA, such laws
are complex and subject to interpretation.
Government
Regulation
United
States Medical Device Regulation
The
Federal Food, Drug, and Cosmetic Act, or FDCA, and the FDA’s implementing
regulations, govern registration and listing, manufacturing, labeling, storage,
advertising and promotion, sales and distribution, and post-market surveillance.
Medical devices and their manufacturers are also subject to inspection by the
FDA. The FDCA, supplemented by other federal and state laws, also provides civil
and criminal penalties for violations of its provisions. We intend to
manufacture and market a medical device that is regulated by the FDA, comparable
state agencies and regulatory bodies in other countries. We also intend to
operate a clinical and diagnostic laboratory which will use reagents and test
kits some of which are regulated medical devices.
The FDA
classifies medical devices into one of three classes (Class I, II or III) based
on the degree of risk the FDA determines to be associated with a device and the
extent of control deemed necessary to ensure the device’s safety and
effectiveness. Devices requiring fewer controls because they are deemed to pose
lower risk are placed in Class I or II. Class I devices are deemed to pose the
least risk and are subject only to general controls applicable to all devices,
such as requirements for device labeling, premarket notification, and adherence
to the FDA’s current good manufacturing practice requirements, as reflected in
its QSR. Most pathology staining kits, reagents, and routine
antibody-based Immunohistochemistry protocols which the Company intends to use
initially are Class I devices. Class II devices are intermediate risk
devices that are subject to general controls and may also be subject to special
controls such as performance standards, product-specific guidance documents,
special labeling requirements, patient registries or postmarket surveillance.
The MASCT System is a Class II device. Class III devices are those for
which insufficient information exists to assure safety and effectiveness solely
through general or special controls, and include life-sustaining,
life-supporting, or implantable devices, and devices not “substantially
equivalent” to a device that is already legally marketed.
Most
Class I devices, including the laboratory staining kits and reagents the Company
intends to use, and some Class II devices are exempted by regulation from the
510(k) clearance requirement and can be marketed without prior authorization
from FDA. Class I and Class II devices that have not been so exempted are
eligible for marketing through the 510(k) clearance pathway. By contrast,
devices placed in Class III generally require premarket approval, or PMA,
approval prior to commercial marketing. To obtain 510(k) clearance for a
medical device, an applicant must submit a premarket notification to the FDA
demonstrating that the device is “substantially equivalent” to a predicate
device legally marketed in the United States. A device is substantially
equivalent if, with respect to the predicate device, it has the same intended
use and (i) the same technological characteristics, or (ii) has different
technological characteristics and the information submitted demonstrates that
the device is as safe and effective as a legally marketed device and does not
raise different questions of safety or effectiveness. A showing of substantial
equivalence sometimes, but not always, requires clinical data. In the case
of the MASCT System, a clinical trial was conducted. Generally, the 510(k)
clearance process can exceed 90 days and may extend to a year or more.
After a device has received 510(k) clearance for a specific intended use, any
modification that could significantly affect its safety or effectiveness, such
as a significant change in the design, materials, method of manufacture or
intended use, will require a new 510(k) clearance or (if the device as modified
is not substantially equivalent to a legally marketed predicate device) PMA
approval. While the determination as to whether new authorization is needed is
initially left to the manufacturer, the FDA may review this determination and
evaluate the regulatory status of the modified product at any time and may
require the manufacturer to cease marketing and recall the modified device until
510(k) clearance or PMA approval is obtained. The manufacturer may also be
subject to significant regulatory fines or penalties.
47
All
clinical trials must be conducted in accordance with regulations and
requirements collectively known as Good Clinical Practice, or GCP. GCPs
include the FDA’s Investigational Device Exemption, or IDE, regulations, which
describe the conduct of clinical trials with medical devices, including the
recordkeeping, reporting and monitoring responsibilities of sponsors and
investigators, and labeling of investigation devices. They also prohibit
promotion, test marketing, or commercialization of an investigational device,
and any representation that such a device is safe or effective for the purposes
being investigated. GCPs also include FDA’s regulations for institutional review
board approval and for protection of human subjects (informed consent), as well
as disclosure of financial interests by clinical investigators.
Required
records and reports are subject to inspection by the FDA. The results of
clinical testing may be unfavorable or, even if the intended safety and
effectiveness success criteria are achieved, may not be considered sufficient
for the FDA to grant approval or clearance of a product. The commencement or
completion of clinical trials, if any, that the Company may sponsor,
may be delayed or halted, or be inadequate to support approval of a PMA
application or clearance of a premarket notification for numerous reasons,
including, but not limited to, the following:
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the
FDA or other regulatory authorities do not approve a clinical trial
protocol or a clinical trial (or a change to a previously approved
protocol or trial that requires approval), or place a clinical trial on
hold;
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patients
do not enroll in clinical trials or follow up at the rate
expected;
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institutional
review boards and third-party clinical investigators may delay or reject
the Company’s trial protocol or changes to its trial
protocol;
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third-party
clinical investigators decline to participate in a trial or do not perform
a trial on the Company’s anticipated schedule or consistent
with the clinical trial protocol, investigator agreements, good clinical
practices or other FDA
requirements;
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third-party
organizations do not perform data collection and analysis in a timely or
accurate manner;
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regulatory
inspections of clinical trials or manufacturing facilities, which may,
among other things, require the Company to undertake corrective action or
suspend or terminate its clinical
trials;
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changes
in governmental regulations or administrative
actions;
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the
interim or final results of the clinical trial are inconclusive or
unfavorable as to safety or effectiveness;
and
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the
FDA concludes that the Company’s trial design is inadequate to demonstrate
safety and effectiveness.
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After a
device is approved and placed in commercial distribution, numerous regulatory
requirements apply. These include:
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establishment
registration and device listing;
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the
QSR, which requires manufacturers to follow design, testing, control,
documentation and other quality assurance
procedures;
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labeling
regulations, which prohibit the promotion of products for unapproved or
“off-label” uses and impose other restrictions on
labeling;
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48
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medical
device reporting regulations, which require that manufacturers report to
the FDA if a device may have caused or contributed to a death or serious
injury or malfunctioned in a way that would likely cause or contribute to
a death or serious injury if malfunctions were to recur;
and
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corrections and removal reporting
regulations, which require that manufacturers report to the FDA field
corrections and product recalls or removals if undertaken to reduce a risk
to health posed by the device or to remedy a violation of the FDCA caused
by the device that may present a risk to
health.
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The FDA
enforces regulatory requirements by conducting periodic, announced and
unannounced inspections and market surveillance. Inspections may include the
manufacturing facilities of our subcontractors. Failure to comply with
applicable regulatory requirements, including those applicable to the conduct of
our clinical trials, can result in enforcement action by the FDA, which may lead
to any of the following sanctions:
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warning
letters or untitled letters;
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fines
and civil penalties;
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unanticipated
expenditures;
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delays
in clearing or approving or refusal to clear or approve
products;
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withdrawal
or suspension of FDA clearance;
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product
recall or seizure;
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orders
for physician notification or device repair, replacement, or
refund;
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production
interruptions;
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operating
restrictions;
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injunctions;
and
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criminal
prosecution.
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The
Company and its contract manufacturers, specification developers and suppliers
are also required to manufacture the MASCT System in compliance with current
Good Manufacturing Practice requirements set forth in the QSR. The QSR
requires a quality system for the design, manufacture, packaging, labeling,
storage, installation and servicing of marketed devices, and includes extensive
requirements with respect to quality management and organization, device design,
buildings, equipment, purchase and handling of components, production and
process controls, packaging and labeling controls, device evaluation,
distribution, installation, complaint handling, servicing and record
keeping. The FDA enforces the QSR through periodic announced and
unannounced inspections that may include the manufacturing facilities of our
subcontractors. If the FDA believes the Company or any of its contract
manufacturers or regulated suppliers is not in compliance with these
requirements, it can shut down the Company’s manufacturing operations, require
recall of the MASCT System, refuse to clear or approve new marketing
applications, institute legal proceedings to detain or seize products, enjoin
future violations, or assess civil and criminal penalties against the Company or
its officers or other employees. Any such action by the FDA would have a
material adverse effect on the Company’s business.
49
CLIA
and State Regulation
As a
future provider of cytology and molecular diagnostic services, the Company is
required to hold certain federal, state and local licenses, certifications, and
permits. Under CLIA, it is required to hold a certificate applicable to
the type of work it performs and to comply with certain CLIA-imposed
standards. CLIA regulates all laboratories by requiring they be certified
by the federal government and comply with various operational, personnel,
facilities administration, quality, and proficiency requirements intended to
ensure that laboratory testing services are accurate, reliable, and timely. CLIA
does not preempt state laws that are more stringent than federal
law.
To obtain
and renew its CLIA certificates, which it is required to renew every two years,
the Company will be regularly subject to survey and inspection to assess
compliance with program standards and may be subject to additional random
inspections. Standards for testing under CLIA are based on the level of
complexity of the tests performed by the laboratory. Laboratories performing
high complexity testing are required to meet more stringent requirements than
laboratories performing less complex tests where a CLIA certificate is required.
Both NAF cytology and molecular diagnostic testing are high complexity tests.
CLIA certification is a prerequisite to be eligible for reimbursement under
Medicare and Medicaid.
The
Clinical Laboratory Improvement Amendments of 1988, or CLIA ’88, was passed to
improve quality control at cytology laboratories performing gynecological
diagnoses (Pap smears for cervical cancer). Under CLIA ‘88, the number of
slides a cytotechnologist may screen each day is regulated (no more than 100
slides in any 24 hour period, and must have at least 8 hours to complete the
examination of 100 slides, which results in an average of 12.5 slides per hour)
and quality control procedures require rescreening of a minimum of 10% randomly
selected within-normal-limits, or WNL, slides per day. In addition,
specialized proficiency testing requirements apply not just to the laboratory,
but to the individuals performing the test, specialized personnel standards, and
quality control procedures. The Company will not be seeking certification
to perform cervical Pap smears and therefore does not believe these provisions
of CLIA ‘88 apply to it.
In
addition to CLIA requirements, the Company will be subject to various state
laws. CLIA provides that a state may adopt laboratory regulations that are more
stringent than those under federal law, and a number of states, including
Washington, where the Company is located, have done so. The Washington
state Medical Test Site, or MTS, Licensure law (Chapter 70.42 RCW) was passed in
May 1989 to allow the state to regulate clinical laboratory testing. In October
1993, Washington became the first state to have its clinical laboratory
licensure program judged by the Federal Health and Human Services Centers for
Medicare and Medicaid Services, or CMS, as equivalent to CLIA and was granted an
exemption. In addition, New York, Maryland, Pennsylvania, Rhode Island,
and California, have implemented their own laboratory regulatory schemes. State
laws may require that laboratory personnel meet certain qualifications, specify
certain quality controls, or prescribe record maintenance
requirements.
Privacy
and Security of Health Information and Personal Information; Standard
Transactions
The
Company will be subject to state and federal laws and implementing regulations
relating to the privacy and security of the medical information of the patients
it treats. The principal federal legislation is part of HIPAA.
Pursuant to HIPAA, the Secretary of the Department of Health and Human Services,
or HHS, has issued final regulations designed to improve the efficiency and
effectiveness of the healthcare system by facilitating the electronic exchange
of information in certain financial and administrative transactions, while
protecting the privacy and security of the patient information exchanged.
These regulations also confer certain rights on patients regarding their access
to and control of their medical records in the hands of healthcare providers
such as the Company.
50
Four
principal regulations have been issued in final form: privacy regulations,
security regulations, standards for electronic transactions, and the National
Provider Identifier regulations. The HIPAA privacy regulations, which
fully came into effect in April, 2003, establish comprehensive federal standards
with respect to the uses and disclosures of an individual’s personal health
information, referred to in the privacy regulations as “protected health
information,” by health plans, healthcare providers, and healthcare
clearinghouses. The Company is a healthcare provider within the meaning of
HIPAA. The regulations establish a complex regulatory framework on a
variety of subjects, including:
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the
circumstances under which uses and disclosures of protected health
information are permitted or required without a specific authorization by
the patient, including but not limited to treatment purposes, activities
to obtain payment for services, and healthcare operations
activities;
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a
patient’s rights to access, amend, and receive an accounting of certain
disclosures of protected health
information;
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the
content of notices of privacy practices for protected health information;
and
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administrative,
technical and physical safeguards required of entities that use or receive
protected health information.
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The
federal privacy regulations, among other things, restrict the Company’s ability
to use or disclose protected health information in the form of
patient-identifiable laboratory data, without written patient authorization, for
purposes other than payment, treatment, or healthcare operations (as defined by
HIPAA) except for disclosures for various public policy purposes and other
permitted purposes outlined in the privacy regulations. The privacy
regulations provide for significant fines and other penalties for wrongful use
or disclosure of protected health information, including potential civil and
criminal fines and penalties. Although the HIPAA statute and regulations
do not expressly provide for a private right of damages, the Company could incur
damages under state laws to private parties for the wrongful use or disclosure
of confidential health information or other private personal
information.
The
Company will implement policies and practices that it believes brings it into
compliance with the privacy regulations. However, the documentation and process
requirements of the privacy regulations are complex and subject to
interpretation. Failure to comply with the privacy regulations could subject the
Company to sanctions or penalties, loss of business, and negative
publicity.
The HIPAA
privacy regulations establish a “floor” of minimum protection for patients as to
their medical information and do not supersede state laws that are more
stringent. Therefore, the Company is required to comply with both HIPAA
privacy regulations and various state privacy laws. The failure to do so could
subject it to regulatory actions, including significant fines or penalties, and
to private actions by patients, as well as to adverse publicity and possible
loss of business. In addition, federal and state laws and judicial
decisions provide individuals with various rights for violation of the privacy
of their medical information by healthcare providers such as the
Company.
The final
HIPAA security regulations, which establish detailed requirements for physical,
administrative, and technical measures for safeguarding protected health
information in electronic form, became effective on April 21, 2005. The
Company intends to employ what it considers to be a reasonable and appropriate
level of physical, administrative and technical safeguards for patient
information. Failure to comply with the security regulations could subject
the Company to sanctions or penalties and negative publicity.
The final
HIPAA regulations for electronic transactions, referred to as the transaction
standards, establish uniform standards for certain specific electronic
transactions and code sets and mandatory requirements as to data form and data
content to be used in connection with common electronic transactions, such as
billing claims, remittance advices, enrollment, and eligibility. The
Company intends to outsource to a third-party vendor the handling of its billing
and collection transactions, to which the transaction standards apply. Failure
of the vendor to properly conform to the requirements of the transaction
standards could, in addition to possible sanctions and penalties, result in
payors not processing transactions submitted on our behalf, including claims for
payment.
51
The HIPAA
regulations on adoption of national provider identifiers, or NPI, required
healthcare providers to adopt new, unique identifiers for reporting on claims
transactions submitted after May 23, 2007. The Company intends to obtain NPIs
for its laboratory facilities and pathologists so that it can report NPIs to
Medicare, Medicaid, and other health plans.
The
healthcare information of the Company’s future patients will includes social
security numbers and other personal information that are not of an exclusively
medical nature. The consumer protection laws of a majority of states now
require organizations that maintain such personal information to notify each
individual if their personal information is accessed by unauthorized persons or
organizations, so that the individuals can, among other things, take steps to
protect themselves from identity theft. The costs of notification and the
adverse publicity can both be significant. Failure to comply with these
state consumer protection laws can subject a company to penalties that vary from
state to state, but may include significant civil monetary penalties, as well as
to private litigation and adverse publicity. California recently enacted
legislation that expanded its version of a notification law to cover improper
access to medical information generally, and other states may follow
suit.
Federal
and State Fraud and Abuse Laws
The
federal healthcare Anti-Kickback Statute prohibits, among other things,
knowingly and willfully offering, paying, soliciting, or receiving remuneration
to induce referrals or in return for purchasing, leasing, ordering, or arranging
for the purchase, lease, or order of any healthcare item or service reimbursable
under a governmental payor program. The definition of “remuneration” has been
broadly interpreted to include anything of value, including gifts, discounts,
the furnishing of supplies or equipment, credit arrangements, payments of cash,
waivers of payments, ownership interests, opportunity to earn income, and
providing anything at less than its fair market value. The Anti-Kickback
Statute is broad, and it prohibits many arrangements and practices that are
lawful in businesses outside of the healthcare industry. Recognizing that
the Anti-Kickback Statute is broad and may technically prohibit many innocuous
or beneficial arrangements within the healthcare industry, HHS has issued a
series of regulatory “safe harbors.” These safe harbor regulations
set forth certain provisions that, if met, will provide healthcare providers and
other parties with an affirmative defense against
prosecution under the federal Anti-Kickback Statute. Although full
compliance with these provisions ensures against prosecution under the federal
Anti-Kickback Statute, the failure of a transaction or arrangement to fit within
a specific safe harbor does not necessarily mean that the transaction or
arrangement is illegal or that prosecution under the federal Anti-Kickback
Statute will be pursued.
From time
to time, the Office of Inspector General, or OIG, issues alerts and other
guidance on certain practices in the healthcare industry. In October 1994, the
OIG issued a Special Fraud Alert on arrangements for the provision of clinical
laboratory services. The Fraud Alert set forth a number of practices allegedly
engaged in by some clinical laboratories and healthcare providers that raise
issues under the “fraud and abuse” laws, including the Anti-Kickback Statute.
These practices include: (i) laboratories providing employees to furnish
valuable services for physicians (other than collecting patient specimens for
testing for the laboratory) that are typically the responsibility of the
physicians’ staff; (ii) providing free testing to a physician’s managed care
patients in situations where the referring physicians benefit from such reduced
laboratory utilization; (iii) providing free pick-up and disposal of
bio-hazardous waste for physicians for items unrelated to a laboratory’s testing
services; (iv) providing general-use facsimile machines or computers to
physicians that are not exclusively used in connection with the laboratory
services; and (v) providing free testing for healthcare providers, their
families, and their employees (professional courtesy testing).
The OIG
emphasized in the Special Fraud Alert that when one purpose of an arrangement is
to induce referrals of program-reimbursed laboratory testing, both the clinical
laboratory and the healthcare provider, or physician, may be liable under the
Anti-Kickback Statute, and may be subject to criminal prosecution and exclusion
from participation in the Medicare and Medicaid programs.
52
Another
issue about which the OIG has expressed concern involves the provision of
discounts on laboratory services billed to customers in return for the referral
of more lucrative federal healthcare program business. In a 1999 Advisory
Opinion, the OIG concluded that a proposed arrangement whereby a laboratory
would offer physicians significant discounts on non-federal healthcare program
laboratory tests might violate the Anti-Kickback Statute. The OIG reasoned that
the laboratory could be viewed as providing such discounts to the physician in
exchange for referrals by the physician of business to be billed by the
laboratory to Medicare at non-discounted rates. The OIG indicated that the
arrangement would not qualify for protection under the discount safe harbor
because Medicare and Medicaid would not get the benefit of the discount.
Subsequently, in a year 2000 correspondence, the OIG stated that the
Anti-Kickback Statute may be violated if there were linkage between the discount
offered to the physician and the physician’s referrals of tests covered under a
federal healthcare program that would be billed by the laboratory directly.
Where there was evidence of such linkage, the arrangement would be considered
“suspect” if the charge to the physician was below the laboratory’s “average
fully loaded costs” of the test.
Generally,
arrangements that would be considered suspect, and possible violations under the
Anti-Kickback Statute, include arrangements between a clinical laboratory and a
physician (or related organizations or individuals) in which the laboratory
would (1) provide items or services to the physician or other referral source
without charge, or for amounts that are less than their fair market value; (2)
pay the physician or other referral source amounts that are in excess of the
fair market value of items or services that were provided; or (3) enter into an
arrangement with a physician or other entity because it is a current or
potential referral source. HIPAA also applies to fraud and false
statements. HIPAA created two new federal crimes: healthcare fraud and false
statements relating to healthcare matters. The healthcare fraud statute
prohibits knowingly and willfully executing a scheme to defraud any healthcare
benefit program, including private payors. A violation of this statute is a
felony and may result in fines, imprisonment, or exclusion from governmental
payor programs such as the Medicare and Medicaid programs. The false statements
statute prohibits knowingly and willfully falsifying, concealing, or covering up
a material fact or making any materially false, fictitious, or fraudulent
statement in connection with the delivery of or payment for healthcare benefits,
items, or services, as well as the retention of any overpayment. A
violation of this statute is a felony and may result in fines or imprisonment or
exclusion from governmental payor programs.
Physician
Referral Prohibitions
Under a
federal law directed at “self-referral,” commonly known as the Stark Law,
prohibitions exist, with certain exceptions, on Medicare and Medicaid payments
for laboratory tests referred by physicians who personally, or through a family
member, have an investment interest in, or a compensation arrangement with, the
laboratory performing the tests. A person who engages in a scheme to circumvent
the Stark Law’s referral prohibition may be fined up to $100,000 for each such
arrangement or scheme. In addition, any person who presents or causes to be
presented a claim to the Medicare or Medicaid programs in violation of the Stark
Law is subject to civil monetary penalties of up to $15,000 per bill submission,
an assessment of up to three times the amount claimed, and possible exclusion
from participation in federal governmental payor programs. Bills submitted in
violation of the Stark Law may not be paid by Medicare or Medicaid, and any
person collecting any amounts with respect to any such prohibited bill is
obligated to refund such amounts.
Any
arrangement between a laboratory and a physician or physicians’ practice that
involves remuneration will prohibit the laboratory from obtaining payment for
services resulting from the physicians’ referrals, unless the arrangement is
protected by an exception to the self-referral prohibition or a provision
stating that the particular arrangement would not result in remuneration. Among
other things, a laboratory’s provision of any item, device, or supply to a
physician would result in a Stark Law violation unless it was used only to
collect, transport, process, or store specimens for the laboratory, or was used
only to order tests or procedures or communicate related results. This may
preclude a laboratory’s provision of fax machines and computers that may be used
for unrelated purposes. Most arrangements involving physicians that would
violate the Anti-Kickback Statute would also violate the Stark Law. Many states
also have “self-referral” and other laws that are not limited to Medicare and
Medicaid referrals. These laws may prohibit arrangements which are not
prohibited by the Stark Law, such as a laboratory’s placement of a phlebotomist
in a physician’s office to collect specimens for the laboratory. Finally, recent
amendments to these laws require self-disclosure of violations by
providers.
53
Discriminatory
Billing Prohibition
In
response to competitive pressures, the Company will be increasingly required to
offer discounted pricing arrangements to managed care payers and physicians and
other referral services. Discounts to referral sources raise issues under
the Anti-Kickback Statute. Any discounted charge below the amount that
Medicare or Medicaid would pay for a service also raises issues under Medicare’s
discriminatory billing prohibition. The Medicare statute permits the government
to exclude a laboratory from participation in federal healthcare programs if it
charges Medicare or Medicaid “substantially in excess” of its usual charges in
the absence of “good cause.” In 2000, the OIG stated in informal correspondence
that the prohibition was violated only if the laboratory’s charge to Medicare
was substantially more than the “median non-Medicare/–Medicaid charge.” On
September 15, 2003, the OIG issued a notice of proposed rulemaking addressing
the statutory prohibition. Under the proposed rule, a provider’s charge to
Medicare or Medicaid would be considered “substantially in excess of [its] usual
charges” if it was more than 120% of the provider’s mean or median charge for
the service. The proposed rule was withdrawn in June 2007. At that time, the OIG
stated that it would continue to evaluate billing patterns of individuals and
entities on a case-by-case basis.
Corporate
Practice of Medicine
The
Company’s contractual relationships with the licensed healthcare providers are
subject to regulatory oversight, mainly by state licensing authorities. In
certain states, for example, limitations may apply to the relationship with the
pathologists that the Company intends to employ or engage, particularly in terms
of the degree of control that the Company exercises or has the power to exercise
over the practice of medicine by those pathologists. A number of states,
including New York, Texas, and California, have enacted laws prohibiting
business corporations, such as the Company, from practicing medicine and
employing or engaging physicians to practice medicine. These requirements are
generally imposed by state law in the states in which the Company operates, vary
from state to state, and are not always consistent among states. In addition,
these requirements are subject to broad powers of interpretation and enforcement
by state regulators. Some of these requirements may apply to the Company even if
it does not have a physical presence in the state, based solely on the
employment of a healthcare provider licensed in the state or the provision of
services to a resident of the state. The Company believes that it operates in
material compliance with these requirements. However, failure to comply can lead
to action against the Company and the licensed healthcare professionals that it
employs, fines or penalties, receipt of cease and desist orders from state
regulators, loss of healthcare professionals’ licenses or permits, the need to
make changes to the terms of engagement of those professionals that interfere
with the Company’s business, and other material adverse
consequences.
State
Laboratory Licensure
The
Company intends that its laboratory will be certified by CLIA and be licensed in
the state of Washington. However, many state licensure laws require a laboratory
that solicits or tests specimens from individuals within that state to hold a
license from that state, even if the testing occurs in another state. The
Company intends to accept testing from California, New York, Pennsylvania,
Maryland, New Jersey, and Rhode Island, which require out-of-state laboratories
to hold state licenses. The Company intends to apply for licenses in these
states. Similarly, many of the states from which it will solicit specimens
require that a physician interpreting specimens from that state be licensed by
that particular state, irrespective of where the services are to be provided. In
the absence of such a state license, the physician may be considered to be
engaged in the unlicensed practice of medicine.
The
Company may become aware from time to time of other states that require out of
state laboratories or physicians to obtain licensure in order to accept
specimens from the state, and it is possible that other states do have such
requirements or will have such requirements in the future. The Company intends
to follow instructions from the state regulators as how to comply with such
requirements.
Referrals
after Becoming a Public Company
Once the
Company’s stock is publicly traded, it will not be able to accept referrals from
physicians who own, directly or indirectly, shares of its stock unless it
complies with the Stark Law exception for publicly traded securities. This
requires, among other things, $75 million in stockholders’ equity (total assets
minus total liabilities). The parallel safe harbor requires, among other things,
$50 million in undepreciated net tangible assets, in order for any distributions
to such stockholders to be protected under the Anti-Kickback
Statute.
54
Other
Regulatory Requirements
The
Company’s laboratory will be subject to federal, state, and local regulations
relating to the handling and disposal of regulated medical waste, hazardous
waste, and biohazardous waste, including chemical, biological agents and
compounds, and human tissue. The Company intends to use outside vendors who are
contractually obligated to comply with applicable laws and regulations to
dispose of such waste. These vendors will be licensed or otherwise qualified to
handle and dispose of such waste.
The
Occupational Safety and Health Administration, or OSHA, has established
extensive requirements relating to workplace safety for healthcare employers,
including requirements mandating work practice controls, protective clothing and
equipment, training, medical follow-up, vaccinations, and other measures
designed to minimize exposure to, and transmission of, blood-borne pathogens.
Pursuant to its authority under the FDCA, the FDA has regulatory responsibility
over instruments, test kits, reagents, and other devices used to perform
diagnostic testing by laboratories such as ours. Specifically, the manufacturers
and suppliers of analyte specific reagents, or ASRs, which we will obtain for
use in diagnostic tests, are subject to regulation by the FDA and are required
to register their establishments with the FDA, to conform manufacturing
operations to the FDA’s Quality System Regulation and to comply with certain
reporting and other record keeping requirements. The FDA also regulates the sale
or distribution, in interstate commerce, of products classified as medical
devices under the FDCA, including in vitro diagnostic test
kits. Such devices must undergo premarket review by the FDA prior to
commercialization unless the device is of a type exempted from such review by
statute or pursuant to the FDA’s exercise of enforcement
discretion.
The FDA
maintains that it has authority to regulate the development and use of LDTs or
“home brews” as medical devices, but to date has not exercised its authority
with respect to “home brew” tests as a matter of enforcement discretion. The FDA
regularly considers the application of additional regulatory controls over the
sale of ASRs and the development and use of “home brews” by laboratories such as
the Company’s.
The FDA
has conducted public hearings to discuss oversight of LDTs. While the
outcome of those hearings is unknown, it is probable that some form of
pre-market notification or approval process will become a requirement for
certain LDTs. Pre-market notification or approval of the Company’s future
LDTs would be costly and delay the ability of the Company to commercialize such
tests.
Compliance
Program
Compliance
with government rules and regulations is a significant concern throughout the
industry, in part due to evolving interpretations of these rules and
regulations. The Company will seek to conduct its business in compliance
with all statutes and regulations applicable to its operations. To this
end, it has determined that it will establish an informal compliance program
that reviews for regulatory compliance procedures, policies, and facilities
throughout its business. To better focus compliance efforts, the Company
intends to hire an experienced compliance officer when appropriate and develop a
formal compliance program. The Company will endeavor to make all suitable
adjustments or modifications as become known or necessary in order to comply
with these complex set of laws and regulations.
Legal
Proceedings
The
Company is not a party to any material legal proceedings.
Employees
As
of December 1, 2010, the Company had three executive officers, one of whom
serves in such capacity as a consultant to the Company, and one other employee.
The Company expects that it will hire more employees as it expands.
Property
The
Company leases approximately 1,300 square feet of office and laboratory space in
the Seattle Life Sciences Center in Seattle, Washington, under a six-month lease
which will convert into a month-to-month lease starting in March 2011. The
Company believes that its current facilities will be adequate to meet its needs
for the next 12 months. The Company intends to lease additional or
alternative office and laboratory space in the Greater Seattle area in the
second half of 2011, if needed.
55
Insurance
The
Company currently maintains commercial general and office premises liability
insurance. At the time the Company establishes its laboratory and launches
the MASCT System, it expects to obtain liability insurance for its products and
services. As a general matter, providers of diagnostic services may be
subject to lawsuits alleging medical malpractice or other similar legal
claims. Some of these suits involve claims for substantial damages.
The Company believes that it will be able to obtain adequate insurance coverage
in the future at acceptable costs, but cannot assure that it will be able to do
so.
56
MANAGEMENT
The
following table sets forth information regarding the members of the board of
directors of the Company and its executive officers as of December 1,
2010:
Executive
Officers, Directors and Prospective Directors
|
Name
|
Age
|
Position(s)
|
||
|
Steven
C. Quay, M.D., Ph.D.
|
60
|
Chairman
of the Board of Directors, Chief Executive Officer and
President
|
||
|
Christopher
Benjamin
|
36
|
Chief
Financial Officer
|
||
|
Shu-Chih
Chen, Ph.D.
|
48
|
Director,
Chief Scientific Officer
|
||
|
John
Barnhart
|
53
|
Director
|
||
|
Stephen
Galli, M.D.
|
60
|
Director
Nominee
|
||
|
Alexander
Cross, Ph.D.
|
|
78
|
|
Director
Nominee
|
Stephen
Galli, M.D. and Alexander Cross, Ph.D. have agreed to serve on the board of
directors of the Company concurrent with the closing of this
offering.
The
Company’s bylaws provide that the number of directors authorized to serve on the
board of directors of the Company may be established, from time to time, by
action of the board of directors of the Company. Vacancies in the existing
board of directors of the Company are filled by a majority vote of the remaining
directors on the board of directors of the Company. Directors serve for a
one-year term until each subsequent annual meeting of stockholders and until
their respective successors have been elected and qualified or until death,
resignation or removal. The Company’s executive officers are appointed by
and serve at the discretion of the board of directors of the
Company.
Dr. Quay
is the Chief Executive Officer and Chairman of the board of directors of the
Company. Dr. Shu-Chih Chen is the Chief Scientific Officer and a director.
Drs. Quay and Chen are husband and wife. They currently beneficially own a
majority of the outstanding voting securities of the Company. Following
the completion of this offering and exercise of the Class A Warrants, they will
remain substantial minority stockholders.
Steven C. Quay,
M.D., Ph.D. Dr. Quay has served as Chief Executive Officer
and Chairman of the board of directors of the Company since the Company was
incorporated in April 2009. Prior to his work at the Company, Dr. Quay
served as Chairman of the Board, President and Chief Executive Officer of MDRNA,
Inc. from August 2000 to May 2008, and as its Chief Scientific Officer until
November 30, 2008. From December 2008 to April 2009, Dr. Quay was involved
in negotiations for the acquisition of the Company’s assets and preparing the
Company’s business plan. Dr. Quay is certified in Anatomic Pathology with
the American Board of Pathology, completed both an internship and
residency in anatomic pathology at the Massachusetts General Hospital,
a Harvard Medical School teaching hospital, is a former faculty member of
the Department of Pathology, Stanford University School of Medicine, and is a
named inventor on 14 U.S. and foreign patents covering the MASCT System.
He oversaw the clinical testing and regulatory filing of the MASCT device with
the FDA that led to its ultimate marketing clearance. Including the
patents for the MASCT System, Dr. Quay has a total of 70 U.S. patents, 98
pending patent applications and is a named inventor on patents covering five
pharmaceutical products that have been approved by the FDA. Dr. Quay
received an M.D. in 1977 and a Ph.D. in 1975 from the University of Michigan
Medical School. He also received his B.A. degree in biology, chemistry and
mathematics from Western Michigan University in 1971. Dr. Quay is a member
of the American Society of Investigative Pathology, the Association of Molecular
Pathology, the Society for Laboratory Automation and Screening and the
Association of Pathology Informatics. He was selected to serve on the
Company’s board of directors because of his role as the founder of the Company
and the inventor of the MASCT System, as well as his qualifications as a
physician and the principal researcher overseeing the clinical and regulatory
development of the MASCT System.
57
Christopher
Benjamin. Mr. Benjamin has served as Chief Financial Officer
of the Company since July 2010. His experience includes both public and
private company financial reporting expertise. Based in Seattle, Mr.
Benjamin has served as President of Rogue CFO Consulting since November 2007, as
well as serving as the Chief Financial Officer for NexTec and Redfin
Corporations and acting as the Accounting Manager and Assistant Controller for
the Bsquare Corporation. His responsibilities at these companies included
monthly financial reporting and analysis, audit and cash management,
forecasting, oversight of the General Ledger, as well as ensuring compliance
with GAAP, FASB and SEC reporting standards. From February 2003 to
November 2005, Mr. Benjamin worked at Cascade Natural Gas Corporation, where his
responsibilities included serving as Manager of Financial Reporting and Fixed
Assets, along with Sarbanes Oxley process documentation, process flow creation
and SEC reporting support. He received his M.B.A. from the University of
Washington in Seattle in 2007 and a B.A. in accounting from the University of
Fraser Valley in Abbotsford, British Columbia, Canada in 1997.
Shu Chih Chen,
Ph.D. Dr.
Chen has served as Chief Scientific Officer and director of the Company since
the Company was incorporated in April 2009. Prior to joining the Company,
Dr. Chen served as President of Ensisheim beginning in 2008, was founder and
President of SC2Q Consulting Company from 2006 to 2008, and served as Head, Cell
Biology, Nastech Pharmaceuticals Company, Inc. from 2002 to 2006. During
1995 and 1996, she was an Associate Professor at National Yang Ming University,
Taipei, Taiwan, and served as the principal investigator of an NIH RO1 grant
studying tumor suppression by gap junction protein connexin 43 at the Department
of Molecular Medicine at Northwest Hospital before working in the research
department at Nastech Pharmaceutical Company. She is named as an
inventor on four patent applications related to cancer therapeutics. Dr.
Chen received her Ph.D. degree in microbiology and public health from Michigan
State University in 1992 and has published extensively on Molecular Oncology.
She received her B.S. degree in medical technology from National Yang Ming
University, Taipei, Taiwan in 1984. Dr. Chen was selected to serve on the
Company’s board of directors because of her qualifications as a professor and
researcher in the field of cancer therapeutics.
John
Barnhart.
Mr. Barnhart has served as a director of the Company since July 2009. He
is the founder and has been the Managing Director of the Visconti Group, a
management consulting group in Seattle, Washington, since November 2003.
He held prior executive positions at The Walt Disney Company, Sony Pictures
Entertainment, and Walt Disney Imagineering. He received a B.S. degree in
engineering from California State University, Long Beach in 1974. Mr.
Barnhart was selected to serve on the Company’s board of directors because of
his understanding and experience with development and marketing of consumer
products and services.
Stephen Galli,
M.D. Dr. Galli will become a member of the Company’s board of
directors upon the completion of this offering. Dr. Galli is Chair of the
Department of Pathology, Professor of Pathology and of Microbiology &
Immunology and the Mary Hewitt Loveless, M.D., Professor, Stanford University
School of Medicine, Stanford, California, and has served in these capacities
since February 1999. Before joining Stanford, he was on the faculty of
Harvard Medical School. He holds 13 U.S. patents and has over 340
publications. He is past president of the American Society for Investigative
Pathology and current president of the Collegium Internationale
Allergologicum. In addition to receiving awards for his research, he was
recently recognized with the 2010 Stanford University President’s Award for
Excellence Through Diversity for his recruitment and support of women and
underrepresented minorities at Stanford University. He received his B.A.
degree in biology, magna cum laude, from Harvard College in 1968 and his M.D.
degree from Harvard Medical School in 1973 and completed a residency in anatomic
pathology at the Massachusetts General Hospital in 1977. Dr. Galli has
been selected as a director nominee because of his qualifications as a professor
and physician, and his specialized expertise as a pathologist.
Alexander D.
Cross, Ph.D. Dr. Cross will
become a member of the Company’s board of directors upon completion of this
offering. Dr. Cross has served on the board and as a member of the Audit,
Compensation, and Nominating and Governance Committees of a number of public
companies, including MDRNA, Inc. and Ligand Pharmaceuticals Inc. Dr. Cross
also served as Chairman of the Board and CEO of Cytopharm, Inc. until August
2006. Dr. Cross has been a consultant in the fields of pharmaceuticals and
biotechnology since January 1986 and has served as a principal of NDA Partners,
LLC since 2003. Previously, Dr. Cross served as President and CEO of
Zoecon Corporation, a biotechnology company, from April 1983 to December 1985,
and Executive Vice President and Chief Operating Officer from 1979 to
1983. Dr. Cross also previously held several corporate management
positions at Syntex Corporation from 1961 through 1979. Dr. Cross holds 109
issued United States patents and is the author of 90 peer-reviewed publications.
Dr. Cross received his B.Sc., Ph.D. and D.Sc. degrees from the University of
Nottingham, England, and is a Fellow of the Royal Society of Chemistry.
Dr. Cross has been selected as a director nominee because of his qualifications
as a scientist, business executive and audit committee financial expert, and his
prior experience as a director and committee member of public
companies.
58
Scientific
Advisory Board
The
Company has established a Scientific Advisory Board to provide strategic
resources to the Company’s management and its board of directors. It is intended
that the Company’s scientific advisory board will have knowledge in breast
cancer, NAF, and breast cancer biomarkers. The Company expects to expand
the board members in the future. The initial Scientific Advisory Board currently
consists of:
Dr. Edward
Sauter, M.D., Ph.D. Dr.
Sauter is the Associate Dean for Research and Professor of Surgery at the
University of North Dakota School of Medicine & Health Sciences. He received
his M.D. from the Louisiana State School of Medicine and his Ph.D. from the
University of Pennsylvania. He completed his general surgery residency at the
Ochsner Clinic, in New Orleans, Louisiana. Dr. Sauter also completed a
Surgical Oncology Fellowship at Fox Chase Cancer Center in Philadelphia,
Pennsylvania. Dr. Sauter was Vice-Chair for Research in the Department of
Surgery and Professor at the University of Missouri-Columbia. He also completed
his MHA while at the University of Missouri. Dr. Sauter is widely recognized for
his research and clinical experience in breast cancer. Among his many
accomplishments, Dr. Sauter and a team of researchers pioneered noninvasive and
minimally invasive techniques to predict breast cancer risk using NAF. Dr.
Sauter is the co-author of over 100 peer-reviewed publications on breast cancer,
the majority of which pertain to cytology and molecular diagnostic biomarkers in
NAF.
Dr.
Sauter and the Company entered into a consulting agreement on February 18, 2010
which provides a $5,000 signing fee and $1,000 per month for up to four hours
per month of Dr. Sauter’s time. The agreement also provides reasonable
travel expenses in connection with his work for the Company. The agreement
currently extends through December 31, 2011.
Director
Compensation
Upon
completion of this offering, Mr. Barnhart and Drs. Galli and Cross, as
non-employee directors of the Company, will receive the following:
|
|
·
|
an
initial director compensation fee of $50,000, paid in shares of the
Company’s common stock and that vests ratably over one year from the date
of grant;
|
|
|
·
|
an
annual director retainer of $50,000, paid in shares of the Company’s
common stock and that vests ratably over one year from the date of grant;
and
|
|
|
·
|
an in-person meeting fee of
$1,500 and a telephone meeting fee of
$1,000.
|
In
addition to the above, annual compensation for service on the Audit Committee
will be $12,000 for the Chair and $8,000 for each member, paid in fully vested
shares of the Company’s common stock or options, payable quarterly in arrears;
and annual compensation for service on the Compensation Committee and
Nominating/Governance Committee will be $10,000 for the Chair and $6,000 for
each member, paid in fully vested shares of the Company’s common stock or
options, payable quarterly in arrears.
All
committee members will also receive a cash payment of $2,000 per in-person
meeting for the Chair and $1,500 per in-person meeting for each member and
$1,500 per telephonic meeting for the Chair and $1,000 per telephonic meeting
for each member.
The
employee directors will receive no compensation for their board service.
All directors will receive reimbursement for reasonable travel
expenses.
Director
Independence
The board
of directors of the Company has reviewed the materiality of any relationship
that each of our directors and prospective directors has with the Company,
either directly or indirectly. Based on this review, the board of directors of
the Company has determined that John Barnhart, a current director, and the
following director nominees will be “independent directors” as
defined by Section 803(A)(2)(b) of the NYSE Amex LLC Company Guide at the time
they become directors (upon the completion of this offering): Stephen Galli,
M.D. and Alexander Cross, Ph.D.
59
Committees
of the Board of Directors of the Company
The board
of directors of the Company has provided for the establishment of an audit
committee, a compensation committee and a nominating/governance committee
effective upon the completion of this offering. The composition and function of
each of these committees is described below.
Audit
Committee
Upon
completion of this offering, the audit committee will be comprised of Dr. Cross
(chair), Mr. Barnhart and Dr. Galli. The board of directors of the Company has
determined that Dr. Cross is an audit committee financial expert, as defined by
the rules of the SEC. The audit committee will be authorized to:
|
|
·
|
approve
and retain the independent registered public accounting firm to conduct
the annual audit of the Company’s financial
statements;
|
|
|
·
|
review
the proposed scope and results of the
audit;
|
|
|
·
|
review
and pre-approve audit and non-audit fees and
services;
|
|
|
·
|
review
accounting and financial controls with the independent auditors and the
Company’s financial and accounting
staff;
|
|
|
·
|
review
and approve transactions between the Company and its directors, officers
and affiliates;
|
|
|
·
|
recognize
and prevent prohibited non-audit services;
and
|
|
|
·
|
establish
procedures for complaints received by the Company regarding accounting
matters; oversee internal audit functions, if
any
|
The
Company believes that the composition of its audit committee will meet the
independence requirements of the applicable rules of the SEC and NYSE Amex upon
completion of this offering.
Compensation
Committee
Upon the
completion of this offering, the compensation committee will be comprised of Mr.
Barnhart (chair) and Dr. Cross. All members of the compensation committee will
qualify as independent directors under the current definition promulgated by
NYSE Amex. The compensation committee will be authorized to:
|
|
·
|
review
and recommend the compensation arrangements for
management;
|
|
|
·
|
establish
and review general compensation policies with the objective to attract and
retain superior talent, to reward individual performance and to achieve
our financial goals;
|
|
|
·
|
administer
stock incentive and purchase plans;
and
|
|
|
·
|
oversee
the evaluation of the board of directors of the Company and
management.
|
Nominating
and Governance Committee
Upon the
completion of this offering, the nominating and governance committee will be
comprised of Dr. Galli (chair) and Mr. Barnhart. All members of the
nominating and governance committee will qualify as independent directors under
the current definition promulgated by NYSE Amex. The nominating and
governance committee will be authorized to:
60
|
|
·
|
identify
and nominate candidates for election to the board of directors of the
Company; and
|
|
|
·
|
develop
and recommend to the board of directors of the Company a set of corporate
governance principles applicable to the
Company.
|
Compensation
Committee Interlocks and Insider Participation
No
prospective member of our compensation committee has at any time been an
employee of ours. None of our executive officers serves as a member of the
board of directors or compensation committee of any other entity that has one or
more executive officers serving as a member of our board of directors or
compensation committee.
Code
of Business Conduct and Ethics
The
Company intends to adopt a code of business conduct and ethics that applies to
all its employees, officers and directors, including those officers responsible
for financial reporting. The code of business conduct and ethics will be
available on the Company’s website. The Company expects that any
amendments to the code, or any waivers of its requirements, will be disclosed on
its website.
Limitation
of Directors’ and Officers’ Liability and Indemnification
The
Delaware General Corporation Law authorizes corporations to limit or eliminate,
subject to specified conditions, the personal liability of directors to
corporations and their stockholders for monetary damages for breach of their
fiduciary duties. The Company’s certificate of incorporation and amended
and restated bylaws limit the liability of its directors to the fullest extent
permitted by Delaware law.
The
Company has obtained director and officer liability insurance to cover
liabilities the Company’s directors and officers may incur in connection with
their services to the Company. The Company’s certificate of incorporation
and amended and restated bylaws also provide that it will indemnify and advance
expenses to any of its directors and officers who, by reason of the fact that he
or she is an officer or director, is involved in a legal proceeding of any
nature. The Company will repay certain expenses incurred by a director or
officer in connection with any civil, criminal, administrative or investigative
action or proceeding, including actions by the Company or in its name. Such
indemnifiable expenses include, to the maximum extent permitted by law,
attorney’s fees, judgments, fines, settlement amounts and other expenses
reasonably incurred in connection with legal proceedings. A director or officer
will not receive indemnification if he or she is found not to have acted in good
faith and in a manner he or she reasonably believed to be in, or not opposed to,
the Company’s best interest.
Such
limitation of liability and indemnification does not affect the availability of
equitable remedies. In addition, the Company has been advised that in the
opinion of the SEC, indemnification for liabilities arising under the Securities
Act of 1933, as amended, is against public policy as expressed in the Securities
Act and is therefore unenforceable.
There is
no pending litigation or proceeding involving any of the Company’s directors,
officers, employees or agents in which indemnification will be required or
permitted. The Company is not aware of any threatened litigation or proceeding
that may result in a claim for such indemnification.
61
EXECUTIVE
COMPENSATION
Remuneration
of Officers
The
Company did not accrue or pay any remuneration or compensation to any officer,
director or employee in 2009. In 2010, the Company has accrued salary
payments to Dr. Steven C. Quay and Dr. Shu-Chih Chen as of September 30, 2010 in
the amounts and on the terms as defined below. The monthly accruals are
approximately $20,833, and $16,667, respectively.
Upon the
completion of this offering, the Company’s compensation committee will be
responsible for reviewing and evaluating key executive employee base salaries,
setting goals and objectives for executive bonuses and administering benefit
plans. The compensation committee will provide advice and recommendations to the
board of directors of the Company on such matters. See “Committees of the
Board of Directors—Compensation Committee” for further details on the role of
the compensation committee.
Employment
Agreements
Employment
Agreement with Steven Quay, M.D., Ph.D.
The
Company has entered into an employment agreement with Dr. Quay to act as the
Company’s chief executive officer. The agreement provides for an initial
base salary of $250,000 per year and an annual target bonus of up to 40% of Dr.
Quay’s then-current base salary, payable upon the achievement of performance
goals to be established annually by the compensation committee. Following
completion of this offering, the compensation committee is expected to meet to
determine the performance goals for Dr. Quay. It is anticipated that these
goals will be based on achievement of shorter term corporate goals, including
MASCT System manufacturing scale-up and launch, filling additional key senior
management positions in marketing and sales, finance, and laboratory management,
and establishing laboratory registration and certification, and longer term
goals, including the development of second generation products such as the
Oxy-MASCT System and second generation biomarkers.
Under
the employment agreement, Dr. Quay received an option to purchase 250,000 shares
of common stock at an exercise price of $5.00 per share, the fair market value
of the common stock on the date of grant, as determined by the Board of
Directors. 25% of the shares of common stock underlying the option, or
62,500 shares, vested on December 31, 2010, and the remaining 75%, or 187,500
shares, will vest in equal quarterly installments over the next three years, so
long as Dr. Quay remains employed with the Company.
During
the employment term, the Company will make available to Dr. Quay employee
benefits provided to other key employees and officers of the Company. To
the extent these benefits are based on length of service with the Company, Dr.
Quay will receive full credit for prior service with the Company.
Participation in health, hospitalization, disability, dental and other insurance
plans that the Company may have in effect for other executives, all of which
shall be paid for by the Company with contribution by Dr. Quay as set for the
other executives, as and if appropriate.
Dr. Quay
will be entitled to six weeks of paid vacation per year for each full year of
employment, pro rated for each partial year. Vacation time not taken
during a calendar year will not be accrued to the next calendar
year.
Dr. Quay
has also agreed that, for the period commencing on the date of his employment
agreement with the Company and during the term of his employment and for a
period of 12 months following voluntary termination of his employment with the
Company that he will not compete with the Company in the United States.
The employment agreement also contains provisions relating to confidential
information and assignment of inventions, which require Dr. Quay to refrain from
disclosing any proprietary information and to assign to the Company any
inventions which directly concern the MASCT System, Oxy-MASCT System, or future
products, research, or development, or which result from work they perform for
the Company or using its facilities.
62
Consulting
Agreement with Christopher Benjamin
The
Company has entered into an agreement with Christopher Benjamin to act as the
Company’s interim chief financial officer. The agreement provides a
monthly retainer fee of $2,250 for up to 25 hours of work per month and $100 per
hour beyond that level. The agreement may be terminated by the Company
upon 30 days written notice.
Employment
Agreement with Shu-Chih Chen
The
Company has entered into an employment agreement with Dr. Chen to act as the
Company’s chief scientific officer. The agreement provides for an initial
base salary of $200,000 per year and an annual target bonus of up to 30% of Dr.
Chen’s then-current base salary, payable upon the achievement of performance
goals to be established annually by the compensation committee. Following
completion of this offering, the compensation committee is expected to meet to
determine the performance goals for Dr. Chen. It is anticipated that these
goals will be based on achievement of shorter term corporate goals, including
filling additional key positions in research and development as well as
laboratory management, and establishing laboratory registration and
certification, and longer term goals, including the management of the
development of second generation products such as the Oxy-MASCT System and
second generation biomarkers.
Under
the employment agreement, Dr. Chen received an option to purchase 100,000 shares
of common stock at an exercise price of $5.00 per share, the fair market value
of the common stock on the date of grant, as determined by the Board of
Directors. 25% of the shares of common stock underlying the option, or
25,000 shares, vested on December 31, 2010, and the remaining 75%, or 75,000
shares, will vest in equal quarterly installments over the next three years, so
long as Dr. Chen remains employed with the Company.
During
the employment term, the Company will make available to Dr. Chen employee
benefits provided to other key employees and officers of the Company. To
the extent these benefits are based on length of service with the Company, Dr.
Chen will receive full credit for prior service with the Company.
Participation in health, hospitalization, disability, dental and other insurance
plans that the Company may have in effect for other executives, all of which
shall be paid for by the Company with contribution by Dr. Chen as set for the
other executives, as and if appropriate.
Dr. Chen
will be entitled to six weeks of paid vacation per year for each full year of
employment, pro rated for each partial year. Vacation time not taken
during a calendar year will not be accrued to the next calendar
year.
Dr. Chen
has also agreed that, for the period commencing on the date of her employment
agreement with the Company and during the term of her employment and for a
period of 12 months following voluntary termination of her employment with the
Company that she will not compete with the Company in the United States.
The employment agreement also contains provisions relating to confidential
information and assignment of inventions, which require Dr. Chen to refrain from
disclosing any proprietary information and to assign to the Company any
inventions which directly concern the MASCT System, Oxy-MASCT System, or future
products, research, or development, or which result from work she performs for
the Company or using its facilities.
Severance
Benefits and Change in Control Arrangements
The
Company has agreed to provide the severance benefits and change in control
arrangements described below to its named executive officers.
Dr.
Steven Quay
Pursuant
to his employment agreement, if (i) the Company terminates the employment of Dr.
Quay without cause, or (ii) Dr. Quay terminates his employment for good reason,
then Dr. Quay will be entitled to receive all accrued but unpaid compensation,
plus a severance payment equal to twelve months of base salary. In
addition, upon such event, the vesting of all shares of common stock underlying
options then held by Dr. Quay will accelerate, and the options will remain
exercisable for the remainder of their terms. The cash severance payment
is required to be paid in substantially equal installments over a period of six
months beginning on the Company’s first payroll date that occurs following the
30 th day
after the effective date of termination of Dr. Quay’s employment, subject to
certain conditions. The Company will not be required, however, to pay any
severance pay for any period following the termination date if Dr. Quay
materially violates certain provisions of his employment agreement and the
violation is not cured within 30 days following receipt of written notice from
the Company containing a description of the violation and a demand for immediate
cure.
63
In
addition, under the terms of his employment agreement, in the event of a “change
in control” of the Company (as defined in the employment agreement) during Dr.
Quay’s employment term, Dr. Quay will be entitled to receive a one-time payment
equal to 2.9 times his base salary, and the vesting of all outstanding equity
awards then held by Dr. Quay will accelerate such that they are fully vested as
of the date of the change in control.
Dr. Shu-Chih
Chen
Pursuant
to her employment agreement, if (i) the Company terminates the employment of Dr.
Chen without cause, or (ii) Dr. Chen terminates her employment for good reason,
then Dr. Chen will be entitled to receive all accrued but unpaid compensation,
plus a severance payment equal to twelve months of base salary. In
addition, upon such event, the vesting of all shares of common stock underlying
options then held by Dr. Chen will accelerate, and the options will remain
exercisable for the remainder of their terms. The cash severance payment
is required to be paid in substantially equal installments over a period of six
months beginning on the Company’s first payroll date that occurs following the
30 th day
after the effective date of termination of Dr. Chen’s employment, subject to
certain conditions. The Company will not be required, however, to pay any
severance pay for any period following the termination date if Dr. Chen
materially violates certain provisions of her employment agreement and the
violation is not cured within 30 days following receipt of written notice from
the Company containing a description of the violation and a demand for immediate
cure.
In
addition, under the terms of her employment agreement, in the event of a “change
in control” of the Company (as defined in the employment agreement) during Dr.
Chen’s employment term, Dr. Chen will be entitled to receive a one-time payment
equal to 2.9 times her base salary, and the vesting of all outstanding equity
awards then held by Dr. Chen will accelerate such that they are fully vested as
of the date of the change in control.
2010
Stock Option and Incentive Plan
The
Company’s 2010 Stock Option and Incentive Plan, or the 2010 Plan, provides for
the grant of equity-based awards to employees, officers, non-employee directors
and other key persons providing services to the Company. Awards of
incentive options may be granted under the 2010 Plan until September 2020.
No other awards may be granted under the 2010 Plan after the date that is 10
years from the date of stockholder approval.
Plan Administration.
The 2010 Plan may be administered by the full board or the compensation
committee. It is the current intention of the Company that the 2010 Plan
be administered by the compensation committee. The compensation committee
has full power to select, from among the individuals eligible for awards, the
individuals to whom awards will be granted, to make any combination of awards to
participants, and to determine the specific terms and conditions of each award,
subject to the provisions of the 2010 Plan. The compensation committee may
delegate to our chief executive officer the authority to grant stock options to
employees who are not subject to the reporting and other provisions of
Section 16 of the Exchange Act and not subject to Section 162(m) of the
Code, subject to certain limitations and guidelines.
Eligibility. Persons
eligible to participate in the 2010 Plan will be those full or part-time
officers, employees, non-employee directors and other key persons (including
consultants and prospective officers) of the Company and its subsidiaries as
selected from time to time by the compensation committee in its
discretion.
Plan Limits. Initially,
the total number of shares of common stock available for issuance under the 2010
Plan is 1,000,000 shares. On January 1, 2012 and each January 1
thereafter, the number of shares of common stock reserved and available for
issuance under the 2010 Plan will be cumulatively increased by 4% of the number
of shares of common stock issued and outstanding on the immediately preceding
December 31. Subject to these overall limitations, the maximum aggregate
number of shares of Stock that may be issued in the form of incentive stock
options or stock appreciation rights to any one individual will not exceed 50%
of the initial 2010 Plan limit of 1,000,000, cumulatively increased on January
1, 2012 and each January 1 thereafter by the lesser of (i) the 4% annual
increase applicable to the 2010 Plan for such year or (ii) 500,000
shares.
64
Stock Options. The 2010
Plan permits the granting of (i) options to purchase common stock intended
to qualify as incentive stock options under Section 422 of the Code and
(ii) options that do not so qualify. Options granted under the 2010
Plan will be non-qualified options if they fail to qualify as incentive options
or exceed the annual limit on incentive stock options. Incentive stock
options may only be granted to employees of the Company and its
subsidiaries. Non-qualified options may be granted to any persons eligible
to receive incentive options and to non-employee directors and key
persons. The option exercise price of each option will be determined by
the compensation committee but may not be less than 100% of the fair market
value of the common stock on the date of grant. Fair market value for this
purpose will be the last reported sale price of the shares of common stock on
the NYSE Amex on the date of grant; provided, that if the date of grant is the
first day on which trading prices for our common stock are reported on the NYSE
Amex, the fair market value will be the price to the public of shares of our
common stock in this offering. The exercise price of an option may not be
reduced after the date of the option grant, other than to appropriately reflect
changes in our capital structure.
The term
of each option will be fixed by the compensation committee and may not exceed 10
years from the date of grant. The compensation committee will determine at
what time or times each option may be exercised. Options may be made
exercisable in installments and the exercisability of options may be accelerated
by the compensation committee. In general, unless otherwise permitted by
the compensation committee, no option granted under the 2010 Plan is
transferable by the optionee other than by will or by the laws of descent and
distribution, and options may be exercised during the optionee’s lifetime only
by the optionee, or by the optionee’s legal representative or guardian in the
case of the optionee’s incapacity.
Upon
exercise of options, the option exercise price must be paid in full either in
cash, by certified or bank check or other instrument acceptable to the
compensation committee or by delivery (or attestation to the ownership) of
shares of common stock that are beneficially owned by the optionee for at least
six months or were purchased in the open market. Subject to applicable
law, the exercise price may also be delivered to the Company by a broker
pursuant to irrevocable instructions to the broker from the optionee. In
addition, the compensation committee may permit non-qualified options to be
exercised using a net exercise feature which reduces the number of shares issued
to the optionee by the number of shares with a fair market value equal to the
exercise price.
To
qualify as incentive options, options must meet additional federal tax
requirements, including a $100,000 limit on the value of shares subject to
incentive options that first become exercisable by a participant in any one
calendar year.
Stock Appreciation
Rights. The compensation committee may award stock appreciation
rights subject to such conditions and restrictions as the compensation committee
may determine. Stock appreciation rights entitle the recipient to shares
of common stock equal to the value of the appreciation in the stock price over
the exercise price. The exercise price is the fair market value of the
common stock on the date of grant. The term of a stock appreciation right
will be fixed by the compensation committee and may not exceed 10
years.
Restricted Stock. The
compensation committee may award shares of common stock to participants subject
to such conditions and restrictions as the compensation committee may
determine. These conditions and restrictions may include the achievement
of certain performance goals and/or continued employment with us through a
specified restricted period.
Restricted Stock Units.
The compensation committee may award restricted stock units to any
participants. Restricted stock units are generally payable in the form of
shares of common stock, although restricted stock units granted to the chief
executive officer may be settled in cash. These units may be subject to
such conditions and restrictions as the compensation committee may
determine. These conditions and restrictions may include the achievement
of certain performance goals (as summarized above) and/or continued employment
with the Company through a specified vesting period. In the compensation
committee’s sole discretion, it may permit a participant to make an advance
election to receive a portion of his or her future cash compensation otherwise
due in the form of a restricted stock unit award, subject to the participant’s
compliance with the procedures established by the compensation committee and
requirements of Section 409A of the Code. During the deferral period,
the deferred stock awards may be credited with dividend equivalent
rights.
65
Adjustments for Stock Dividends,
Stock Splits, Etc. The 2010 Plan requires the compensation
committee to make appropriate adjustments to the number of shares of common
stock that are subject to the 2010 Plan, to certain limits in the 2010 Plan, and
to any outstanding awards to reflect stock dividends, stock splits,
extraordinary cash dividends and similar events.
Tax Withholding.
Participants in the 2010 Plan are responsible for the payment of any federal,
state or local taxes that the Company is required by law to withhold upon the
exercise of options or stock appreciation rights or vesting of other
awards. Subject to approval by the compensation committee, participants
may elect to have the minimum tax withholding obligations satisfied by
authorizing the Company to withhold shares of common stock to be issued pursuant
to the exercise or vesting.
Amendments and
Termination. The board of directors of the Company may at any time
amend or discontinue the 2010 Plan and the compensation committee may at any
time amend or cancel any outstanding award for the purpose of satisfying changes
in the law or for any other lawful purpose. However, no such action may
adversely affect any rights under any outstanding award without the holder’s
consent. To the extent required under the NYSE Amex rules, any amendments
that materially change the terms of the 2010 Plan will be subject to approval by
our stockholders. Without approval by our stockholders, the compensation
committee may not reduce the exercise price of options or stock appreciation
rights or effect repricing through cancellation or re-grants, including any
cancellation in exchange for cash. Amendments shall also be subject to
approval by our stockholders if and to the extent determined by the compensation
committee to be required by the Code to preserve the qualified status of
incentive options or to ensure that compensation earned under the 2010 Plan
qualifies as performance-based compensation under Section 162(m) of the
Code.
Other
Benefits
The
Company offers health, dental, disability, and life insurance to its full-time
employees.
66
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Dr. Quay
is the president, chief executive officer and chairman of the board of directors
of the Company. Dr. Chen is the chief scientific officer and a director of
the Company. Drs. Quay and Chen are husband and wife. Prior to the
completion of this offering, Drs. Quay and Chen were the Company’s majority
stockholders. After the completion of this offering and exercise of the
Class A Warrants, Drs. Quay and Chen will no longer be majority stockholders but
will remain substantial minority stockholders. Ensisheim Partners, LLC,
which holds 66.3% of the outstanding common stock of the Company prior to this
offering, is wholly owned by Drs. Quay and Chen, and they are the beneficial
owners of the shares of the Company’s stock owned by that entity.
Ensisheim
was the original owner of the patents covering the MASCT System, which were
acquired by the Company in June 2010. Ensisheim has no further interest or
right to the U.S. patents and foreign counterparts that cover the manufacture,
use, and selling of the MASCT System, the pending patent applications for
improvements, or the FDA marketing authorization for the MASCT System that was
transferred to the Company. Ensisheim did not receive any monetary
compensation in connection with the transfer and assignment to the Company of
the patents, patent applications and FDA marketing authorization but received
shares of common stock of the Company in consideration for its contribution of
these assets. Ensisheim holds patents and patent applications for
inventions created by the owners in fields unrelated to the Company’s business
and provides a corporate structure for consulting activities of the owners in
fields unrelated to the Company’s business. Drs. Quay and Chen currently
devote substantially all of their professional efforts to the business of the
Company.
On
December 24, 2009, the Company entered into a commercial lease agreement with
Ensisheim for office space located in Seattle, Washington, at an annual rent of
$13,200 plus applicable sales tax. The original term of the lease was to
expire on December 31, 2010. From April 30, 2009 (inception) through
September 30, 2010, the Company incurred $6,848 of rent expense for the
lease. As of September 30, 2010, security deposit for the lease amounted
to $1,100. On July 15, 2010, the Company and Ensisheim terminated the
lease, effective July 1, 2010.
The
Company has borrowed an aggregate of $105,000 from Dr. Quay pursuant to
promissory notes that are due and payable in full on or before December 31,
2010. The notes bear an annual interest rate of 10% accruing from June 30,
2010 and carry a pass-through loan origination fee of $4,000. To date, Dr. Quay
has not demanded repayment of these notes.
On
November 3, 2010, the Company issued a promissory note to Dr. Quay in connection
with a $500,000 line of credit extended to the Company by Dr.
Quay. Pursuant to the terms of the note, all principal amounts
borrowed under the line of credit bear interest at a rate of 10% per annum, and
all principal and accrued interest will be due and payable in full on December
31, 2011. As of the date of this prospectus, the Company has borrowed
$80,000 under the line of credit.
In July
2010, in connection with the departure of Robert L. Kelly, a former officer, the
Company entered into a consulting agreement with a limited liability company
controlled by Mr. Kelly. Under the agreement, the Company was to receive
consulting services relating to capital raising and investor relations.
The agreement was terminated by the Company in September 2010, through which
time a total of $30,000 had been paid.
Indemnification
Agreements
Prior to
the completion of this offering, the Company intends to enter into
indemnification agreements with each of its directors and certain of its
executive officers. These agreements will require the Company to indemnify
these individuals to the fullest extent permitted under Delaware law against
liabilities that may arise by reason of their service to the Company, and to
advance expenses incurred as a result of any proceeding against them as to which
they could be indemnified.
Related
Party Transaction Policies
Related
party transactions to be entered into after the completion of this offering and
that the Company is required to disclose publicly under the federal securities
laws will require prior approval of the Company’s independent directors without
the participation of any director who may have a direct or indirect interest in
the transaction in question. Related parties include directors, nominees
for director, principal stockholders, executive officers and members of their
immediate families. For these purposes, a “transaction” will include all
financial transactions, arrangements or relationships, ranging from extending
credit to the provision of goods and services for value and will include any
transaction with a company in which a director, executive officer immediate
family member of a director or executive officer, or principal stockholder (that
is, any person who beneficially owns five percent or more of any class of the
Company’s voting securities) has an interest by virtue of a 10% or greater
equity interest. The Company’s policies and procedures regarding related
party transactions are not expected to be a part of a formal written policy, but
rather, will represent a course of practice determined to be appropriate by the
board of directors of the Company.
67
The
following table sets forth information as of December 1, 2010 regarding the
beneficial ownership of the Company’s common stock by each of its executive
officers and directors, individually and as a group and by each person who
beneficially owns in excess of five percent of the common stock after giving
effect to any exercise of warrants or options held by that person within 60 days
after December 1, 2010. Unless indicated otherwise, the address for
the beneficial holders is c/o Atossa Genetics Inc., Seattle Life Sciences
Center, 1124 Columbia Street, Suite 621, Seattle,
WA 98104.
|
Shares
|
Percentage
of Common Stock
Beneficially
Owned
|
|||||||||||||||
|
Name
of Beneficial Owner
|
Beneficially
Owned
|
Before
Offering
(1)
|
After
Offering
(2)
|
After
Offering
(3)
|
||||||||||||
|
Directors
and Officers
|
||||||||||||||||
|
Steven
C. Quay, M.D., Ph.D. (4)
|
4,355,754 | 71.8 | % | 48.1 | % | 28.9 | % | |||||||||
|
Shu-Chih
Chen, Ph.D. (5)
|
4,001,461 | 66.4 | % | 44.3 | % | 26.6 | % | |||||||||
|
John
Barnhart
|
48,602 | * | * | * | ||||||||||||
|
Christopher
Benjamin
|
0 | — | — | — | ||||||||||||
|
All
Current Officers and Directors as a Group (4 persons)
|
4,429,356 | 72.8 | % | 48.7 | % | 29.4 | % | |||||||||
|
Director
Nominees
|
||||||||||||||||
|
Stephen
Galli, M.D.
|
17,674 | * | * | * | ||||||||||||
|
Alexander
D. Cross, Ph.D. (6)
|
88,366 | 1.5 | % | 1.0 | % | * | ||||||||||
|
*
|
Less than
1%
|
|
(1)
|
Based
on 6,000,067 shares of common stock issued and outstanding as
of December 1, 2010.
|
|
(2)
|
Assumes
the sale of 3,000,000 shares of common stock, representing all of the
shares underlying the Units and no exercise of the Class A Warrants
underlying the Units.
|
|
(3)
|
Assumes
the sale of 9,000,000 shares of common stock, representing 3,000,000
shares underlying the Units and an additional 6,000,000 shares issuable
upon exercise of the Class A
Warrants.
|
|
(4)
|
Consists
of (i) 316,793 shares of common stock directly owned by Dr. Quay,
(ii) 3,976,461 shares of common stock owned by Ensisheim and (iii)
62,500 shares of common stock issuable upon the exercise of stock options
held by Dr. Quay and exercisable within 60 days after November 1,
2010. Drs. Quay and Chen share voting and investment power over the
securities held by Ensisheim. Ensisheim is solely owned and
controlled by Drs. Quay and Chen, and, as a result, Drs. Quay and Chen are
deemed to be beneficial owners of the shares held by this
entity.
|
|
(5)
|
Consists
of (i) 3,976,461 shares of common stock owned by Ensisheim and (ii) 25,000
shares of common stock issuable upon the exercise of stock options held by
Dr. Chen and exercisable within 60 days after November 1, 2010. Drs.
Quay and Chen share voting and investment power over the securities held
by Ensisheim. Ensisheim is solely owned and controlled by Drs. Quay
and Chen, and, as a result, Drs. Quay and Chen are deemed to be beneficial
owners of the shares held by this
entity.
|
|
(6)
|
Represents
88,366 shares of common stock held by the Alexander D. Cross Family
Trust. Mr. Alexander D. Cross has sole voting and investment power
over the securities held by the trust and as such, is deemed to be the
beneficial owner of the shares held by this
entity.
|
68
Capitalization
The
Company is authorized to issue 75,000,000 shares of common stock, par value
$0.001 per share, of which 6,000,067 shares were outstanding as of the date of
this prospectus, and 10,000,000 shares of undesignated preferred stock, par
value $0.001 per share, none of which have been designated or
issued.
As
of December 1, 2010, there were 56 record holders of the Company’s common
stock.
Units
Unit Composition . The
Company is offering for sale 3,000,000 Units, with each Unit consisting of
(i) one share of common stock, (ii) two Class A Warrants, and
(iii) one Class B Warrant. A description of the common stock, Class A
Warrants and Class B Warrants is set forth below. The securities
underlying the Units will automatically separate from the Units on the 90th day
after the date of this prospectus, unless Dawson James Securities, Inc., the
representative of the underwriters, determines that an earlier separation date
is acceptable based on its assessment of the relative strengths of the
securities markets and small capitalization companies in general, and the
trading pattern of, and demand for, the Company’s securities in
particular. The Company will issue a press release announcing when such
separation will occur.
Rights as Stockholder. Unit
holders do not have any voting or other rights as a stockholder of the
Company. Upon the separation of the Units, a Unit holder will be deemed to
have become the holder of record of the underlying common stock as of the date
of separation. If the date of separation is a date upon which the stock
transfer books of the Company are closed, the Unit holder will be deemed to have
become the record holder of the underlying common stock the next day on which
the stock transfer books of the Company are open.
Listing of Units. The
Units are expected to be listed for trading on the NYSE Amex under the symbol
“ATOSU.” Upon the
separation of the Units, we intend to request that AMEX delist the Units as an
AMEX-listed security, thereby providing that the Units will no longer trade on
an exchange. We also expect to notify the Depositary Trust
Corporation and our transfer agent the Units have been separated and are
therefore no longer outstanding. With these actions, we expect that
there will be no further trading in the Units after the separation
date. The
Company will announce the separation of the Units by way of a press release, to
be issued no later than the day of separation. Additionally, the
Company will announce the separation on a Current Report filed on Form 8-K with
the U.S. Securities and Exchange Commission. See information under
the caption “Additional Information.” Investors will not receive
individual notices of separation.
Common
Stock
Voting Rights. Holders of
shares of common stock are entitled to one vote for each share on all matters to
be voted on by the stockholders. Holders of common stock do not have cumulative
voting rights.
Dividend and Distribution
Rights. Dividends, if any, may be declared from time to time by the
board of directors of the Company or any authorized committee of the board of
directors in its discretion from funds legally available therefore. In the event
of a liquidation, dissolution or winding up, the holders of common stock are
entitled to share pro rata all assets remaining after payment in full of all
liabilities and all amounts due to holders of preferred stock that may have a
liquidation preference that is senior to the common stock.
No Preemptive Rights.
Holders of common stock have no preemptive rights to purchase additional shares
of the Company’s common stock.
Other Rights. There are no
conversion or redemption rights or sinking fund provisions with respect to the
common stock.
Listing of Common Stock
.. The common stock is expected to be listed for trading on the NYSE Amex
under the symbol “ATOS.” Trading of the common stock will not
commence until the Units are separated.
69
Class
A Warrants
Below is
a summary of the material terms of the Class A Warrants, including relevant
provisions of the Warrant Agent Agreement between the Company and Onyx Stock
Transfer, LLC, the Warrant Agent for the Class A Warrants and the Class B
Warrants, or Onyx Stock Transfer. This summary is qualified with reference
to the Warrant Agent Agreement and the Class A Warrant Certificate, copies of
which have been filed as exhibits to the Company’s registration statement, of
which this prospectus is a part. Investors are urged to review the Warrant
Agent Agreement and the form of Class A Warrant Certificate for additional
information regarding the Class A Warrants.
Purchase Rights. Each
Class A Warrant will entitle the holder to acquire one share of common stock
during the exercise period and subject to the conditions set forth
below.
Warrant Agent; Book Entry and
Certificated Warrants. Onyx Stock Transfer will serve as the
warrant agent for the Class A Warrants. Onyx Stock Transfer also serves as
the transfer agent and registrar for the Units, common stock, Class A Warrants
and Class B Warrants. Certificates representing Class A Warrants are
expected to be issued in “book entry” form, deposited with the Depository Trust
Company and registered in the name of Cede & Co., a nominee of Depository
Trust Company. If warrant certificates cannot be issued in book entry
form, or if a warrant holder requests in writing that a warrant certificate be
issued in physical form, then the warrant agent will issue a Class A Warrant
Certificate.
Listing of Class A
Warrants. The Class A Warrants will not be listed for trading on
any securities exchange.
Exercise Period. The
Class A Warrants will be exercisable at the option of the holder for a period of
10 days, beginning the sixth trading day after separation of the Units.
The Company intends to issue a press release announcing the separation of the
securities and the commencement of the 10-day exercise period. If any
Class A Warrants are not exercised prior to the expiration of this 10-day
period, those warrants will expire.
Exercise Price. Each
Class A Warrant will have an exercise price of $0.05 per share of common stock,
which may only be paid on a cashless “net exercise” basis. When exercising
a Class A Warrant on a net exercise basis, the holder will be entitled to
receive a number of shares of common stock for each Class A Warrant, rounded up
to the nearest whole number, calculated using the following
formula:
X = (A -
$0.05)
A
Where:
|
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X =
|
the number of shares of common
stock to be issued to the holder per Class A
Warrant
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|
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A =
|
the five trading-day average
closing price of the Company’s common stock immediately following
separation of the Units
|
Because
the number of shares of common stock to be issued upon exercise of the Class A
Warrant will be rounded up to the nearest whole share, each Class A Warrant will
represent the right to acquire one share of common stock irrespective of the
common stock value, unless the five-day average price of the common stock is
equal to or less than $0.05 per share, in which case the Class A Warrant would
have no value. The exercise price and the number of shares of common stock
purchasable upon the exercise of each warrant are subject to adjustment upon the
happening of certain events, such as stock dividends, distributions, stock
splits and recapitalizations, although the Company does not expect any such
events to occur prior to the expiration of the Class A Warrants.
Rights as Stockholder.
Warrant holders do not have any voting or other rights as a stockholder of the
Company. Upon the exercise of the Class A Warrants, a holder will be
deemed to have become the holder of record of the underlying common stock as of
the date upon which the Class A Warrant Certificate (if issued) was surrendered
and the exercise notice was submitted. If the date of such surrender (if
applicable) and submission is a date upon which the stock transfer books of the
Company are closed, the holder will be deemed to have become the record holder
of the common stock the next day on which the stock transfer books of the
Company are open.
70
Limits on Exercise. The
Class A Warrants provide that no exercise will be effected, and the holder of a
warrant will not have the right to exercise a warrant, if after giving effect to
the exercise the holder, together with any affiliates, would beneficially own in
excess of 9.99% of the number of shares of common stock of the Company
outstanding immediately after giving effect to the issuance of shares upon
exercise. The holder may not waive the 9.99% limit. To the extent
that a warrant holder cannot exercise a Class A Warrant due to this limitation,
the unexercised portion of the Class A Warrant will expire at the end of the
10-day exercise period.
Amendment. With the
consent of holders of Class A Warrants representing a majority of the shares
issuable upon exercise of all outstanding Class A Warrants, the Company and Onyx
Stock Transfer, as the Warrant Agent, may modify the Warrant Agent Agreement or
modify the rights of the holders of the Class A Warrants; provided, however,
that no modifications made be made to the terms upon which the Class A Warrants
are exercisable without the consent of the holder of each outstanding Class A
Warrant that would be affected by the proposed amendment.
Fundamental
Transaction. The Class A Warrants may be exercisable for
securities, property or rights other than Company common stock if any of the
following transactions (each referred to below in this subsection as a
Fundamental Transaction) occur while Class A Warrants are issued and
outstanding:
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·
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the Company, directly or
indirectly, in one or more related transactions effects any merger or
consolidation of the Company with or into another
person;
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|
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·
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the Company, directly or
indirectly, effects any sale, lease, license, assignment, transfer,
conveyance or other disposition of all or substantially all of its assets
in one or a series of related
transactions;
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·
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any, direct or indirect, purchase
offer, tender offer or exchange offer (whether by the Company or another
person) is completed pursuant to which holders of Company common stock are
permitted to sell, tender or exchange their shares for other securities,
cash or property and such offer has been accepted by the holders of 50% or
more of the outstanding Company common
stock;
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·
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the Company, directly or
indirectly, in one or more related transactions, effects any
reclassification, reorganization or recapitalization of the common stock
or any compulsory share exchange pursuant to which the common stock is
effectively converted into or exchanged for securities other than the
Company’s securities, cash or property;
or
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·
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the Company, directly or
indirectly, in one or more related transactions consummates a stock or
share purchase agreement or other business combination (including, without
limitation, a reorganization, recapitalization, spin-off or scheme of
arrangement) with another person whereby such other person acquires more
than 50% of the outstanding shares of common stock (not including any
shares of common stock held by the other person or other persons making or
party to, or associated or affiliated with the other persons making or
party to, such stock or share purchase agreement or other business
combination).
|
Following
the occurrence of a Fundamental Transaction, upon any exercise of a Class A
Warrant, the holder will have the right to receive, for each share of common
stock that would have been issuable prior to the occurrence of the Fundamental
Transaction, securities of the successor or acquiring corporation or of the
Company, if it is the surviving corporation, and any additional consideration
(e.g., cash) payable in connection with the Fundamental Transaction on each
share of common stock that was outstanding immediately prior to the Fundamental
Transaction. For example, if the Company is acquired in a merger where each
share of Company common stock will receive upon closing one share of the
acquiring company, plus $1.00 per share, then the holders of Class A Warrants
would be entitled upon exercise to receive the same combination of cash and
stock. If holders of common stock are given any choice as to the type of
consideration they will receive in a Fundamental Transaction, then the warrant
holders will, upon exercise of the warrants, be given the same
choice.
71
Redemption Rights. The
Company will have no rights to call the Class A Warrants for
redemption.
Ranking. The Class A
Warrants are equal in seniority to the Class B warrants.
Class B Warrants
Below is
a summary of the material terms of the Class B Warrants, including relevant
provisions of the Warrant Agent Agreement. This summary is qualified with
reference to the Warrant Agent Agreement and the Class B Warrant Certificate,
copies of which have been filed as exhibits to the Company’s registration
statement, of which this prospectus is a part. Investors are urged to
review the Warrant Agent Agreement and the form of Class B Warrant Certificate
for additional information regarding the Class B Warrants.
Purchase Rights. Each
Class B Warrant will entitle the holder to acquire one share of common stock
during the exercise period and subject to the conditions set forth
below.
Warrant Agent; Book Entry and
Certificated Warrants. Onyx Stock Transfer will serve as the
warrant agent for the Class B Warrants. Onyx Stock Transfer also serves as
the transfer agent and registrar for the Units, common stock, Class A Warrants
and Class B Warrants. Certificates representing Class B Warrants are
expected to be issued in “book entry” form, deposited with the Depository Trust
Company and registered in the name of Cede & Co., a nominee of Depository
Trust Company. If warrant certificates cannot be issued in book entry
form, or if a warrant holder requests in writing that a warrant certificate be
issued in physical form, then the warrant agent will issue a Class B Warrant
Certificate.
Listing of Class B
Warrants. The Class B Warrants are expected to be listed for
trading on the NYSE Amex under the symbol “ATOSW.” Trading will
not commence until the Class B Warrants are separated from the
Units.
Exercise Period.
Subject to the redemption right described below, the Class B Warrants will be
exercisable at the option of the holder commencing on the first anniversary
of the date of this prospectus and continuing until the fifth anniversary
of the date of separation of the Units. The Company intends to issue
a press release announcing the separation of the securities and the commencement
of the exercise period. If any Class B Warrants are not exercised prior to
the expiration of this five-year exercise period, those warrants will
expire.
Exercise Price. Each
Class B Warrant will have an exercise price equal to 55% of the Unit offering
price. With an assumed Unit offering price of $6.00 per Unit, which is the
midpoint of the estimated price range on the cover of this prospectus, the Class
B Warrant exercise price would initially be $3.30 per share. The Class B
Warrants may be exercised only for full shares of common stock.
The Class
B Warrants must be exercised for cash, unless the Company does not then have an
effective registration statement under the Securities Act of 1933 covering the
issuance of the shares underlying the Class B Warrants, in which case they may
only be exercised on a cashless, net exercise basis. When exercising a
Class B Warrant on a net exercise basis, the holder will be entitled to receive
a number of shares of common stock upon exercise calculated using the following
formula:
X = Y (A -
B)
A
Where:
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X =
|
the number of shares of common
stock to be issued to the holder under Class B Warrants being
exercised
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Y
=
|
the
number of Class B Warrants being
exercised
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A =
|
the ten trading-day average
closing price of the Company’s common stock prior to
exercise
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72
|
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B =
|
the exercise price of the Class B
Warrants (initially $3.30, based on an assumed offering price of $6.00 per
Unit), subject to any applicable
adjustments
|
The
exercise price and the number of shares of common stock purchasable upon the
exercise of each warrant are subject to adjustment upon the happening of certain
events, such as stock dividends, distributions, stock splits and
recapitalizations. No fractional shares (or cash payments in respect of
fractional share interests) will be issued upon any exercise of the Class B
Warrants. If the cashless exercise of a Class B Warrant would result in
the issuance of a fractional share under the above formula, the number of shares
of common stock issued upon such exercise of the Class B Warrant will be rounded
up to the nearest whole share.
Rights as Stockholder.
Warrant holders do not have any voting or other rights as a stockholder of the
Company. Upon the exercise of the Class B Warrants, a holder will be
deemed to have become the holder of record of the underlying common stock as of
the date upon which the Class B Warrant Certificate (if issued) was surrendered
and the exercise notice was submitted. If the date of such surrender (if
applicable) and submission is a date upon which the stock transfer books of the
Company are closed, the holder will be deemed to have become the record holder
of the common stock the next day on which the stock transfer books of the
Company are open.
Limits on Exercise. The
Class B Warrants provide that no exercise will be effected, and the holder of a
warrant will not have the right to exercise a warrant, if after giving effect to
the exercise the holder, together with any affiliates, would beneficially own in
excess of 4.99% of the number of shares of common stock of the Company
outstanding immediately after giving effect to the issuance of shares upon
exercise. The holder may, upon 61 days prior written notice, waive this
4.99% limit and thereby elect to increase the exercise limit to 9.99% of the
total shares outstanding. The holder may not waive the 9.99% limit.
To the extent that a warrant holder cannot exercise a Class B Warrant due to
this limitation, the unexercised portion of the Class B Warrant will expire at
the end of the exercise period.
Amendment. With the
consent of holders of Class B Warrants representing a majority of the shares
issuable upon exercise of all outstanding Class B Warrants, the Company and Onyx
Stock Transfer, as the Warrant Agent, may modify the Warrant Agent Agreement or
modify the rights of the holders of the Class B Warrants; provided, however,
that no modifications made be made to the terms upon which the Class B Warrants
are exercisable without the consent of the holder of each outstanding Class B
Warrant that would be affected by the proposed amendment.
Fundamental
Transaction. The Class B Warrants may be exercisable for
securities, property or rights other than Company common stock if any of the
following transactions (each referred to below in this subsection as a
Fundamental Transaction) occur while Class B Warrants are issued and
outstanding:
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·
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the Company, directly or
indirectly, in one or more related transactions effects any merger or
consolidation of the Company with or into another
person;
|
|
|
·
|
the Company, directly or
indirectly, effects any sale, lease, license, assignment, transfer,
conveyance or other disposition of all or substantially all of its assets
in one or a series of related
transactions
|
|
|
·
|
any, direct or indirect, purchase
offer, tender offer or exchange offer (whether by the Company or another
person) is completed pursuant to which holders of Company common stock are
permitted to sell, tender or exchange their shares for other securities,
cash or property and such offer has been accepted by the holders of 50% or
more of the outstanding Company common
stock;
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|
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·
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the Company, directly or
indirectly, in one or more related transactions, effects any
reclassification, reorganization or recapitalization of the common stock
or any compulsory share exchange pursuant to which the common stock is
effectively converted into or exchanged for securities other than the
Company’s securities, cash or property;
or
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73
|
|
·
|
the Company, directly or
indirectly, in one or more related transactions consummates a stock or
share purchase agreement or other business combination (including, without
limitation, a reorganization, recapitalization, spin-off or scheme of
arrangement) with another person whereby such other person acquires more
than 50% of the outstanding shares of common stock (not including any
shares of common stock held by the other person or other persons making or
party to, or associated or affiliated with the other persons making or
party to, such stock or share purchase agreement or other business
combination).
|
Following
the occurrence of a Fundamental Transaction, upon any exercise of a Class B
Warrant, the holder will have the right to receive, for each share of common
stock that would have been issuable prior to the occurrence of the Fundamental
Transaction, securities of the successor or acquiring corporation or of the
Company, if it is the surviving corporation, and any additional consideration
(e.g., cash) payable in connection with the Fundamental Transaction on each
share of common stock that was outstanding immediately prior to the Fundamental
Transaction. For example, if the Company is acquired in a merger where each
share of Company common stock will receive one share of the acquiring company’s
common stock, plus $1.00 per share, then the holders of Class B Warrants would
be entitled upon exercise to receive the same combination of stock and
cash. If holders of Company common stock are given any choice as to the
type of consideration they will receive in a Fundamental Transaction, then the
warrant holders will, upon exercise of the warrants, be given the same
choice.
Redemption Rights. The
Company will have the right to redeem the Class B Warrants at $0.25 per share of
common stock underlying the Class B Warrants in the event (i) the average of the
closing price of the common stock exceeds 200% of the exercise price for 10
consecutive trading days while the warrants are exercisable and (ii) there
is then an effective registration statement with a current prospectus on file
with the SEC covering the exercise of the Class B Warrants for cash. In
the event that the Company wishes to call the Class B Warrants for redemption,
it will provide warrant holders with 30 days prior notice of the redemption,
during which time the holders of Class B Warrants may continue to exercise the
warrant. At the end of the 30-day period, and assuming the Company has
complied with applicable redemption requirements, the warrant holders will
thereafter be entitled only to receive the redemption value, subject to the
surrender of warrant certificates, if applicable.
Ranking. The Class B
Warrants are equal in seniority to the Class A warrants.
Preferred
Stock
The board
of directors of the Company is authorized to provide for the issuance of any or
all of the shares of preferred stock in series and, by filing a certificate
pursuant to the applicable law of the State of Delaware, to establish from time
to time the number of shares to be included in each such series, and to fix the
designation, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof.
The
authority of the board of directors of the Company with respect to each series
of preferred stock includes determination of the following
characteristics:
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·
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The
number of shares constituting that series and the distinctive designation
of that series;
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·
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The
dividend rate on the shares of that series, whether dividends shall be
cumulative, and, if so, from which date or dates, and the relative rights
of priority, if any, of payment of dividends on shares of that
series;
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·
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Whether
that series shall have voting rights, in addition to the voting rights
provided by law, and, if so, the terms of such voting
rights;
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·
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Whether
that series shall have conversion privileges, and, if so, the terms and
conditions of such conversion, including provision for adjustment of the
conversion rate in such events as the board of directors of the Company
shall determine;
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·
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Whether
or not the shares of that series shall be redeemable, and, if so, the
terms and conditions of such redemption, including the date or dates upon
or after which they shall be redeemable, and the amount per share payable
in case of redemption, which amount may vary under different conditions
and at different redemption
dates;
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74
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·
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Whether
that series shall have a sinking fund for the redemption or purchase of
shares of that series, and, if so, the terms and amount of such sinking
fund;
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·
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The
rights of the shares of that series in the event of voluntary or
involuntary liquidation, dissolution or winding up of the Company, and the
relative rights of priority, if any, of payment of shares of that series;
and
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·
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Any other relative rights,
preferences and limitations of that
series.
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Anti-Takeover
Devices
Upon
completion of this offering, the Company’s certificate of incorporation and
bylaws will include a number of provisions that may have the effect of delaying,
deferring or preventing another party from acquiring control of us and
encouraging persons considering unsolicited tender offers or other unilateral
takeover proposals to negotiate with our board of directors rather than pursue
non-negotiated takeover attempts. These provisions include the items
described below.
Board Composition and Filling
Vacancies. In accordance with the Company’s certificate of
incorporation, our board of directors is divided into three classes serving
staggered three-year terms, with one class being elected each year. The
Company’s certificate of incorporation also provides that directors may only be
removed from office for cause and only by the affirmative vote of holders of 75%
or more of the outstanding shares of capital stock then entitled to vote at an
election of directors. Furthermore, any vacancy on the Company’s board of
directors, however occurring, including any vacancy resulting from an increase
in the size of the board, may only be filled by the affirmative vote of a
majority of our directors then in office, even if less than a quorum. The
classification of directors, together with the limitations on removal of
directors and treatment of vacancies, has the effect of making it more difficult
for stockholders to change the composition of our board of
directors.
Undesignated Preferred Stock.
The Company’s certificate of incorporation authorizes “blank-check”
preferred stock, which means that the board of directors of the Company has the
authority to designate one or more series of preferred stock without stockholder
approval. These series of preferred stock may have superior rights,
preferences and privileges over our common stock, including dividend rights,
voting rights and liquidation preferences. The ability of the board of
directors of the Company to issue shares of the Company’s preferred stock
without stockholder approval could deter takeover offers and make it more
difficult or costly for a third party to acquire the Company without the consent
of the board of directors of the Company.
Section 203 of the Delaware General
Corporation Law. In addition, the Company’s certificate of incorporation
does not opt out of Section 203 of the Delaware General Corporation Law, which
protects a corporation against an unapproved takeover by prohibiting a company
from engaging in any business combination with any interested stockholder
(defined as a stockholder owning more than 15% of the outstanding shares) for a
period of three years from the time such stockholder became a 15% holder unless
approved by the board of directors of the Company.
No
Trading Market
There is
currently no established public trading market for the Company’s
securities. A trading market in the securities may never develop.
The Company intends to apply for listing of the Units, its common stock and the
Class B Warrants on the NYSE Amex under the trading symbols “ATOSU,” “ATOS” and
“ATOSW,” respectively. If for any reason the Units, the Company’s common
stock or the Class B Warrants are not so listed or a public trading market does
not develop, purchasers of the Units may have difficulty selling their
securities. The Class A Warrants will not be listed for trading on any
exchange.
75
NYSE
Amex Listing Requirements
The NYSE
Amex has established quantitative standards for initial listing of companies as
well as continuation of listing standards. The NYSE Amex has four
differing listing standards applicable for initial listing. The initial
listing standard that most effectively applies to the Company consists of a
market capitalization of at least $50 million, a market value of the public
float of $15 million, a minimum per share price of $2.00, stockholders equity of
at least $4 million, and at least 400 public stockholders with at least 1.0
million shares. In addition, the NYSE Amex has qualitative standards
concerning corporate governance, director independence, and conflicts of
interest that must be met. The Company believes that following this
offering it will meet the requirements for initial listing.
Dividends
The
Company does not anticipate declaring dividends but anticipates that it will use
any funds for further development and growth of the Company.
Transfer
Agent
Onyx
Stock Transfer, LLC, 2672 Bayshore Parkway, Suite 1055, Mountain View,
California 94043 (telephone: (650) 215-4880; facsimile: (650) 215-4884) will
serve as transfer agent for the Units, Class A Warrants, Class B Warrants and
common stock of the Company.
76
SHARES
ELIGIBLE FOR FUTURE SALE
Prior to
this offering, there has been no public market for our common stock, and a
liquid trading market for our common stock may not develop or be sustained after
this offering. Future sales of substantial amounts of our common stock in
the public market, including shares issued upon exercise of outstanding options
and warrants or in the public market after this offering, or the anticipation of
these sales, could adversely affect market prices prevailing from time to time
and could impair our ability to raise capital through the sale of equity
securities in the future.
Upon the
completion of this offering, we will have outstanding an aggregate of 15,000,067
shares of common stock, assuming full exercise of the Class A Warrants issued in
this offering, no exercise by the underwriters of their over-allotment option
and no exercise of options or warrants outstanding as of September 30,
2010. None of our shares of common stock outstanding as of the date of
this prospectus are being registered for sale under this
prospectus.
Rule
144
Of the
shares to be outstanding immediately after the closing of this offering, we
expect that 9,000,000 shares (including 6,000,000 shares issuable upon the
cashless, or net exercise, of the Class A Warrants issued in this offering) will
be freely tradable without restriction under the Securities Act unless purchased
by our “affiliates,” as that term is defined in Rule 144 under the Securities
Act. The remaining shares of our common stock outstanding after this
offering will be “restricted securities” under Rule 144 of the Securities
Act. “Restricted securities” as defined under Rule 144 were issued and
sold by us in reliance on exemptions from the registration requirements of the
Securities Act. These shares may be sold in the public market only if
registered or pursuant to an exemption from registration, such as Rule 144 or
Rule 701 under the Securities Act. All of our restricted securities
outstanding as of the date of this prospectus that would otherwise be eligible
for sale under Rule 144 after the completion of this offering will be subject to
a 12-month lock-up period under the lock-up agreements described below. In
addition, resale of certain of the restricted shares that will become available
for sale in the public market after the expiration of the lock-up period will be
limited by volume and other resale restrictions under Rule 144 because those
shares are held by our affiliates. As of the date of this prospectus,
approximately 4,340,000 shares of our outstanding common stock are owned
directly and beneficially by affiliates.
Lock-Up
Agreements
As of the
effective date of this prospectus, the holders of all the Company’s outstanding
shares of common stock have entered into lock-up agreements with the
underwriters restricting the sale of such shares, including all the shares owned
directly and beneficially by affiliates of the Company.
The
lock-up agreements restrict the sale of such shares from the effective date of
the registration statement of which this prospectus is a part for a period of 12
months, after which time the provisions of the lock-up agreement expire.
However, such shares cannot be sold publicly even after the expiration of the
lock-up period unless registered under the Securities Act or sold pursuant to
provisions of Rule 144.
The
lock-up agreements are more fully described under the caption “Underwriting” in
this prospectus.
77
The
following discussion sets forth the material U.S. federal income tax
considerations in connection with the purchase of the Units and of the ownership
and disposition of the common stock, Class A Warrants and Class B Warrants
underlying the Units and the exercise or expiration of the warrants, in each
case to U.S. Holders and Non-U.S. Holders (each as defined below); provided,
that this discussion applies only to holders that hold common stock and warrants
as capital assets;
provided, further, that this discussion does not include tax considerations that
arise from rules of general application to all taxpayers and that would be
applicable independently from the purchase, ownership or disposition of the
Units, the common stock, the Class A Warrants or the Class B Warrants,
and does
not address all aspects of U.S. federal income taxation that may be important to
particular holders in light of their individual circumstances or to holders who
may be subject to special tax rules, including, without limitation, partnerships
(including any entity or arrangement treated as a partnership for U.S. federal
income tax purposes), dealers in securities or foreign currency, traders in
securities that use a mark-to-market method of accounting for securities
holdings, U.S. expatriates, U.S. persons whose functional currency is not the
U.S. dollar, “controlled foreign corporations”, “passive foreign investment
companies”, insurance companies, tax-exempt organizations, banks, financial
institutions, broker-dealers, holders who hold common stock as part of a hedge,
straddle, conversion, constructive sale or other integrated security
transaction, or who acquired common stock pursuant to the exercise of
compensatory stock options or otherwise as compensation, all of whom may be
subject to tax rules that differ significantly from those summarized
below.
This
discussion is based upon the Internal Revenue Code of 1986, as amended, or the
Code, Treasury Regulations promulgated thereunder, judicial decisions, and the
U.S. Internal Revenue Service’s, or IRS’s, current administrative rules,
practices and interpretations of law, all as in effect on the date of this
document, and all of which are subject to change, possibly with retroactive
effect, and to differing interpretations, which could result in U.S. federal
income tax consequences different from those described below. We have not
sought, and will not seek, a ruling from the IRS regarding the U.S. federal
income tax consequences of this offering. The following discussion does
not address the tax consequences of this offering under federal estate, foreign,
state, or local tax laws, or the alternative minimum tax provisions of the
Code. Accordingly, you are urged to consult your tax advisor with respect
to the particular tax consequences of this offering.
For
purposes of this description, a “U.S. Holder” is a beneficial owner of common
stock or a warrant that is:
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An individual citizen or resident
of the United States;
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a corporation or other entity
taxable as a corporation that is created or organized in or under the laws
of the U.S., any state thereof or the District of
Columbia;
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an estate, the income of which is
subject to U.S. federal income taxation, regardless of its source;
or
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·
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a trust, if a U.S. court is able
to exercise primary supervision over the administration of the trust and
one or more U.S. persons have the authority to control all substantial
decisions of the trust (or the trust was in existence on August 20, 1996,
and validly elected to continue to be treated as a U.S.
person).
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For
purposes of this discussion, a Non-U.S. Holder is a beneficial owner of common
stock or a warrant that is not a U.S. Holder and is not a partnership for U.S.
federal income tax purposes. If an entity classified as a partnership for
U.S. federal income tax purposes holds common stock or a warrant, the tax
treatment of a partner will depend on the status of the partner and the
activities of the partnership. Any holder of common stock or a warrant
that is a partnership, or any partner in such a partnership, should consult its
tax advisors.
THIS
SUMMARY IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSTRUED TO BE, LEGAL, OR TAX
ADVICE. THE U.S. FEDERAL INCOME TAX TREATMENT OF THE UNITS IS COMPLEX
.. EACH HOLDER WHO ACQUIRES UNITS IS STRONGLY URGED TO CONSULT HIS, HER OR
ITS OWN TAX ADVISER WITH RESPECT TO THE U.S. FEDERAL, STATE, LOCAL AND FOREIGN
INCOME, ESTATE AND OTHER TAX CONSEQUENCES OF THE ACQUISITION OF THE UNITS, WITH
SPECIFIC REFERENCE TO SUCH PERSON’S PARTICULAR FACTS AND
CIRCUMSTANCES.
78
U.S.
Holders
Common
Stock
Distributions.
Distributions with respect to common stock, if any, will be includible in the
gross income of a U.S. Holder as ordinary dividend income to the extent paid out
of current or accumulated earnings and profits, as determined for U.S. federal
income tax purposes. Any portion of a distribution in excess of current or
accumulated earnings and profits would be treated as a return of the holder’s
tax basis in its common stock and then as gain from the sale or exchange of the
common stock. Newly enacted legislation requires U.S. Holders that are
individuals, estates or trusts with incomes in excess of $200,000 ($250,000 for
a married couple filing a joint return) to pay up to an additional 3.8% tax on
dividends and capital gains for taxable years beginning after December 31,
2012.
Distributions
to U.S. Holders that are corporate shareholders, constituting dividends for U.S.
federal income tax purposes, may qualify for the 70% dividends received
deduction, or DRD, which is generally available to corporate shareholders that
own less than 20% of the voting power or value of the outstanding stock of the
distributing corporation. A U.S. holder that is a corporate shareholder
holding 20% or more of the distributing corporation may be eligible for an 80%
DRD. No assurance can be given that we will have sufficient earnings and profits
(as determined for U.S. federal income tax purposes) to cause any distributions
to be eligible for a DRD. In addition, a DRD is available only if if the
stock is held for at least 46 days during the 91-day period beginning on the
date that is 45 days before the date on which the stock becomes ex-dividend with
respect to such dividend and to the extent that taxable income requirements of
the corporate shareholder are satisfied. The length of time that a U.S.
Holder has held stock is reduced by any period during which the U.S. Holder’s
risk of loss with respect to the stock maybe be diminished by reason of the
existence of options, contracts to sell, short sales, or other similar
transactions. Also, to the extent that a corporation incurs indebtedness that is
directly attributable to an investment in the stock on which the dividend is
paid, all or a portion of the DRD may be disallowed. Corporate
shareholders should consult their tax advisors regarding the availability of a
DRD in light of their particular circumstances. In addition, any dividend
received by a corporation may also be subject to the extraordinary distribution
provisions of the Tax Code.
Dispositions. If you
sell or otherwise dispose of any shares of common stock, you will recognize
capital gain or loss equal to the difference between your amount realized and
your adjusted tax basis of such shares of common stock. The respective tax
bases of the common stock, the Class A Warrants and the Class B Warrants
underlying the Units acquired in this offering will be determined by first
allocating the purchase price for each Unit among the common stock, the Class A
Warrants and the Class B Warrants in proportion to their respective fair market
values on the date the Unit is purchased. (See “Warrants – Cashless
Exercise” and “Warrants – Exercise for Cash” below for a discussion of tax basis
with respect to common stock received upon exercise of a Class A Warrant or a
Class B Warrant). Such capital gain or loss will be long-term capital gain
or loss if your holding period for such shares of common stock is more than one
year. Your holding period for the common stock underlying a Unit will
begin on the date the Unit is purchased. (See “Warrants – Cashless
Exercise” and “Warrants - Exercise for Cash” below for a discussion of holding
period with respect to common stock received upon exercise of a Class A Warrant
or a Class B Warrant). The deductibility of capital losses is subject to
limitations.
Warrants
Dispositions. If you
sell or otherwise dispose of a warrant, you will recognize capital gain or loss
equal to the difference between the amount realized and your adjusted tax basis
of such warrant. The respective tax bases of the common stock, the Class A
Warrants and the Class B Warrants underlying the Units acquired in this offering
will be determined by first allocating the purchase price for each Unit among
the common stock, the Class A Warrants and the Class B Warrants in proportion to
their respective fair market values on the date of the Unit is purchased.
Such capital gain or loss will be long-term capital gain or loss if your holding
period for a warrant is more than one year. Your holding period for the
warrants underlying a Unit will begin on the date the Unit is purchased.
In the event a warrant lapses unexercised, you will recognize a capital loss in
an amount equal to the adjusted tax basis of the warrant. Such capital
loss will be long-term if your holding period of such warrant was more than one
year at the time of lapse. The deductibility of capital losses is subject
to limitations.
79
Cashless Exercise. The
Class A Warrants will be exercised only by way of cashless exercise, while the
Class B Warrants can be exercised in a cashless manner only if the Company does
not have an effective registration statement under the Securities Act of 1933
covering the issuance of the shares underlying the Class B Warrants. The
tax consequences of a cashless exercise of a warrant are not clear under current
tax law. It is possible that a cashless exercise may be treated as a
recapitalization for U.S. federal income tax purposes, in which case no gain or
loss would be recognized in connection with such exercise, other than with
respect to cash received in lieu of a fractional share. In this case, a
U.S. Holder’s tax basis in the common stock received would equal the holder’s
basis in the warrant (plus any gain recognized from the receipt of cash in lieu
of a fractional share minus the amount of cash received). If a cashless
exercise is treated as a recapitalization, the holding period of the common
stock will include the holding period of the warrant. The Company intends
to treat the Class A Warrants as equity for U.S. federal income tax purposes and
the cashless exercise of the Class A Warrants and the cashless exercise of the
Class B Warrants, if applicable, as a recapitalization.
However,
it is also possible that a cashless exercise could be treated as a taxable
exchange in which gain or loss would be recognized. In such event, a U.S.
Holder could be deemed to have surrendered warrants equal to the number of
common shares having a value equal to the exercise price for the total number of
warrants to be exercised. The U.S. Holder would recognize capital gain or
loss in an amount equal to the difference between the fair market value of the
warrants deemed surrendered to pay the exercise price and the holder’s tax basis
in such warrants deemed surrendered. In this case, a U.S. Holder’s tax
basis in the common stock received would equal the sum of the fair market value
of the warrants deemed surrendered to pay the exercise price and the holder’s
tax basis in the warrants exercised. A U.S. Holder’s holding period for
the common stock would commence on the date following the date of exercise of
the warrant.
In
addition, upon a cashless exercise of a warrant, cash received in lieu of a
fractional share of common stock will be treated as a payment in a taxable
exchange for such fractional share of common stock, and gain or loss will be
recognized on the receipt of cash in an amount equal to the difference between
the amount of cash received and the amount of adjusted tax basis allocable to
the fractional share of common stock.
DUE TO
THE ABSENCE OF AUTHORITY ON THE U.S. FEDERAL INCOME TAX TREATMENT OF A CASHLESS
EXERCISE, THERE CAN BE NO ASSURANCE WHICH, IF ANY, OF THE ALTERNATIVE TAX
CONSEQUENCES AND HOLDING PERIODS DESCRIBED ABOVE WOULD BE ADOPTED BY THE IRS OR
A COURT OF LAW. ACCORDINGLY, HOLDERS SHOULD CONSULT THEIR TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF A CASHLESS EXERCISE.
Exercise for Cash. Your
tax basis in shares of common stock received upon exercise of a Class B Warrant
for cash will equal the tax basis of the Class B Warrant, increased by the
amount paid upon exercise of the warrant. Your holding period of shares of
common stock received upon exercise of a warrant will begin on the day following
the date on which the warrant is exercised.
Constructive
Distributions. A shareholder may be deemed to receive a
constructive distribution pursuant to Section 305 of the Code. Such a
constructive distribution could occur if at any time during the period you hold
warrants, we pay a taxable dividend to our stockholders and, in accordance with
the anti-dilution provisions of the warrants, we adjust the exercise price of
the warrant. That adjustment will be taxable as a dividend, return of
capital, or capital gain in accordance with the earnings and profits rules under
the Code, notwithstanding that you will not receive a cash payment. In
addition, the occurrence of, or failure to make, adjustments to either the
number of shares of common stock to be issued upon exercise of a warrant or to
the warrant’s exercise price in connection with a stock split, combination,
recapitalization or other similar transaction affecting the common stock, could
result in a constructive distribution. Furthermore, we may be obligated to
adjust the conversion rate of the warrants or, in lieu of such adjustment, to
provide for the conversion of warrants into warrants or shares of an
acquirer. See “Description of Securities-Class A Warrants and Class B
Warrants.” Depending on the circumstances, such modification could
result in a deemed exchange of your warrant for a new warrant, potentially
resulting in the recognition of taxable gain or loss. You should consult
your tax advisor regarding the proper treatment of any adjustments to the
warrants.
Information
Reporting and Backup Withholding
Information
reporting requirements will apply to payments of dividends on shares of common
stock or deemed dividends on a warrant and to the proceeds of a sale of a
warrant or shares of common stock paid to you unless you are an exempt recipient
such as a corporation or, in some circumstance, a tax-exempt
organization.
80
Backup
withholding will apply to those payments if you fail to provide your correct
taxpayer identification number, certify your exempt status, or report in full
interest and dividend income. Selected U.S. Holders, including, among
others, corporations, financial institutions and some tax exempt organizations,
generally are not subject to backup withholding. Backup withholding tax is
not an additional tax, and you may use amounts withheld as credit against your
U.S. federal income tax liability or may claim a refund as long as you timely
provide the required information to the IRS. U.S. Holders should
consult their own tax advisors regarding the applicability of backup
withholding.
Non-U.S.
Holders
Common
Stock
Distributions.
Dividends paid to a Non-U.S. Holder, if any, with respect to shares of
common stock will be subject to withholding tax at a 30% rate (or lower
applicable income tax treaty rate) unless the dividends are effectively
connected with the Non-U.S. Holder’s conduct of a trade or business in the
United States. If a Non-U.S. Holder is engaged in a trade or business in
the United States and dividends with respect to the common stock are effectively
connected with the conduct of that trade or business and, if required by an
applicable income tax treaty, are attributable to a U.S. permanent
establishment, then the Non-U.S. Holder will be subject to U.S. federal income
tax on those dividends on a net income basis (although the dividends will be
exempt from the 30% U.S. federal withholding tax, provided the certification
requirements are satisfied) in the same manner as if received by a U.S. person
as defined under the Code. Any such effectively connected income received by a
foreign corporation may be subject to an additional branch profits tax at a 30%
rate (or lower applicable income tax treaty rate).
Subject
to the discussion below under “— New Legislation Relating to Foreign Accounts,”
in order to obtain a reduced rate of withholding, you will be required to timely
provide a properly executed IRS Form W-8BEN (or other applicable IRS form)
certifying your entitlement to benefits under a treaty. If a Non-U.S.
Holder is eligible for a reduced rate of U.S. withholding tax pursuant to an
income tax treaty, it can obtain a refund of any excess amounts withheld by
filing an appropriate claim for refund with the Internal Revenue
Service.
Dispositions. A
Non-U.S. Holder may recognize gain upon the sale, exchange, redemption or other
taxable disposition of common stock. Subject to the discussion below
concerning backup withholding and the newly-enacted legislation relating to
foreign accounts, such gain generally will not be subject to U.S. federal income
tax unless: (i) that gain is effectively connected with conduct of a trade or
business in the United States (and, if required by an applicable income tax
treaty, is attributable to a U.S. permanent establishment) by a Non-U.S. Holder;
(ii) the Non-U.S. Holder is an individual who is present in the United States
for 183 days or more in the taxable year of that disposition, and other
conditions are met; or (iii) the Company is or has been a “U.S. real property
holding corporation” for U.S. federal income tax purposes.
If a
Non-U.S. Holder is an individual described in clause (i) of the last sentence of
the preceding paragraph, the Non-U.S. Holder will be subject to tax on the net
gain at regular graduated U.S. federal income tax rates. If the Non-U.S.
holder is an individual described in clause (ii) of the preceding paragraph, the
Non-U.S. holder will be subject to a flat 30% tax on the gain, which may be
offset by U.S. source capital losses even though the non-U.S. holder is not
considered a resident of the United States. If a Non-U.S. Holder is a
foreign corporation that is described in clause (i) of the last sentence of the
preceding paragraph, it will be subject to tax on its net gain in the same
manner as if it were a U.S. person as defined under the Code and, in addition,
the Non-U.S. Holder may be subject to the branch profits tax at a rate equal to
30% of its effectively connected earnings and profits or at such lower rate as
may be specified by an applicable income tax treaty.
The
Company believes that it is not and does not anticipate becoming a “U.S. real
property holding corporation” for U.S. federal income tax purposes.
However, because the determination depends on the fair market value of our U.S.
real property interests and the fair market value of our other assets, no
assurance can be provided that we currently are not, or in the future will not
become, a U.S. real property holding corporation. The tax relating to stock in a
“U.S. real property holding corporation” will not apply to a Non-U.S. Holder
whose holdings (taking into account actual ownership and the constructive
ownership rules as modified by Treasury Regulations) at all times during the
applicable period, constitute 5% or less of our common stock, provided that our
common stock is regularly traded on an established securities market. If
your holdings (taking into account actual ownership and the constructive
ownership rules as modified by Treasury Regulations) at all times during the
applicable period, constituted 5% or less of our common stock and provided our
common stock is regularly traded on an established securities market, you will
not be subject to U.S. federal income tax on the disposition of your common
stock.
81
Warrants
Dispositions. A
Non-U.S. Holder may recognize gain upon the sale, exchange, redemption, exercise
or other taxable disposition of a warrant. Subject to the discussion below
concerning backup withholding and the newly-enacted legislation relating to
foreign accounts, such gain generally will not be subject to U.S. federal income
tax unless: (i) that gain is effectively connected with conduct of a trade or
business in the United States (and, if required by an applicable income tax
treaty, is attributable to a U.S. permanent establishment) by a Non-U.S. Holder;
(ii) the Non-U.S. Holder is an individual who is present in the United States
for 183 days or more in the taxable year of that disposition, and certain other
conditions are met; or (iii) the Company is or has been a “U.S. real property
holding corporation” for U.S. federal income tax purposes.
If a
Non-U.S. Holder is an individual described in clause (i) of the last sentence of
the preceding paragraph, the Non-U.S. Holder will be subject to tax on the net
gain at regular graduated U.S. federal income tax rates. If the Non-U.S.
holder is an individual described in clause (ii) of the preceding paragraph, the
Non-U.S. holder will be subject to a flat 30% tax on the gain, which may be
offset by U.S. source capital losses even though the non-U.S. holder is not
considered a resident of the United States. If a Non-U.S. Holder is a
foreign corporation that is described in clause (i) of the last sentence of the
preceding paragraph, it will be subject to tax on its net gain in the same
manner as if it were a U.S. person as defined under the Code and, in addition,
the Non-U.S. Holder may be subject to the branch profits tax at a rate equal to
30% of its effectively connected earnings and profits or at such lower rate as
may be specified by an applicable income tax treaty.
The
Company believes that it is not and does not anticipate becoming a “U.S. real
property holding corporation” for U.S. federal income tax purposes.
However, because the determination depends on the fair market value of our U.S.
real property interests and the fair market value of our other assets, no
assurance can be provided that we currently are not, or in the future will not
become, a U.S. real property holding corporation. If we are a U.S. real
property holding corporation and our warrants are treated as a U.S. real
property interest, you will be subject to U.S. federal income tax on a net
income basis on any gain realized on a sale or other disposition of the warrants
and a purchaser may be required to withhold a portion of the proceeds payable to
you from the disposition. However, provided our common stock is regularly
traded on an established securities market and your holdings (taking into
account actual ownership and the constructive ownership rules as modified by
Treasury Regulations) on the date of the acquisition of your warrants have a
fair market value of 5% or less of the value of our publicly traded common
stock, you will not be subject to U.S. federal income tax on the disposition of
your warrants. If any subsequent acquisitions cause your interests to exceed the
applicable limitation described above, then all such interests shall be treated
as U.S. real property interests, regardless of when acquired.
Constructive Distributions.
A shareholder may be deemed to receive a constructive distribution
pursuant to Section 305 of the Code. Such a constructive distribution
could occur if at any time during the period you hold warrants, we pay a taxable
dividend to our stockholders and, in accordance with the anti-dilution
provisions of the warrants, we adjust the exercise price of the warrant.
That adjustment will be taxable as a dividend, return of capital, or capital
gain in accordance with the earnings and profits rules under the Code,
notwithstanding that you will not receive a cash payment. In addition, the
occurrence of, or failure to make, adjustments to either the number of shares of
common stock to be issued upon exercise of a warrant or to the warrant’s
exercise price in
connection with a stock split, combination, recapitalization or other similar
transaction affecting the common stock, could
result in a constructive distribution. See “Description of
Securities-Class A Warrants and Class B Warrants.”
Any
deemed dividends that are not effectively connected with the conduct of a trade
or business in the United States generally will be subject to withholding tax at
a 30% rate (or lower applicable income tax treaty rate). Subject to the
discussion below under “— New Legislation Relating to Foreign Accounts,” in
order to obtain a reduced rate of withholding, you will be required to timely
provide a properly executed IRS Form W-8BEN (or other applicable IRS form)
certifying your entitlement to benefits under a treaty. Because any
constructive dividend would not give rise to any cash from which any applicable
withholding tax could be satisfied, it is possible that this tax would be
withheld from any amount owed to you, including, but not limited to, cash or
shares of common stock otherwise due on exercise, dividends or sales proceeds
subsequently paid or credited to you.
82
Constructive
dividends that are effectively connected with the conduct of a trade or business
within the United States and, where a tax treaty applies, are attributable to a
U.S. permanent establishment, are not subject to withholding tax, but instead
are subject to U.S. federal income tax on a net income basis at applicable
graduated U.S. federal income tax rates in the same manner as if you were a
resident of the United States. In such cases, we generally will not be
required to withhold U.S. federal income tax if you comply with applicable
certification and disclosure requirements, generally on a properly executed IRS
Form W-8ECI (or other applicable IRS Form). Any such effectively connected
income received by a Non-U.S. Holder that is classified as corporation for U.S.
tax purposes may also be subject to an additional branch profits tax at a 30%
rate (or lower applicable income tax treaty rate).
A
Non-U.S. Holder of warrants that wishes to claim the benefit of an applicable
treaty rate is required to satisfy applicable certification and other
requirements. If you are eligible for a reduced rate of U.S. withholding tax
pursuant to an income tax treaty, you may obtain a refund of any excess amounts
withheld by filing an appropriate claim for refund with the IRS. You
should consult your tax advisor regarding the certification and disclosure
requirements applicable to you.
In certain situations, we
may be obligated to adjust the conversion rate of the warrants or, in lieu of
such adjustment, to provide for the conversion of warrants into warrants or
shares of an acquirer. Depending on the circumstances, such modification
could result in a deemed exchange of your warrant for a new warrant, potentially
resulting in the recognition of taxable gain (See “Warrants – Dispositions”
above). You should consult your tax advisor regarding the proper treatment
of any adjustments to the warrants.
New
Legislation Relating to Foreign Accounts
Newly
enacted legislation imposes withholding taxes on certain types of payments made
to “foreign financial institutions” and certain other non-U.S. entities where
information reporting requirements are not satisfied. The legislation imposes a
30% withholding tax on dividends on, and gross proceeds from the sale or other
disposition of, common stock or paid to a foreign financial institution or to a
foreign non-financial entity, unless (i) the foreign financial institution
undertakes required 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.
Information
Reporting and Backup Withholding
We
must report to the IRS and to you the amount of dividends paid (or deemed paid)
to you and the amount of tax, if any, withheld with respect to those payments.
Copies of the information returns reporting such interest payments and any
withholding may also be made available to the tax authorities in the country in
which you reside under the provisions of an applicable income tax
treaty.
In
general, you will not be subject to backup withholding with respect to payments
of dividends (or deemed dividends) that we make to you provided that we do not
have actual knowledge or reason to know that you are a U.S. person, as defined
under the Code, and (a) we have a properly executed IRS Form W-8BEN (or other
applicable IRS form) on which you certify, under penalties of perjury, that you
are not a U.S. person or (b) you hold your common stock or warrants through
certain foreign intermediaries and satisfy the certification requirements of
applicable U.S. Treasury regulations. Special rules apply to non-U.S.
holders that are pass-through entities rather than corporations or
individuals.
In
addition, no information reporting or backup withholding will be required
regarding the proceeds of the sale of common stock or a warrant made within the
U.S. or conducted through certain U.S.-related financial intermediaries, if the
payor receives the statement described above and does not have actual knowledge
or reason to know that you are a U.S. person, as defined under the Code, or you
otherwise establish an exemption.
83
Any
amounts withheld under the backup withholding rules will be allowed as a refund
or a credit against your U.S. federal income tax liability provided the required
information is timely furnished to the IRS.
Subject
to the terms and conditions of the underwriting agreement, the underwriters
named below, through their representative, Dawson James Securities, Inc., who is
acting as the sole book-running manager and sole representative of the
underwriters of this offering, each underwriter named below has severally agreed
to purchase from us on a firm commitment basis the following respective number
of Units at a public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus:
|
Underwriter
|
Number of
Shares
|
|||
|
Dawson
James Securities, Inc.
|
||||
|
Total
|
||||
The
underwriting agreement provides that the obligation of the underwriters to
purchase all of the 3,000,000 Units being offered to the public (assuming a
$6.00 per Unit public offering price) is subject to specific conditions,
including the absence of any material adverse change in our business or in the
financial markets and the receipt of certain legal opinions, certificates and
letters from us, our counsel and the independent auditors. Subject to the terms
of the underwriting agreement, the underwriters will purchase all of the
3,000,000 Units being offered to the public, other than those covered by the
over-allotment option described below, if any of these Units are
purchased.
Over-Allotment
Option
We have
granted to the underwriters an option, exercisable not later than 45 days after
the effective date of the registration statement, to purchase up to 450,000
additional Units at the public offering price less the underwriting discounts
and commissions set forth on the cover of this prospectus. The underwriters may
exercise this option only to cover over-allotments made in connection with the
sale of the Units offered by this prospectus. The over-allotment option will
only be used to cover the net syndicate short position resulting from the
initial distribution. To the extent that the underwriters exercise this option,
each of the underwriters will become obligated, subject to conditions, to
purchase approximately the same percentage of these additional Units as the
number of Units to be purchased by it in the above table bears to the total
number of Units offered by this prospectus. We will be obligated, pursuant to
the option, to sell these additional Units to the underwriters to the extent the
option is exercised. If any additional Units are purchased, the underwriters
will offer the additional Units on the same terms as those on which the other
Units are being offered hereunder.
Commissions
and Discounts
The
underwriting discounts and commissions are 7% of the initial public offering
price. We have agreed to pay the underwriters the discounts and commissions set
forth below, assuming either no exercise or full exercise by the underwriters of
the underwriters’ over-allotment option. In addition, we have agreed to pay
to Dawson James Securities, Inc. a non-accountable expense allowance
of up to 3% of the gross proceeds of this offering.
84
Additionally,
Dawson James Securities, Inc. will receive a warrant exercisable for the
purchase of Units in an amount up to 10% of the aggregate number of Units sold
in this offering. The Dawson James warrant will be exercisable, at an
exercise price of 110% of the public Unit offering price, commencing one year
from the effective date of the registration statement of which this prospectus
forms a part and will expire four years from such effective date. The
Dawson James warrant will contain a cashless, net exercise feature. Each
of the Units issuable upon exercise of the Dawson James warrant will consist of
(i) one share of common stock, (ii) two Class A Warrants, each exercisable for
one share of common stock at an exercise price of $0.05 per share and (iii) one
Class B Warrant, exercisable for one share of common stock at an exercise price
equal to 55% of the Unit price in this offering. The Class A Warrants
issuable upon exercise of the Dawson James warrant will be exercisable only on a
cashless basis and will be exercisable for a period of 10 days from the date the
Dawson James Unit warrant is exercised; the Class B Warrants issuable upon
exercise of the Dawson James warrant will be exercisable for a period of five
years following the exercise of the Dawson James Unit warrant. In
compliance with the lock-up restrictions set forth in FINRA
Rule 5110(g)(1), neither the Dawson James warrants nor the underlying
securities may be sold, transferred, assigned, pledged or hypothecated, or be
the subject of any hedging, short sale, derivative, put, or call transaction
that would result in the effective economic disposition of the securities by any
person for a period of at least 180 days immediately following the date of
effectiveness or commencement of sales of the offering, except to any member
participating in the offering and the officers or partners thereof, and only if
all securities so transferred remain subject to the one-year lock-up restriction
for the remainder of the lock-up period.
The
following table summarizes the underwriting discounts and commissions we will
pay to the underwriters. The underwriting discounts and commissions are equal to
the public offering price per share less the amount per share the underwriters
pay us for the shares.
|
Per Unit
|
Total without
Over-Allotment
|
Total with
Over-Allotment
|
||||||||||
|
Public
offering price
|
||||||||||||
|
Underwriting
discount (1)
|
||||||||||||
|
Proceeds,
before expenses, to us
|
||||||||||||
|
(1)
|
Does
not include the non-accountable expense reimbursement fee in the amount of
up to 3% of the gross proceeds of this
offering.
|
We
estimate that the total expenses of the offering, including registration, filing
and listing fees, printing fees and legal and accounting expenses, but excluding
underwriting discounts and commissions, will be approximately $_________, all of
which are payable by us.
Lock-Up
Agreements
We and
each of our officers, directors, and existing stockholders are bound by
agreements providing that we and these stockholders may not offer, issue, sell,
contract to sell, encumber, grant any option for the sale of or otherwise
dispose of any shares of our common stock or other securities convertible into
or exercisable or exchangeable for shares of our common stock for a period of 12
months from the effective date of the registration statement of which this
prospectus is a part without the prior written consent of Dawson
James.
Dawson
James may in its sole discretion and at any time without notice release some or
all of the shares subject to lock-up agreements prior to the expiration of the
lock-up period. When determining whether or not to release shares from the
lock-up agreements, the representative will consider, among other factors, the
securityholder’s reasons for requesting the release, the number of shares for
which the release is being requested and market conditions at the
time.
85
Pricing
of this Offering
Prior to
this offering there has been no public market for any of our securities. The
public offering price of the Units and the terms of the warrants, including the
exercise prices of the warrants, were negotiated between us and Dawson
James. Factors considered in determining the prices and terms of the
Units, including the common stock and warrants underlying the Units,
include:
|
|
·
|
the
history and prospects of companies in our
industry;
|
|
|
·
|
prior
offerings of those companies;
|
|
|
·
|
our
prospects for developing and commercializing our products;
|
|
|
·
|
our capital structure; |
|
|
·
|
an
assessment of our management and their experience;
|
|
|
·
|
general conditions of the securities markets at the time of the offering; and |
|
|
·
|
other
factors as were deemed relevant.
|
However,
although these factors were considered, the determination of our offering price
is more arbitrary than the pricing of securities for an operating company in a
particular industry since the underwriters are unable to compare our financial
results and prospects with those of public companies operating in the same
industry.
Price
Stabilization, Short Positions and Penalty Bids
The
underwriters may engage in over-allotment, stabilizing transactions, short
positions, syndicate covering transactions, and penalty bids or purchasers for
the purpose of pegging, fixing or maintaining the price of the common stock, in
accordance with Regulation M under the Exchange Act:
|
|
·
|
Over-allotment
involves sales by the underwriters of shares in excess of the number of
shares the underwriters are obligated to purchase, which creates a
syndicate short position. In connection with the offering, the
underwriters may make short sales of the Company’s shares. The short
position may be either a covered short position or a naked short position.
In a covered short position, the number of shares over-allotted by the
underwriters is not greater than the number of shares that they may
purchase in the over-allotment option. In a naked short position, the
number of shares involved is greater than the number of shares in the
over-allotment option. The underwriters may close out any short position
by either exercising their over-allotment option and/or purchasing shares
in the open market.
|
|
|
·
|
Stabilizing
transactions permit bids to purchase the underlying security so long as
the stabilizing bids do not exceed a specified
maximum.
|
|
|
·
|
Syndicate
covering transactions involve purchases of the common stock in the open
market after the distribution has been completed in order to cover
syndicate short positions. In determining the source of shares to close
out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option, a naked short position, the position
can only be closed out by buying shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned
that there could be downward pressure on the price of the shares in the
open market after pricing that could adversely affect investors who
purchase in the offering.
|
|
|
·
|
Penalty
bids permit the underwriters to reclaim a selling concession from a
syndicate member when the common stock originally sold by the syndicate
member is purchased in a stabilizing or syndicate covering transaction to
cover syndicate short positions.
|
These
stabilizing transactions, short positions, syndicate covering transactions and
penalty bids may have the effect of raising or maintaining the market price of
our common stock or preventing or retarding a decline in the market price of the
common stock. As a result, the price of the common stock may be higher than the
price that might otherwise exist in the open market. These transactions may be
effected in the over-the-counter market or otherwise and, if commenced, may be
discontinued at any time.
86
Neither
we nor any of the underwriters make any representation or prediction as to the
direction or magnitude of any effect that the transactions described above may
have on the price of the common stock. In addition, neither we nor any of the
underwriters make representation that the underwriters will engage in these
stabilizing transactions or that any transaction, once commenced, will not be
discontinued without notice.
Other
Terms
We have
engaged Dawson James, on a non-exclusive basis, as our agent for the
solicitation of the exercise of the Class B Warrants. To the extent not
inconsistent with the guidelines of the Financial Industry Regulatory Authority,
or FINRA, and the rules and regulations of the SEC, we have agreed to pay the
underwriter for bona fide services rendered a commission equal to 5% of the
exercise price for each warrant exercised more than one year after the date of
this prospectus if the exercise was solicited by Dawson James. No compensation
will be paid to the underwriter upon the exercise of the warrants
if:
|
|
·
|
the
market price of the underlying shares of common stock is lower than the
exercise price;
|
|
|
·
|
the
holder of the warrants has not confirmed in writing that the underwriter
solicited his, her or its exercise;
|
|
|
·
|
the
warrants are held in a discretionary account, unless prior specific
written approval for the exercise is received from the
holder;
|
|
|
·
|
the
warrants are exercised in an unsolicited transaction;
or
|
|
|
·
|
the
arrangement to pay the commission is not disclosed in the prospectus
provided to warrant holders at the time of
exercise.
|
In
addition, we have agreed to reimburse the underwriters for up to $150,000 of the
legal fees incurred by the underwriters in connection with the offering, plus up
to an additional $25,000 in legal fees for blue sky matters and up to $15,000
for legal fees related to filings with FINRA. These expenses, which are in
addition to the 3% non-accountable expense reimbursement fee described above,
will be paid from the proceeds of this offering.
Indemnification
We have
agreed to indemnify the underwriters against liabilities relating to the
offering arising under the Securities Act, liabilities arising from breaches of
some or all of the representations and warranties contained in the underwriting
agreement, and to contribute to payments that the underwriters may be required
to make for these liabilities.
Electronic
Distribution
A
prospectus in electronic format may be made available on a website maintained by
the representatives of the underwriters and may also be made available on a
website maintained by other underwriters. The underwriters may agree to allocate
a number of shares to underwriters for sale to their online brokerage account
holders. Internet distributions will be allocated by the representatives of the
underwriters to underwriters that may make Internet distributions on the same
basis as other allocations. In connection with the offering, the underwriters or
syndicate members may distribute prospectuses electronically. No forms of
electronic prospectus other than prospectuses that are printable as Adobe® PDF
will be used in connection with this offering.
The
underwriters have informed us that they do not expect to confirm sales of Units
offered by this prospectus to accounts over which they exercise discretionary
authority.
87
Other
than the prospectus in electronic format, the information on any underwriter’s
website and any information contained in any other website maintained by an
underwriter is not part of the prospectus or the registration statement of which
this prospectus forms a part, has not been approved and/or endorsed by us or any
underwriter in its capacity as underwriter and should not be relied upon by
investors.
Relationships
Certain
of the underwriters or their affiliates have provided from time to time and may
in the future provide investment banking, lending, financial advisory and other
related services to us and our affiliates for which they have received and may
continue to receive customary fees and commissions.
Foreign
Regulatory Restrictions on Purchase of Units
We have
not taken any action to permit a public offering of the Units outside the United
States or to permit the possession or distribution of this prospectus outside
the United States. Persons outside the United States who come into possession of
this prospectus must inform themselves about and observe any restrictions
relating to this offering of Units and the distribution of the prospectus
outside the United States.
LEGAL
MATTERS
The
validity of the securities offered by this prospectus will be passed upon for us
by Goodwin Procter LLP, San Francisco, California. Certain legal matters
relating to this offering will be passed upon for the underwriter by McDermott
Will & Emery LLP, Menlo Park, California.
EXPERTS
KCCW
Accountancy Corp., an independent PCAOB registered public accounting firm, has
audited the Company’s balance sheets as of December 31, 2009 and the related
statements of operations, stockholders’ equity, and cash flows, which are
included in this prospectus. The financial statements are included in
reliance on the report of KCCW Accountancy Corp., given their authority as
experts in accounting and auditing.
ADDITIONAL
INFORMATION
We have
filed with the SEC a registration statement on Form S-1 under the Securities Act
of 1933 with respect to the Units offered by this prospectus. This
prospectus does not contain all of the information included in the registration
statement, portions of which are omitted as permitted by the rules and
regulations of the SEC. For further information pertaining to us and the Units
to be sold in this offering, you should refer to the registration statement and
its exhibits.
In this
prospectus, whenever reference is made to contracts, agreements or other
documents, the references are not necessarily complete, and you should refer to
the exhibits attached to the registration statement for copies of the actual
contract, agreement or other document filed as an exhibit to the registration
statement or such other document, each such statement being qualified in all
respects by such reference.
Upon the
completion of this offering, we will be subject to the informational
requirements of the Securities Exchange Act of 1934 and will be required to file
annual, quarterly and current reports, proxy statements and other information
with the SEC. We anticipate making these documents publicly available, free of
charge, on its website as soon as reasonably practicable after filing such
documents with the SEC. The information contained in, or that can be accessed
through, our website is not part of this prospectus.
You can
read the registration statement and future filings, as they are filed with the
SEC, over the Internet at the SEC’s website at www.sec.gov . Copies of
filings may be requested, at no cost, from us. You may also read and copy
any document filed with the SEC at its public reference facility at 100 F
Street, N.E., Washington, D.C. 20549 and copies may be requested at prescribed
rates at such address or at 1-800-SEC-0330.
88
ATOSSA
GENETICS, INC.
(A
Development Stage Company)
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
||
|
Unaudited
Financial Statements
|
|
|
|
|
||
|
Balance
Sheet as of September 30, 2010 (unaudited)
|
F-1
|
|
|
Statements
of Operations through the Period Ended September 30, 2010
(unaudited)
|
F-2
|
|
|
Statements
of Cash Flows through the Period Ended September 30, 2010
(unaudited)
|
F-3
|
|
|
Notes
to Financial Statements as of September 30, 2010
(unaudited)
|
F-4
|
|
|
|
||
|
Audited
Financial Statements
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-13
|
|
|
Balance
Sheet as of December 31, 2009
|
F-14
|
|
|
Statements
of Operations through the Period Ended December 31, 2009
|
F-15
|
|
|
Statements
of Changes in Stockholders’ Deficit through the Period Ended December 31,
2009
|
F-16
|
|
|
Statements
of Cash Flows through the Period Ended December 31, 2009
|
F-17
|
|
|
Notes
to Financial Statements as of December 31, 2009
|
F-18
|
89
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
BALANCE
SHEETS
|
September
30,
|
December
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
(Unaudited)
|
(Audited)
|
|||||||
|
Assets
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 29,531 | $ | 84,364 | ||||
|
Other
receivable
|
1,622 | - | ||||||
|
Total
Current Assets
|
31,153 | 84,364 | ||||||
|
Other
Assets
|
||||||||
|
Security
deposit - related parties
|
1,100 | 1,100 | ||||||
|
Total
Other Assets
|
1,100 | 1,100 | ||||||
|
Total
Assets
|
$ | 32,253 | $ | 85,464 | ||||
|
Liabilities and Stockholders' (Deficit)
Equity
|
||||||||
|
Current
Liabilities
|
||||||||
|
Accrued
payroll
|
$ | 166,071 | $ | - | ||||
|
Accrued
expenses
|
285,811 | 36,281 | ||||||
|
Note
payable - related party
|
107,000 | 5,000 | ||||||
|
Accrued
royalty payable - related party
|
- | 12,500 | ||||||
|
Total
Current Liabilities
|
558,882 | 53,781 | ||||||
|
Stockholders'
(Deficit) Equity
|
||||||||
|
Preferred
stock - $.001 par value; 10,000,000 shares authorized, 0 shares issued and
outstanding
|
- | - | ||||||
|
Common
stock - $.001 par value, 75,000,000 shares authorized, 6,000,067 and
4,899,882 shares issued and outstanding, respectively
|
6,000 | 4,900 | ||||||
|
Additional
paid-in capital
|
334,585 | 149,640 | ||||||
|
Accumulated
deficit
|
(867,214 | ) | (122,857 | ) | ||||
|
Total
Stockholders' (Deficit) Equity
|
(526,629 | ) | 31,683 | |||||
|
Total
Liabilities and Stockholders' (Deficit) Equity
|
$ | 32,253 | $ | 85,464 | ||||
The
accompanying notes are an integral part of these financial
statements.
F-1
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
STATEMENTS
OF OPERATIONS
(UNAUDITED)
|
For The Three
Months Ended
September 30,
2010
|
For The Three
Months Ended
September 30,
2009
|
For The Nine
Months Ended
September 30,
2010
|
From April 30,
2009 (Inception)
Through
September 30,
2009
|
From April 30,
2009 (Inception)
Through
September 30,
2010
|
||||||||||||||||
|
Net
Revenue
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
|
Operating
Expenses
|
||||||||||||||||||||
|
Legal
and professional expenses
|
237,249 | 70,804 | 331,863 | 70,804 | 416,480 | |||||||||||||||
|
Compensation
expenses
|
140,545 | - | 194,116 | - | 194,116 | |||||||||||||||
|
Consulting
expenses
|
46,449 | - | 90,614 | - | 90,614 | |||||||||||||||
|
Research
and development expenses
|
1,306 | 17,500 | 1,306 | 17,500 | 22,556 | |||||||||||||||
|
Website
and internet expenses
|
- | - | 52,500 | - | 55,538 | |||||||||||||||
|
Advertising
and promotion expenses
|
- | - | 12,204 | - | 12,204 | |||||||||||||||
|
Other
operating expenses
|
51,760 | 4,277 | 56,953 | 4,801 | 70,906 | |||||||||||||||
|
Total
operating expenses
|
477,309 | 92,581 | 739,557 | 93,105 | 862,414 | |||||||||||||||
|
Operating
Loss
|
(477,309 | ) | (92,581 | ) | (739,557 | ) | (93,105 | ) | (862,414 | ) | ||||||||||
|
Interest
Income
|
2 | - | 455 | - | 455 | |||||||||||||||
|
Interest
Expense
|
(5,129 | ) | - | (5,129 | ) | - | (5,129 | ) | ||||||||||||
|
Net
Loss before Income Taxes
|
(482,436 | ) | (92,581 | ) | (744,231 | ) | (93,105 | ) | (867,089 | ) | ||||||||||
|
Income
Taxes
|
- | - | 125 | - | 125 | |||||||||||||||
|
Net
Loss
|
$ | (482,436 | ) | $ | (92,581 | ) | $ | (744,356 | ) | $ | (93,105 | ) | $ | (867,214 | ) | |||||
|
Loss
per common share - basic and diluted
|
$ | ( 0.08 | ) | $ | ( 0.02 | ) | $ | ( 0.13 | ) | $ | ( 0.02 | ) | $ | ( 0.17 | ) | |||||
|
Weighted
average shares outstanding, basic and diluted
|
6,000,035 | 4,004,426 | 5,914,204 | 3,993,093 | 5,024,779 | |||||||||||||||
The
accompanying notes are an integral part of these financial
statements.
F-2
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
STATEMENTS
OF CASH FLOWS
(UNAUDITED)
|
For The Nine
Months Ended
September 30,
2010
|
From April 30,
2009 (Inception)
Through
September 30,
2009
|
From April 30,
2009 (Inception)
Through
September 30,
2010
|
||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net
loss
|
$ | (744,356 | ) | $ | ( 93,105 | ) | $ | ( 867,214 | ) | |||
|
Common
shares issued for services
|
71,000 | - | 71,000 | |||||||||
|
Compensation
cost for stock options granted to executives
|
13,045 | - | 13,045 | |||||||||
|
Loan
initiation fee accrued for notes payable
|
2,000 | - | 2,000 | |||||||||
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||||||
|
Increase
in other receivable
|
(1,622 | ) | - | (1,622 | ) | |||||||
|
Increase
in security deposits
|
- | - | (1,100 | ) | ||||||||
|
Increase
in accrued payroll
|
166,071 | - | 166,071 | |||||||||
|
Increase
in accrued expenses
|
237,030 | 51,250 | 285,811 | |||||||||
|
Net
cash used in operating activities
|
(256,833 | ) | (41,855 | ) | (332,009 | ) | ||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Proceeds
from issuance of common stocks
|
102,000 | 54,540 | 256,540 | |||||||||
|
Proceeds
from loans from related parties
|
100,000 | 5,000 | 105,000 | |||||||||
|
Net
cash provided by financing activities
|
202,000 | 59,540 | 361,540 | |||||||||
|
NET
(DECREASE) INCREASE IN CASH & CASH EQUIVALENTS
|
(54,833 | ) | 17,686 | 29,531 | ||||||||
|
CASH
& CASH EQUIVALENTS, BEGINNING BALANCE
|
84,364 | - | - | |||||||||
|
CASH
& CASH EQUIVALENTS, ENDING BALANCE
|
$ | 29,531 | $ | 17,686 | $ | 29,531 | ||||||
|
SUPPLEMENTAL
DISCLOSURES:
|
||||||||||||
|
Interest
paid
|
$ | - | $ | - | $ | - | ||||||
|
Income
taxes paid
|
$ | 125 | $ | - | $ | 125 | ||||||
The
accompanying notes are an integral part of these financial
statements.
F-3
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
NOTE
1: NATURE OF OPERATIONS
Atossa
Genetics, Inc., (the “Company”) was incorporated on April 30, 2009 in the State
of Delaware. The Company was formed to develop and market the Mammary
Aspirate Specimen Cytology Test, or the MASCT System, a cellular and molecular
diagnostic risk assessment product for the detection of pre-cancerous changes
that could lead to breast cancer. The Company’s fiscal year ends on
December 31st.
Development Stage
Risk
To date,
the Company has not earned any revenues from operations. Accordingly,
the Company’s activities have been accounted for as those of a “Development
Stage Enterprise” as set forth in Accounting Standards Codification (“ASC”) 915
“Development Stage Entities”, which was previously Statement of Financial
Accounting Standards No. 7 (“SFAS 7”). Among the disclosures required
by ASC 915 are that the Company’s financial statements be identified as those of
a development stage company, and that the statements of operations,
stockholders’ equity and cash flows disclose activity since the date of the
Company’s inception.
Since its
inception, the Company has been dependent upon the receipt of capital investment
to fund its continuing activities. In addition to the normal risks
associated with a new business venture, there can be no assurance that the
Company’s business plan will be successfully executed. The Company’s
ability to execute its business plan will depend on its ability to obtain
additional financing and achieve a profitable level of
operations. There can be no assurance that sufficient financing will
be obtained. Further, the Company cannot give any assurance that it
will generate substantial revenues or that its business operations will prove to
be profitable.
NOTE
2: GOING CONCERN
The
Company’s financial statements are prepared using generally accepted accounting
principles in the United States of America applicable to a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company has not yet established an
ongoing source of revenues sufficient to cover its operating costs and allow it
to continue as a going concern. The ability of the Company to
continue as a going concern is dependent on the Company obtaining adequate
capital to fund operating losses until it becomes profitable. If the
Company is unable to obtain adequate capital, it could be forced to cease
operations. The accompanying financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
Management’s Plan to
Continue as a Going Concern
In order
to continue as a going concern, the Company will need, among other things,
additional capital resources. Management’s plans to obtain such resources for
the Company include (1) obtaining capital from the sale of its securities, (2)
sales of the MASCT System and (3) short-term borrowings from stockholders or
other related party(ies) when needed. However, management cannot provide any
assurance that the Company will be successful in accomplishing any of its
plans.
F-4
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
The
ability of the Company to continue as a going concern is dependent upon its
ability to successfully accomplish the plans described in the preceding
paragraph and eventually to secure other sources of financing and attain
profitable operations.
NOTE
3: SUMMARY OF ACCOUNTING POLICIES
Revenue
Recognition:
Although
the Company has yet to generate any revenues, it expects that it will recognize
product and service revenue when the following fundamental criteria are met: (i)
persuasive evidence of an arrangement exists, (ii) delivery has occurred or the
service has been performed, (iii) the Company’s price to the customer is fixed
or determinable and (iv) collection of the resulting accounts receivable is
reasonably assured. The Company will recognize revenue for product
sales upon transfer of title to the customer. The Company will
recognize revenue for services upon performance of the
service. Customer purchase orders and/or contracts will generally be
used to determine the existence of an arrangement. Shipping documents
and the completion of any customer acceptance requirements, when applicable,
will be used to verify product delivery or that services have been
rendered. The Company will assess whether a price is fixed or
determinable based upon the payment terms associated with the transaction and
whether the sales price is subject to refund or adjustment. The Company will
record reductions to revenue for estimated product returns and pricing
adjustments in the same period that the related revenue is
recorded. These estimates will be based on industry-based historical
data, historical sales returns, if any, analysis of credit memo data, and other
factors known at the time.
Interim
Financial Statements:
The
unaudited financial statements of the Company have been prepared in accordance
with U.S. generally accepted accounting principles for interim financial
information. Accordingly, they do not include all the information
and footnotes
required by accounting principles generally accepted in the United States of
America for annual audited financial statements. However, the
information included in these interim financial statements reflects all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for the fair presentation of the financial
position and the results of operations of the Company. Results shown
for interim periods are not necessarily indicative of the results to be obtained
for a full year. These interim financial statements should be read in
conjunction with the Company’s audited financial statements as of December 31,
2009 and related notes included therein.
Cash
and Cash Equivalents:
Cash and
cash equivalents include cash and all highly liquid instruments with original
maturities of three months or less.
Use
of Estimates:
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Accordingly, actual results could differ
from those estimates.
F-5
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
Research
and Development Expenses:
Research
and development costs are generally expensed as incurred. The
Company’s research and development expenses consist of costs incurred for
internal and external research and development.
Share
Based Payments:
In
December 2004, the Financial Accounting Standard Board, or the FASB, issued the
Statement of Financial Accounting Standards, or SFAS, No. 123(R), “Share-Based
Payment”, which replaces SFAS No. 123 and supersedes APB Opinion No.
25. SFAS No. 123(R) is now included in the FASB’s ASC Topic 718,
“Compensation – Stock Compensation.” Under SFAS No. 123(R), companies
are required to measure the compensation costs of share-based compensation
arrangements based on the grant-date fair value and recognize the costs in the
financial statements over the period during which employees or independent
contractors are required to provide services. Share-based
compensation arrangements include stock options and warrants, restricted share
plans, performance-based awards, share appreciation rights and employee share
purchase plans. In March 2005, the SEC issued Staff Accounting
Bulletin No. 107, or SAB 107, which expresses views of the staff regarding the
interaction between SFAS No. 123(R) and certain SEC rules and regulations and
provides the staff’s views regarding the valuation of share-based payment
arrangements for public companies. SFAS No. 123(R) permits public
companies to adopt its requirements using one of two methods. On
April 14, 2005, the SEC adopted a new rule amending the compliance dates for
SFAS No. 123(R). Companies may elect to apply this statement either
prospectively, or on a modified version of retrospective application under which
financial statements for prior periods are adjusted on a basis consistent with
the pro forma disclosures required for those periods under SFAS No.
123.
The
Company has fully adopted the provisions of FASB ASC 718 and related
interpretations as provided by SAB 107. As such, compensation cost is
measured on the date of grant as the fair value of the share-based
payments. Such compensation amounts, if any, are amortized over the
respective vesting periods of the option grant.
Recently
Issued Accounting Pronouncements:
The
Company has adopted all recently issued accounting pronouncements that
management believes to be applicable to the Company. The adoption of
these accounting pronouncements, including those not yet effective, is not
anticipated to have a material effect on the financial position or results of
operations of the Company.
NOTE
4: STOCKHOLDERS’ EQUITY
The
Company is authorized to issue a total of 85,000,000 shares of stock consisting
of 75,000,000 shares of Common Stock, par value $.001 per share, and 10,000,000
shares of Preferred Stock, par value $.001 per share.
Reverse
Stock-Split
On
September 28, 2010, the Board of Directors approved a 1-for-2.26332 reverse
share split for all issued and outstanding shares of Common Stock, with no
change to the par value of the common stock.
F-6
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
Prior Issuances of Common
Stock
On April
30, 2009 (inception), the Company issued 1,767,315 shares (or 4,000,000 shares
prior to the reverse stock-split on September 28, 2010) to Ensisheim Partners
LLC, a related party to the Company through common ownership, for cash in the
amount of $24,000, or $.014 per share (or $.006 per share prior to the reverse
stock-split on September 28, 2010); 1,325,487 shares (or 3,000,000 shares prior
to the reverse stock-split on September 28, 2010) to Manistee Ventures LLC, a
related party to the Company through common ownership, for cash in the amount of
$18,000, or $.014 per share (or $.006 per share prior to the reverse stock-split
on September 28, 2010); and 883,658 shares (or 2,000,000 shares prior to the
reverse stock-split on September 28, 2010) to the Chairman, CEO and President of
the Company at that time for cash in the amount of $12,000, or $.014 per share
(or $.006 per share prior to the reverse stock-split on September 28,
2010).
On July
28, 2009, the Company issued 39,765 shares (or 90,000 shares prior to the
reverse stock-split on September 28, 2010) to a director of the Company for cash
in the amount of $540, or $.014 per share (or $.006 per share prior to the
reverse stock-split on September 28, 2010).
On
December 28, 2009, the Company issued 883,658 shares (or 2,000,000 shares prior
to the reverse stock-split on September 28, 2010) to Ensisheim Partners LLC for
cash in the amount of $100,000, or $.11 per share (or $.05 per share prior to
the reverse stock-split on September 28, 2010).
On
January 21, 2010, the Company issued 865,984 shares (or 1,960,000 shares prior
to the reverse stock-split on September 28, 2010) to forty-four (44) investors
for cash in the amount of $98,000, or .11 per share (or $.05 per share prior to
the reverse stock-split on September 28, 2010).
On
January 21, 2010, the Company issued 132,549 shares (or 300,000 shares prior to
the reverse stock-split on September 28, 2010) to a servicer for effecting
transactions intended to cause the Company to become a public company and to
have its securities traded in the United States. The shares were
issued at a value of $15,000, or $.11 per share (or $.05 per share prior to the
reverse stock-split on September 28, 2010), the same price as the issuance of
the 865,984 shares (or 1,960,000 shares prior to the reverse stock-split on
September 28, 2010) for cash on the same date.
On
January 21, 2010, the Company issued an additional 53,019 shares (or 120,000
shares prior to the reverse stock-split on September 28, 2010) to a shareholder
who acquired 13,255 shares (or 30,000 shares prior to the reverse stock-split on
September 28, 2010) for cash on the same date as one of the forty-four (44)
investors. Those shares were issued to the shareholder for services
to be performed, including investor relations, media relations, and corporate
communications. Those shares were issued at a value of $6,000, or
$.11 per share (or $.05 per share prior to the reverse stock-split on September
28, 2010), the same price as the issuance of the 865,984 shares (or 1,960,000
shares prior to the reverse stock-split on September 28, 2010) for cash on the
same date.
On
January 23, 2010, the Company issued 35,346 shares (or 80,000 shares prior to
the reverse stock-split on September 28, 2010) to an investor for cash in the
amount of $4,000, or $.11 per share (or $.05 per share prior to the reverse
stock-split on September 28, 2010).
F-7
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
On April
27, 2010, the Company issued 13,255 shares (or 30,000 shares prior to the
reverse stock-split on September 28, 2010) at $3.77 per share (or $1.67 per
share prior to the reverse stock-split on September 28, 2010) to a service
provider for website development services pursuant to an original agreement
between the Company and the web site developer executed on December 14, 2009,
where it was agreed at that time $50,000 or 30,000 shares of common stock would
be issued to the developer in exchange for his services.
Letter of Intent for
Proposed Initial Public Offering
On May
25, 2010, the Company executed a Letter of Intent with Dawson James Securities,
Inc. relating to a proposed public initial public offering of the Company’s
securities (the “Letter Agreement”). Pursuant to the Letter
Agreement, the Company paid a $25,000 deposit upon signing for out-of-pocket
expenses and will reimburse Dawson James for up to $150,000 in expenses incurred
in connection with the offering. If the offering is successful,
Dawson James will receive compensation in an amount equal to 7% of the gross
proceeds received by the Company in the offering, plus an expense allowance of
3% of the gross proceeds. Dawson James will also receive a warrant to
purchase Units equal to 15% of the total Units sold in the offering, exercisable
at 110% of the public offering price of the Units.
Stock Option and Incentive
Plan
On
September 28, 2010, the Board of Directors approved the adoption of the 2010
Stock Option and Incentive Plan, or the 2010 Plan, subject to stockholder
approval, to provide for the grant of equity-based awards to employees,
officers, non-employee directors and other key persons providing services to the
Company. Awards of incentive options may be granted under the 2010
Plan until September 2020. No other awards may be granted under the
2010 Plan after the date that is 10 years from the date of stockholder
approval. An aggregate of 1,000,000 shares (or 2,263,320 shares prior
to the reverse stock-split on September 28, 2010) are reserved for issuance in
connection with awards granted under the 2010 Plan, such number of shares to be
subject to adjustment as provided in the plan and in any award agreements
entered into by the Company under the plan, and upon the exercise or conversion
of any awards granted under the plan. As of September 30, 2010, no
award agreement or award had been entered into or granted by the Company under
the plan.
NOTE
5: INCOME TAXES
The
Company accounts for income taxes as outlined in ASC 740, “Income Taxes”, which
was previously Statement of Financial Accounting Standards No. 109, “Accounting
for Income Taxes” (“SFAS 109”). Under the asset and liability method
of SFAS 109, deferred income tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. A valuation
allowance is provided for the amount of deferred tax assets that, based on
available evidence, are not expected to be realized.
The
provision for income taxes differs from the amounts which would be provided by
applying the statutory federal income tax rate of 34% to the net loss before
provision for income taxes for the following reasons:
F-8
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
|
Nine Month
Period Ended
September 30,
2010
|
From April 30,
2009 (Inception)
Through
September 30,
2009
|
From April 30,
2009 (Inception)
Through
September 30,
2010
|
||||||||||
|
Income
tax benefit at statutory rate (34%)
|
$ | (251,277 | ) | $ | (31,656 | ) | $ | (292,937 | ) | |||
|
Valuation
allowance
|
251,277 | 31,656 | 292,937 | |||||||||
|
Delaware
state tax
|
125 | - | 125 | |||||||||
|
Income
taxes
|
$ | 125 | $ | - | $ | 125 | ||||||
The tax
effect of temporary difference that gave rise to the Company’s deferred tax
asset as of September 30, 2010 and December 31, 2009 is as follows:
|
September 30,
2010
|
December 31,
2009
|
|||||||
|
NOL
carryover
|
$ | 292,937 | $ | 46,871 | ||||
|
Valuation
allowance
|
(292,937 | ) | (46,871 | ) | ||||
|
Net
deferred tax asset
|
$ | - | $ | - | ||||
NOTE
6: CONCENTRATION OF CREDIT RISK
Financial
instruments that potentially subject the Company to concentration of credit risk
consist principally of cash deposits. Accounts at each institution
are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to
$250,000. At June 30, 2010 and December 31, 2009, the Company had no
amounts in excess of the FDIC insured limit.
NOTE
7: RELATED PARTY TRANSACTIONS
Loans from
Officer
The
Company had borrowed $5,000 as of December 31, 2009 from its Chairman of the
Board and Chief Executive Officer. This amount was borrowed on May
26, 2009 as a short-term, unsecured loan via verbal agreement and did not bear
any interest. Commencing June 30, 2010, the loan was converted into a
written Promissory Note bearing an annual interest rate of 10%, with a maturity
date of December 31, 2010.
On
June 30, 2010, the Company borrowed an additional $100,000 from its Chairman of
the Board and Chief Executive Officer pursuant to a promissory
note. The note bears a 10% interest rate per annum and carries a
$4,000 loan origination fee which is accreted to the loan balance throughout the
life of the loan. The loan under the note was funded to the Company
on July 12, 2010. This note
matured and became callable on December 31, 2010. To date, Dr. Quay has not
demanded repayment of this note.
F-9
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
Exclusive License
Agreement
On July
27, 2009, the Company entered into an exclusive license agreement with Ensisheim
Partners LLC (“Ensisheim”), an entity solely owned by the Chairman and Chief
Executive Officer of the Company and the Chief Technology Officer of the
Company, who is also the Company’s Chairman and CEO’s wife. Pursuant
to that agreement, Ensisheim granted the Company an exclusive, worldwide,
perpetual, irrevocable, royalty-bearing, license to the MASCT System, with the
right to grant and authorize sublicenses. The license agreement
provided that the Company would pay Ensisheim a royalty equal to 2% of net sales
revenues, with a minimum royalty of $12,500 per fiscal quarter during the term
of the agreement, which would have increased to a minimum royalty of $25,000 per
fiscal quarter beginning in the quarter in which the first commercial sale of a
licensed product would have taken place. As of December 31, 2009, a
total of $12,500 was payable to Ensisheim under the minimum royalty
provisions. From inception through September 30, 2010, the Company
had incurred $16,250 in patent-related expenses under the license agreement with
Ensisheim.
On June
17, 2010, the Company and Ensisheim entered into an Assignment Agreement,
whereby Ensisheim assigned to the Company all rights to the patents and patent
applications underlying the MASCT System. Pursuant to the assignment,
the Company will have all responsibility for prosecution, maintenance, and
enforcement and will indemnify Ensisheim from any and all claims against the
patent estate. Ensisheim retained no residual rights with respect to
the patents and patent applications. In conjunction with the
assignment, the Company terminated the exclusive license agreement between the
Company and Ensisheim dated July 27, 2009. As a result of the
termination, the Company has no further obligations with respect to royalty
payments to Ensisheim due under the old licensing agreement. As a
result, the $12,500 of patent royalty payable to Ensisheim recorded as accrued
royalty payable at December 31, 2009 has been reversed through royalty expense
during the second quarter of 2010.
Commercial Lease
Agreement
On
December 24, 2009, the Company entered into a commercial lease agreement with
Ensisheim for office space located in Seattle, Washington. The lease
provided for annual rent of $13,200, plus applicable sales tax. From
inception through December 31, 2009, the Company incurred $248 of rent expense
for the lease. As of December 31, 2009, security deposit for the
lease amounted to $1,100. For the period of January 1, 2010 through
June 30, 2010, the Company incurred $6,600 of rent expense for the
lease. On July 15, 2010 the Company and Ensisheim terminated the
lease, effective July 1, 2010 and the Company commenced use of the facility rent
free.
On
September 29, 2010, the Company entered into a commercial lease agreement with
CompleGen, Inc. for laboratory space located in Seattle,
Washington. The lease provides for monthly rent of $3,657.05 and a
security deposit of $3,657.50. The lease terms are from September 29,
2010 through March 31, 2011, at which time the lease will convert to month to
month unless two months written notice of the intent to terminate the agreement
is given prior.
Executive
Compensation
On May
19, 2010, the Company entered into employment agreements with three executives,
including its Chief Executive Officer, its former President, and its Chief
Technology Officer. The annual base salaries under each agreement
were calculated based on combined consideration of the success of capital raise
and the operating results of the Company, and capped at $360,000, $350,000, and
$250,000, respectively for the three executives.
F-10
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
On July
22, 2010, in connection with the resignation and departure of Robert L. Kelly,
the President and a director, the Company entered into a consulting agreement
with a limited liability company controlled by Mr. Kelly. Under the
agreement, the Company was to receive consulting services relating to capital
raising and investor relations. The agreement was terminated by the
Company
in September 2010, through which time a total of $30,000 consulting
expense had been paid.
On July
22, 2010, the Company restated and amended the employment agreements with its
CEO and CTO. The agreements modified the base annual salary amounts
to $250,000 and $200,000, respectively, effective retroactively to May 19,
2010. These salaries were accrued and amounted to $166,071 as of
September 30, 2010.
Share-Based
Compensation
The
amended employment agreement with the CEO granted options to purchase 250,000
shares (or 565,830 shares prior to the reverse stock-split on September 28,
2010) at a price of $5.00 per share, in consideration of their services to the
Company. Of these options, 25% (or 62,500 shares) will vest on
December 31, 2010 with the remaining 75% (or 187,500 shares) will vest in equal
quarterly installments over the next three years so long as the executives
remain employed with the company.
The
amended employment agreement with the CTO granted options to purchase 100,000
shares (or 226,332 shares prior to the reverse stock-split on September 28,
2010) at a price of $5.00 per share in consideration of their services to the
Company. Of these options, 25% (or 25,000 shares) will vest on
December 31, 2010 with the remaining 75% (or 75,000 shares) will vest in equal
quarterly installments over the next three years so long as the executives
remain employed with the company.
In
accordance with the guidance provided in ASC Topic 718, Stock Compensation
(formerly SFAS 123R), the compensation costs associated with these options are
recognized, based on the grant-date fair values of these options, over the
requisite service period, or vesting period. Accordingly, the Company
recognized a compensation expense of $13,045 for the nine-month period ended
September 30, 2010.
The
Company estimates the fair value of these options using the Black-Scholes-Merton
option pricing model based on the following weighted-average
assumptions:
|
Date of grant
|
July 22, 2010
|
|||
|
Fair
value of common stock on date of grant
|
$ | 2.756 | ||
|
Exercise
price of the options
|
$ | 5.00 | ||
|
Expected
life of the options (years)
|
3.33 | |||
|
Dividend
yield
|
- | |||
|
Expected
volatility
|
58.59 | % | ||
|
Risk-free
interest rate
|
1.03 | % | ||
|
Weighted-average
fair value of the options (per unit)
|
$ | 0.6744 | ||
Management
determined that it is not possible to reasonably estimate the grant-date fair
value of the options because the Company’s stock had not been publicly traded as
of the date of grant. Accordingly, as required by ASC 718-10-30, the
Company has accounted for the options using the calculated value
method. The Company identified seven public entities in the similar
industry for which share price information was available, and considered the
historical volatilities of those public entities’ share prices in calculating
the expected volatility appropriate to the Company.
F-11
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
The
risk-free rate of return reflects the interest rate for United States Treasury
Note with similar time-to-maturity to that of the options.
Options
issued and outstanding as of September 30, 2010 and their activities during the
period are as follows:
|
Number of
Underlying
Shares
|
Weighted-
Average
Exercise Price
Per Share
|
Weighted-
Average
Contractual
Life
Remaining in
Years
|
||||||||||
|
Outstanding
as of January 1, 2010
|
- | - | ||||||||||
|
Granted
|
350,000 | $ | 5.00 | |||||||||
|
Expired
|
- | - | ||||||||||
|
Forfeited
|
- | - | ||||||||||
|
Outstanding
as of September 30, 2010
|
350,000 | $ | 5.00 | 3.25 | ||||||||
|
Exercisable
as of September 30, 2010
|
- | - | - | |||||||||
NOTE
8: SUBSEQUENT EVENTS
On
November 3, 2010, the Company issued a promissory note to its Chairman of the
Board and Chief Executive Officer in connection with a $500,000 line of credit
extended to the Company by the officer. Pursuant to the terms of the
note, all principal amounts borrowed under the line of credit bear interest at a
rate of 10% per annum, and all principal and accrued interest will be due and
payable in full on December 31, 2011. To date, the Company has
borrowed $30,000 under the line of credit.
F-12
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Atossa
Genetics, Inc.:
We have
audited the accompanying balance sheet of Atossa Genetics, Inc. (a development
stage company) (the “Company”) as of December 31, 2009, and the related
statement of operations, changes in stockholders' equity, and cash flows for the
period from April 30, 2009 (inception) through December 31,
2009. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Atossa Genetics, Inc. (a
development stage company) as of December 31, 2009 and the results of their
operations and their cash flows for the period from April 30, 2009 (inception)
through December 31, 2009 in conformity with accounting principles generally
accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As described in Note 2 of the
financial statements, the Company has been in the development stage since its
inception (April 30, 2009) and continues to incur expenses. The
Company’s viability is dependent upon its ability to obtain future financing and
the success of its future operations. These matters raise substantial
doubt about the Company’s ability to continue as a going
concern. Management’s plan in regard to these matters is also
described in Note 2 to the financial statements. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ KCCW
Accountancy Corp.
Diamond
Bar, California
February
20, 2010
F-13
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
BALANCE
SHEET
December
31, 2009
|
Assets
|
||||
|
Current
Assets
|
||||
|
Cash
and cash equivalents
|
$ | 84,364 | ||
|
Total
Current Assets
|
84,364 | |||
|
Other
Assets
|
||||
|
Security
deposit - related parties
|
1,100 | |||
|
Total
Other Assets
|
1,100 | |||
|
Total
Assets
|
$ | 85,464 | ||
|
Liabilities and Stockholders'
Equity
|
||||
|
Current
Liabilities
|
||||
|
Accrued
expenses
|
$ | 36,281 | ||
|
Accrued
expenses - related parties
|
12,500 | |||
|
Loan
from officer
|
5,000 | |||
|
Total
Current Liabilities
|
53,781 | |||
|
Stockholders'
Equity
|
||||
|
Preferred
stock - $.001 par value; 10,000,000 shares authorized, 0
shares
|
||||
|
issued
and outstanding
|
- | |||
|
Common
stock - $.001 par value; 75,000,000 shares authorized,
|
||||
|
4,899,882
shares issued and outstanding
|
4,900 | |||
|
Additional
paid-in capital
|
149,640 | |||
|
Accumulated
deficit
|
(122,857 | ) | ||
|
Total
Stockholders' Equity
|
31,683 | |||
|
Total
Liabilities and Stockholders' Equity
|
$ | 85,464 | ||
The
accompanying notes are an integral part of financial
statements.
F-14
(A
DEVELOPMENT STAGE COMPANY)
STATEMENT
OF OPERATIONS
From
April 30, 2009 (Inception) through December 31, 2009
|
Net
Revenue
|
$ | - | ||
|
General
and Administrative Expenses
|
||||
|
Legal
and professional expenses
|
88,522 | |||
|
Other
general and administrative expenses
|
13,085 | |||
|
Total
general, selling and administrative expenses
|
101,607 | |||
|
Research
and Development Expenses
|
21,250 | |||
|
Net
Loss before Income Taxes
|
(122,857 | ) | ||
|
Income
Tax Expense
|
- | |||
|
Net
Loss
|
$ | (122,857 | ) | |
|
Loss
per common share - basic and diluted
|
$ | (0.03 | ) | |
|
Weighted
average shares outstanding, basic and diluted
|
4,037,847 |
The
accompanying notes are an integral part of financial
statements.
F-15
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
STATEMENT
OF STOCKHOLDERS' EQUITY
|
Common Stock
|
Additional
|
Total
|
||||||||||||||||||
|
Paid-in
|
Accumulated
|
Stockholders'
|
||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
||||||||||||||||
|
Balance
at April 30, 2009, Founders' shares
|
3,976,459 | $ | 3,976 | $ | 50,024 | $ | - | $ | 54,000 | |||||||||||
|
Issuance
of shares for cash, July 28, 2009
|
39,765 | 40 | 500 | - | 540 | |||||||||||||||
|
Issuance
of shares for cash, December 28, 2009
|
883,658 | 884 | 99,116 | - | 100,000 | |||||||||||||||
|
Net
loss for the period ended December 31, 2009
|
- | - | - | (122,857 | ) | (122,857 | ) | |||||||||||||
|
Balance
at December 31, 2009
|
4,899,882 | $ | 4,900 | $ | 149,640 | $ | (122,857 | ) | $ | 31,683 | ||||||||||
The
accompanying notes are an integral part of financial
statements.
F-16
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
STATEMENT
OF CASH FLOWS
From
April 30, 2009 (Inception) through December 31, 2009
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||
|
Net
loss
|
$ | (122,857 | ) | |
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||
|
Increase
in security deposits
|
(1,100 | ) | ||
|
Increase
in accrued expenses
|
48,781 | |||
|
Net
cash used in operating activities
|
(75,176 | ) | ||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||
|
Proceeds
from issuance of common stocks
|
154,540 | |||
|
Proceeds
from loans from related parties
|
5,000 | |||
|
Net
cash provided by financing activities
|
159,540 | |||
|
NET
DECREASE IN CASH & CASH EQUIVALENTS
|
84,364 | |||
|
CASH
& CASH EQUIVALENTS, BEGINNING BALANCE
|
- | |||
|
CASH
& CASH EQUIVALENTS, ENDING BALANCE
|
$ | 84,364 | ||
|
SUPPLEMENTAL
DISCLOSURES:
|
||||
|
Interest
paid
|
$ | - | ||
|
Income
taxes paid
|
$ | - | ||
The
accompanying notes are an integral part of financial
statements.
F-17
NOTE
1: NATURE OF OPERATIONS
Atossa
Genetics, Inc., (the “Company”) was incorporated on April 30, 2009 in the State
of Delaware. The Company specializes in the molecular diagnostic
industry to develop and market a patented, FDA-approved cellular and molecular
diagnostic risk assessment product for breast cancer, the Mammary Aspirate
Cytology Specimen Test (MASCT) system. The Company’s fiscal
year ends on December 31st.
Development Stage
Risk
The
Company has not earned revenues from operations. Accordingly, the
Company’s activities have been accounted for as those of a “Development Stage
Enterprise” as set forth in Accounting Standards Codification (“ASC”) 915
“Development Stage Entities”, which was previously Statement of Financial
Accounting Standards No. 7 (“SFAS 7”). Among the disclosures required
by ASC 915 are that the Company’s financial statements be identified as those of
a development stage company, and that the statements of operations,
stockholders’ equity and cash flows disclose activity since the date of the
Company’s inception.
Since its
inception, the Company has been dependent upon the receipt of capital investment
to fund its continuing activities. In addition to the normal risks
associated with a new business venture, there can be no assurance that the
Company’s business plan will be successfully executed. Our ability to
execute our business plan will depend on our ability to obtain additional
financing and achieve a profitable level of operations. There can be
no assurance that sufficient financing will be obtained. Further, we
cannot give any assurance that we will generate substantial revenues or that our
business operations will prove to be profitable.
NOTE
2: GOING CONCERN
The
Company’s financial statements are prepared using generally accepted accounting
principles in the United States of America applicable to a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company has not yet established an
ongoing source of revenues sufficient to cover its operating costs and allow it
to continue as a going concern. The ability of the Company to
continue as a going concern is dependent on the Company obtaining adequate
capital to fund operating losses until it becomes profitable. If the
Company is unable to obtain adequate capital, it could be forced to cease
operations. The accompanying financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
Management’s Plan to
Continue as a Going Concern
In order
to continue as a going concern, the Company will need, among other things,
additional capital resources. Management’s plans to obtain such
resources for the Company include (1) obtaining capital from the sale of its
securities, (2) the sale of the MASCT Systems, and (3) short-term borrowings
from shareholders or related party when needed. However, management
cannot provide any assurance that the Company will be successful in
accomplishing any of its plans.
The
ability of the Company to continue as a going concern is dependent upon its
ability to successfully accomplish the plans described in the preceding
paragraph and eventually secure other sources of financing and attain profitable
operations.
NOTE
3: SUMMARY OF ACCOUNTING POLICIES
Basis
of Presentation:
The
accompanying financial statements have been prepared by the
Company. The Company’s financial statements are prepared in
accordance with generally accepted accounting principles in the United States of
America (“US GAAP”).
F-18
Cash
and Cash Equivalents:
Cash and
cash equivalents include cash and all highly liquid instruments with original
maturities of three months or less.
Use
of Estimates:
The
preparation of financial statements in conformity with generally accepted
accounting principles in the Unites States of America requires management to
make estimates and assumptions 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 revenue and expenses during
the reporting period. Accordingly, actual results could differ from
those estimates.
Research
and Development Expenses:
Research
and Development costs are generally expensed as incurred. The
Company’s Research and Development expenses consist of costs incurred for
internal and external research and development.
Share
Based Payments:
In
December, 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”, which
replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No.
123(R) is now included in ASC 718 “Compensation – Stock
Compensation”. Under SFAS No. 123(R), companies are required to
measure the compensation costs of share-based compensation arrangements based on
the grant-date fair value and recognize the costs in the financial statements
over the period during which employees or independent contractors are required
to provide services. Share-based compensation arrangements include
stock options and warrants, restricted share plans, performance-based awards,
share appreciation rights and employee share purchase plans. In
March, 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) which
expresses views of the staff regarding the interaction between SFAS No. 123(R)
and certain SEC rules and regulations and provides the staff’s views regarding
the valuation of share-based payment arrangements for public
companies. SFAS No. 123(R) permits public companies to adopt its
requirements using one of two methods. On April 14, 2005, the SEC
adopted a new rule amending the compliance dates for SFAS No.
123(R). Companies may elect to apply this statement either
prospectively, or on a modified version of retrospective application under which
financial statements for prior periods are adjusted on a basis consistent with
the pro forma disclosures required for those periods under SFAS No.
123.
The
Company has fully adopted the provisions of SFAS No. 123(R) and related
interpretations as provided by SAB 107. As such, compensation cost is
measured on the date of grant as the fair value of the share-based
payments. Such compensation amounts, if any, are amortized over the
respective vesting periods of the option grant.
Recently
Issued Accounting Pronouncements:
The
Company has adopted all recently issued accounting
pronouncements. The adoption of the accounting pronouncements,
including those not yet effective, is not anticipated to have a material effect
on the financial position or results of operations of the
Company.
NOTE
4: STOCKHOLDERS’ EQUITY
The
Company is authorized to issue a total of 85,000,000 shares of stock consisting
of 75,000,000 shares of Common Stock, par value $.001 per share, and 10,000,000
shares of Preferred Stock, par value $.001 per
share.
On April
30, 2009 (inception), the Company issued 1,767,315 shares (or 4,000,000 before
giving effect to the September 2010 reverse stock split) to Ensisheim Partners
LLC, a related party to the Company through common ownership, for cash in the
amount of $24,000, or $.014 per share (or $.006 per share before giving effect
to the September 2010 reverse stock split); 1,325,487 shares (or 3,000,000
shares before giving effect to the September 2010 reverse stock split) to
Manistee Ventures LLC, a related party to the Company through common ownership,
for cash in the amount of $18,000, or $.014 per share (or $.006 per share before
giving effect to the September 2010 reverse stock split); and 883,658 shares (or
2,000,000 shares before giving effect to the September 2010 reverse stock split)
to the Chairman, CEO and President of the Company at that time for cash in the
amount of $12,000, or $.014 per share (or $.006 per share before giving effect
to the September 2010 reverse stock split).
F-19
On July
28, 2009, the Company issued 39,765 shares (or 90,000 shares before giving
effect to the September 2010 reverse stock split) to a director of the Company
for cash in the amount of $540, or $.014 per share (or $.006 per share before
giving effect to the September 2010 reverse stock split).
On
December 28, 2009, the Company issued 883,658 shares (or 2,000,000 shares before
giving effect to the September 2010 reverse stock split) to Ensisheim Partners
LLC for cash in the amount of $100,000, or $.11 per share (or $.05 per share
before giving effect to the September 2010 reverse stock
split).
NOTE
5: INCOME TAXES
The
Company accounts for income taxes as outlined in ASC 740, “Income Taxes”, which
was previously Statement of Financial Accounting Standards No. 109, “Accounting
for Income Taxes” (“SFAS 109”). Under the asset and liability method
of SFAS 109, deferred income tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. A valuation
allowance is provided for the amount of deferred tax assets that, based on
available evidence, are not expected to be realized.
The
provision for income taxes differs from the amounts which would be provided by
applying the statutory federal income tax rate of 34% to the net loss before
provision for income taxes for the following reasons:
|
December 31,
2009
|
||||
|
Income
tax benefit at statutory rate (34%)
|
$ | (46,871 | ) | |
|
Valuation
allowance
|
46,871 | |||
|
Net
income tax benefit
|
$ | - | ||
The tax
effect of temporary difference that gave rise to the Company’s deferred tax
asset as of December 31, 2009 is as follows:
|
December 31,
2009
|
||||
|
NOL
carryover
|
$ | 46,871 | ||
|
Valuation
allowance
|
(46,871 | ) | ||
|
Net
deferred tax asset
|
$ | - | ||
NOTE
6: CONCENTRATION OF CREDIT RISK
Financial
instruments that potentially subject the Company to concentration of credit risk
consist principally of cash deposits. Accounts at each institution
are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to
$250,000. At December 31, 2009, the Company had no amounts in excess
of FDIC insured limit.
NOTE
7: RELATED PARTY TRANSACTIONS
The
parties primarily refer to the shareholders and officers of the Company and
corporate entities related to the Company through common
ownership.
F-20
Loan from
Officer
Loan from
officer amounted to $5,000 as of December 31, 2009. The loan was
borrowed from the CEO and President of the Company on May 26, 2009 for
short-term with verbal agreement, unsecured, and bearing no
interest.
Exclusive License
Agreement
On July
27, 2009, the Company entered into an exclusive license agreement with Ensisheim
Partners LLC (“Ensisheim”), solely owned by the CEO and President of the Company
and the COO of the Company, the Company’s CEO’s
wife. Pursuant to the agreement, Ensisheim grants to the Company an
exclusive, worldwide, perpetual, irrevocable, royalty-bearing, license, with the
right to grant and authorize sublicenses. The Company will pay
Ensisheim a royalty equal to two percent (2%) of net sales revenues derived from
such licensing, with a minimum royalty of $12,500 per fiscal quarter during the
term of this agreement, which will increase to a minimum royalty of $25,000 per
fiscal quarter beginning in the quarter in which the first commercial sale of a
licensed product takes place. This agreement will continue in effect,
on a country-by-country basis, until the date on which no further licensing
royalty would be due in such country, unless terminated earlier in accordance
with the terms of this agreement. From inception through December 31,
2009, the Company incurred $16,250 of patent royalty with Ensisheim which was
recorded as research and development expense. As of December 31,
2009, $12,500 of patent royalty payable to Ensisheim was recorded as accrued
expense whereas $4,000 was paid during the period from inception through
December 31, 2009.
Commercial Lease
Agreement
On
December 24, 2009, the Company entered into a commercial lease agreement with
Ensisheim for an office space located in Seattle, Washington. The
term of the lease shall terminate on December 31, 2010, with annual rent of
$13,200 plus applicable sales tax. From inception through December
31, 2009, the Company incurred $248 of rent expense for the lease. As
of December 31, 2009, security deposit for the lease amounted to
$1,100.
NOTE
8: SUBSEQUENT EVENTS
On
January 21, 2010, the Company issued 865,984 shares (or 1,960,000 shares before
giving effect to the September 2010 reverse stock split) to forty-four (44)
investors for cash in the amount of $98,000, or $0.11 per share (or
$.05 per share before giving effect to the September 2010 reverse stock
split).
On
January 21, 2010, the Company issued 132,549 shares (or 300,000 shares before
giving effect to the September 2010 reverse stock split) to a service provider
for effecting transactions intended to cause the Company to become a public
company and to have its securities traded on a national exchange in the United
States. The shares were issued at a value of $15,000, or $0.11 per
share (or $.05 per share before giving effect to the September 2010 reverse
stock split), the same price as the 865,984 shares (or 1,960,000 shares before
giving effect to the September 2010 reverse stock split) issued for cash on the
same date.
On
January 21, 2010, the Company issued an additional 53,019 shares (or 120,000
shares before giving effect to the September 2010 reverse stock split) to a
shareholder who acquired 13,255 shares (or 30,000 shares before giving effect to
the September 2010 reverse stock split) for cash on the same date as one of the
forty-four (44) investors. Those shares were issued to the
shareholder for services to be performed, including investor relations, media
relations, and corporate communications. Those shares were issued at
a value of $6,000, or $0.11 per share (or $.05 per share before giving effect to
the September 2010 reverse stock split), the same price as the issuance of the
865,984 shares (or 1,960,000 shares before giving effect to the September 2010
reverse stock split) for cash on the same date.
On
January 23, 2010, the Company issued 35,346 shares (or 80,000 shares before
giving effect to the September 2010 reverse stock split) to an investor for cash
in the amount of $4,000, or $0.11 per share (or $.05 per share before giving
effect to the September 2010 reverse stock split).
F-21
3,000,000
Units
PROSPECTUS
DAWSON
JAMES SECURITIES, INC.
______________________,
2011
Until
_______________, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers’ obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PART
II
Item
13. Other Expenses of Issuance and Distribution
The
expenses (other than underwriting discounts and commissions) payable by us in
connection with this offering are as follows:
|
Amount
|
||||
|
SEC
registration fee
|
$ | 1,255 | ||
|
Financial
Industry Regulatory Authority, Inc. fee
|
3,000 | |||
|
NYSE
Amex listing fee
|
* | |||
|
Accountants’
fees and expenses
|
* | |||
|
Legal
fees and expenses
|
250,000 | |||
|
Transfer
Agent’s fees and expenses
|
25,000 | |||
|
Printing
and engraving expenses
|
* | |||
|
Miscellaneous
|
* | |||
|
Total
Expenses
|
$ | * | ||
|
|
*
|
to be completed by
amendment
|
All
expenses are estimated except for the SEC registration fee and the Financial
Industry Regulatory Authority, Inc. fee.
Item
14. Indemnification of Directors and Officers
Section
145 of the Delaware General Corporation Law, or the DGCL, authorizes a
corporation to indemnify its directors and officers against liabilities arising
out of actions, suits and proceedings to which they are made or threatened to be
made a party by reason of the fact that they have served or are currently
serving as a director or officer to a corporation. The indemnity may cover
expenses (including attorneys’ fees) judgments, fines and amounts paid in
settlement actually and reasonably incurred by the director or officer in
connection with any such action, suit or proceeding. Section 145 permits
corporations to pay expenses (including attorneys’ fees) incurred by directors
and officers in advance of the final disposition of such action, suit or
proceeding. In addition, Section 145 provides that a corporation has the power
to purchase and maintain insurance on behalf of its directors and officers
against any liability asserted against them and incurred by them in their
capacity as a director or officer, or arising out of their status as such,
whether or not the corporation would have the power to indemnify the director or
officer against such liability under Section 145.
We have
adopted provisions in our certificate of incorporation and bylaws to be in
effect at the completion of this offering that limit or eliminate the personal
liability of our directors to the fullest extent permitted by the DGCL, as it
now exists or may in the future be amended. Consequently, a director will not be
personally liable to us or our stockholders for monetary damages or breach of
fiduciary duty as a director, except for liability for:
|
|
·
|
any
breach of the director’s duty of loyalty to us or our
stockholders;
|
|
|
·
|
any
act or omission not in good faith or that involves intentional misconduct
or a knowing violation of law;
|
|
|
·
|
any
unlawful payments related to dividends or unlawful stock purchases,
redemptions or other distributions;
or
|
|
|
·
|
any
transaction from which the director derived an improper personal
benefit.
|
These
limitations of liability do not alter director liability under the federal
securities laws and do not affect the availability of equitable remedies such as
an injunction or rescission.
II-1
In
addition, our bylaws to be in effect at the completion of this offering will
provide that:
|
|
·
|
we
will indemnify our directors, officers and, in the discretion of our board
of directors, certain employees to the fullest extent permitted by the
DGCL, as it now exists or may in the future be amended;
and
|
|
|
·
|
we
will advance reasonable expenses, including attorneys’ fees, to our
directors and, in the discretion of our board of directors, to our
officers and certain employees, in connection with legal proceedings
relating to their service for or on behalf of us, subject to limited
exceptions.
|
We will
enter into indemnification agreements with each of our directors and certain of
our executive officers. These agreements provide that we will indemnify each of
these directors and executive officers to the fullest extent permitted by
Delaware law. We will advance expenses, including attorneys’ fees, judgments,
fines and settlement amounts, to each indemnified director, executive officer or
affiliate in connection with any proceeding in which indemnification is
available and we will indemnify our directors and officers for any action or
proceeding arising out of that person’s services as an officer or director
brought on behalf of the Company or in furtherance of our rights.
We also
expect to maintain general liability insurance that covers certain liabilities
of our directors and officers arising out of claims based on acts or omissions
in their capacities as directors or officers, including liabilities under the
Securities Act.
The
underwriting agreement filed as Exhibit 1.1 to this registration statement
provides for indemnification of us and our directors and officers by the
underwriters against certain liabilities under the Securities Act and the
Exchange Act.
Item
15. Recent Sales of Unregistered Securities
The
Company has sold the following securities within the past three years which were
not registered under the Securities Act of 1933:
Pursuant
to an exemption from registration under Section 4(2) of the Securities Act of
1933, as amended, as a transaction by an issuer not involving any public
offering as founder shares in connection with the formation of the Company, the
Company issued 4,899,884 shares of its common stock as follows:
|
Shares
|
Date
|
Consideration
|
|||||||
|
Steven
Quay
|
883,658 |
April
30, 2009
|
$ | 12,000 | |||||
|
Ensisheim
Partners LLC
|
1,767,316 |
April
30, 2009
|
(1)
|
||||||
|
Ensisheim
Partners LLC
|
883,658 |
December
28, 2009
|
$ | 100,000 | |||||
|
Manistee
Ventures, Inc.
|
1,325,487 |
April
30, 2009
|
$ | 18,000 | |||||
|
John
Barnhart
|
39,765 |
July
28, 2009
|
$ | 540 | |||||
(1) The
1,767,316 shares of common stock issued to Ensisheim Partners LLC at the
Company’s inception were issued in consideration for $24,000 in cash and this
entity’s contribution to the Company of intellectual property rights and FDA
marketing authorization for the MASCT System.
In
January 2010, pursuant to an exemption from registration under Rule 504 pursuant
to the Securities Act of 1933 (the “Securities Act”), the Company issued an
aggregate of 901,354 shares of its common stock to 45 investors for aggregate
cash proceeds of $102,000. Of these 45 investors, 13 are accredited
investors and 4 are citizens and residents of Taiwan, Republic of
China.
In
January 2010, the Company issued 185,569 shares in consideration for services
performed by two consultants, with an aggregate value of $21,000. This
offering was exempt from registration under Rule 504 under the Securities
Act.
On April
23, 2010, the Company issued 13,256 shares of common stock for services
performed by a consultant with an aggregate value of $50,000. This
offering was exempt from registration under Section 4(2) of the Securities Act,
as a transaction by an issuer not involving any public
offering.
II-2
Item
16. Exhibits and Financial Statement Schedules.
EXHIBITS
|
1.1*
|
Form
of Underwriting Agreement
|
|
|
3.1+
|
Certificate
of Incorporation, as currently in effect
|
|
|
3.2+
|
Certificate
of Incorporation (to be effective immediately prior to
completion of this offering)
|
|
|
3.3+
|
By-laws,
as currently in effect
|
|
|
3.4+
|
By-laws
(to be effective immediately prior to completion of this
offering)
|
|
|
4.1*
|
Specimen
common stock certificate
|
|
|
4.2*
|
Form
of Warrant Agent Agreement
|
|
|
4.3*
|
Form
of Class A Warrant Certificate
|
|
|
4.4*
|
Form
of Class B Warrant Certificate
|
|
|
4.5*
|
Form
of Unit Certificate
|
|
|
5.1*
|
Opinion
of Goodwin Procter LLP
|
|
|
10.1+
|
License
Agreement with Ensisheim Partners, LLC
|
|
|
10.2+
|
Termination
of Exclusive Patent License Agreement, dated June 17,
2010
|
|
|
10.3#+
|
Amended
and Restated Employment Agreement with Steven Quay
|
|
|
10.4#+
|
Amended
and Restated Employment Agreement with Shu-Chih Chen
|
|
|
10.5*
|
Form
of Indemnification Agreement
|
|
|
10.6#+
|
2010
Stock Option and Incentive Plan
|
|
|
10.7*#
|
Form
of Incentive Stock Option Agreement
|
|
|
10.8*#
|
Form
of Non-Qualified Stock Option Agreement for Employees
|
|
|
10.9*#
|
Form
of Non-Qualified Stock Option Agreement for Non-Employee
Directors
|
|
|
10.10+
|
Form
of Subscription Agreement
|
|
|
10.11+
|
Promissory
Note issued by the Company to Steven Quay on January 2,
2010.
|
|
|
10.12+
|
Promissory
Note issued by the Company to Steven Quay on June 30,
2010.
|
|
|
10.13+
|
Sublease
Agreement with CompleGen, Inc, dated September 29,
2010
|
|
|
10.14*
|
Patent
Assignment Agreement by and between Atossa Genetics, Inc. and Ensisheim
Partners, LLC
|
|
|
10.15*#
|
Form
of Restricted Stock Award Agreement
|
|
|
10.16+
|
Form
of Lock-Up Agreement
|
|
|
10.17+
|
Consulting
Agreement with Christopher Benjamin
|
|
|
10.18
|
Consulting
Agreement with Edward Sauter
|
|
|
10.19+
|
Promissory
Note – Line of Credit issued by the Company to Steven Quay on November 3,
2010.
|
|
| 10.20+ | Prototype Development Proposal and Terms and Conditions, dated July 22, 2010, between the Company and HLB, LLC. | |
|
23.1
|
Consent
of KCCW Accountancy Corp.
|
|
|
23.2*
|
Consent
of Goodwin Procter LLP (filed as part of Exhibit 5.1)
|
|
|
24.1+
|
Power
of Attorney (contained on signature page)
|
|
|
99.1
|
Reserved.
|
|
|
99.2+
|
Consent
of Prospective Director Stephen Galli, M.D.
|
|
|
99.3+
|
|
Consent
of Prospective Director Alexander Cross,
Ph.D.
|
+ Previously filed.
* To be filed by
amendment.
# Indicates management contract or
compensatory plan, contract or agreement.
II-3
Item
17. Undertakings
Request for acceleration of
effective date or filing of registration statement becoming effective upon
filing.
The
undersigned registrant hereby undertakes:
|
1.
|
For
purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4)
or 497(h) under the Securities Act 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,
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.
|
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act 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 Act and will be governed by the final adjudication of
such issue.
II-4
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this Amendment No. 3 to Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized in the City
of Seattle, State of Washington, on January 7, 2011.
|
ATOSSA
GENETICS INC.
|
||
|
By:
|
/s/ Steven C. Quay
|
|
|
Name:
Steven C. Quay, M.D., Ph.D.
|
||
|
Title:
President and Chief Executive
Officer
|
||
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Amendment
No. 3 to Registration Statement on Form S-1 has been signed by the
following persons in the capacities and on the dates indicated.
|
Signature
|
Capacity
|
Date
|
||
|
/s/
Steven C. Quay
|
President,
Chief Executive Officer and
Chairman
of the Board of Directors
|
January
7, 2011
|
||
|
Steven
C. Quay, M.D., Ph.D.
|
(Principal
Executive Officer)
|
|||
|
/s/
Christopher Benjamin
|
Chief
Financial Officer
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January
7, 2011
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||
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Christopher
Benjamin
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(Principal
Financial Officer and Principal Accounting Officer)
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*
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Director
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January
7, 2011
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Shu-Chih
Chen, Ph.D.
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*
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Director
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January
7, 2011
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John
Barnhart
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*By:
/s/ Steven C. Quay
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January
7, 2011
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Steven
C. Quay, M.D., Ph.D.
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||||
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Attorney-in-Fact
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II-5
BUSINESS
CONSULTANT AGREEMENT
This
Business Consultant Agreement ("Agreement") is made effective January 1,
2011.
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BETWEEN:
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Dr. Edward Sauter, MD,
(the "Consultant"), an individual with his main address located
at:
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1812 Belmont Road
Grand
Forks, ND 58201
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AND:
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Atossa Genetics, Inc.
(the "Company"), a company organized and existing under the laws of
the State of Delaware, with its head office located
at:
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4105 E. Madison St., Suite
320
Seattle,
WA 98112
NOW,
THEREFORE, in consideration of the mutual covenants set forth herein and
intending to be legally bound, the parties hereto agree as follows:
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A.
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CONSULTATION
SERVICES
|
The company hereby employs the
consultant as a member of the Scientific Advisory Board to perform the following
services in accordance with the terms and conditions set forth in this
agreement: Provide scientific advice to the board of directors and officers of
the Company; recommend additional qualified individuals to join the SAB, and
participate in meetings of the SAB.
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B.
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TERMS
OF AGREEMENT
|
This
agreement will begin the effective date of this agreement and will end December
31, 2011. Either party may cancel this agreement on 30 days notice to the other
party in writing, by certified mail or personal delivery. This
agreement can be extended on an annual basis upon mutual written agreement of
the parties.
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C.
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TIME
DEVOTED BY CONSULTANT
|
It is
anticipated the consultant will spend approximately four hours per month in
fulfilling its obligations under this contract. The particular amount of time
may vary from month to month. However, the consultant shall devote a minimum of
four hours per month to its duties in accordance with this
agreement.
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D.
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PLACE
WHERE SERVICES WILL BE RENDERED
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The
consultant will perform most services in accordance with this contract at a
location of consultant’s discretion. In addition, the consultant will perform
services on the telephone and at such other places as necessary to perform these
services in accordance with this agreement.
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E.
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COMPENSATION,
BENEFITS AND EXPENSES
|
|
5.1
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Compensation
|
In
consideration of the services to be rendered hereunder, Consultant shall be paid
$250.00 per hour.
|
Business
Consultant Agreement
|
Page
1 of 2
|
|
5.2
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Benefits
|
Other
than the compensation specified in this 5.1, Consultant shall not be entitled to
any direct or indirect compensation for services performed
hereunder.
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5.3
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Expenses
|
The
Company shall reimburse Consultant for reasonable travel and other business
expenses incurred in the performance of the duties hereunder in accordance with
the Company’s general policies, as they may be amended from time to time during
the course of this Agreement.
|
6
|
INDEPENDENT
CONTRACTOR
|
Both the
company and the consultant agree that the consultant will act as an independent
contractor in the performance of its duties under this contract. Accordingly,
the consultant shall be responsible for payment of all taxes including Federal,
State and local taxes arising out of the consultant's activities in accordance
with this contract, including by way of illustration but not limitation, Federal
and State income tax, Social Security tax, Unemployment Insurance taxes, and any
other taxes or business license fee as required.
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7
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CONFIDENTIAL
INFORMATION
|
The
consultant agrees that any information received by the consultant during any
furtherance of the consultant's obligations in accordance with this contract,
which concerns the personal, financial or other affairs of the company will be
treated by the consultant in full confidence and will not be revealed to any
other persons, firms or organizations.
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8
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USE
OF WORK PRODUCT
|
Except as
specifically set forth in writing and signed by Company and Consultant,
Consultant shall have all copyright and patent rights with respect to all
materials developed under this contract, and Company is hereby granted a
non-exclusive, royalty-free license, with a right to sublicense, to use and
employ such materials within the Company’s business.
IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of December
17th, 2010.
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COMPANY
|
CONSULTANT
|
|
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/s/ Steven C. Quay
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/s/ Edward R. Sauter
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|
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Authorized
Signature
|
Authorized
Signature
|
|
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Steven C. Quay, President and
CEO
|
Edward R.
Sauter
|
|
|
Print Name and
Title
|
Print Name and
Title
|
|
|
December 17,
2010
|
December 17,
2010
|
|
Business
Consultant Agreement
|
Page
2 of 2
|
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby
consent to the use in this Amendment No. 3 to the Registration Statement on Form
S-1 of Atossa Genetics Inc. (a development stage company) of our report dated
February 20, 2010 relating to the financial statements as of December 31, 2009
and for the period from April 30, 2009 (date of inception) to December 31, 2009
appearing in the Prospectus, which is part of this Registration
Statement. We also consent to the reference to us under the heading
“Experts” in such Prospectus.
/s/ KCCW
Accountancy Corp.
Diamond
Bar, California
January
7, 2011