UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2009
Commission File Number 0-22677
CLARIENT, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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75-2649072
(IRS Employer
Identification Number) |
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31 Columbia |
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Aliso Viejo, CA
(Address of principal executive offices)
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92656-1460
(Zip code) |
(949) 425-5700
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
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Common Stock, par value $0.01
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The Nasdaq Stock Market, LLC |
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of the registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No þ
As of June 30, 2009, the aggregate market value of the registrants common stock held by
non-affiliates of the registrant was $112,434,296 based on the closing price as reported on the
NASDAQ Capital Market.
The number of shares outstanding of each of the issuers classes of common stock as of the
latest practicable date,
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Class
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Outstanding at March 8, 2010 |
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Common Stock, $0.01 par value per share
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84,103,031 shares |
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference into the following
parts of this Form 10-K: definitive proxy statement for the registrants 2010 Annual Meeting of
StockholdersPart III, Items 10, 11, 12, 13, and 14
Cautionary Note Concerning Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements that are based on current
expectations, estimates, forecasts and projections about us, the industries in which we operate and
other matters, as well as managements beliefs and assumptions and other statements regarding
matters that are not historical facts. These statements include, in particular, statements about
our plans, strategies and prospects. For example, when we use words such as projects, expects,
forecasts, anticipates, intends, plans, believes, seeks, estimates, should,
would, could, will, opportunity, potential or may, variations of such words or other
words that convey uncertainty of future events or outcomes, we are making forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the
Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange
Act).
Our forward-looking statements are subject to risks and uncertainties. Factors that might
cause actual results to differ materially, include, but are not limited to: our ability to continue
to develop and expand our diagnostic services business, uncertainties inherent in our product
development programs, our ability to expand and maintain a successful sales and marketing
organization, our ability to maintain compliance with financial and other covenants under our
credit facility, limitations on our ability to borrow funds under our credit facility based on our
qualified accounts receivable and other liquidity factors, our ability to obtain annual renewals of
or replacements for our credit facility, our ability to successfully manage our in-house billing
function, our ability to accurately forecast bad debt expense, the continuation of favorable third
party payor reimbursement for laboratory tests, our ability to obtain additional financing on
acceptable terms or at all, unanticipated expenses or liabilities or other adverse events affecting
cash flow, uncertainty of success in identifying and developing new diagnostic tests or novel
markers, our ability to fund development of new diagnostic tests and novel markers and the amount
of resources we determine to apply to novel marker development and commercialization, failure to
obtain Food and Drug Administration, or FDA, clearance or approval for particular applications
if/when required, our ability to compete with other technologies and with emerging competitors in
novel cancer diagnostics and our dependence on third parties for collaboration in developing new
tests, and those factors set forth under the captions Managements Discussion and Analysis of
Financial Condition and Results of Operations and Risk Factors in this Annual Report on Form
10-K and the financial statements and the notes thereto. Many of these factors are beyond our
ability to predict or control. In addition, as a result of these and other factors, our past
financial performance should not be relied upon as an indication of future performance. All
forward-looking statements attributable to us, or to persons acting on our behalf, are expressly
qualified in their entirety by this cautionary statement. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by law. In light of these risks and uncertainties, the
forward-looking events and circumstances discussed in this report might not occur.
PART I
Company Overview
Clarient, Inc., a Delaware corporation (Clarient, the Company, we, us, or our), is
an advanced oncology diagnostics services company, headquartered in Aliso Viejo, California, and
incorporated in 1993. Our mission is to help improve the lives of those affected by cancer through
translating cancer discoveries into better patient care. We combine innovative technologies,
clinically meaningful diagnostic tests, and world-class pathology expertise to provide advanced
diagnostic services that assess and characterize cancer for physicians treating their patients, as
well as for biopharmaceutical companies in the process of clinically testing various therapies.
Our customers are connected to our Internet-based portal, PATHSiTE®, that delivers high resolution
images and critical interpretative reports resulting from our diagnostic testing services.
Our strategic focus is centered on identifying high-value opportunities that enable the
expansion and differentiation of our cancer diagnostic services within the highly competitive
medical laboratories sector in which we operate. We commercialize our services through our highly
developed channels with community pathologists, oncologists, universities, hospitals, and
pharmaceutical researchers. An important aspect of our strategy is to develop and expand our
diagnostic offerings by applying our technical and medical expertise in combination with available
intellectual property. Our diagnostic tests utilize biomarkers which are present in human
tissues, cells, or fluids to aid in understanding a cancer patients diagnosis, prognosis, and
expected outcome from the use of specific therapeutics. We believe that diagnostic tests which
utilize biomarkers help bring clarity to critical decision making points related to cancer
treatment for healthcare providers and the biopharmaceutical industry.
3
Company Evolution
With the completion of the human genome project in the late 1990s, medical science has entered
a new era of diagnostics that will move us closer than ever before to understanding the molecular
causes of complex diseases, particularly cancer. As a result, the landscape of cancer management
and treatment is undergoing significant change. There is now an escalating need for advanced
oncology testing to provide physicians with necessary information on the cellular molecular profile
of a specific tumor, enabling the selection of the most appropriate therapies. Significant
business opportunities exist for companies that are able to execute strategies to extract value
from this new environment. For this reason, we began operating under a new business plan in the
third quarter of 2004 by launching a business initiativebuilding a laboratory facility providing
comprehensive services focused on cancer testing for both the clinical and biopharmaceutical
marketscapitalizing on the growth that is widely anticipated over the next five to ten years in
the cancer diagnostics market.
In 2005, we changed our corporate name and completed the first stage of the transformation of
our business from ChromaVision Medical Systems, Inc. (positioned as a medical device provider with
a single application) to Clarient, Inc. (positioned as a technology and services company offering a
broad menu of advanced tests to assess and characterize cancer). We gathered an experienced group
of professionals from the anatomic pathology laboratory and the in-vitro diagnostics businesses to
carefully guide this transition. We have achieved rapid growth by commercializing a set of services
which focuses on the needs of the community pathologist. In June 2005, we kicked off the second
stage of our business strategy when we signed a distribution and development agreement with Dako
A/S (Dako), a Danish company recognized as a worldwide leader in pathology diagnostics systems.
The agreement with Dako enabled us to strengthen our legacy position as a leader in cellular
digital image analysis with the ACIS® Automated Image Analysis System (ACIS).
In 2006, we built upon our core capabilities within immunohistochemistry (IHC), a diagnostic
testing methodology, with the addition of flow cytometry and fluorescent in situ hybridization
(FISH) molecular testing methodologies. These additions positioned us to move beyond solid tumor
testing into the important area of leukemia/lymphoma assessment.
In March 2007, we entered the third stage of our business strategy by selling our instrument
systems business, consisting of certain tangible assets, inventory, intellectual property
(including our patent portfolio and the ACIS and ChromaVision trademarks), contracts, and other
assets used in the operations of the instrument systems business (the Technology Business), to
Carl Zeiss MicroImaging, Inc. (Zeiss), an international leader in the optical and
opto-electronics industries (the ACIS Sale). The ACIS Sale provided us with additional financial
resources to focus our efforts on the most profitable and fastest growing opportunities within our
services business. We believe that our strength as an advanced oncology diagnostics services
laboratory, our strong commercial reach with cancer-focused pathologists, our unique delivery of
completed services through PATHSiTE®, our deep domain expertise, and our access to robust
intellectual property can propel our continued growth through the development of additional tests,
unique analytical capabilities, and novel service offerings.
In December 2009, we acquired Applied Genomics, Inc. (AGI), a company focused on the
research and development of multivariate IHC biomarkers for use in assessing the recurrence rates
of various cancer types, and the likelihood of response to various treatment options. The AGI
acquisition provides us with ready-for-market IHC-based tests, particularly in assessing and
characterizing lung cancer, pending the completion of validation procedures required under clinical
laboratory regulations. The AGI acquisition also provides us with intellectual property content
and tissue bank samples for our ongoing research and development efforts.
Significant Stockholders
Safeguard Scientifics, Inc. (NYSE: SFE) and certain of its subsidiaries comprise our single
largest stockholder, holding 28.0% of our issued and outstanding voting securities as of December
31, 2009. We refer to Safeguard Scientifics, Inc. and/or its subsidiaries collectively herein as
Safeguard. Our other significant stockholder is Oak Investment Partners XII, Limited
Partnership, holding 20.0% of our issued and outstanding voting securities as of December 31, 2009.
We refer to Oak Investment Partners XII, Limited Partnership herein as Oak.
4
Market Overview and Opportunity
Personalized medicine is defined by the U.S. Congress, as the application of genomic and
molecular data to better target the delivery of health care, facilitate the discovery and clinical
testing of new products, and help determine a persons predisposition to a particular disease or
condition. Personalized medicine currently has the attention of the federal and state
governments, the national healthcare community, and the national media. Such attention has
impacted the awareness and demand for personalized cancer diagnostic testing, a market widely
expected by analysts to grow between $1.5 billion and $3.0 billion over todays market size. Many
factors will contribute to the expected increase in demand for our diagnostic and interpretive
services, including an increased incidence of cancer within an aging U.S. population, cancer
therapeutics developed by biopharmaceutical companies which require companion diagnostics (defined
below), and new technologies which will enable the development of novel diagnostic tests. Recent
trends indicate that medical treatment decisions are likely to involve the assessment of a complex
panel of protein-and-gene based testing, rather than simply a single test. Diagnostic and
predictive testing for these therapies will likely become increasingly complex, which will increase
demand for sophisticated diagnostic tests. Such tests will also require additional expertise to
interpret test results and/or assist pathologists in such interpretations.
The advent of proteomicsthe scientific study of the structure and function of proteins and
their activation pathwayshas provided the ability to characterize cells associated with a number
of diseases, including cancer. Such knowledge may be applied to gain insight into the molecular
profile of a disease and to clarify the most probable pathway of disease progression. Many
biopharmaceutical companies are rapidly developing drugs to inhibit or reduce the adverse effects
of certain proteins in cancer progression. These drugs target tumor cells which exhibit certain
molecular characteristics, with the goals of yielding better patient outcomes and fewer drug side
effects.
Biopharmaceutical companies are investing billions of dollars in the development of
high-potential targeted therapies, making this one of the fastest growing segments of oncology drug
development. Each day of a delay to market has a substantial and quantifiable cost for these
companies. Furthermore, many of these therapies will require a specific test (referred to as a
theranostic or companion diagnostic) to assist physicians in selecting the right drug for the
right patient. Beginning early in the process, the same theranostic is likely to accelerate the
process for drug approval and market introduction by guiding selection of the most appropriate
patients for the clinical trials. The FDAs Critical Path Initiative is facilitating a national
effort to modernize the scientific process through which a potential human drug, biological
product, or medical device is transformed from a discovery or proof of concept into a medical
product. We believe the companion diagnostic tests which we currently offer, and the tests that we
are developing, are a key to this transformation.
Based on data from industry consultants, we estimate that there are over 600 active drug
projects in clinical trials focused on an estimated 45 cancer indications. Of these, over 80
therapies are in Phase III clinical trials, and more than 300 compounds are in Phase II clinical
trials. Over 65% of these compounds are directed at specific molecular targets. Of the compounds
directed at specific targets, we believe over 50% are directed at the top five solid tumor cancers
(lung, breast, ovarian, colon, and prostate), and over 15% are directed at the areas of
leukemia/lymphoma. We have focused our core capabilities on these five solid tumor cancers and
leukemia/lymphoma.
As the compounds that represent targeted therapies are released to the market, the way that
cancer is managed will change dramatically. The result will be a clinical need for quantitative or
semi-quantitative measurement of the relevant targeted proteins within a cancer cell. An example of
a targeted therapy that uses a companion diagnostic test is Genentech, Inc.s Herceptin®, which
specifically targets breast tumors that over express Her2/neu protein on the cell membrane. The
National Comprehensive Cancer Network (NCCN), a not-for-profit alliance of 21 of the worlds
leading cancer centers, currently mandates that all new breast tumors be tested for Her2/neu
expression levels.
Anatomic pathologists specialize in diagnosing abnormal changes in tissue. When using
traditional methods only, pathologists often have difficulty determining which patients are most
likely to benefit from new therapies. We believe that todays pathologists need to be empowered
with the most advanced resources and information available for the personalized treatment of the
patient.
Operating Segment
We have one reportable operating segment that delivers oncology diagnostic testing services to
community pathologists, oncologists, biopharmaceutical companies, and researchers. At December 31,
2009, all of our services were provided within the United States, and substantially all of our
assets were located within the United States. We previously had an additional operating segment
which consisted of a business sold on March 8, 2007. That business developed, manufactured, and
marketed certain instrument systems see Note 4 to the Consolidated Financial Statements.
5
Our Services
Overview
We provide a wide range of oncology diagnostic testing and consultative services which include
technical laboratory services and professional interpretation of laboratory test results by
licensed physicians that specialize in pathology; such reports and analyses primarily are provided
to our customers through our Internet-based portal, PATHSiTE®.
Our services are focused on the most common types of solid tumors: breast, ovarian, prostate,
lung, and colon, representing over 80% of annual diagnosed cases in the United States. We also
offer an extensive menu of hematopathology testing for leukemia and lymphoma. In addition, we
provide a complete complement of commercial services to biopharmaceutical companies and other
research organizations, ranging from diagnostic testing services to the development of directed
diagnostics through clinical trials.
New Tests Launched in 2009
Clarient Insight® Dx Breast Cancer Profile
During the second quarter of 2009, we launched the Clarient Insight® Dx Breast Cancer Profile,
a prognostic test which has been clinically validated for women with early-stage,
hormone-receptor-positive breast cancer. Clarient Insight® Dx Breast Cancer Profile uses a
combination of pathology risk factors and molecular markers to categorize patients as either
high-risk or low-risk for recurrence of breast cancer, utilizing a non-linear mathematical
algorithm incorporating clinical and key pathologic variables into a continuous risk score. The
main prognostic factors associated with breast cancer are the number of lymph nodes affected, tumor
size, histological grade, and hormone receptor status, though some patients have a recurrence
despite having a tumor with good prognostic features. We believe the Clarient Insight® Dx Breast
Cancer Profile provides physicians with meaningful data to help stratify a patients risk of
cancer recurrence into high risk or low risk, based upon their patients tumor characteristics,
previous treatment, and performance status.
We are currently in the process of evaluating reimbursement options for our Clarient Insight®
Dx Breast Cancer Profile and completing additional validation studies. Accordingly, we have not
billed or recognized revenue in 2009 for any of our services which incorporate its use.
EGFR Mutation Test
During the second quarter of 2009, we launched a new gene mutation test (EGFR Mutation Test)
that can help physicians select the proper therapy for patients with non-small cell lung cancer
(NSCLC). There are a number of drugs used for the treatment of NSCLC. We expect that our EGFR
Mutation Test will provide pathologists and oncologists with the necessary data to best treat their
patients, ensuring that unnecessary toxicities and treatment delays are avoided, and reduce the
overall cost of therapy.
BRAF Mutation Test
From late December 2008 through January 2009, we launched a new predictive biomarker for
colorectal cancer which detects mutations in the BRAF gene. Patients who have this mutation will
not respond to anti-EGFR therapies. We expect that this test, which complements our KRAS testing,
will help pathologists and oncologists in determining which therapies will be the most effective
for their patients with colon cancer, sparing unnecessary toxicities, treatment delays, and cost.
Methodologies Employed in Our Laboratory Services
Our extensive menu of over 350 diagnostic tests used to assess and characterize cancer
includes various methodologies which incorporate the latest laboratory technologies: IHC, flow
cytometry, PCR, FISH, cytogenetics, and histology, which are briefly described below:
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IHC refers to the process of localizing proteins in cells of a tissue
section and relies on the principle of antibodies binding specifically to antigens
in biological tissues. IHC is widely used in the diagnosis of abnormal cells such
as those found in cancerous tumors. Specific molecular markers are characteristic
of particular cellular events such as proliferation or cell death (apoptosis). IHC
is also used to understand the distribution and localization of biomarkers and
differentially expressed proteins in various parts of
biological tissue. |
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Flow cytometry is a technology that measures and analyzes multiple physical
characteristics of single particles, usually cells, as they flow in a fluid stream
through a beam of light. The properties measured include a particles relative
size, relative granularity or internal complexity, and relative fluorescence
intensity. The use of flow cytometry assists a pathologist in diagnosing a wide
variety of leukemia and lymphoma neoplasms. Flow cytometry is also used to monitor
patients through therapy to determine whether the disease burden is increasing or
decreasing, otherwise known as minimal residual disease monitoring. |
6
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PCR is a molecular biology technique that uses small DNA probes to target and
amplify specific gene sequences for further analysis. The amplification occurs
through the use of the polymerase chain reaction which consists of repeated cycles
of heating and cooling the specimen in the presence of specific reagents. The
technique is extremely sensitive and rapid, and offers direct detection and
visualization of gene sequences. |
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FISH is a molecular technique that can be used to detect and localize the
presence or absence of specific DNA sequences on chromosomes. The technique uses
fluorescent probes that bind to only those parts of the chromosome with which they
show a high degree of sequence similarity. Fluorescence microscopy is used to
visualize the fluorescent probes bound to the chromosomes. FISH is often used for
finding specific features of the genome for use in genetic counseling, medicine,
and species identification. FISH can be used to help identify a number of gene
alternations, such as amplification, deletions, and translocations. |
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Histology is the study of the microscopic structure of tissues. Through
histology services, a pathologist attempts to determine the diagnosis of disease.
Through structural and other changes in cells, tissues, and organs, pathologists
can use a number of tools to establish a diagnosis of the type of disease suffered
by the patient, a prognosis on the likely progression of the disease, and a
determination as to which therapies are most likely to be effective in treating the
patient. In addition to histology service, a number of molecular studies can now
be run on these samples to gain further insight on prognostic and predictive
indicators. |
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Cytogenetics involves genetic testing in cancer to assess a variety of genetic
disorders and hematologic malignancies. It involves looking at the chromosome
structure to identify changes from patterns seen in normal chromosomes. |
Billing
Overview
Our net revenue is predominately derived from performing oncology diagnostic testing services
which are billed to third parties (Medicare and private health insurers), clients (pathologists,
hospitals, clinics, and biopharmaceutical companies), and patients. Our laboratory diagnostic
services are eligible for third-party reimbursement under well-established medical billing codes.
These billing codes are known as Healthcare Common Procedure Coding Systems and incorporate
Medicares Common Procedural Terminology (CPT) codes, providing the means by which
Medicare/Medicaid and private health insurers identify certain medical services that are eligible
for reimbursement. The Medicare/Medicaid reimbursement amounts are based on the relative value of
medical services with associated CPT codes, as established by the Centers for Medicare & Medicaid
Services (CMS) with recommendations from the American Medical Associations Relative Value Update
Committee.
Medicare reimbursement rates, which provide the basis for substantially all of our billings,
are dictated by CPT codes under two distinct reimbursement schedules: a Physician Fee Schedule and
a Clinical Fee Schedule. We have the requisite Medicare provider numbers for both schedules,
though the vast majority of our billings fall under the Physician Fee Schedule. The relevant CPT
billing codes under the Physician Fee Schedule further distinguishes between Technical diagnostic
services (the performance of a diagnostic test), Professional services (the professional
interpretation of a diagnostic test, typically performed by a licensed physician), and Global
services (the combination of Technical and Professional services).
7
The amount that we are able to be reimbursed from private health insurers is based on several
factors, including the type of health insurance coverage (for example, health maintenance
organization or preferred provider organization), whether the services are considered to be in
network or out of network by the health insurance provider, and the amount of any co-pays or
deductibles for which the patient is responsible.
Payor Classes
Third-party billing. The majority of our net revenue is generated from patients who use health
insurance coverage through Medicare or private health insurers.
Client billing. We generally establish arrangements with our clients that allow us to bill
them an agreed-upon amount for each type of service provided, though our client pricing is
generally based upon the effective CPT code rate. It is generally our clients responsibility to
seek reimbursement from their patients health insurance companies and/or the patients themselves.
Patient billing. We bill patients with health insurance co-payment obligations and deductibles
(indirect billings), as well as patients without health insurance coverage (direct billings).
We do not rely on any single customer, or subset of customers, for a significant portion of
our net revenue and we therefore have minimal risk of customer concentration. We, however, are
dependent upon reimbursement from Medicare and its designated administrator for a substantial
portion of our services, and any significant delay in payment or reductions in the published
Medicare fee schedules could impact our operating results, cash flows, and/or financial condition.
8
CPT Code Summary 2009, 2008, and 2007
The following table summarizes the Medicare reimbursement rates under the Physician Fee
Schedule for the most common CPT codes used in our laboratory services. The TC modifier denotes
Technical services, 26 modifier denotes Professional services, and no modifier denotes Global
services. The below CPT codes, which provide the basis for our reimbursement rates per test, were
associated with a substantial portion of our net revenue for the years ended December 31, 2009,
2008, and 2007:
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2009 |
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2008 |
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2009 Change |
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2007 |
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2008 Change |
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CPT Code |
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General Description of Service |
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(1/1/09 12/31/09) |
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(1/1/08 12/31/08) |
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From 2008 |
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(1/1/07 12/31/07) |
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from 2007 |
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88185 |
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Flow cytometry (cell surface, cytoplasmic, or nuclear marker) |
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$ |
59 |
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$ |
52 |
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13.5 |
% |
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$ |
41 |
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26.8 |
% |
88342 TC |
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IHC (including tissue immunoperoxidase) |
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$ |
72 |
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$ |
69 |
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4.3 |
% |
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$ |
60 |
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15.0 |
% |
88342 26 |
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IHC (including tissue immunoperoxidase) |
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$ |
44 |
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$ |
44 |
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$ |
46 |
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(4.3 |
)% |
88342 |
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IHC (including tissue immunoperoxidase) |
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$ |
116 |
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$ |
113 |
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2.7 |
% |
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$ |
107 |
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5.6 |
% |
88361 TC |
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IHC (computer assisted) |
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$ |
116 |
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$ |
123 |
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(5.7 |
)% |
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$ |
120 |
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2.5 |
% |
88361 26 |
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IHC (computer assisted) |
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$ |
62 |
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$ |
62 |
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$ |
65 |
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(4.6 |
)% |
88361 |
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IHC (computer assisted) |
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$ |
178 |
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$ |
186 |
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(4.3 |
)% |
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$ |
186 |
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88368 TC |
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FISH (manual) |
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$ |
182 |
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$ |
158 |
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15.2 |
% |
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$ |
112 |
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41.1 |
% |
88368 26 |
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FISH (manual) |
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$ |
70 |
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$ |
71 |
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(1.4 |
)% |
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$ |
75 |
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(5.3 |
)% |
88368 |
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FISH (manual) |
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$ |
251 |
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$ |
229 |
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9.6 |
% |
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$ |
193 |
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18.7 |
% |
88367 TC |
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FISH (computer assisted) |
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$ |
222 |
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$ |
204 |
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8.8 |
% |
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$ |
183 |
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11.5 |
% |
88367 26 |
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FISH (computer assisted) |
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$ |
66 |
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$ |
65 |
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1.5 |
% |
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$ |
70 |
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(7.1 |
)% |
88367 |
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FISH (computer assisted) |
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$ |
288 |
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$ |
269 |
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7.1 |
% |
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$ |
252 |
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6.7 |
% |
83891 |
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PCR - Isolation or extraction of highly purified NA |
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$ |
6 |
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$ |
6 |
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$ |
6 |
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83896 |
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PCR - NA probe |
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$ |
6 |
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$ |
6 |
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|
|
|
|
|
$ |
6 |
|
|
|
|
|
83898 |
|
PCR - Amp of patient NA, each NA sequence |
|
$ |
24 |
|
|
$ |
23 |
|
|
|
4.4 |
% |
|
$ |
23 |
|
|
|
|
|
83907 |
|
PCR - Lysis of cells prior to NA extraction (FFPE Only) |
|
$ |
20 |
|
|
$ |
19 |
|
|
|
5.3 |
% |
|
$ |
19 |
|
|
|
|
|
83914 |
|
PCR - Mutation identification |
|
$ |
24 |
|
|
$ |
23 |
|
|
|
4.4 |
% |
|
$ |
23 |
|
|
|
|
|
83912 26 |
|
PCR - Interpretation and report |
|
$ |
19 |
|
|
$ |
19 |
|
|
|
|
|
|
$ |
19 |
|
|
|
|
|
88381 |
|
PCR - Microdissection, manual |
|
$ |
257 |
|
|
$ |
257 |
|
|
|
|
|
|
Not applicable |
|
|
Not applicable |
|
9
We work with relevant medical societies and other constituents to encourage appropriate
reimbursement levels from Medicare and other payors (which generally base their reimbursement
levels upon Medicare rates) that fairly reflect the costs of developing specialized laboratory
diagnostic services and their related benefits. Our services are widely recognized for providing
net healthcare savings by empowering physicians with diagnostic and interpretive information to
more responsively treat their patients.
Sales and Marketing
Our primary target market includes community pathology practices and hospitals. The process
of selling diagnostic services for the assessment and characterization of cancer requires a
knowledgeable and skilled sales force that can help pathologists and oncologists understand the
mechanisms of targeted therapy and the value of the prognostic and predictive services which we
offer. Our sales representatives generally have previous sales experience in the medical
diagnostic services market, have strong technical knowledge, and have an extensive understanding of
the community-based pathology practice. Our typical sales representative has a four-year
bachelors degree, generally in the biological sciences. All of our sales representatives are kept
current through our continuous and intensive training programs.
As of December 31, 2009, we had 58 people dedicated to our sales and marketing efforts. Our
sales and marketing efforts are directly overseen by our Senior Vice President of Commercial
Operations. Our Vice President of Sales and National Director of Sales are responsible for
developing our sales representatives and identifying sales opportunities. We are organized into
two regions and six districts. We have two Regional Sales Directors and six District Managers who
identify and develop sales opportunities, and train and support the salespeople in their
region/district. Within each district, each sales representative has a dedicated territory based on revenue potential and geographic
reach. We use an Internet-based sales system to optimize customer and territory management. We
will continue to expand our sales force as appropriate. Our sales strategy focuses on expanding the
menu of services provided to our current customer base, while acquiring new customers. Our sales
approach is designed to understand our current and potential customers needs and to provide the
appropriate solutions from our expanding range of diagnostic services.
Our marketing efforts in 2009 continued to focus on establishing a strong and distinctive
corporate brand identity, and distinguishing the diagnostic services that we offer. Our core
commercial focus remains on community pathologists. We use our CONTiNUUM national and regional
seminar and webcast programs to provide a collaborative environment between potential customers and
our medical advisory board and medical staff.
Managed Care
During 2009, we strengthened our relationships with numerous managed care organizations
(MCO) by adding experienced managed care personnel to our marketing team. Our MCO marketing
team promotes our cancer diagnostic testing capabilities, and the value of our services, with the
goal of selectively entering into contracts with MCOs. We believe that our comprehensive test menu
and pathology expertise provides MCOs with a high quality and cost-effective solution for
delivering cancer diagnostic services to their members.
Primary Market Segments
Our data indicate that there are approximately 4,000 hospitals or practice networks (the
Clinical Market) in the United States that require cancer diagnostic or prognostic services. We
approach the Clinical Market by dividing it into three market segments, as identified below. We
also serve the biopharmaceutical market in providing diagnostic services associated with clinical
validations of various therapies. Our services are designed to meet the specific needs of each
market segment.
Clinical Market
Larger community hospitals and pathology groups. This market segment typically has the
expertise to perform tests to assess and characterize cancer, though the resources required for the
necessary laboratory equipment and staff are often cost and time prohibitive. Even if such
resources were obtained, they would likely not yield an adequate return on investment due to the
lack of sufficient testing volume. Accordingly, larger community hospitals and pathology groups
typically choose to outsource many of their specialized oncology diagnostic services.
Smaller community hospitals and pathology groups. This market segment typically outsources
all specialized oncology diagnostic services.
10
Regional reference laboratories, regional cancer centers, teaching hospitals and other large
hospitals/multi-hospital systems, and associated large pathology practice groups. This market
segment typically has comprehensive capabilities and performs most testing in-house. This market
segment may require our specialized oncology diagnostic services for particularly complex cases.
Biopharmaceutical Market. We estimate that world-wide there are over 1,000 biopharmaceutical
organizations that could benefit from our laboratory expertise and capabilities in the development
of targeted therapeutics and companion diagnostics. We are in the early stages of reaching out to
this market, though we are actively developing collaborative opportunities within this market. We
are currently participating in a number of clinical trials with various leaders in
biopharmaceutical industry in which we provide diagnostic testing services in connection with their
validation of the related therapy.
Seasonality
Our business is subject to the impact of seasonality, particularly during the holiday season
in the fourth quarter. Medical procedures, including surgeries, are not as frequently scheduled
during such time. Consequently, the demand for our services, in general, could be subject to
declines in the fourth quarter.
Patents, Trademarks, and Proprietary Technology
We are focused on developing an intellectual property portfolio for our laboratory service
methodologies which use automated cellular instrumentation, rare event identification, and our
proteomic mathematic capabilities. We hold patents and have patents pending to protect our
intellectual property. We also hold trademarks to protect the names of our service offerings.
To protect our trade secrets and proprietary know-how, we typically enter into confidentiality
agreements with our employees, consultants, customers, business partners, and other third parties.
As a condition of employment, we require that all employees enter into an inventions assignment and
non-disclosure agreement.
In December 2009, we acquired AGI through a merger of AGI with a wholly-owned subsidiary of
our company (see Note 15 to the Consolidated Financial Statements). As of the effective date of
the merger, AGI had developed 10 prognostic and predictive multivariate IHC biomarkers for use in
assessing the recurrence rates of various cancers and related treatment options. Such biomarkers
have associated patents and patent applications pending approval. We believe the intellectual
property obtained through the AGI acquisition will broaden our test menu significantly, allow us to
firmly enter the lung cancer market with a distinct identity in the marketplace, and provide
content for our ongoing research and development efforts.
In March 2007, as part of the ACIS Sale, we transferred our then existing patent portfolio and
other intellectual property relating to our Technology Business to Zeiss (see Note 4 to the
Consolidated Financial Statements). We entered into a license agreement with Zeiss, pursuant to
which Zeiss granted us a non-exclusive, perpetual, and royalty-free license to certain of the
transferred patents, copyrights, and software code for use in connection with image applications
(excluding the sales of imaging instruments) and our laboratory services business. This license
allows us to develop new applications and analytical capabilities which incorporate proprietary
imaging technologies.
Competition
Competition in the diagnostic services market is intense and has increased with the rapid pace
of technological development. The oncology testing sector has been consolidating and is becoming
increasingly competitive. Our industry is led by two national laboratories: Laboratory Corporation
of America (also known as LabCorp) and Quest Diagnostics Incorporated. Both companies offer a wide
test and product menu with significant financial, sales, and logistical resources, and have
extensive contracts with a variety of payor groups. Our secondary competitors include laboratories
that are affiliated with large medical centers or universities, such as Mayo Medical Laboratories
and Associated Regional and University Pathologists (also known as ARUP). We also compete with
specialized laboratories in specific areas of cancer such as Genoptix, Inc. (leukemia/lymphoma),
Bostwick Laboratories, Inc. (prostate cancer), NeoGenomics, Inc. (breast cancer and
leukemia/lymphoma), and Caris Life Sciences, Inc. (colon cancer). New competitors have heightened
the competitive landscape. We anticipate that additional companies will enter our market and will
aggressively compete for market share.
11
We believe that healthcare providers consider a number of factors when selecting a diagnostic
services laboratory, including:
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Accuracy, quality, and timeliness in reporting test results; |
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Menu of tests offered and volume capability; |
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Reputation in the medical community; |
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Ability to report test results within a secure Internet site; |
We believe that we are an effective competitor in each of the above areas.
Collaborations and Partnerships
Our goal is to position our company as the recognized industry leader within the cancer
diagnostic testing market, which includes novel biomarker development and novel marker clinical
validation services. Opportunities to differentiate our services exist through the development of
novel biomarker diagnostic tests that provide clarity in assessing and characterizing cancer.
In January 2008, we announced a collaboration with Prediction Sciences, LLC to commercialize a
novel breast cancer test. During the second quarter of 2009, we began offering the Clarient
Insight® Dx Breast Cancer Profile, a prognostic test which has been clinically validated for women
with early-stage, hormone-receptor-positive breast cancer. Clarient Insight® Dx Breast Cancer
Profile uses a combination of pathology risk factors and molecular markers to categorize patients
as either high-risk or low-risk for recurrence of breast cancer, utilizing a non-linear
mathematical algorithm incorporating clinical and key pathologic variables into a continuous risk
score. The main prognostic factors associated with breast cancer are the number of lymph nodes
affected, tumor size, histological grade, and hormone receptor status, though some patients have a
recurrence despite having a tumor with good prognostic features. We believe the Clarient Insight®
Dx Breast Cancer Profile provides physicians with meaningful data to choose a therapy based upon
their patients tumor characteristics, previous treatment, and performance status in order to
improve the probability of survival, without unnecessarily compromising the patients quality of
life.
We also work with a variety of biopharmaceutical companies through supporting their therapy
development. This includes projects in preclinical, Phase II, and Phase III clinical trials. We
provide a full suite of biomarker assay development, validation services, and biomarker testing
services. Our laboratory allows for a fully-integrated approach to biomarker assay development
services using our core IHC, flow cytometry, FISH, and PCR technologies.
Research & Development
Our research and development activities primarily relate to the development and validation of
diagnostic tests in connection with our specialized oncology diagnostic services and the
development of technology to electronically deliver such services to our clients. Our quality
procedures and regulatory staff ensure that every developed test and application meets stringent
regulatory guidelines.
Quality Assurance
The quality of our diagnostic testing services is of critical importance to
us, our customers, and the patient being treated. We have established a comprehensive quality
assurance program for our laboratory operations. Our quality assurance program is designed to
deliver accurate and timely diagnostic test results and a consistent level of high quality. We
have developed a variety of internal systems and procedures to emphasize, monitor, and continuously
improve the quality of our laboratory operations, in addition to the compulsory requirements of CMS
and other regulatory agencies.
12
External Proficiency and Accreditations
We participate in numerous externally-administered quality surveillance
programs, and our laboratory is accredited by the College of American Pathologists (CAP). The
CAP accreditation program involves both unannounced on-site inspections of our laboratory, and
participation in CAPs ongoing proficiency testing program for all testing categories. CAP is an
independent, non-governmental organization of board-certified pathologists which accredits, on a
voluntary basis, laboratories nationwide. CAP has been deemed by CMS as an accrediting agency to
inspect clinical laboratories to determine adherence to the standards of the Clinical Laboratory
Improvement Amendments of 1988 (CLIA). A laboratorys receipt of accreditation by CAP satisfies
the Medicare requirement for participation in proficiency testing programs administered by an
external source, one of Medicares primary requirements for reimbursement eligibility. Our most
recent CAP inspection was successfully completed in November 2009.
Internal Quality Control
We maintain internal quality control through documentation and review of daily
key quality processes, rigorous validation and optimization practices, training and competency of
staff involved in performing laboratory testing, and internal audits by our Quality Assurance
department to ensure compliance with internal and external standards. Our quality assurance
team, which is comprised of representative members involved in all aspects of patient testing and
reporting, meets regularly to review various performance and quality metrics and to discuss methods
to further improve the quality of our laboratory processes. On an annual basis, our Medical
Director prepares an objective assessment of our quality management program, which is presented to
our executive management team, and is utilized to guide our prospective focus on quality practices.
Information Systems
We have implemented information systems that support our laboratory operations and finance and
administrative functions. We believe that our information systems strategically position us for
long-term growth in our evolving market. We believe that our information systems are secure and
robust. We maintain an off-site backup of all our critical data and e-mail systems on a regular
basis. To electronically deliver services to our customers, PATHSiTE® provides high resolution
images and critical diagnostic test reports through an Internet-based portal, in a secure,
HIPAA-compliant environment.
Legal and Regulatory Environment
Our business is subject to extensive laws and regulations, the most significant of which are
summarized below.
Anti-Kickback Laws
Existing federal laws governing Medicare and Medicaid, and other similar state laws, impose a
variety of broadly described restrictions on financial relationships among healthcare providers,
including clinical laboratories. These laws include the federal anti-kickback law, which
prohibits individuals or entities, including clinical laboratories, from making payment or
furnishing other benefits intended to induce or influence the referral of patients for tests billed
to Medicare, Medicaid, or certain other federally funded programs. The consequences of violation
may include criminal penalties, civil sanctions, and/or exclusion from participating in Medicare,
Medicaid, and other federal healthcare programs.
Stark Law
Self-referral prohibitions prevent us from accepting referrals from physicians with whom we
have a compensation relationship. The federal law prohibiting physician self-referrals, commonly
known as the Stark Law, prohibits, with certain exceptions, Medicare/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 testing laboratory. A person who
engages in a scheme to circumvent the Stark Laws prohibitions may be fined up to $100,000 for each
such scheme. In addition, anyone who presents (or causes such presentation) of a claim to the
Medicare program in violation of the Stark Law is subject to penalties of up to $15,000 per claim
submitted, an assessment of several times the amount claimed, and possible exclusion from
participation in federal healthcare programs. In addition, claims submitted in violation of the
Stark Law may be alleged to be subject to liability under the federal False Claims Act and its
whistleblower provisions.
13
Several states in which we operate have enacted legislation that prohibits physician
self-referral arrangements and/or requires physicians to disclose to their patients any financial
interest they may have with a healthcare provider when referring patients to that provider. Some of
these statutes cover all patients and are not limited to beneficiaries of Medicare, Medicaid, and
other federal healthcare programs. Possible sanctions for violating state physician self-referral
laws vary, but may include loss of license and civil and criminal sanctions. State laws vary from
jurisdiction to jurisdiction and in a few states are more restrictive than the Stark Law. Some
states have indicated they will interpret their own self-referral statutes the same way that CMS
interprets the Stark Law, but it is possible that states will interpret their own laws differently
in the future.
Federal False Claims Act
There are other rules governing billing markups and direct billing rules that may apply to our
relationships with our customers. Of particular importance to our operations are federal and state
laws prohibiting fraudulent billing and providing for the recovery of non-fraudulent overpayments,
as a large number of laboratories have been forced by the federal and state governments, as well as
by private payors, to enter into substantial settlements under these laws. In particular, if an
entity is determined to have violated the federal False Claims Act, it may be required to pay up to
three times the actual damages sustained by the government, plus civil penalties ranging from
$6,000 to $11,000 for each separate false claim. While there are many potential bases for liability
under the federal False Claims Act, such liability primarily arises when an entity knowingly
submits, or causes another to submit, a false claim for reimbursement to the federal government.
Submitting a claim with reckless disregard or deliberate ignorance of its validity could result in
substantial civil liability. A current trend within the healthcare industry is the increased use
of the federal False Claims Act and, in particular, actions under the False
Claims Acts whistleblower or qui tam provisions to challenge providers and suppliers.
Those provisions allow a private individual standing to bring actions on behalf of the government,
alleging that the defendant has submitted a fraudulent claim for payment to the federal government.
The government may join in the lawsuit, but if the government declines to do so, the individual may
choose to pursue the lawsuit alone. The government must be kept apprised of the progress of the
lawsuit. Whether or not the federal government intervenes in the case, it will receive the majority
of any recovery. In addition, various states have enacted laws modeled after the federal False
Claims Act.
Health Insurance Portability and Accountability Act of 1996
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) created two general
federal violations, healthcare fraud and false statements relating to healthcare matters, and
protects the security and privacy of individually identifiable health information. We have
implemented practices and procedures to meet the applicable requirements of HIPAA, as briefly
described below.
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|
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, and/or exclusion
from government sponsored programs. |
|
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|
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. A violation of this statute is a felony
and may result in fines or imprisonment. |
|
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|
Standards govern the conduct of certain electronic transmission of health care
information and to protect the security and privacy of individually identifiable
health information maintained or transmitted by health care providers, health plans,
and health care clearinghouses. These standards include: (i) Standards for
Electronic Transactions and (ii) Standards for Privacy and Security of Individually
Identifiable Information. |
|
i) |
|
The Standards for Electronic Transactions establishes
standards for common health care transactions such as claims information,
plan eligibility, and payment information. It also establishes standards for
the use of electronic signatures, unique identifiers for providers,
employers, health plans, and individuals. |
|
ii) |
|
The Standards for Privacy of Individually Identifiable
Information restrict our use and disclosure of certain individually
identifiable health information. The HIPAA privacy and security regulations
establish a uniform federal floor and do not supersede state laws that are
more stringent or provide individuals with greater rights with respect to the
privacy or security of, and access to, their records containing
patient/private health information (PHI). As a result, we are required to
comply with both HIPAA privacy regulations and varying state privacy and
security laws, which include physical and electronic safeguard requirements.
These laws contain significant fines and other penalties for wrongful use or
disclosure of PHI. |
14
HITECH Act
The American Recovery and Reinvestment Act of 2009 (ARRA) became law on February 17, 2009.
The ARRA includes provisions relating to Health Information Technology. Title XIII of ARRA, the
Health Information Technology for Economic and Clinical Health Act (the HITECH Act), made
significant changes to the privacy and security rules of HIPAA, extending their reach and imposing
breach notification requirements on HIPAA-covered entities and their business associates.
Additionally, the HITECH Act increased enforcement of, and penalties for, violations of privacy and
security of PHI.
The HITECH Acts security breach notification provisions require that covered entities notify
individuals if their health information has been breached. The U.S. Department of Health and Human
Services must be notified as well, and in some circumstances, the media. In determining whether or
not notice is required, two questions are important: (1) did the event qualify as a defined
breach? and (2) was the information protected by adequate encryption technology?
If we were in violation of the HITECH Act, a penalty determination would be based on the
nature and extent of the violation and the nature and extent of the harm resulting from the
violation. The penalties range from $100 $50,000 per violation depending upon the violation
category, subject to a $1.5 million cap for multiple violations of an identical requirement or
prohibition in a calendar year.
Clinical Laboratory Improvement Amendments
Because we operate a clinical laboratory, many aspects of our business are subject to complex
federal, state, and local regulations. In 1988, Congress passed CLIA, establishing quality
standards for all laboratory testing to ensure the accuracy, reliability and timeliness of patient
test results regardless of where the test was performed. Under CLIA, a laboratory is defined as any
facility which performs laboratory testing on specimens derived from humans for the purpose of
providing information for the diagnosis, prevention or treatment of disease, or the impairment of,
or assessment of health. CLIA is user-fee funded; therefore, all costs of administering the program
must be covered by the regulated facilities, including certificate and survey costs. To enroll in
the CLIA program, laboratories must register by completing an application, paying fees, being
surveyed, if applicable, and becoming certified in the state in which they operate. We received our
California state licensure with CLIA certification in the fourth quarter of 2004.
The final CLIA regulations were published on February 28, 1992, and updated on January 24,
2003. CLIA specifies quality standards for proficiency testing, patient test management, quality
control, personnel qualifications and quality assurance for laboratories performing non-waived
tests. Non-waived laboratories must enroll in CLIA, pay the applicable fees, and follow
manufacturers instructions. Our laboratory service offerings now include tests in the non-waived
category.
CMS is charged with the implementation of CLIA, including laboratory registration, fee
collection, surveys, surveyor guidelines and training, enforcement, approvals of proficiency
testing providers, and accrediting organizations. The Centers for Disease Control and Prevention is
responsible for the CLIA studies, convening the Clinical Laboratory Improvement Amendments
Committee and providing scientific and technical support/consultation to the Department of Health
and Human Services and CMS. The FDA is responsible for test categorization and regulation of the
medical devices used by clinical laboratories, including analyte specific reagents (ASR), in
vitro diagnostic multivariate index assays (IVDMIA), general purpose reagents, laboratory
equipment, instrumentation, and controls.
The State of California Department of Health and Human ServicesLaboratory Field Services
enforces the states requirements to apply for and maintain licensure, CLIA certification, and
proficiency testing. CLIA accreditation is maintained through regular inspections by CAP. Our
facilities have been inspected by these authorities and have been issued licenses to manufacture
medical devices and provide laboratory diagnostic services in California. These licenses must be
renewed every year. The State of California could prohibit our provision of laboratory services if
we failed to maintain these licenses.
15
State Application and Provisional Requirements
We must also satisfy various other state application and provisional requirements. Our
California laboratory is required to be licensed by the New York State Department of Health to
receive specimens from New York State. We maintain such licensure for our laboratory under New York
state laws and regulations, which establish standards for the day-to-day operation of a clinical
laboratory, physical facilities requirements, equipment and quality control. New York law also
mandates proficiency testing for laboratories licensed under New York state law, regardless of
whether or not such laboratories are located in New York. We maintain a current license in good
standing with the New York State Department of Health. Florida, Maryland, Pennsylvania and Rhode
Island require out-of-state laboratories, which accept specimens from those states, to be licensed
by such states. We have obtained licenses in such states and believe we are in compliance with
applicable licensing laws. We may become aware from time to time of other states that require
out-of-state laboratories 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. If we identify any other state with such requirements or if we are contacted by any other
state advising us of such requirements, we intend to follow instructions from the state regulators
as to how we should comply with such requirements.
FDA Regulations
The FDA has stated that clinical laboratories which develop tests in-house are considered to
be manufacturers of medical devices and are subject to the FDAs jurisdiction under the federal
Food, Drug, and Cosmetic Act (FD&C Act). We develop assays and intend to validate new markers as
they become available to us. Many of the assays and new markers
we intend to validate will be considered ASRs, commonly referred to as home brews. ASRs are
reagents composed of chemicals or antibodies which are the active ingredients of tests used to
identify one specific disease or condition. The FDA announced in November 1997 that it will
exercise enforcement discretion over laboratory-developed ASRs, as well as laboratory-developed
tests (LDTs) using commercially available and laboratory-developed ASRs.
The FDA announced (in draft guidance in July 2007) that IVDMIAs do not fall within the scope
of LDTs over which the FDA has generally exercised enforcement discretion. The guidance document
defines IVDMIAs as gene or protein-based tests (which include tests for breast and prostate cancer)
that combine assays and algorithms to produce results tailored to a specific patient. In the draft
guidance, the FDA stated that IVDMIAs must meet pre-market and post-market device requirements
under the FD&C Act and FDA regulations, including pre-market review of class II and III devices.
We may decide to develop IVDMIAs in-house, which would then be subject to aforementioned
regulations, should the FDA adopt these draft provisions. In such case, we would be required to
obtain pre-market notification clearance, often referred to as a 510(k) clearance or pre-market
approval (PMA) of the test from the FDA. In order to market a device subject to the 510(k)
clearance process, the FDA must determine that the proposed device is substantially equivalent to
a device legally on the market, known as a predicate device. Clinical and non-clinical data may
be required to demonstrate substantial equivalence. The 510(k) clearance process usually takes from
three to twelve months from the time of submission to the time that a company can begin to market
and distribute such product in the United States. The process can take significantly longer and
there can be no assurance that the FDA will issue such clearance. The PMA approval pathway requires
an applicant to demonstrate that the device is safe and effective and such determination is based,
in part, on data obtained in clinical trials. The PMA approval process is much more costly,
lengthy, and uncertain and generally takes between one and three years from submission to PMA
approval, but may take significantly longer and such approval may never be obtained. Once clearance
or approval is obtained, ongoing compliance with FDA regulations, including those related to
manufacturing operations, recordkeeping, reporting, marketing, and promotion, would increase the
cost, time and complexity of conducting our business.
Clarient Pathology Services, Inc.
California prohibits general corporations from engaging in the practice of medicine, pursuant
to both statutory and common law principles commonly known as the Corporate Practice of Medicine
Doctrine (CPMD). In general, the CPMD prohibits non-professional corporations from employing
physicians and certain other healthcare professionals who provide professional medical services.
All of our pathology services, which require licensed physician sign-off, are provided by, or are
under the supervision of, Clarient Pathology Services, Inc. (CPS) under a long-term, exclusive
amended and restated professional services agreement by and between us (including Clarient
Diagnostic Services, Inc. (CDS), a wholly-owned subsidiary) and CPS, entered into on September 1,
2009 (the Professional Services Agreement). Kenneth J. Bloom, M.D. is the sole shareholder and
president of CPS. Dr. Bloom also serves as our Chief Medical Officer (CMO), a senior management
function focused primarily on the technical oversight of our diagnostics services laboratory. In
compliance with the CPMD, Dr. Bloom provides no pathology services, or any other medical services,
while acting in his capacity as our CMO. As required under the Professional Services Agreement, we
are responsible to perform a variety of non-medical administrative services for CPS. We bill and
collect for the pathology services provided by CPS. We in turn pay CPS a monthly professional
services fee equal to the aggregate of all estimated physician salaries and benefits and all other
operating costs of CPS. The financial statements within this Annual Report on Form 10-K include
the financial position, results of operations, and cash flows of us, and the accounts of CPS, which
are consolidated as required by applicable accounting principles generally accepted in the United
States (GAAP).
16
We refer to CPS and us collectively throughout this Annual Report on Form 10-K as we, us,
and our, except in this paragraph, the next paragraph below, and the related risk factor in
Item 1A. We are organized so that all physician services are offered by the physicians who are
employed by CPS. We do not employ practicing physicians as practitioners, exert control over their
decisions regarding medical care, or represent to the public we offer medical services. CPS also
retains the authority to select the non-physician personnel, equipment, and supplies used to
perform its medical services, as well as the authority to set its professional fees and approve all
managed care contracts. Control and direction of licensed medical professionals rests with CPS.
Under the Professional Services Agreement, CPS is responsible to appropriately staff its group with
physicians who provide interpretative services and related reports us. We perform all non-medical
management of CPS and have exclusive authority over all aspects of the business of CPS (other than
those directly related to the provision of pathology or other medical services, or as otherwise
prohibited by state law). The non-medical management provided by us under the Professional Services
Agreement includes, among other functions, financial management and reporting, accounting,
operating and capital budgeting, negotiating business agreements (in consultation with CPS), and
all other administrative services. We, through CDS, bill for the services provided by CPS.
We believe that the services we provide to CPS do not constitute the practice of medicine
under applicable laws. Because of the unique structure of the relationships described above, many
aspects of our business operations have not been the subject of state or federal regulatory
interpretation. We have no assurance that a review of our business by the courts or regulatory
authorities will result in a determination that our operations comply with applicable law. Any
determination that our relationship with CPS does not comply with applicable laws relating to the
practice of medicine could have a material adverse affect on our operations.
Employees
As of December 31, 2009, we (inclusive of CPS) had 361 employees: 208 in laboratory
diagnostics, research and development, and related support positions; 95 in executive, finance,
information technology, billing, and administrative positions; and 58 in sales and marketing
positions. We are not subject to any collective bargaining agreements, and we believe that our
relationship with our employees is good. In addition to full-time employees, we use the services of
various independent contractors, primarily for certain service development, marketing, and
administrative activities.
Recent Acquisition
On December 21, 2009, we acquired AGI through a merger of AGI with a wholly-owned subsidiary
of our company. The AGI acquisition provides us with proprietary IHC biomarkers and other related
diagnostic tests for use in assessing the recurrence rates of various cancers, and the likelihood
of a favorable response to certain therapy options. The AGI acquisition also provides us with
content for our on-going research and development activities.
Consideration for the AGI acquisition included 4.4 million shares of our common stock and a
maximum of an additional 3.2 million shares of our common stock, inclusive of exchanged stock
option awards, upon the achievement of certain revenue and scientific publication milestones by
December 31, 2012.
Two former executive officers of AGI joined us as our (i) Senior Vice President and Chief
Scientific Officer and (ii) Senior Vice President, Technology Assessment, and General Manager,
Huntsville Facility. Six other former employees of AGI have also joined us in business development,
research and development, and laboratory services roles. See Note 15 to our Consolidated Financial
Statements for further discussion of the AGI acquisition.
Available Information
All periodic and current reports, registration statements, and other filings that we are
required to file with the Securities and Exchange Commission (SEC), including our Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) of the Exchange Act, are available free of
charge from the SECs Internet site (http://www.sec.gov) or public reference room at 101 F Street
NE, Washington, D.C. 20549, or through our Internet site at http://www.clarientinc.com. Such
documents are available as soon as reasonably practicable after electronic filing of the material
with the SEC. Information on the operation of the SECs public reference room is available by
calling the SEC at 1-800-SEC-0300. Copies of these reports (excluding exhibits) may also be
obtained free of charge, upon written request to: Investor Relations, Clarient, Inc., 31 Columbia,
Aliso Viejo, CA 92656-1460.
17
Our Internet website address is included in this report solely for identification purposes.
Our Internet website and the information contained therein or connected thereto are not intended to
be incorporated into this Annual Report on Form 10-K. The following corporate governance documents
are available free of charge on our website: the charters of our Audit, Compensation, and Corporate
Governance Committees, our Statement on Corporate Governance, and our Code of Conduct. Copies of
these corporate governance documents may also be obtained by any stockholder, free of charge, upon
written request to: Corporate Secretary, Clarient, Inc., 31 Columbia, Aliso Viejo, CA 92656-1460.
Before deciding to invest in us, or to maintain or increase your investment, one should
carefully consider the risks described below, in addition to the other information contained in
this Annual Report on Form 10-K and other reports we have filed with the SEC. The risks and
uncertainties described below are not the only ones we face. Additional risks and uncertainties not
presently known to us, or that we currently deem immaterial, may also affect our business
operations. If any
of these risks are realized, our business, financial condition, or results of operations could
be seriously harmed and in that event, the market price for our common stock could decline, and one
may lose all or part of their investment.
Risks Related to Our Business
We have a history of operating losses, and future profitability is uncertain.
We have incurred operating losses in every year since inception. Our accumulated deficit as
of December 31, 2009 was $165.0 million. Those operating losses are principally associated with the
investments we have made, and expenses we have incurred, in our diagnostic services business,
including bad debt expense, and to a lesser extent, the costs related to various activities
associated with developing and commercializing our former ACIS technology, which we transferred to
Zeiss as part of the ACIS Sale.
Although we have reduced our operating losses, we may continue to incur losses as a result of
our laboratory services expansion. We may never become profitable. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a quarterly or annual
basis. If we are unable to achieve and/or maintain profitability, the market value of our common
stock will likely decline.
Third party billing is extremely complicated and could result in us incurring significant
additional costs.
Billing for laboratory services is extremely complicated. The customer is the party that
refers the tests and the payor is the party that pays for the tests, and the two are not always the
same. Depending on the billing arrangement and/or applicable law, we need to bill various payors,
including patients, health insurance companies, Medicare, Medicaid, doctors and employer groups,
all of which have different billing requirements. Health insurance companies and governmental
payors also generally require complete and correct billing information within certain filing
deadlines. Additionally, our billing relationships require us to undertake internal audits to
evaluate compliance with applicable laws and regulations as well as internal compliance policies
and procedures. Health insurance companies also impose routine external audits to evaluate payments
made.
Additional factors complicating billing are:
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Pricing differences between our fee schedules and the reimbursement rates of
the payors; |
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Disputes with payors as to which party is responsible for payment; and |
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Disparity in coverage and information requirements among various carriers. |
We incur significant additional costs as a result of our participation in the Medicare and
Medicaid programs, as billing and reimbursement for laboratory testing are subject to considerable
and complex federal and state regulations. The additional costs we expect to incur as a result of
our participation in the Medicare and Medicaid programs include costs related to, among other
factors: (1) complexity added to our billing processes; (2) training and education of our employees
and customers; (3) implementing compliance procedures and oversight; (4) collections and legal
costs; (5) challenging coverage and payment denials; and (6) providing patients with information
regarding claims processing and services, such as advanced beneficiary notices.
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We previously outsourced responsibility for billing and collections for our laboratory
services to a third-party. In order to improve the quality of our collection efforts and reduce
processing costs, we established an internal billing and collection department during 2008, and
staffed the department with experienced, knowledgeable, and licensed personnel. We, as a company,
however, do not have previous experience in billing third parties or patients directly for our
services, nor do we, as a company, have previous experience in collections activities. If our
in-house billing and collection department is not able to bill and collect for services on a timely
and accurate basis, including the compliance with filing deadlines required by certain payors, our
operating results, cash flows, and financial condition may be negatively impacted.
Changes in federal payor regulations or policies may adversely affect coverage and
reimbursement for our services and may have a material adverse effect upon our business.
Government payors, such as Medicare and Medicaid, have increased their efforts to control the
cost, utilization, and delivery of health care services. On March 1, 2010, a 21.2% cut to Medicare
payments to the Physician Fee Schedule was to
take effect, though the reduction has been stayed for 30 days. We believe that the proposed
cuts to the Physician Fee Schedule will ultimately not occur, though there can be no assurance of
our expectation. If payment cuts to the Physician Fee Schedule were to take effect, reductions in
the reimbursement rates applicable to other third-party payors would likely also occur, since many
of our payors base their reimbursement on the published Medicare fee schedules. Accordingly, the
21.2% proposed rate cut to the Physician Fee Schedule would have a material adverse impact on our
business if enacted. From time to time, Congress will consider and implement other reductions to
the Medicare Physician Fee Schedule in conjunction with budgetary legislation which would similarly
have a negative impact on our business if/when such reductions occur.
In addition, the 2010 extension of the technical component grandfather clause for Medicare
billings has not yet occurred. We expect the grandfather clause to be extended in the near term,
though there can be no assurance of our expectation. The grandfather clause permits us to
directly bill Medicare for the technical laboratory services we provide to hospital inpatients and
outpatients. Hospitals generally receive a bundled payment from Medicare for all services provided
to Medicare patients. Absent the grandfather clause, when a hospital subcontracts out a cancer
diagnostic test to us, the hospital would be responsible for paying us out of the bundled fee it
receives from Medicare, since we would not be able to directly bill Medicare for technical
laboratory services. This form of reimbursement would subject us to increased administrative costs
and slower collections and would likely result in reduced reimbursement levels and pricing
pressure.
Our net revenue will be diminished if payors do not adequately cover or reimburse us for our
services.
There has been, and will likely continue to be, significant efforts by both federal and state
agencies to reduce costs in government healthcare programs and to otherwise implement government
control of healthcare costs. In addition, increasing emphasis on managed care in the United States
may continue to put pressure on the pricing of healthcare services. Uncertainty exists as to the
coverage and reimbursement status of new applications or services. Governmental payors and private
payors are scrutinizing new medical products and services. Such third-parties may not cover, or
may limit coverage and resulting reimbursement for our services. Additionally, third-party
insurance coverage may not be available to patients for any of our existing assays or assays we may
discover and develop in the future. A substantial portion of the testing for which we bill our
hospital and laboratory clients is ultimately paid by third-party payors. Any pricing pressure
exerted by these third-party payors on our customers may, in turn, be exerted by our customers on
us. If governmental payors, including their contracted administrators, and other third-party payors
do not provide adequate coverage and/or timely reimbursement for our services, our operating
results, cash flows, or financial condition may decline.
Our cash flows and financial condition may decline if payors do not reimburse us for our
services in a timely manner.
We depend on our payors to reimburse us for our services in timely manner. If our payors,
particularly Medicare or Medicares designated administrator, do not reimburse us in a timely
manner, our cash flows and financial condition may decline.
A majority of managed care organizations are using capitated payment contracts in an attempt
to shift payment risks which may negatively impact our operating margins.
Managed care providers typically contract with a limited number of diagnostic laboratories and
then designate the laboratory or laboratories to be used for tests ordered by participating
physicians. The majority of managed care testing is negotiated on a fee-for-service basis at a
discount. Such discounts have historically resulted in price erosion and we expect that they could
negatively impact our operating margins as we continue to offer laboratory services to managed care
organizations.
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Our net revenue may be diminished from health care reform initiatives.
Health care reform has been identified as a priority by President Obama and other political
leaders, business leaders, public advocates, policy experts, and candidates for office at the
federal, state and local levels. Proposals include, among others: (1) establishing universal
health care coverage or purchasing pools; (2) modifying how hospitals, physicians and other health
care providers are paid; (3) evaluating hospitals, physicians and other health care providers on a
variety of quality and efficacy standards to support pay-for-performance systems and (4) investing
in health information technology and medical research. Congress and the Obama administration have
indicated their desire to institute significant health care reform in the near term. The
Presidents budget for fiscal year 2010 proposes a health care reserve fund of over $600 billion to
implement comprehensive health reforms over a ten-year period. Various reforms are also under
consideration by Congress. Although health care reform may be financed in part by cuts in
government health care payments, health care
reform could be implemented in a way that is beneficial to healthcare providers if increased
payments are available for more people who are currently uninsured or under insured. In order to
pay for health reform initiatives, the Obama administration is considering to make significant cuts
in Medicare payments. Our net revenue could be adversely affected by potential adjustments to
Medicare reimbursement rates for our laboratory diagnostic services.
We are required to maintain compliance with financial and other restrictive covenants in our
debt financing agreements which can restrict our ability to operate our business, and if we fail to
comply with those covenants, our outstanding indebtedness may be accelerated.
In July 2008, we entered into a credit facility with Gemino. The Gemino Facility was amended
in January 2009, February 2009, November 2009, and December 2009. The Gemino Facility, as amended,
contains a financial covenant which requires us to meet a minimum fixed charge coverage ratio
through January 2011.
The fixed charge coverage ratio covenant requires us to maintain a minimum ratio on a
cumulative annualized basis of 1.00 for the three months ending March 31, 2010, 1.10 for six months
ending June 30, 2010, 1.20 for the nine months ending September 30, 2010, and 1.20 for the twelve
months ending December 31, 2010 and thereafter. The fixed charge coverage ratio is defined as
the ratio of EBITDA (net income plus interest expense, tax expense, depreciation/ amortization
expense, and stock-based compensation expense) to the sum of (i) interest expense paid in cash on
the Gemino Facility, plus (ii) payments made under capital leases, plus (iii) unfinanced capital
expenditures, plus (iv) taxes paid.
The Gemino Facility also contains covenants which, among other things, restrict our ability
to:
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Pay dividends or make other distributions or payments on our capital stock; |
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Make capital expenditures; |
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Incur (or permit to exist) liens; |
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Enter into transactions with our affiliates; |
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Change our business, legal name or state of incorporation; |
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Guarantee the debt of other entities, including joint ventures; |
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Merge or consolidate or otherwise combine with another company; and |
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Transfer or sell our assets. |
The above covenants could adversely affect our ability to finance our future operations or
capital needs and pursue available business opportunities, including acquisitions. A breach of any
of these covenants could result in a default under the Gemino Facility, and thus result in the
indebtedness, together with accrued interests and other fees, to be immediately due and payable and
could allow Gemino to proceed against collateral securing such indebtedness.
The minimum fixed charge coverage ratio required by the Gemino Facility through September
30, 2009 was 1.10. Our calculated fixed charge coverage ratio through September 30, 2009 was
0.83. Accordingly, we were not in compliance with the minimum fixed charge coverage ratio
covenant as of September 30, 2009. On November 13, 2009, we obtained a waiver of non-compliance
from Gemino. The fixed charge coverage ratio covenant was removed for the period through
December 31, 2009 with an amendment to the Gemino Facility in November 2009.
20
We expect to be in compliance with all covenants contained within the Gemino Facility through
January 2011, though such outcome is uncertain. If we were not able to maintain compliance through
such date, our ability to receive a waiver of non-compliance from Gemino is also uncertain.
As of December 31, 2009, we had approximately $2.7 million of outstanding indebtedness under
our facility with Gemino, and $10.9 million of cash and cash equivalents. In the event the
facility with Gemino is accelerated, we may be able to repay our obligation to Gemino through our
cash and cash equivalents, assuming our current cash burn rates remain consistent. In addition, we
would likely seek alternative sources of financing to support our prospective working capital
requirements, though we may be unable to secure such financing on commercially reasonable terms, if
at all.
Our credit agreement with Gemino contains a material adverse change clause.
If our business encountered difficulties that would qualify as a material adverse change in
our (i) operations, (ii) condition (financial or otherwise), or (iii) ability to repay our facility, our credit
agreement with Gemino could be cancelled. Gemino could elect to declare the indebtedness under the
facility, together with accrued interest and other fees, to be immediately due and payable and
proceed against any collateral securing such indebtedness.
Disruption in credit markets and volatility in equity markets may affect our ability to access
sufficient funding.
The global equity markets have been volatile and global credit markets have been disrupted,
which has reduced the availability of investment capital and credit. If these conditions continue
or worsen, we may be unable to access adequate funding to operate and grow our business. Our
inability to access adequate funding or to generate sufficient cash from operations may require us
to reconsider certain projects and capital expenditures. The extent of any impact will depend upon
several factors, including our operating cash flows, the duration of tight credit conditions and
volatile equity markets, our credit ratings and credit capacity, the cost of financing, and other
general economic and business conditions.
We sold our Technology Business to Zeiss and we may incur indemnification obligations.
In March 2007, we sold our Technology Business to Zeiss for an aggregate purchase price of
$12.5 million. In connection therewith, we made customary representations and warranties to Zeiss
and we retained certain pre-closing liabilities relating to the Technology Business. As a result,
we may have future indemnification obligations to Zeiss upon a breach of such representations and
warranties and in connection with any related third party claims, surviving through the applicable
statute of limitation, though we believe the value and likelihood of such obligations are minimal.
We may not successfully manage our growth, which may result in delays or unanticipated
difficulties in implementing our business plan.
Our success will depend upon the expansion of our operations and the effective management of
our growth. We expect to experience growth in the scope of our operations and services and the
number of our employees. If we grow significantly, such growth will place a significant strain on
our management, administrative, operational, and financial resources. To manage significant growth,
we may need to expand our facilities, augment our operational, financial, and management systems,
internal controls and infrastructure, and hire and train additional qualified personnel. Our future
success is heavily dependent upon growth and acceptance of our future services. If we are unable to
scale our business appropriately or otherwise adapt to anticipated growth and the introduction of
new services, our business, operating results, cash flows, and financial condition may be harmed.
The diagnostic laboratory market is characterized by rapid technological change, frequent new
product introductions, and evolving industry standards, and we may encounter difficulties keeping
pace with changes in this market.
The introduction of diagnostic tests embodying new technologies and the emergence of new
industry standards can render existing tests obsolete and unmarketable in short periods of time. We
expect our competitors to introduce new products and services and enhancements to their existing
products and services. Our future success will depend upon our ability to enhance our current
tests, and to develop new tests, in a manner that keeps pace with emerging industry standards and
achieves market acceptance. Our inability to accomplish any of these endeavors will likely have a
material adverse effect on our business, operating results, cash flows, and financial condition.
21
We face substantial existing competition and potential new competition.
The laboratory business is intensely competitive both in terms of price and service. This
industry is dominated by several national independent laboratories, but includes many smaller niche
and regional independent laboratories as well. Large commercial enterprises, including Quest
Diagnostics Incorporated and Laboratory Corporation of America (LabCorp), have substantially
greater financial resources, larger research and development programs, and more sales and marketing
channels than we do, enabling them to potentially develop and market competing products and
services. These enterprises may also be able to achieve greater economies of scale or establish
contracts with payor groups on more favorable terms. Academic and regional medical institutions
generally lack the advantages of the larger commercial laboratories, but still compete with us on a
limited basis. Smaller niche laboratories compete with us based on their reputation in specializing
within a narrow test menu. Pricing of laboratory testing services is one of the significant factors
often used by health care providers in selecting a laboratory. As a result, the laboratory industry
is undergoing significant consolidation. Larger clinical laboratory providers are able to maximize
cost efficiencies afforded by large-scale automated testing. This consolidation results in greater
price competition. To meet such competition, we may be unable to improve our cost
efficiencies sufficiently, if at all, and as a result, our operating results, cash flows, and
our financial position could be negatively impacted.
Our current and developing competitors are actively conducting research and development in
areas where we are also conducting such activities. The products and services these companies may
develop could directly compete with our current or potential services, or may address other areas
of diagnostic evaluation, making such companies compete more effectively against us. The
diagnostic testing market is sensitive to the timing of product and service availability. A
company that can quickly develop and achieve clinical study and regulatory success ahead of its
competitors may hold a competitive advantage. If we are not able to effectively compete within our
industry, our business and results of operations will be adversely affected.
If we fail to develop our proprietary biomarkers, we may not achieve an acceptable return on
our research and development expenditures.
Our future success will depend, in part, on the timely development and introduction
of biomarkers that address evolving market requirements for cancer diagnostic services. We are new
to independently developing biomarkers and our future success will depend, in part, on our ability
to internally develop and commercialize biomarkers. If we fail in this regard, we will not obtain
an adequate return on our research and development expenditures, and will likely incur goodwill
impairment charges, and lose valuable market share to our competitors, which may be difficult or
impossible to regain.
Failure in our information technology systems could disrupt our operations.
Our success will depend, in part, on the continued and uninterrupted performance of our
information technology systems. Information systems are used extensively in virtually all aspects
of our business, including laboratory testing, billing, customer service, logistics, management of
medical data, and dissemination of test results.
Our computer systems are vulnerable to damage from a variety of sources, including
telecommunications failures, malicious human acts, and natural disasters. Moreover, despite
reasonable security measures we have implemented, some of our information technology systems are
potentially vulnerable to physical or electronic break-ins, computer viruses, and similar
disruptive problems. In July 2009, we began utilizing a new Enterprise Resource Planning (ERP)
system. The ERP has various modules which impact our internal control over financial reporting and
the related business risks that could arise in connection therewith are uncertain.
We conduct business over the Internet and because certain of our information technology
systems are located at third-party web hosting providers, we cannot control the maintenance and
operation of the data centers by such third-parties. Despite the precautions we have taken,
unanticipated problems affecting our systems could cause interruptions in our information
technology systems, leading to lost revenue, deterioration of customer confidence, and significant
business disruption. Our business, financial condition, results of operations, or cash flows could
be materially and adversely affected by any problem that interrupts or delays our operations.
22
We may require additional financing for, among other things, general working capital,
expansion of our laboratory operations, possible acquisitions, development of novel molecular
tests, capital expenditures and other costs, and it is uncertain whether such financing will be
available on favorable terms, if at all.
We will continue to expend funds for development of novel markers, clinical trials, and to
expand our service offerings and will need additional capital if our current business initiatives
are not successful or we fail to achieve the level of revenue and gross profit from our services
within the time frame contemplated by our business plan.
Our present and future funding requirements will also depend on certain other external
factors, including, among other things:
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The level of development investment required to maintain and improve our
service offerings, including the development of novel molecular tests; |
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Our need or decision to acquire or license complementary technologies or
acquire complementary businesses; |
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Competing technological and market developments; |
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Changes in regulatory policies or laws that affect our operations; and |
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Our ability to receive, in cash, the net revenue we have recognized and
reported. |
We do not know whether additional financing will be available to us as needed on commercially
acceptable terms or at all. The current turmoil in the global credit markets adds to such
uncertainty due to the more limited availability of credit. These conditions could also impair
the ability of those with whom we do business, such as our customers, suppliers, and lenders, to
satisfy their obligations to us. If adequate funds are not available, or are not available on
commercially acceptable terms, we might be required to delay, scale back or eliminate some or all
of our development activities or new business initiatives, or to license to third parties the right
to commercialize products or technologies that we would otherwise seek to commercialize ourselves.
If additional funds are raised through an equity or convertible debt financing, our stockholders
may experience significant dilution.
If a catastrophe were to strike our facility, we would be unable to operate our
business competitively.
Our facility may be affected by catastrophes such as fires or earthquakes. Although we have
installed certain power back-up systems, we may also be affected by sustained interruptions in
electrical service. Earthquakes and fires are of particular significance to us because our
laboratory facility is located in southern California, an earthquake and fire prone area. In the
event our existing facility or equipment is affected by man-made or natural disasters, we may be
unable to process our customers samples in a timely manner and unable to operate our business in a
commercially competitive manner.
Our ability to maintain our competitive position depends on our ability to attract and retain
highly qualified managerial, technical, and sales and marketing personnel.
We believe that our continued success depends to a significant extent upon the efforts and
abilities of our executive officers and our scientific and technical personnel, including the
following individuals:
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Ronald A. Andrews, our Vice Chairman and Chief Executive Officer; |
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Michael J. Pellini, M.D., our President and Chief Operating Officer; |
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Michael R. Rodriguez, our Senior Vice President and Chief Financial Officer; |
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Kenneth J. Bloom, M.D., our Chief Medical Officer; |
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Todd S. Barry, M.D., Ph.D, our Medical Director; |
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David J. Daly, our Senior Vice President of Commercial Operations; |
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Douglas Ross, M.D., Ph.D, our Chief Scientific Officer; |
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Robert Seitz, our Senior Vice President, Technology Assessment, and General
Manager, Huntsville Facility; |
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Ronald D. Collette, our Chief Information Officer; and |
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Glen M. Fredenberg, our Vice President of Finance and Corporate Controller. |
23
The loss of any of our executive officers, senior managers, or key scientific or technical
personnel could have a material adverse effect on our business, operating results, cash flows, and
financial condition. We do not maintain key-person life insurance on any of our officers, managers,
scientific and technical personnel, or other employees. Furthermore, our anticipated growth and
expansion will require the addition of highly skilled technical, management, financial, sales and
marketing personnel. Competition for personnel is intense, and our failure to hire and retain
talented personnel or the loss of one or more key employees could have a material adverse effect on
our business. In particular, we may encounter difficulties in attracting and retaining a sufficient
number of qualified California licensed laboratory scientists.
We are dependent on others for the development of products. The failure of our collaborations
to successfully develop products could harm our business.
Our business strategy includes entering into agreements with clinical and commercial
collaborators and other third parties for the development, clinical evaluation, and marketing of
new services, including novel molecular tests. Research performed under a collaboration for which
we receive or provide funding may not lead to the development of products in the timeframe
expected, or at all. If these agreements are terminated earlier than expected, or if third parties
do not perform their related obligations properly and on a timely basis, we may not be able to
successfully develop new products as planned, or at all.
We may acquire other businesses, products or technologies in order to remain competitive in
our market and our business could be adversely affected as a result of any of these future
acquisitions.
We may make acquisitions of complementary businesses, products or technologies. If we identify
any appropriate acquisition candidates, we may not be successful in negotiating acceptable terms of
the acquisition, financing the acquisition, or integrating the acquired business, products or
technologies into our existing business and operations. Further, completing an acquisition and
integrating an acquired business will significantly divert management time and resources. The
diversion of management attention and any difficulties encountered in the transition and
integration process could harm our business. If we consummate any significant acquisitions using
stock or other securities as consideration, our stockholders equity could be significantly
diluted. If we make any significant acquisitions using cash consideration, we may be required to
use a substantial portion of our available cash. Acquisition financing may not be available on
favorable terms, if at all.
Clinicians or patients using our services may sue us, and our insurance may not sufficiently
cover all claims brought against us, which will increase our expenses.
The development, marketing, sale, and performance of healthcare services expose us to the risk
of litigation, including professional negligence. Damages assessed in connection with, and the
costs of defending, any legal action could be substantial. We currently maintain numerous insurance
policies, including a $10.0 million aggregate, $5.0 million per claim, medical professional
liability insurance policy, with a deductible of $25,000. However, we may be faced with litigation
claims which exceed our insurance coverage or are not covered under any of our insurance policies.
In addition, litigation could have a material adverse effect on our business if it impacts our
existing and potential customer relationships, creates adverse public relations, diverts management
resources from the operation of the business, or hampers our ability to otherwise conduct our
business.
If we use biological and hazardous materials in a manner that causes injury, we could be
liable for damages.
Our development and clinical pathology activities sometimes involve the controlled use of
potentially harmful biological materials, hazardous materials, chemicals, and various radioactive
compounds. We cannot completely eliminate the risk of accidental contamination or injury to third
parties from the use, storage, handling, or disposal of these materials. We currently maintain
numerous casualty policies, including a $1.0 million per occurrence, $2.0 million aggregate general
liability policy, and a $10.0 million umbrella liability policy. These policies have deductibles
ranging from $5,000 to $50,000 and contain customary exclusions. However, in the event of
contamination or injury, we could be held liable for any resulting damages, and any liability could
exceed our financial resources and/or any applicable insurance coverage we may have. Additionally,
we are subject on an ongoing basis to federal, state and local laws and regulations governing the
use, storage, handling and disposal of these materials and specified waste products. The cost of
compliance with these laws and regulations is significant and could negatively affect our
operations, cash flows, and financial condition if these costs substantially increase.
24
Any breakdown in the protection of our licensed proprietary technology, or any determination
that our licensed proprietary technology infringes on the rights of others, could materially affect
our business.
Our commercial success will depend in part on our ability to protect and maintain our
proprietary technology. We rely primarily on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures, and contractual provisions to protect our proprietary rights.
However, obtaining, defending and enforcing intellectual property rights involve complex legal and
factual questions. We may not be able to effectively maintain our technologies as unpatented trade
secrets or otherwise obtain meaningful protection for our proprietary technology. Moreover, third
parties may infringe, design around, or improve upon our proprietary technology or rights.
If the use of our technologies conflicts with the intellectual property rights of third
parties, we may incur substantial liabilities and we may be unable to commercialize products based
on these technologies in a profitable manner, if at all.
Our competitors and other third parties may have, or may acquire, patent rights that they
could enforce against us. If they do so, we may be required to alter our technologies, pay
licensing fees, or cease activities. Additionally, if our technologies conflict with patent rights
of others, third parties could bring legal action against us or our licensees, suppliers,
customers, or collaborators, claiming damages and seeking to enjoin manufacturing and marketing of
the affected products. If these legal actions are successful, in addition to any potential
liability for damages, we might have to obtain a royalty or licensing arrangement in order to
continue to manufacture or market the affected products. A required license or royalty under the
related patent or other intellectual property may not be available on acceptable terms, if at all.
Because patent applications can take many years to issue, there may be pending applications,
unknown to us, that may later result in issued patents upon which our technologies may infringe.
There could also be existing patents of which we are unaware upon which our technologies may
infringe. In addition, if third parties file patent applications or obtain patents claiming
technology also claimed by us in pending applications, we may have to participate in interference
proceedings in the United States Patent and Trademark Office to determine priority of invention. If
third parties file oppositions in foreign countries, we may also have to participate in opposition
proceedings in foreign tribunals to defend filed foreign patent applications. Additionally, we may
have to participate in interference proceedings involving our issued patents or our pending
applications.
If a third party claims that we infringe upon its proprietary rights, any of the following may
occur:
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We may become involved in time-consuming and expensive litigation, even if a
claim is without merit; |
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We may become liable for substantial damages for past infringement, including
possible treble damages for allegations of willful infringement; |
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A court may prohibit us from using a technology or providing a service without
a license from the patent holder, which may not be available on commercially acceptable
terms, if at all, or which may require us to pay substantial royalties or grant
cross-licenses to our intellectual property; and |
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We may have to redesign our services so that they do not infringe upon others
patent rights, which may not be possible, or if possible, could require substantial
funds or time. |
If any of these events occur, our business, results of operation, cash flows, and financial
condition will likely suffer and the market price of our common stock will likely decline.
25
Risks Related to Regulation of Our Industry
If we are not able to obtain all of the regulatory approvals and clearances required to
conduct clinical trials if/when required and/or commercialize our services and underlying
diagnostic applications, our business would be significantly harmed.
The industry in which we operate is highly regulated. Areas of the regulatory environment
that may affect our ability to conduct business include, without limitation:
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Federal and state laws applicable to billing and claims payment and/or
regulatory agencies enforcing those laws and regulations; |
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Federal and state laboratory anti-mark-up laws; |
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Federal and state anti-kickback laws; |
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Federal and state false claims laws; |
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Federal and state self-referral and financial inducement laws, including the
federal physician anti-self-referral law, or the Stark Law; |
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Coverage and reimbursement levels by Medicare, Medicaid, other governmental payors, and
private insurers; |
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Restrictions on reimbursements for our services; |
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Federal and state laws governing laboratory testing, including CLIA; |
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Federal and state laws governing the development, use and distribution of
diagnostic medical tests known as home brews; |
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HIPAA and the HITECH Act; |
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Federal and state regulation of privacy, security and electronic transactions; |
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State laws regarding prohibitions on the corporate practice of medicine; |
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State laws regarding prohibitions on fee-splitting; |
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Federal, state and local laws governing the handling and disposal of medical and
hazardous waste; and |
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Occupational Safety and Health Administration (OSHA) rules and regulations. |
The above noted laws and regulations are extremely complex and in many instances,
there are no significant regulatory or judicial interpretations of such laws and regulations. While
we believe that we are currently in material compliance with applicable laws and regulations, a
determination that we have violated any laws, or the public announcement that we are being
investigated for possible violations of any laws, would adversely affect our business, prospects,
results of operations, and financial condition. In addition, a significant change in any of the
above listed laws may require us to change our business model in order to maintain compliance,
which could reduce our net revenue or increase our costs and adversely affect our business,
prospects, results of operations, and financial condition.
We are subject to significant environmental, health and safety regulation.
We are subject to regulation under federal, state, and local laws and regulations relating to
the protection of the environment, including laws and regulations relating to the handling,
transportation and disposal of medical specimens, infectious and hazardous waste, and radioactive
materials, as well as to the safety and health of our laboratory employees. OSHA has established
extensive requirements relating to workplace safety for health care employers, including clinical
laboratories, whose workers may be exposed to blood-borne pathogens such as HIV and the hepatitis B
virus. These regulations, among other things, require 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. In addition, the federally-enacted
Needlestick Safety and Prevention Act requires, among other things, that we include in our safety
programs the evaluation and use of engineering controls such as safety needles if found to be
effective at reducing the risk of needlestick injuries in the workplace. Compliance with
applicable environmental, health and safety regulations may be expensive, and current or future
environmental laws and regulations may impair business efforts. If we do not comply with
applicable regulations, we may be subject to fines and penalties.
26
We are subject to federal and state laws governing the financial relationship among healthcare
providers, including Medicare & Medicaid laws, and our failure to comply with these laws could
result in significant penalties and other adverse consequences.
Our reimbursement from Medicare accounted for approximately 33.5% of our net revenue for the
year ended December 31, 2009. The Medicare program is administered by CMS, and similar to state
Medicaid programs, imposes extensive and detailed requirements on diagnostic services providers,
including, but not limited to, rules that govern how we structure our relationships with
physicians, how and when we submit reimbursement claims, and how we provide our specialized
diagnostic services. Our failure to comply with applicable Medicare, Medicaid, and other
governmental payor rules could result in our inability to participate in a governmental payor
program, our returning of funds already paid to us, civil monetary penalties, criminal penalties,
and/or limitations on the operational function of our laboratory. If we were unable to receive
reimbursement under a governmental payor program, a substantial portion of our net revenue would be
lost, which would adversely affect our results of operations and financial condition.
Our business is subject to stringent laws and regulations governing the privacy, security and
transmission of medical information, and our failure to comply could subject us to criminal
penalties and civil sanctions.
Governmental laws and regulations affect the privacy, security and transmission of medical
information. Such laws and regulations restrict our ability to use or disclose patient
identifiable laboratory data, without 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 of HIPAA. Such
privacy and security regulations provide for significant fines and other penalties for wrongful use
or disclosure of PHI, including potential civil and criminal fines and penalties. Although HIPAA
does not expressly provide for a private right of damages, we also could incur damages under state
laws to private parties for the wrongful use or disclosure of confidential health information, or
other private personal information.
Federal law and the laws of many states generally specify who may practice medicine and limit
the scope of relationships between medical practitioners and other parties.
Because of the unique structure of the relationships between CPS and us, as described in Item
1, Clarient Pathology Services, Inc., many aspects of our business operations have not been the
subject of state or federal regulatory interpretation. A review of our business by the courts or
regulatory authorities could result in a determination that our operations do not comply with
applicable law. In addition, the health care regulatory environment may change in a manner that
restricts our existing operations or future expansion.
Risks Related to Ownership of Our Common Stock
We have never paid cash dividends on our common stock and do not anticipate paying dividends
on our common stock, which may cause you to rely on capital appreciation for a return on your
investment.
We currently intend to retain future earnings for use in our business and do not anticipate
paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends
will also depend on our financial condition, results of operations, capital requirements, and other
factors and will be at the discretion of our board of directors. In addition, we are restricted
from paying a dividend under our credit facilities without our lenders consent. Accordingly, one
will have to rely on capital appreciation, if any, to earn a return on their investment in our
common stock.
27
If we raise additional funds, you may suffer dilution or subordination, and we may grant
rights in our technology or products to third parties.
If we raise additional funds by issuing equity securities, further dilution to our
stockholders could result, and new investors could have rights superior to those of holders of our
common stock. Any equity securities issued also may provide for rights, preferences or privileges
senior to those of holders of our common stock. If we raise additional funds by issuing debt
securities, these debt securities would have rights, preferences and privileges senior to those of
holders of our common stock, and the terms of the debt securities issued could impose significant
restrictions on our operations. If we raise additional funds through collaborations and licensing
arrangements, we might be required to relinquish significant rights to our developed technologies
or products, or grant licenses on terms that are not favorable to us. If adequate funds are not
available, we may have to delay or may be unable to continue to develop our products.
Our stock price is likely to continue to be volatile, which could result in substantial losses
for investors.
The market price of our common stock has in the past been, and in the future is likely to be,
highly volatile. These fluctuations could result in substantial losses for investors. Our stock
price may fluctuate for a number of reasons, including, but not limited to:
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Our operating performance; |
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Media reports and publications and announcements about cancer or diagnostic
products or treatments or new innovations; |
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Developments or disputes regarding patent or other proprietary rights; |
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Announcements regarding clinical trials or other technological or competitive
developments by us and our competitors; |
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The hiring and retention of key personnel; |
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Announcements concerning our competitors or the biotechnology industry in
general; |
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Regulatory developments regarding us or our competitors; |
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Changes in coverage and reimbursement policies concerning our services or
competitors services; |
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Changes in the current structure of the healthcare financing and payment
systems; |
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Stock market price and volume fluctuations, which have particularly affected
the market prices for life sciences companies, and which have often been unrelated to
the operating performance of such companies; and |
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General economic, political, and market conditions. |
Securities class action litigation is often brought against a company after a period of
volatility in the market price of its stock. This type of litigation could be brought against us in
the future, which could result in substantial expense and damage awards and divert managements
attention from running our business.
With the advent of the Internet, new avenues have been created for the dissemination of
information. We do not have control over the information that is distributed and discussed on
electronic bulletin boards and investment chat rooms. The motives of the people or organizations
that distribute such information may not be in our best interest or in the interest of our
stockholders. This, in addition to other forms of investment information, including newsletters and
research publications, could result in a significant decline in the market price of our common
stock.
28
Future sales of shares by existing stockholders could result in a decline in the market price
of our stock.
Some of our current stockholders hold a substantial number of shares which they are currently
able to sell in the public market, and our employees hold options to purchase a significant number
of shares and/or have been issued shares of restricted stock that are covered by registration
statements on Form S-8. If our common stockholders sell substantial amounts of common stock in the
public market, or the market perceives that such sales may occur, the market price of our common
stock could fall.
Two stockholders, in the aggregate, hold 48% of our outstanding voting shares. Those
stockholders interests may differ from other stockholders interests and may adversely affect the
trading price of our common stock.
Safeguard and Oak beneficially own approximately 28.0% and 20.0% of our outstanding voting
shares, respectively. As a result, Safeguard and Oak will have significant influence in determining
the outcome of any corporate transaction or other matter submitted to our stockholders for
approval, including mergers, consolidations, and the sale of all, or substantially all, of our
assets. Safeguard and Oak are contractually able to appoint five of our nine directors, though
their combined voting interest could result in their election of all of our directors through their
combined support. As a result, Safeguard and Oak could dictate the management of our business and
affairs, particularly if acting in concert. The interests of Safeguard and Oak may differ from
other stockholders interests. In addition, this concentration of ownership may delay, prevent, or
deter a change in control and could deprive other stockholders of an opportunity to receive a
premium for their common stock as part of a sale of our business. This concentration of share
ownership may adversely affect the trading price of our common stock because investors often
perceive disadvantages in owning stock in companies with stockholders with significant voting
interests.
Section 203 of Delaware General Corporation Law could inhibit a change in control and prevent
a stockholder from receiving a favorable price for his or her shares.
Section 203 of the Delaware General Corporation Law limits business combination transactions
with 15% stockholders that have not been approved by our board of directors. These provisions and
others could make it difficult for a third party to acquire us, or for members of our board of
directors to be replaced, even if doing so would be beneficial to our
stockholders. Because our board of directors is responsible for appointing the members of our
management team, these provisions could in turn affect any attempt to replace the current
management team. If a change of control or change in management is delayed or prevented, one may
lose an opportunity to realize a premium on their shares of common stock or the market price of our
common stock could decline.
If we do not maintain compliance with the listing requirements of the NASDAQ Capital Market,
or any other national securities exchange, our common stock could be delisted, and such delisting
may negatively affect our business and the liquidity and price of our common stock.
Our common stock is listed on the NASDAQ Capital Market. We are required to satisfy various
listing maintenance standards for our common stock to remain listed on the NASDAQ Capital Market.
If we fail to meet such standards, our common stock would likely be delisted from the NASDAQ
Capital Market and if we are unable to comply with the listing requirements of any other national
securities exchange, our common stock would be traded on an over-the-counter market such as the OTC
Bulletin Board or the Pink Sheets. The over-the-counter markets are generally considered to be
less efficient markets and having our common stock quoted on an over-the-counter market would
seriously impair the liquidity of our common stock and limit our potential to raise future capital
through the sale of our common stock, which could materially harm our business, results of
operations, cash flows, and financial position.
Securities analysts may not initiate coverage for our common stock, may cease coverage for our
common stock or may issue negative reports, and this may have a negative impact on the market price
of our common stock.
Securities analysts may elect not to provide research coverage of our common stock. If
securities analysts do not cover our common stock, the lack of research coverage may adversely
affect the market price of our common stock. The trading market for our common stock may be
affected in part by the research and reports that industry or financial analysts publish about us
or our business. If one or more of the analysts who elect to cover us downgrades our stock, our
stock price could decline. If one or more of these analysts ceases coverage of our company, we
could lose visibility in the market, which in turn could cause our stock price to decline.
29
Shares of our Series A convertible preferred stock are subject to anti-dilution rights that
could increase the concentration of the ownership of our common stock.
Pursuant to our Certificate of Designations, Preferences and Rights of Series A Convertible
Preferred Stock, our Series A convertible preferred stock has certain anti-dilution protections.
Pursuant to these protections, the number of shares of common stock that the Series A convertible
preferred stock may convert into will increase in the event that we issue stock at a price lower
than the original price of the Series A convertible preferred stock in certain circumstances. If
the number of shares of common stock into which the Series A convertible preferred stock may
convert increases, the holders of the Series A convertible preferred stock will control an
increased percentage of our voting stock and will be in an even greater position to control
significant corporate actions.
The holders of our Series A convertible preferred stock are entitled to receive liquidation
payments in preference to the holders of our common stock.
Upon a change in control, liquidation, dissolution or winding up of the affairs of our
business, whether voluntary or involuntary, the holders of our Series A convertible preferred stock
are entitled to receive a liquidation payment prior to the payment of any amount with respect to
shares of our common stock. The amount of this preferential liquidation payment per share of the
Series A convertible preferred stock is the amount equal to the greater of (1) $7.60 per whole
share of Series A convertible preferred stock (as adjusted for stock splits, reverse stock splits,
stock dividends and similar transactions with respect to the Series A convertible preferred stock
plus declared and unpaid dividends on such share of Series A convertible preferred stock or (2)
such amount per share of Series A convertible preferred stock as would have been payable had each
share of Series A convertible preferred stock which is convertible into common stock been so
converted immediately prior to such change in control, liquidation, dissolution or winding up.
Because of the liquidation preference to which the holders of shares of the Series A convertible
preferred stock are entitled, the amount available to be distributed to the holders of shares of
our common stock upon a liquidation, dissolution or winding up of the affairs of our business could
be substantially limited or reduced. Each share of Series A convertible preferred stock is
currently convertible into four shares of common stock.
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Item 1B. |
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Unresolved Staff Comments |
None.
We believe that our facilities are well maintained and adequate for our business requirements
for the near-term, and that additional space, when needed, will be available on commercially
reasonable terms. We have three facilities which are described below.
Corporate Headquarters and Diagnostic Services Laboratory
Our corporate headquarters and diagnostic services laboratory is located in Aliso Viejo,
California, where we lease a facility with approximately 78,000 square feet. The initial ten-year
term of our lease commenced on December 1, 2005, and we have an option to extend the lease term for
up to two additional five-year periods.
Research and Development and Biopharmaceutical Services Centers
We lease our research and development and biopharmaceutical services centers in Huntsville,
Alabama and Burlingame, California, comprising approximately 6,500 square feet. The Huntsville
lease expires in January 2013. The Burlingame lease expires in March 2010 and will not be renewed.
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Item 3. |
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Legal Proceedings |
We are not a party to any material pending legal proceedings, the adverse outcome of which,
individually or in the aggregate, management believes would have a material adverse affect on our
business, financial condition, or results of operations. We may be subject to various claims and
legal actions arising in the ordinary course of business from time to time.
30
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Item 4A. |
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Executive Officers of the Registrant |
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Name |
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Age |
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Position |
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Executive Officer Since |
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Ronald A. Andrews |
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50 |
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Vice Chairman and Chief Executive Officer |
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2004 |
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Michael J. Pellini, M.D. |
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44 |
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President and Chief Operating Officer |
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2007 |
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Michael R. Rodriguez |
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42 |
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Senior Vice President and Chief Financial Officer |
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2009 |
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David J. Daly |
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48 |
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Senior Vice President of Commercial Operations |
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2005 |
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Ronald A. Andrews, 50, has been our Chief Executive Officer since July 2004 and Vice Chairman
since April 2008. He also served as our President from July 2004 through April 2008. Mr. Andrews
was Senior Vice President of Global Marketing and Commercial Business Development at Pleasanton,
California-based Roche Molecular Diagnostics from 2002 to 2004. In that role, he developed and led
the strategic execution for all molecular diagnostic commercial operations. This included the
oversight of five Business Sector Vice Presidents responsible for all aspects of global marketing
and business development in the areas of blood screening, virology, womens health, microbiology
and automation/emerging diagnostics. Mr. Andrews was also responsible for executive direction of
all marketing functions, directed the development of the 10-year Strategic Plan for the
organization and completed the reorganization of commercial operations during that period. From
2000 to 2002, Mr. Andrews held two senior executive positions with Indianapolis-based Roche
Diagnostics Corporation. As Vice President, U.S. Commercial Operations, Molecular Diagnostics, he
directed sales, marketing, technical field support and product development activities and was
responsible for United States commercial strategy development for the clinical laboratory market.
Prior to that, as Vice President, Marketing, U.S. Commercial Operations, he was responsible for
planning and directing all aspects of the Roche U.S. Laboratory Systems Commercial Operations
Marketing which included the clinical chemistry, immunochemistry, hematology, near patient testing
and molecular markets. From 1995 to 2000,
Mr. Andrews was Vice President of Atlanta-based Immucor, Inc. where he helped lead the
transition of that company from a reagent manufacturer to an instrument systems company. Prior to
joining Immucor, Mr. Andrews spent almost 10 years in management positions of increasing
responsibility at Chicago-based Abbott Diagnostics, culminating in the position of Senior Marketing
Manager, Business Unit Operations. Mr. Andrews earned a B.S. degree in Biology and Chemistry from
Spartanburg, South Carolina-based Wofford College in 1981 and participated extensively in the
executive development programs at both Roche and Abbott Labs.
Michael J. Pellini, M.D., 44, has been our Chief Operating Officer since October 2007 and
President since April 2008. From February 2007 to April 2008, Dr. Pellini also served as Vice
President of Safeguards Life Sciences Group. Prior to joining Safeguard, Dr. Pellini was Executive
Vice President and Chief Operating Officer at Lakewood Pathology Associates, Inc., a national
anatomical pathology company that provides comprehensive molecular and pathology services tailored
toward the outpatient needs of surgical sub-specialists, from April 2005 to December 2006. From
September 2004 to April 2005, Dr. Pellini was an Entrepreneur in Residence at BioAdvance, where he
was responsible for reviewing and evaluating seed stage investment proposals. From June 1999 to
February 2004, Dr. Pellini served as President and Chief Executive Officer of Genomics
Collaborative, Inc., a Boston-based biotech firm that was acquired by SeraCare Life Sciences, Inc.
in 2004. Dr. Pellini is a native of the greater Philadelphia region. He trained as a primary care
physician in the Thomas Jefferson University Health System. Before attending medical school, he
worked in the investment banking industry in both Philadelphia and Sydney, Australia. Dr. Pellini
earned a M.D. from Jefferson Medical College of Thomas Jefferson University in Philadelphia, an
M.B.A. degree from Drexel University in Philadelphia and a B.A. degree in Economics from Boston
College in Massachusetts.
Michael R. Rodriguez, 42, has been our Chief Financial Officer since December 2009. From
August 2004 to July 2009, Mr. Rodriguez served as the Senior Vice President, Finance and Chief
Financial Officer at Endocare, Inc., a publicly-traded medical device company focused on minimally
invasive technologies for tissue and tumor ablation, which was acquired by HealthTronics, Inc. in
July 2009. From January 2004 until August 2004, Mr. Rodriguez served as a consultant to Endocare,
providing assistance on a variety of financial and operational projects and compliance with Section
404 of the Sarbanes-Oxley Act. Prior to joining Endocare as a consultant, Mr. Rodriguez served as
Executive Vice President and Chief Financial Officer of Directfit, Inc., a privately-held provider
of information technology staffing services, from June 2000 to November 2003. From September 1997
to June 2000, Mr. Rodriguez held a variety of positions, including Senior Vice President and Chief
Financial Officer, with Tickets.com, Inc., a publicly-traded Internet-based provider of
entertainment ticketing services and software. From June 1995 to September 1997, Mr. Rodriguez was
Corporate Controller and Director of Finance at EDiX Corporation, a medical informatics company.
Mr. Rodriguez began his career at Arthur Andersen LLP and was with that firm from 1989 to 1993. Mr.
Rodriguez holds a B.S. degree in accounting from the University of Southern California and an
M.B.A. degree from the Stanford University Graduate School of Business. Mr. Rodriguez is a
Certified Public Accountant (inactive).
31
David J. Daly, 48, our Senior Vice President of Commercial Operations, joined us in
February 2005 as Vice President of Sales. In 2006, Mr. Daly took over responsibility for both our
marketing in addition to sales functions. In 2007, Mr. Daly became responsible for all of our
commercial operations. Prior to joining us, Mr. Daly served as Area Marketing Manager for Roche
Diagnostics, where he was responsible for the establishment of Molecular Centers of Excellence
throughout the western region. Prior to Roche, Mr. Daly spent ten years with Abbott Laboratories,
Diagnostic Division. He started his career as a territory sales representative and took on
increasing levels of responsibility throughout his tenure. His roles included Worldwide Marketing,
where he was responsible for the development and implementation of Abbotts Global lab automation
strategy and Sales Management where he served as District Manager for Hematology products. Mr. Daly
completed his career at Abbott as Director of U.S. Sales, Animal Health division, where he was
responsible for a $50 million annual sales plan and managed a 35 member sales organization. Mr.
Daly earned an M.A. degree in Economics from the University of California, Santa Barbara and
graduated cum laude with a B.A. degree in Economics from the University of California, Irvine.
Other Significant Employees
Kenneth J. Bloom, M.D., 52, has been our Medical Director since August 2004 and Chief Medical
Officer since September 2004. Dr. Bloom is the President and sole shareholder of Clarient
Pathology Services, Inc., which is discussed in Item 1. Clarient Pathology Services, Inc. Dr.
Bloom joined us from Irvine, California-based U.S. Labs, where he served as Senior Medical Director
since 2002. Prior to that, Dr. Bloom spent more than two decades serving in senior academic,
consultative and clinical roles with leading hospitals and healthcare enterprises principally in
the specialization of cancer care. Dr. Blooms academic posts have included over 10 years as
Associate Professor of Pathology at Chicago-based Rush Medical College, as well as one year as a
visiting Professor in the Department of Computer Science at DePaul University. Over the past 15
years, Dr. Bloom has held more than 10 appointed positions at Chicago-based Rush Presbyterian St.
Lukes Medical Center, one of the leading cancer research hospitals in the United States.
Those positions included Director of Laboratory Operations, Director of Immunohistochemistry, and
Director of the Breast Service in the Department of Pathology, Consultant to the Rush Breast Cancer
Center, and Director of Information Services for the Rush Cancer Institute. Dr. Bloom has, for more
than three decades, been a prolific researcher and lecturer in the fields of pathology and,
specifically, cancer related topics. He has been a member of the College of American Pathologists
(CAP) since 1987 and currently serves as a member of the Immunohistochemistry and Technology
Assessment Committees for that organization. In addition to the roles mentioned above, Dr. Bloom
has served the industry off and on for the past 20 years in both advisory and operational roles.
Those appointments include Board of Directors seats, consulting roles and executive posts including
executive level positions at both diagnostics technology and information technology firms. Dr.
Bloom earned his earned a M.D. from Rush Medical College and a B.A. degree from Grinnell College.
Todd S. Barry, M.D., Ph.D., 47, has been our Medical Director since September 2008. Prior to
joining us, Dr. Barry was employed by PhenoPath Laboratories, in Seattle, WA, from July 2002
through August 2008, where he served as the Director of Molecular and Hematopathology. During his
tenure with PhenoPath, Dr. Barry gained extensive experience in the use of morphologic,
immunophenotypic, and molecular tools used in the diagnosis and prognosis of hematologic and
non-hematologic malignancies. Dr. Barrys expertise includes: immunohistochemistry, molecular
diagnostic testing, flow cytometry, leukemias, lymphomas, cutaneous lymphoid disorders, breast
pathology, and prognostic and predictive breast cancer biomarkers. Dr. Barry has lectured on these
topics in numerous courses for the USCAP, ASCP, CAP, as well as, state and international pathologic
societies. Dr. Barry received an M.D. degree and a Ph.D. degree in Immunology from Duke University
in Durham, N.C., under the direct supervision of Dr. Barton Haynes (Hanes Professor of Medicine) in
1995. Dr. Barry then completed his residency training in Anatomic and Clinical Pathology at the
University of Washington Medical Center in Seattle, WA in 1999. Following his residency training,
Dr. Barry finished a one year Surgical Pathology/ Immunohistochemistry Fellowship at the University
of Washington Medical Center. Additionally, Dr. Barry completed two more years of Hematopathology
Fellowship training at the National Cancer Institute within the National Institutes of Health in
Bethesda, Maryland.
Robert S. Seitz, 46, joined us in December 2009 as our Senior Vice President and General
Manager, Huntsville Facility, and Technology Assessment. Previously, Mr. Seitz was Chief
Executive Officer and co-founder of AGI. Mr. Seitz founded the antibody department at Research
Genetics, Inc. and had been its director for the eight years before founding AGI. Mr. Seitz has
extensive expertise in creating and marketing an antibody business and related services. As
director of the antibody department of Research Genetics, Mr. Seitz managed numerous collaborations
with both academic and pharmaceutical development teams. Mr. Seitz has a B.S. degree in Chemistry
from the University of South Alabama and a M. Div. degree from Fuller Theological Seminary.
32
Douglas T. Ross, M.D., Ph.D, 50, joined us in December 2009 as our Chief Scientific Officer.
Previously, Dr. Ross was Chief Scientific Officer and co-founder of AGI. Dr. Ross was a
postdoctoral fellow with Patrick O. Brown and David Botstein at Stanford University. Dr. Ross was
instrumental in the initiation and scale-up of the Stanford human microarray project, and for
developing strategies for large-scale analysis of gene expression in human cancer. Dr. Ross earned
an M.D. degree and a Ph.D. degree in Pathology from the University of Washington while studying at
the Fred Hutchinson Cancer Research Center in Seattle, Washington. Dr. Ross completed two years of
clinical pathology training including serving as Chief Resident at the University of California at
San Francisco before joining the microarray project at Stanford University in 1996.
Ronald D. Collette, 46, became our Chief Information Officer in January of 2009, taking on the
responsibility for directing and managing information technologies for our company. Mr. Collette is
a well respected professional in the field of information technologies with over 25 years of
experience working for various Fortune-500 organizations such as Fluor Corporation, Pacific Life,
Countrywide Mortgage, and the Resolution Trust Corporation. Mr. Collette was a founding partner
of Traxx Consulting Inc., a boutique consultancy focused on information security, team development,
and technical architecture. He is a regular speaker at a number of security and IT related events
such as International Standards Organization (ISO) conference, SecureWorld Expo, and InfoSeCon.
Mr. Collette is also a regular columnist and research analyst for Computer Economics. Mr. Collette
has also co-authored two books on information security The CISO Handbook: A Practical Guide to
Securing Your Company and the companion publication CISO Soft Skills: Securing Organizations
Impaired by Employee Politics, Apathy, and Intolerant Perspectives. Both of these books are used
as course material for numerous advanced education and university masters programs on security
leadership. Mr. Collettes contribution to the information yechnology industry is represented by
numerous publications, papers, and presentations. Mr. Collette holds a B.S. degree in Economics
with minors in Accounting and Business Administration from Arizona State University, and has
completed post graduate work in Software Engineering.
Glen M. Fredenberg, 45, has served as our Vice President of Finance and Corporate Controller
since August 2009. From April 2007 to August 2009, Mr. Fredenberg served as Vice President and
Divisional Controller for Laboratory Corporation of America, or LabCorp. From February 2005 to
April 2007, Mr. Fredenberg served as Associate Vice President and Divisional Controller for
LabCorps Esoteric Businesses Division. From April 1998 to February 2005, Mr. Fredenberg served in
a variety of senior financial roles at US LABS (acquired by LabCorp in February 2005), including
Corporate Controller, Interim Chief Financial Officer, and Vice President of Finance. While at US
LABS, Mr. Fredenberg was responsible for the Billing and Collections function which included a
conversion from an in-house billing system to the XIFIN system. Mr. Fredenberg holds a B.S. degree
in Business Administration with a concentration in Accounting from California State University,
Fullerton. Mr. Fredenberg is a Certified Public Accountant (inactive).
PART II
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|
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Item 5. |
|
Market For Registrants Common Equity, Related Stockholder Matters, and Issuer Purchases
of Equity Securities |
Our common stock trades on the NASDAQ Capital Market under the symbol CLRT. The table below
sets forth the high and low sales prices of our common stock for the periods indicated:
|
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|
|
|
|
|
|
|
|
High |
|
|
Low |
|
2009 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
2.25 |
|
|
$ |
1.20 |
|
Second Quarter |
|
|
3.81 |
|
|
|
2.16 |
|
Third Quarter |
|
|
4.39 |
|
|
|
3.23 |
|
Fourth Quarter |
|
|
4.30 |
|
|
|
2.26 |
|
2008 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
2.43 |
|
|
$ |
1.34 |
|
Second Quarter |
|
|
2.19 |
|
|
|
1.35 |
|
Third Quarter |
|
|
2.31 |
|
|
|
1.69 |
|
Fourth Quarter |
|
|
1.77 |
|
|
|
0.86 |
|
As of March 8, 2010, we had outstanding 84,103,031 shares of common stock held by
approximately 9,300 stockholders, including beneficial owners of the common stock whose shares are
held in the names of various dealers, clearing agencies, banks, brokers, and other fiduciaries.
33
We have not paid cash dividends during the two most recent years and do not intend on paying
cash dividends in the foreseeable future. Furthermore, the declaration and payment of dividends is
completely restricted by a covenant in our credit facility with Gemino. We expect to use any future
earnings to finance our operations. The actual amount of any dividends that may be paid in the
future will be subject to the discretion of our board of directors and will depend on our
operations, financial, and business requirements, and other factors.
Item 12 provides information as of December 31, 2009 with respect to all of our compensation
plans, agreements and arrangements under which our equity securities were authorized for issuance.
Additionally, more detailed information with respect to our stock-based compensation is included in
Note 11 to the Consolidated Financial Statements.
The following chart compares the yearly percentage change in the cumulative total stockholder
return on Clarient common stock for the period from December 31, 2004 through December 31, 2009,
with the cumulative total return on the Nasdaq Composite Index and the peer group index for the
same period. The peer group consists of SIC Code 8071 Services- Medical Laboratories. The
comparison assumes that $100 was invested on December 31, 2004 in our common stock at the then
closing price of $2.16 per share.
34
|
|
|
Item 6. |
|
Selected Financial Data |
The following table presents selected financial data for the last five years of the operation
of our business and has been adjusted for the effects of discontinued operations. The following
information should be read in conjunction with the Consolidated Financial Statements and Notes
thereto in Item 8 and Managements Discussion and Analysis of Financial Condition and Results of
Operations in Item 7.
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007(a) |
|
|
2006 |
|
|
2005 |
|
Consolidated Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
91,599 |
|
|
$ |
73,736 |
|
|
$ |
42,995 |
|
|
$ |
27,723 |
|
|
$ |
11,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services |
|
|
39,107 |
|
|
|
32,936 |
|
|
|
26,807 |
|
|
|
19,777 |
|
|
|
10,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
52,492 |
|
|
|
40,800 |
|
|
|
16,188 |
|
|
|
7,946 |
|
|
|
491 |
|
Operating expenses |
|
|
55,613 |
|
|
|
42,290 |
|
|
|
27,985 |
|
|
|
20,563 |
|
|
|
16,118 |
|
Interest expense, net |
|
|
4,431 |
|
|
|
8,149 |
|
|
|
2,349 |
|
|
|
920 |
|
|
|
212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes |
|
|
(7,552 |
) |
|
|
(9,639 |
) |
|
|
(14,146 |
) |
|
|
(13,537 |
) |
|
|
(15,839 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit |
|
|
599 |
|
|
|
(6 |
) |
|
|
2,088 |
|
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations, net of income taxes |
|
|
(6,953 |
) |
|
|
(9,645 |
) |
|
|
(12,058 |
) |
|
|
(13,561 |
) |
|
|
(15,839 |
) |
Income (loss) from discontinued operations, net of
income taxes |
|
|
901 |
|
|
|
|
|
|
|
3,301 |
|
|
|
(2,574 |
) |
|
|
1,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(6,052 |
) |
|
$ |
(9,645 |
) |
|
$ |
(8,757 |
) |
|
$ |
(16,135 |
) |
|
$ |
(14,802 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A preferred stock beneficial conversion feature |
|
|
(4,290 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders |
|
$ |
(10,342 |
) |
|
$ |
(9,645 |
) |
|
$ |
(8,757 |
) |
|
$ |
(16,135 |
) |
|
$ |
(14,802 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share applicable to
common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(0.14 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.29 |
) |
Income (loss) from discontinued operations |
|
|
0.01 |
|
|
|
|
|
|
|
0.05 |
|
|
|
(0.04 |
) |
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders |
|
$ |
(0.13 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
10,903 |
|
|
$ |
1,838 |
|
|
$ |
1,516 |
|
|
$ |
448 |
|
|
$ |
9,333 |
|
Accounts receivable, net |
|
|
21,568 |
|
|
|
20,315 |
|
|
|
12,020 |
|
|
|
9,165 |
|
|
|
4,786 |
|
Total assets |
|
|
66,947 |
|
|
|
35,509 |
|
|
|
26,618 |
|
|
|
27,344 |
|
|
|
25,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities of discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,327 |
|
|
|
1,223 |
|
Total current liabilities |
|
|
14,175 |
|
|
|
35,934 |
|
|
|
26,402 |
|
|
|
14,246 |
|
|
|
8,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations |
|
|
604 |
|
|
|
345 |
|
|
|
906 |
|
|
|
7,439 |
|
|
|
2,073 |
|
Deferred rent and other non-current liabilities |
|
|
3,055 |
|
|
|
3,970 |
|
|
|
4,099 |
|
|
|
3,651 |
|
|
|
1,756 |
|
Contingently issuable common stock |
|
|
2,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit |
|
|
(165,164 |
) |
|
|
(154,822 |
) |
|
|
(145,177 |
) |
|
|
(136,420 |
) |
|
|
(120,285 |
) |
Total stockholders (deficit) equity |
|
|
7,877 |
|
|
|
(4,740 |
) |
|
|
(4,789 |
) |
|
|
951 |
|
|
|
12,462 |
|
***
|
|
|
(a) |
|
As discussed in Note 18 to the Consolidated Financial Statements, we determined
that we did not properly present the income tax effect of the ACIS Sale (see Note 4),
though such error had no impact on net income. The following table summarizes the
effect of the adjustments in the year ended December 31, 2007 (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, 2007 |
|
|
|
Previously |
|
|
As |
|
|
|
Reported |
|
|
Adjusted |
|
Condensed Consolidated Statements of Operations: |
|
|
|
|
|
|
|
|
Income tax (expense) benefit |
|
$ |
(23 |
) |
|
$ |
2,088 |
|
Loss from continuing operations, net of income taxes |
|
|
(14,169 |
) |
|
|
(12,058 |
) |
Income from discontinued operations, net of income taxes |
|
|
5,412 |
|
|
|
3,301 |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share applicable to common stockholders basic and diluted: |
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(0.20 |
) |
|
$ |
(0.17 |
) |
Income from discontinued operations |
|
|
0.08 |
|
|
|
0.05 |
|
|
|
|
Item 7. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following managements discussion and analysis of financial condition and results of
operations contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve risks and uncertainties,
including those set forth in Item 1A of this report under the caption Risks Relating to Our
Business, and other reports we file with the SEC. Our actual results could differ materially from
those anticipated in these forward-looking statements.
Overview and Outlook
We are an advanced oncology diagnostics services company. Our mission is to combine
innovative technologies, clinically meaningful test results, and world-class pathology expertise to
improve the lives of those affected by cancer by bringing clarity to a complex disease. Our vision
is to be the leader in cancer diagnostics by dedicating ourselves to collaborative relationships
with the health care community as we translate cancer discovery and information into better patient
care.
36
Our focus is on identifying high-quality opportunities to increase our profitability and
differentiate our service offerings in a highly competitive market. An important aspect of our
strategy is to develop high-value, revenue generating opportunities by combining our medical
expertise and our intellectual property to develop and commercialize novel diagnostic tests (also
referred to as novel markers or biomarkers) through our highly developed commercial channels.
Novel diagnostic tests on which we focus detect characteristics of an individuals tumor or disease
that, once identified and qualified, allow for more accurate prognosis, diagnosis, and treatment.
In addition, we work to identify specific partners and technologies where we can assist in the
commercialization of novel diagnostic tests developed by third-parties. We believe that broader
discovery and use of novel diagnostic tests will clarify and simplify decisions for healthcare
providers and the biopharmaceutical industry. The growing demand for personalized medicine has
generated a need for these novel diagnostic tests, creating a new market for such novel diagnostic
tests, widely expected by analysts to grow between $1.5 billion and $3.0 billion over todays
market size within the next five years, based upon industry analyst data and managements internal
estimates.
In 2010, we will focus on four primary objectives:
|
|
|
Maintain net revenue growth by reaching new customers and increasing same
store sales to our existing customers with our new services; |
|
|
|
Maintain financial discipline to achieve profitability; |
|
|
|
Leverage our industry-leading commercial channel and successfully launch new
proprietary diagnostic tests; and |
|
|
|
Maximize the effectiveness of our billing and collection function. |
Characteristics of our Revenue and Expenses
Net revenue
Net revenue is derived from billing governmental and private health insurers, clients, and
patients for the services that we provide. We report revenue net of contractual allowances which
is defined and discussed within the Critical Accounting Policies and Estimates section below.
Bad debt expense is recorded as an operating expense, and is a key component of our overall
operating performance.
Cost of services
Cost of services includes compensation (including stock-based compensation) and benefits of
laboratory personnel, laboratory support personnel, and pathology personnel. Cost of services also
includes depreciation expense for laboratory equipment, laboratory supplies expense, allocated
facilities-related expenses, and certain direct costs such as shipping.
Sales and marketing
Sales and marketing expenses primarily consist of the compensation and benefits of our sales force,
sales support, and marketing personnel. It also includes costs attributable to marketing our
services to our customers and prospective customers.
General and administrative
General and administrative expenses primarily include compensation (including stock-based
compensation) and benefits for personnel that support our general operations such as: information
technology, executive management, billing and collection, client services, financial accounting,
purchasing, and human resources. General and administrative expenses also include allocated
facilities-related expenses, insurance, recruiting, legal, audit, and other professional services.
Bad debt
Bad debt consists of estimated uncollectible accounts, or portions thereof, recorded during
the period. The process of establishing a reasonable allowance for doubtful accounts, and
resulting bad debt expense, at each period end involves the combination of an objective evaluation
of our historical collection experience, and a subjective evaluation to identify certain at risk
receivable balances. Our allowance for doubtful accounts model is designed to consider the age of
the receivable balance and associated payor class. In addition, we use a significant degree of
judgment in determining the receivables we believe are unlikely to be collected.
37
Research and development
Research and development expenses consist of compensation and benefits for research and
development personnel, certain laboratory supplies, certain information technology personnel,
research and development consultants, and allocated facility-related costs. Our research and
development activities primarily relate to the development and validation of diagnostic tests in
connection with our specialized oncology diagnostic services, as well as the development of
technology to electronically deliver such services to our customers.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities, and the
disclosure of contingent assets and liabilities as of the date of the financial statements and the
reported amounts of net revenue and expenses during the reported periods. While management
believes these estimates are reasonable and consistent, they are by their very nature, estimates of
amounts that will depend on future events. Accordingly, actual results could differ from these
estimates. Our Audit Committee of the Board of Directors periodically reviews our significant
accounting policies. Our critical accounting policies arise in conjunction with the following:
|
|
|
Allowance for doubtful accounts and bad debt expense |
|
|
|
Stock-based compensation |
Revenue recognition
Net revenue for our diagnostic services is recognized on an accrual basis at the time discreet
diagnostic tests are completed. Each test performed relates to a specimen encounter derived from a
patient, and received by us on a specific date (such encounter is commonly referred to as an
accession). Our services are billed to various payors, including Medicare, private health
insurance companies, healthcare institutions, biopharmaceutical companies, and patients. We use
published fee schedules from CMS for recognized revenue for amounts billed to Medicare for our
services. We report net revenue for our services from contracted payors, including certain private
health insurance companies and healthcare institutions, based on the contracted rate (which is
generally based on the CMS published fee schedule) or in certain instances, our estimate of such
rate, based upon our historical collection experience.
The difference between the amount billed and the amount recognized as net revenue is the
result of standard discounts (commonly referred to as contractual allowances). We report net
revenue from non-contracted payors, including certain private health insurance companies, based on
the amount expected to be approved for payment for our services. Additional revenue adjustments
are recorded for non-contracted payors in the period that the additional information becomes known
to us. Patient revenue is divided into two classes: direct bill and indirect bill. The amount
recognized as net revenue for direct bill patients is based on a standard multiple of the CMS
published fee schedule. The amount recognized as net revenue for indirect bill patients is based
on their co-pay or deductible obligation with their primary insurance payor.
Allowance for doubtful accounts and bad debt expense
An allowance for doubtful accounts is recorded for estimated uncollectible amounts due from
our various payor groups. The process for estimating the allowance for doubtful accounts involves
significant assumptions and judgments. Specifically, the allowance for doubtful accounts is
adjusted periodically, and is principally based upon an evaluation of historical collection
experience of accounts receivable by age for our various payor classes. After appropriate
collection efforts, accounts receivable are written off and deducted from the allowance for
doubtful accounts. Additions to the allowance for doubtful accounts are charged to bad debt
expense. The payment realization cycle for certain governmental and managed care payors can be
lengthy, involving denial, appeal, and adjudication processes, and is subject to periodic
adjustments that may be significant.
38
During the third quarter of 2009, we refined our model for estimating an appropriate allowance
for doubtful accounts at each period end, utilizing historical payment information by payor class
and receivable age, which was not previously available to us in sufficient form and content.
Nonetheless, due to a combination of objective and subjective factors in our previous model for
estimating an appropriate allowance for doubtful accounts, our reported net accounts receivable of
$21.6 million as of December 31, 2009, would not have been materially different had the previous
model been applied in the third or fourth quarter of 2009.
Stock-based compensation
We record compensation expense related to stock-based awards, including stock options and
restricted stock, based on the fair value of the award using the Black-Scholes option-pricing model
(see Note 11 to the Consolidated Financial Statements). Stock-based compensation expense recognized
during the period is based on the value of the portion of the stock-based awards that are
ultimately expected to vest, and thus, the gross expense is reduced for estimated forfeitures. We
recognize stock-based compensation expense over the vesting period using the straight-line
method for employees and ratably for non-employees. We classify compensation expense related to
these awards in the Consolidated Statements of Operations based on the department to which the
recipient reports.
Income taxes
We account for income taxes utilizing the asset and liability method. Under this method,
deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and for tax loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. We do not recognize a tax benefit, unless we conclude that it is more likely than
not that the benefit will be sustained on audit by the taxing authority based solely on the
technical merits of the associated tax position. If the recognition threshold is met, we recognize
a tax benefit measured at the largest amount of the tax benefit that we believe is greater than 50
percent likely to be realized. Due to both historical and recent changes in our capitalization
structure, the utilization of net operating losses may be limited pursuant to Section 382 of the
Internal Revenue Code. As of December 31, 2009 our gross deferred tax asset of $60.2 million has a
full valuation allowance, so that our net deferred tax assets are recorded at zero. In the event
of future successive quarters of profitability, the valuation allowance may be reversed through the
recording of an income tax benefit.
Strategy and Key Metrics
Our strategic focus is centered on identifying high-value opportunities that enable the
expansion and differentiation of our cancer diagnostic services within the highly competitive
medical laboratories sector in which we operate. We commercialize our services through our highly
developed channels with community pathologists, oncologists, universities, hospitals, and
pharmaceutical researchers. Our primary objective is to grow market share and increase net
revenue, while efficiently running our business to maximize stockholder value. There are high
fixed and semi-variable costs associated with operating a licensed medical services laboratory.
Our business requires requisite test volume and associated net revenue to offset such costs and
realize positive income from operations. We began offering cancer diagnostic services in late
2004. Our net revenue has grown substantially in each annual period through 2009.
We continued to make significant progress in growing our business in 2009 by expanding the
breadth and depth of our cancer diagnostic menu and expanding our commercial reach, while
judiciously managing costs, and operating our laboratory in a highly efficient manner. In 2010,
achieving full year profitability will be a top priority of our management team, and is planned to
be achieved as a result of: (i) our forecasted test volume and associated net revenue in 2010 and
(ii) the efficient management of our business to contain expenses in 2010 and beyond. The
aforementioned forward looking statements are inherently uncertain and are subject to a high degree
of risk, as further discussed in our Cautionary Note Concerning Forward-Looking Statements within
this Annual Report on Form 10-K.
39
The below tables within Continuing Operations Overview 2009, 2008, and 2007 represent the
key metrics we review in measuring our annual financial and operating success.
Results of Operations
Continuing Operations Overview 2009, 2008, and 2007
The following table presents our results of continuing operations and the percentage of the
years net revenue (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007(a) |
|
Net revenue |
|
$ |
91,599 |
|
|
|
100.0 |
% |
|
$ |
73,736 |
|
|
|
100.0 |
% |
|
$ |
42,995 |
|
|
|
100.0 |
% |
Cost of services |
|
|
39,107 |
|
|
|
42.7 |
% |
|
|
32,936 |
|
|
|
44.7 |
% |
|
|
26,807 |
|
|
|
62.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
52,492 |
|
|
|
57.3 |
% |
|
|
40,800 |
|
|
|
55.3 |
% |
|
|
16,188 |
|
|
|
37.7 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
17,380 |
|
|
|
19.0 |
% |
|
|
10,941 |
|
|
|
14.8 |
% |
|
|
8,630 |
|
|
|
20.1 |
% |
General and administrative |
|
|
23,587 |
|
|
|
25.8 |
% |
|
|
18,729 |
|
|
|
25.4 |
% |
|
|
15,278 |
|
|
|
35.5 |
% |
Bad debt |
|
|
12,927 |
|
|
|
14.1 |
% |
|
|
12,199 |
|
|
|
16.5 |
% |
|
|
3,558 |
|
|
|
8.3 |
% |
Research and development |
|
|
1,719 |
|
|
|
1.9 |
% |
|
|
421 |
|
|
|
0.6 |
% |
|
|
519 |
|
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
55,613 |
|
|
|
60.7 |
% |
|
|
42,290 |
|
|
|
57.4 |
% |
|
|
27,985 |
|
|
|
65.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(3,121 |
) |
|
|
(3.4 |
)% |
|
|
(1,490 |
) |
|
|
(2.0 |
)% |
|
|
(11,797 |
) |
|
|
(27.4 |
)% |
Interest expense, net |
|
|
4,431 |
|
|
|
4.8 |
% |
|
|
8,149 |
|
|
|
11.1 |
% |
|
|
2,349 |
|
|
|
5.5 |
% |
Income tax benefit (expense) |
|
|
599 |
|
|
|
0.7 |
% |
|
|
(6 |
) |
|
|
|
|
|
|
2,088 |
|
|
|
4.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations, net of income taxes |
|
$ |
(6,953 |
) |
|
|
(7.6 |
)% |
|
$ |
(9,645 |
) |
|
|
(13.1 |
)% |
|
$ |
(12,058 |
) |
|
|
(28.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
See Note 18 to the Consolidated Financial Statements for certain adjustments from
previous SEC filings for the year ended December 31, 2007. |
Each test we perform relates to a specimen encounter derived from a patient, and received by
us on a specific date. Such specimen encounter is commonly referred to as an accession. The
following table presents the total number of our accessions in 2009, 2008, and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Total Accessions |
|
|
135 |
|
|
|
109 |
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
The following table presents our test volumes by general test type in 2009, 2008, and 2007.
Our diagnostic services incorporate a variety of testing methodologies for each of the below
categories, as discussed in Item 1, Our Services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Test Volume by: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Solid tumor, including breast prognostics |
|
|
332 |
|
|
|
298 |
|
|
|
232 |
|
Leukemia / Lymphoma |
|
|
589 |
|
|
|
479 |
|
|
|
284 |
|
Molecular diagnostics |
|
|
22 |
|
|
|
9 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
Total test volume |
|
|
943 |
|
|
|
786 |
|
|
|
519 |
|
|
|
|
|
|
|
|
|
|
|
40
The following table presents our average net revenue and average cost of services per
accession in 2009, 2008, and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Average net revenue per accession |
|
$ |
679 |
|
|
$ |
676 |
|
|
$ |
581 |
|
Average cost of services per accession |
|
|
290 |
|
|
|
302 |
|
|
|
362 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit per accession |
|
$ |
389 |
|
|
$ |
374 |
|
|
$ |
219 |
|
|
|
|
|
|
|
|
|
|
|
The following table presents our average net revenue and average cost of services per test in
2009, 2008, and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Average net revenue per test |
|
$ |
97 |
|
|
$ |
94 |
|
|
$ |
83 |
|
Average cost of services per test |
|
|
41 |
|
|
|
42 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit per test |
|
$ |
56 |
|
|
$ |
52 |
|
|
$ |
31 |
|
|
|
|
|
|
|
|
|
|
|
The following table presents our net revenue by payor class in 2009, 2008, and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Governmental health
insurance (Medicare,
Medicaid) |
|
$ |
33,493 |
|
|
|
36.7 |
% |
|
$ |
26,062 |
|
|
|
35.4 |
% |
|
$ |
16,860 |
|
|
|
39.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private health insurance |
|
|
37,600 |
|
|
|
41.0 |
% |
|
|
30,017 |
|
|
|
40.7 |
% |
|
|
15,595 |
|
|
|
36.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clients (pathologists,
hospitals, clinics, and
biopharmaceutical
companies) |
|
|
15,713 |
|
|
|
17.2 |
% |
|
|
12,365 |
|
|
|
16.8 |
% |
|
|
7,156 |
|
|
|
16.6 |
% |
|
Patients |
|
|
4,793 |
|
|
|
5.1 |
% |
|
|
5,292 |
|
|
|
7.1 |
% |
|
|
3,384 |
|
|
|
7.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
91,599 |
|
|
|
100 |
% |
|
$ |
73,736 |
|
|
|
100 |
% |
|
$ |
42,995 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents our estimated active customer count, as defined as any customer
that has ordered our services within six months prior to December 31, 2009, 2008, and 2007,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Customers |
|
|
1,125 |
|
|
|
865 |
|
|
|
675 |
|
|
|
|
|
|
|
|
|
|
|
41
The following table presents average net revenue per full time equivalent (FTE) employee
(a), including the employees of CPS, for the years ended December 31, 2009, 2008, and
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Net revenue per FTE employee |
|
$ |
284 |
|
|
$ |
328 |
|
|
$ |
231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents our average number of company-wide employees during the respective year,
as adjusted for part-time personnel, utilizing a typical 40 hour work week. |
The decrease in net revenue per FTE employee in 2009 as compared to 2008 is primarily due to
the average net increase of 98 FTE employees in 2009 versus 2008. In anticipation of the growth in
our business, and to facilitate such growth, we hired additional personnel throughout 2009 in
various company departments. We expect that in 2010, our net revenue per FTE employee will exceed
$0.3 million.
Year Ended December 31, 2009 versus December 31, 2008
Net Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
|
|
|
Percent |
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
|
change |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
91,599 |
|
|
$ |
73,736 |
|
|
$ |
17,863 |
|
|
|
24.2 |
% |
Our 24.2% net revenue increase resulted from a 20.0% increase in diagnostic services test
volume, increased Medicare reimbursement rates, and a favorable mix of higher-value services
performed in the current period, partially offset by certain pricing reductions based on a 2009
analysis of historical cash collections by payor class. See the above Billing section for a table
of Medicare reimbursement rates under the Physician Fee Schedule for the most common CPT codes
associated with our laboratory services in 2009 and 2008.
Our menu of oncology diagnostic testing services expanded in the first quarter of 2008 to
include markers for tumors of the colon, prostate, and lung. We expect to continue to expand our
services menu to include markers for additional tumor types, and to deepen our market penetration
for the diagnostic services that we currently provide. We have also steadily increased the depth
of our diagnostic services for certain cancer types, including lymphoma/leukemia.
Net revenue growth in the year ended December 31, 2009, as compared to 2008, was enabled by
our expanded capabilities and service offerings which utilize the test methodologies of IHC, flow
cytometry, FISH, and molecular/PCR, and our accompanying sales and marketing efforts. We
anticipate that net revenue will continue to increase as we further execute our commercial
operation strategy of expanding the breadth and depth of our oncology diagnostic services and our
sales and marketing efforts for such services.
Cost of Services, Gross Profit, and Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
|
|
|
Percent |
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
|
change |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
Cost of services |
|
$ |
39,107 |
|
|
$ |
32,936 |
|
|
$ |
6,171 |
|
|
|
18.7 |
% |
Gross profit |
|
|
52,492 |
|
|
|
40,800 |
|
|
|
11,692 |
|
|
|
28.7 |
% |
Gross margin percentage (gross profit as a percent of net revenue) |
|
|
57.3 |
% |
|
|
55.3 |
% |
|
|
2.1 |
% |
|
|
|
|
The $6.2 million increase in cost of services was driven by a 20.0% increase in test volume,
and was primarily related to: additional laboratory personnel costs of $2.1 million, increased lab
supplies of $1.3 million, additional courier expenses of $0.7 million, and increased cost of tests
performed on our behalf by other laboratories of $1.2 million.
42
Gross margin for the year ended December 31, 2009 improved to 57.3%, and was primarily due to
increased test volumes and the related economies of scale in our operations. We anticipate that
gross margins will gradually improve as our testing volumes increase and we continue to improve the
efficiency and effectiveness of our laboratory operations. Laboratory employee productivity
continues to improve based on metrics of specimens prepared and tested by month per FTE laboratory
employee. Gross margins could be adversely affected, however, if Medicare reimbursement rates are
decreased in 2010 or beyond.
Operating Expenses and Interest Expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
|
|
|
Percent |
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
|
change |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
Sales and marketing |
|
$ |
17,380 |
|
|
$ |
10,941 |
|
|
$ |
6,439 |
|
|
|
58.9 |
% |
|
General and administrative |
|
|
23,587 |
|
|
|
18,729 |
|
|
|
4,858 |
|
|
|
25.9 |
% |
Bad debt |
|
|
12,927 |
|
|
|
12,199 |
|
|
|
728 |
|
|
|
6.0 |
% |
Research and development |
|
|
1,719 |
|
|
|
421 |
|
|
|
1,298 |
|
|
|
308.3 |
% |
Interest expense, net |
|
|
4,431 |
|
|
|
8,149 |
|
|
|
(3,718 |
) |
|
|
(45.6 |
)% |
Sales and marketing. The $6.4 million increase for the year ended December 31, 2009 as
compared to 2008 was primarily related to $5.1 million of additional sales and marketing personnel
related costs, including sales commissions. During the first quarter of 2009, we hired 16 new
sales representatives to deepen our market penetration across the U.S. The remaining $1.3 million
increase was related to a $0.7 million increase in travel-related expenses and increased tradeshow,
advertising, sales conferences, and consulting fees of $0.3 million.
General and administrative. The $4.9 million increase is related to several factors which
include: (i) a $3.1 million increase in personnel expenses (including relocation & recruiting),
particularly within our billing and collection, human resources, and information technology
departments to support our growth, (ii) a $0.4 million increase in stock based compensation, (iii)
a $0.6 million increase in depreciation expense on recently deployed capital assets, (iv) a $0.4
million increase in consulting expenses related to certain corporate initiatives, (v) a $0.4
million increase in facilities expenses associated with expansion at our current facility in Aliso
Viejo, and (vi) increased general insurance fees of $0.5 million. These increases were partially
offset by a reduction in third party collection fees of $0.6 million resulting from bringing our
billing function in-house during the second half of 2008.
Bad debt. During the third quarter of 2009, we refined our model of estimating our allowance
for doubtful accounts, based upon historical collection information not previously available to us
in sufficient form and content. Our process involved a detailed analysis of historical collections
by each payor class since we began performing the billing and collection function in-house in June
2008. Due to a combination of objective and subjective factors in our previous model for
estimating an appropriate allowance for doubtful accounts and resulting bad debt expense, our
reported bad debt expense of $12.9 million for the year ended December 31, 2009 would not have been
materially different had the previous model been applied.
We expect that bad debt expense will gradually decrease to below 10% of net revenue over the
next four to six quarters, as we more effectively manage our billing and collection function and
continue to improve our billing and collection processes.
Research and development. The $1.3 million increase in research and development expenses was
primarily driven by $0.3 million of increased compensation and benefits costs for recently hired
research and development personnel, and $0.8 million of increased costs associated with third
parties who assist us in developing novel diagnostic tests.
Interest expense, net. Interest expense includes stated interest and fees on our credit
facilities, plus the amortization of the fair value of issued common stock warrants in connection
with borrowings under our former credit facility with Safeguard and certain other lenders. The $3.7
million decrease in interest expense is primarily related to lower average outstanding short-term
borrowings due to the repayment and retirement of our revolving credit facilities with Comerica and
Safeguard as discussed in Note 7 to the Consolidated Financial Statements.
43
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
|
|
(in thousands) |
|
|
|
|
Income tax benefit (expense) |
|
$ |
599 |
|
|
$ |
(6 |
) |
|
$ |
(605 |
) |
The $0.6 million tax benefit in 2009 relates to the tax effect, through continuing operations,
of a $1.5 million payment received in April 2009 from Zeiss, the acquirer in the ACIS Sale. The
proceeds were in connection with the satisfaction of certain post-closing conditions from the ACIS
Sale in 2007. The nominal tax expense in 2008 represents certain minimum payments due in various
states.
Year Ended December 31, 2008 versus December 31, 2007
Net Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
|
|
|
Percent |
|
|
|
2008 |
|
|
2007 |
|
|
Variance |
|
|
change |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
Net revenue |
|
$ |
73,736 |
|
|
$ |
42,995 |
|
|
$ |
30,741 |
|
|
|
71.5 |
% |
Our 71.5% net revenue increase resulted from our increase in diagnostic services test volume
of 51.4%, and increased Medicare reimbursement rates. See the above Billing section for a table of
Medicare reimbursement rates under the Physician Fee Schedule for the most common CPT codes
associated with our laboratory services in 2008 and 2007.
We expanded our menu of oncology diagnostic testing services in the first quarter of 2008 to
include markers for tumors of the colon, prostate, and lung. Our expanded capabilities in the test
methodologies of IHC, flow cytometry, FISH, and molecular/PCR, and our accompanying sales and
marketing efforts, have driven net revenue growth in the year ended December 31, 2008, as compared
to 2007.
Cost of Services, Gross Profit, and Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
|
|
|
Percent |
|
|
|
2008 |
|
|
2007 |
|
|
Variance |
|
|
change |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
Cost of services |
|
$ |
32,936 |
|
|
$ |
26,807 |
|
|
$ |
6,129 |
|
|
|
22.9 |
% |
Gross profit |
|
|
40,800 |
|
|
|
16,188 |
|
|
|
24,612 |
|
|
|
152.0 |
% |
Gross margin (gross profit as a percent of net revenue) |
|
|
55.3 |
% |
|
|
37.7 |
% |
|
|
17.6 |
% |
|
|
|
|
The $6.1 million increase in cost of services was driven by an overall increase in net
revenue, and was primarily related to: (i) additional laboratory personnel costs of $2.1 million,
(ii) increased laboratory reagents and other supplies expense of $1.4 million, (iii) increased
allocated facilities expense of $0.4 million, (iv) increased cost of tests performed on our behalf
by other laboratories of $1.7 million, and (v) an increase in shipping expense of $1.2 million.
Gross margin for the year ended December 31, 2008 was 55.3% compared to 37.7% in the prior
year. The increase in gross margin was primarily driven by an overall increase in net revenue
including higher value oncology diagnostic services. In addition, laboratory employee productivity
improved based on metrics of specimens prepared and tested per month per FTE laboratory employee.
Gross margin, however, does not include the bad debt expense that impacts our overall results.
See our bad debt discussion below.
44
Operating Expenses and Interest Expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
|
|
|
Percent |
|
|
|
2008 |
|
|
2007 |
|
|
Variance |
|
|
change |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
$ |
10,941 |
|
|
$ |
8,630 |
|
|
$ |
2,311 |
|
|
|
26.8 |
% |
General and administrative |
|
|
18,729 |
|
|
|
15,278 |
|
|
|
3,451 |
|
|
|
22.6 |
% |
Bad debt |
|
|
12,199 |
|
|
|
3,558 |
|
|
|
8,641 |
|
|
|
242.9 |
% |
Research and development |
|
|
421 |
|
|
|
519 |
|
|
|
(98 |
) |
|
|
(18.9 |
)% |
Interest expense, net |
|
|
8,149 |
|
|
|
2,349 |
|
|
|
5,800 |
|
|
|
247.0 |
% |
Sales and marketing. The $2.3 million increase for the year ended December 31, 2008 as
compared to 2007 was primarily related to additional sales and marketing personnel costs of $1.7
million which included increased sales commission expense of $0.6 million, a $0.3 million increase
in travel-related expenses, and increased tradeshow, advertising, and consulting fees of $0.2
million.
General and administrative. The $3.5 million increase is related to several factors which
include additional personnel costs of $2.6 million to support our business growth and to establish
an in-house billing and collection department, and severance expenses of approximately $0.3
million, partially offset by a $1.0 million decrease in third-party billing and collection fees.
As compared to the prior year, accounting and legal fees increased by $0.8 million and $0.6
million, respectively. The increase in accounting fees was primarily associated with the testing
of internal controls over financial reporting. The increase in legal fees was primarily associated
with SEC compliance, corporate governance, financing arrangements, and executive compensation
review.
Bad debt. We recorded bad debt expense at a rate of approximately 16.5% and 8.3% of revenue
for 2008 and 2007, respectively. The increase in bad debt expense is primarily related to our 71.5%
increase in net revenue as compared to the prior year and the impact on cash collections due to
delays in our internal billing and collection efforts. Bad debt expense was also impacted by
higher loss experience, including significant uncollectible accounts identified during the second
half of 2008 which were previously serviced by our former third-party billing and collection
service provider.
Research and development. Research and development expenses in 2008 remained consistent with
2007. Our research and development costs in both years primarily included compensation and
benefits for research and development personnel, laboratory supplies, and allocated
facility-related costs.
Interest expense, net. The increase in interest expense is primarily related to higher average
outstanding short-term borrowings in the year ended December 31, 2008, as compared to 2007, in
order to support our growing operations and the recognition, through interest expense, of the fair
value of common stock warrants issued to Safeguard in March 2008 through November 2008 in
connection with the New Mezzanine Facility, as discussed in Note 7 to the Consolidated Financial
Statements.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Variance |
|
|
|
(in thousands) |
|
|
|
|
Income tax (expense) benefit |
|
$ |
(6 |
) |
|
$ |
2,088 |
|
|
$ |
2,094 |
|
The ACIS Sale occurred in March 2007. Reported income from discontinued operations for the
year ended December 31, 2007 was $5.4 million. The associated income tax benefit is reported
within continuing operations. The nominal tax expense in 2008 represents certain minimum
payments due in various states.
45
Liquidity and Capital Resources
The below chart summarizes selected liquidity data and metrics as of December 31, 2009 and
2008:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands, except financial |
|
|
|
metrics data) |
|
Cash and cash equivalents |
|
$ |
10,903 |
|
|
$ |
1,838 |
|
Accounts receivable, net |
|
|
21,568 |
|
|
|
20,315 |
|
Total current liabilities |
|
|
14,175 |
|
|
|
35,934 |
|
Working capital surplus (deficit) (a) |
|
|
21,287 |
|
|
|
(12,480 |
) |
Days sales outstanding (DSO) (b) |
|
86 days |
|
|
85 days |
|
Current ratio (c) |
|
|
2.50 |
|
|
|
(0.65 |
) |
|
|
|
(a) |
|
total current assets minus total current liabilities. |
|
(b) |
|
net accounts receivable divided by a rolling three-month average
of net revenue multiplied by 31 days. |
|
(c) |
|
total current assets divided by total current liabilities. |
Operating Activities
Cash used in operating activities was $3.1 million for the year ended December 31, 2009, as
compared to cash used in operating activities of $4.5 million in the prior year period. The
decrease in cash used in operating activities is primarily a function of the general improvements
in our billing and collection processes, specifically within the area of monitoring and follow-up
of significant accounts receivable balances. We hired additional billing and collection personnel
in 2009 in order to improve the completeness and accuracy of the bills we send, and to minimize the
time between our completed service date and our billing date. During the years ended December
31, 2009 and 2008, our cash collections from customers totaled $77.9 million and $53.2 million,
respectively, representing 85.1% and 72.2% of net revenue reported for the same periods,
respectively.
Investing Activities
Cash used in investing activities for the year ended December 31, 2009 of $5.1 million
consisted of (i) $4.6 million of capital expenditures related to purchases of new laboratory
equipment and information technology system enhancements, and (ii) security deposits into two
restricted cash accounts totaling $2.1 million for a standby letter of credit related to the lease
of our Aliso Viejo facility and a capital lease of computer hardware. These expenditures were
partially offset by our $1.5 million receipt upon escrow period expiration in connection with the
sale of our former equipment business (see Note 4 to the Consolidated Financial Statements).
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2009 was $17.3
million, an increase of $8.8 million as compared to the prior year, which we used to support our
working capital needs. The $17.3 million in cash provided by financing activities was primarily
attributable to $40.0 million in gross proceeds from the sale of our Series A convertible preferred
stock to Oak on March 26, 2009 and May 14, 2009 (see Note 12 to the Consolidated Financial
Statements), partially offset by 2009 net repayments of $23.5 million, against our now-retired
revolving credit facilities with Safeguard and Comerica, and our active Gemino Facility (see Note 7
to the Consolidated Financial Statements).
46
Credit Arrangements
The following table summarizes our outstanding balance under our credit arrangement (excluding
capital lease obligations) and our remaining credit availability as of December 31, 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
Credit Availability |
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2009 |
|
|
Earliest Stated Maturity |
|
Gemino Facility |
|
$ |
2,678 |
|
|
$ |
5,322 |
|
|
January 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
As discussed in Note 12 to the Consolidated Financial Statements, on March 25, 2009 we entered
into a Stock Purchase Agreement with Oak (the Oak Purchase Agreement), pursuant to which we
agreed to sell and issue to Oak, up to an aggregate of 6.6 million shares of our Series A
convertible preferred stock in two or more tranches for aggregate consideration of up to $50.0
million (the Oak Private Placement). The initial closing of the Oak Private Placement occurred
on March 26, 2009, at which time we issued and sold Oak an aggregate of 3.8 million preferred
shares for aggregate consideration of $29.1 million. After paying investment banking fees and
legal expenses, we used the remaining proceeds to repay in full the outstanding balance of $9.8
million on our revolving credit facility with Comerica Bank, to support a $2.3 million standby
letter of credit with Comerica Bank (subsequently reduced to $1.5 million in December 2009) through
opening a restricted cash account with Comerica Bank in the same amount, and to repay $14.0 million
of our mezzanine facility with Safeguard.
The second closing of the Oak Private Placement occurred on May 14, 2009, at which time we
issued and sold Oak an aggregate of 1.4 million Series A preferred shares (the Second Oak Closing
Shares) for aggregate consideration of $10.9 million. Of the $10.9 million of proceeds from the
second closing of the Oak Private Placement, $5.7 million was used to repay in full and terminate
the mezzanine facility with Safeguard. The remaining amount of $4.8 million, net of legal fees and
investment banking fees, was used to support our working capital requirements. Though our Comerica
and Safeguard facilities have been repaid and retired, we continue to maintain our credit facility
(the Gemino Facility) with Gemino Healthcare Finance, LLC (Gemino).
The Gemino Facility contains certain financial and non-financial covenants which require our
compliance, as described within Note 7 to the Consolidated Financial Statements. Failure to
maintain compliance would constitute an event of default. The Gemino Facility also contains a
material adverse change (MAC) clause. If we encountered difficulties that would qualify as a MAC
in our (i) operations, (ii) condition (financial or otherwise), or (iii) ability to repay the
amount outstanding, our credit agreement could be cancelled at Geminos sole discretion. Gemino
could then elect to declare the indebtedness, together with accrued interest and other fees, to be
immediately due and payable and proceed against any collateral securing such indebtedness. We
believe, though we can provide no assurance, that we will be able to meet the financial covenants,
as amended (see below), and will not encounter a MAC triggering event associated with the Gemino
Facility.
On November 13, 2009, we executed the November 2009 Gemino Amendment. The November 2009
Gemino Amendment (i) extended the maturity date of the Gemino Facility from January 31, 2010 to
January 31, 2011, (ii) removed the excess liquidity covenant, (iii) increased the facilitys
advance rate from 75% to 85%, (iv) eliminated the minimum fixed charge coverage ratio covenant
through December 31, 2009, (v) includes a maximum loan turnover ratio (average
monthly loan balance divided by average monthly cash collections multiplied by 30 days) of 35
days only for the three months ending December 31, 2009, (vi) requires a minimum annualized fixed
charge coverage ratio covenant of 1.00 for the three months ending March 31, 2010, 1.10 for six
months ending June 30, 2010, 1.20 for the nine months ending September 30, 2010, and 1.20 for the
twelve months ending December 31, 2010 and thereafter, and (vii) reduced the commitment fee from
0.75% to 0.50% per year on the daily average of unused credit availability.
In-House Billing and Collection
On June 1, 2008, our in-house billing and collection department began operations, using
licensed third-party billing and collection software. During the fourth quarter of 2008 we ceased
utilizing the services of our former billing and collection service provider. We did not have
adequate internal resources to address the unanticipated issues that arose during the establishment
of our internal billing and collection department, and as a result, our cash collections in 2008
did not increase at the same rate as our net revenue increased. Certain of such issues continued
through December 31, 2008 and into early 2009. Consequently, our collection efforts were also
negatively impacted in the first and second quarters of 2009, and to a lesser extent, for the
second half of 2009.
47
We continue to improve the overall effectiveness of our billing and collection processes. In
the second half of 2009, we experienced improved collection results (measured by aggregate cash
collections and cash collections as a percentage of net revenue) as compared to the first half of
2009, and second half of 2008. As we rely on our cash collections to support our general working
capital needs, it is critical that we continue to improve the overall effectiveness of our billing
and collection department in 2010 and beyond.
Contractual Obligations
The following table summarizes our contractual obligations and commercial commitments at
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period at December 31, 2009 |
|
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
than 1 |
|
|
|
|
|
|
|
|
|
|
After |
|
|
|
Total |
|
|
Year |
|
|
1 - 3 Years |
|
|
3 - 5 Years |
|
|
5 Years |
|
|
|
(in thousands) |
|
Gemino Facility |
|
$ |
2,678 |
|
|
$ |
2,678 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Capital lease obligations |
|
|
1,249 |
|
|
|
645 |
|
|
|
604 |
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
10,526 |
|
|
|
1,784 |
|
|
|
5,473 |
|
|
|
3,269 |
|
|
|
|
|
Minimum purchase commitments |
|
|
1,191 |
|
|
|
432 |
|
|
|
759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations and commercial commitments |
|
$ |
15,644 |
|
|
$ |
5,539 |
|
|
$ |
6,836 |
|
|
$ |
3,269 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table does not include our reserves for unrecognized tax benefits. We had a $3.2 million
reserve for unrecognized tax benefits, including interest and penalties, at December 31, 2009 and
2008, respectively, as discussed in Note 14 to Consolidated Financial Statements. In addition,
this table does not include potential severance benefits due under various employment agreements
with certain employees if such employee(s) was terminated without cause, the timing and total
amount of which are not practicable to estimate.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that provide financing, liquidity, market or credit
risk support, or involve leasing, hedging for our business, except for operating lease
arrangements. In addition, we have no arrangements that may expose us to liability that is not
expressly reflected in the Consolidated Financial Statements, except for potential indemnification
obligations associated with the ACIS Sale.
As of December 31, 2009, we did not have any relationships with unconsolidated entities or
financial partnerships, 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, except our relationship with CPS, described in Note 1 to the
Consolidated Financial Statements. As such, we are not subject to any material financing,
liquidity, market or credit risk that could arise if we had engaged in such relationships.
Recent Accounting Pronouncements
Several new accounting standards have been issued and adopted recently. None of these
standards had or expected to have a material impact on our financial position, results of
operations, or liquidity. See Note 5 to the Consolidated Financial Statements.
|
|
|
Item 7A. |
|
Quantitative and Qualitative Disclosures About Market Risk |
Our cash and cash equivalents are not subject to significant interest rate risk due to the
short term maturities of these investments. As of December 31, 2009 the carrying value of our cash
and cash equivalents approximates fair value.
We had $2.7 million of variable interest rate debt outstanding at December 31, 2009 under our
Gemino Facility. Borrowings bear interest at an annual rate equal to 30-day LIBOR (subject to a
minimum annual rate of 2.50% at all times) plus an applicable margin of 6.0% through its maturity
date of January 31, 2011. The variable interest rate applicable of our Gemino Facility may
therefore expose us to market risk due to changes in interest rates of 30-day LIBOR. A
hypothetical 10% increase in the applicable interest rate on our Gemino Facility would negatively
affect our pre-tax results of operations and cash flows by approximately $0.3 million on an
annualized basis, assuming our average outstanding borrowings remained at $2.7 million.
48
|
|
|
Item 8. |
|
Financial Statements and Supplementary Data |
CLARIENT, INC. AND SUBSIDIARIES
FORM 10-K-ANNUAL REPORT
For the Fiscal Year Ended December 31, 2009
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page |
|
|
|
No. |
|
|
|
|
50 |
|
|
|
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
|
|
55 |
|
|
|
|
|
|
|
|
|
56 |
|
|
|
|
|
|
Financial Statement Schedule |
|
|
|
|
|
|
|
|
|
|
|
|
96 |
|
All other schedules are omitted because the required information is not applicable or the
information is presented in the Consolidated Financial Statements or the notes thereto.
49
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Clarient, Inc.
Aliso Viejo, California
We have audited the accompanying consolidated balance sheet of Clarient Inc. and subsidiaries (the
Company) as of December 31, 2009, and the related consolidated statements of operations,
stockholders equity (deficit) and comprehensive loss, and cash flows for the year ended December
31, 2009. Our audit also included the 2009 financial statement schedule listed in the Index at Item
15. We also have audited the Companys internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The companys management is
responsible for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management Report on
Internal Control over Financial Reporting in Item 9a. Our responsibility is to express an opinion
on these financial statements and financial statement schedule and an opinion on the Companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audit of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinions.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion such consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Clarient Inc. and subsidiaries as of December 31, 2009
and the results of their operations and their cash flows for the year ended December 31, 2009, in
conformity with accounting principles generally accepted in the United States of America. Also, in
our opinion such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all material respects, the
information set forth therein. Also, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2009, based on the
criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 16, 2010
50
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Clarient, Inc.:
We have audited the accompanying consolidated balance sheet of Clarient, Inc. and subsidiaries as
of December 31, 2008, and the related consolidated statements of operations, stockholders
(deficit) equity and comprehensive loss, and cash flows for the years ended December 31, 2008 and
2007. In connection with our audits of the consolidated financial statements, we also have audited
the related financial statement schedule. These consolidated financial statements and financial
statement schedule are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Clarient, Inc. and subsidiaries as of December 31,
2008, and the results of their operations and their cash flows for the years ended December 31,
2008 and 2007, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related
financial statement schedule for the years ended December 31, 2008 and 2007, when considered in
relation to the basic consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the consolidated financial statements,
the Company has suffered recurring losses from operations and negative cash flows from operations
and has working capital and net capital deficiencies. In addition, it is not probable that the
Company can remain in compliance with the restrictive financial covenants in its bank credit
facilities. These matters raise substantial doubt about the Companys ability to continue as a
going concern. Managements plans in regard to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of
accounting for uncertainties in income taxes in 2007.
/s/ KPMG LLP
Irvine, California
March 19, 2009
51
CLARIENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
10,903 |
|
|
$ |
1,838 |
|
Restricted cash |
|
|
765 |
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts of $8,747 and
$8,045 at December 31, 2009 and 2008, respectively |
|
|
21,568 |
|
|
|
20,315 |
|
Supplies inventory |
|
|
1,291 |
|
|
|
648 |
|
Prepaid expenses and other current assets |
|
|
935 |
|
|
|
653 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
35,462 |
|
|
|
23,454 |
|
Restricted cash |
|
|
1,314 |
|
|
|
|
|
Property and equipment, net |
|
|
14,346 |
|
|
|
11,911 |
|
Intangible assets, net |
|
|
11,639 |
|
|
|
|
|
Goodwill |
|
|
3,959 |
|
|
|
|
|
Other assets |
|
|
227 |
|
|
|
144 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
66,947 |
|
|
$ |
35,509 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Revolving lines of credit |
|
$ |
2,678 |
|
|
$ |
14,104 |
|
Related party line of credit, net of discount |
|
|
|
|
|
|
11,461 |
|
Accounts payable |
|
|
2,883 |
|
|
|
3,783 |
|
Accrued payroll |
|
|
3,985 |
|
|
|
3,760 |
|
Accrued expenses and other current liabilities |
|
|
3,984 |
|
|
|
2,563 |
|
Current maturities of capital lease obligations |
|
|
645 |
|
|
|
263 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
14,175 |
|
|
|
35,934 |
|
Long-term capital lease obligations |
|
|
604 |
|
|
|
345 |
|
Deferred rent and other non-current liabilities |
|
|
3,055 |
|
|
|
3,970 |
|
Contingently issuable common stock |
|
|
2,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock subject to redemption requirements outside the control of the issuer: |
|
|
|
|
|
|
|
|
Series A convertible preferred stock $0.01 par value, authorized 8,000 shares,
issued and outstanding 5,263 and -0- shares at December 31, 2009 and December 31,
2008, respectively. Aggregate liquidation preference and redemption value: December
31, 2009 and December 31, 2008$55,800 and $-0-, respectively |
|
|
38,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit): |
|
|
|
|
|
|
|
|
Common stock $0.01 par value, authorized 150,000 shares, issued and outstanding
84,092 and 76,995 shares, at December 31, 2009 and 2008, respectively |
|
|
841 |
|
|
|
770 |
|
Additional paid-in capital |
|
|
172,200 |
|
|
|
149,403 |
|
Accumulated deficit |
|
|
(165,164 |
) |
|
|
(154,822 |
) |
Accumulated other comprehensive loss |
|
|
|
|
|
|
(91 |
) |
|
|
|
|
|
|
|
Total stockholders equity (deficit) |
|
|
7,877 |
|
|
|
(4,740 |
) |
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit) |
|
$ |
66,947 |
|
|
$ |
35,509 |
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
52
CLARIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
91,599 |
|
|
$ |
73,736 |
|
|
$ |
42,995 |
|
Cost of services |
|
|
39,107 |
|
|
|
32,936 |
|
|
|
26,807 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
52,492 |
|
|
|
40,800 |
|
|
|
16,188 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
17,380 |
|
|
|
10,941 |
|
|
|
8,630 |
|
General and administrative |
|
|
23,587 |
|
|
|
18,729 |
|
|
|
15,278 |
|
Bad debt |
|
|
12,927 |
|
|
|
12,199 |
|
|
|
3,558 |
|
Research and development |
|
|
1,719 |
|
|
|
421 |
|
|
|
519 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
55,613 |
|
|
|
42,290 |
|
|
|
27,985 |
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(3,121 |
) |
|
|
(1,490 |
) |
|
|
(11,797 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net of interest income of $32, $21, and $60 in
the years ended December 31, 2009, 2008, and 2007, respectively |
|
|
874 |
|
|
|
859 |
|
|
|
1,209 |
|
Interest expense to related parties |
|
|
3,557 |
|
|
|
7,290 |
|
|
|
1,140 |
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes |
|
|
(7,552 |
) |
|
|
(9,639 |
) |
|
|
(14,146 |
) |
Income tax benefit (expense) (see Note 18) |
|
|
599 |
|
|
|
(6 |
) |
|
|
2,088 |
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations, net of income taxes |
|
|
(6,953 |
) |
|
|
(9,645 |
) |
|
|
(12,058 |
) |
Income from discontinued operations, net of income tax expense of
$599, $0, and $2,088 in the years ended December 31, 2009, 2008,
and 2007, respectively (see Notes 4 and 18) |
|
|
901 |
|
|
|
|
|
|
|
3,301 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(6,052 |
) |
|
$ |
(9,645 |
) |
|
$ |
(8,757 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A preferred stock beneficial conversion feature |
|
|
(4,290 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders |
|
$ |
(10,342 |
) |
|
$ |
(9,645 |
) |
|
$ |
(8,757 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share applicable to common stockholders
basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(0.14 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
0.01 |
|
|
|
|
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders |
|
$ |
(0.13 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
77,693 |
|
|
|
72,918 |
|
|
|
71,573 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
53
CLARIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
AND COMPREHENSIVE LOSS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
$0.01 |
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
Stockholders |
|
|
|
|
|
|
Issued |
|
|
Par |
|
|
Paid-in |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Equity |
|
|
Comprehensive |
|
|
|
Shares |
|
|
Value |
|
|
Capital |
|
|
Deficit |
|
|
Loss |
|
|
(Deficit) |
|
|
Loss |
|
Balances at December 31,
2006 |
|
|
71,488 |
|
|
$ |
715 |
|
|
$ |
136,670 |
|
|
$ |
(136,420 |
) |
|
$ |
(14 |
) |
|
$ |
951 |
|
|
|
|
|
Issuance of warrants |
|
|
|
|
|
|
|
|
|
|
734 |
|
|
|
|
|
|
|
|
|
|
|
734 |
|
|
|
|
|
Exercise of warrants |
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
577 |
|
|
|
6 |
|
|
|
686 |
|
|
|
|
|
|
|
|
|
|
|
692 |
|
|
|
|
|
Restricted stock cancelled |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense related to stock
options and restricted stock |
|
|
|
|
|
|
|
|
|
|
1,668 |
|
|
|
|
|
|
|
|
|
|
|
1,668 |
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,757 |
) |
|
|
|
|
|
|
(8,757 |
) |
|
$ |
(8,757 |
) |
Foreign currency
translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77 |
) |
|
|
(77 |
) |
|
|
(77 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(8,834 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31,
2007 |
|
|
72,067 |
|
|
$ |
721 |
|
|
$ |
139,758 |
|
|
$ |
(145,177 |
) |
|
$ |
(91 |
) |
|
$ |
(4,789 |
) |
|
|
|
|
Issuance of warrants |
|
|
|
|
|
|
|
|
|
|
7,020 |
|
|
|
|
|
|
|
|
|
|
|
7,020 |
|
|
|
|
|
Exercise of warrants |
|
|
4,164 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42 |
|
|
|
|
|
Exercise of stock options |
|
|
675 |
|
|
|
6 |
|
|
|
779 |
|
|
|
|
|
|
|
|
|
|
|
785 |
|
|
|
|
|
Issuance of common stock |
|
|
89 |
|
|
|
1 |
|
|
|
184 |
|
|
|
|
|
|
|
|
|
|
|
185 |
|
|
|
|
|
Expense related to stock
options and restricted stock |
|
|
|
|
|
|
|
|
|
|
1,662 |
|
|
|
|
|
|
|
|
|
|
|
1,662 |
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,645 |
) |
|
|
|
|
|
|
(9,645 |
) |
|
$ |
(9,645 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(9,645 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31,
2008 |
|
|
76,995 |
|
|
$ |
770 |
|
|
$ |
149,403 |
|
|
$ |
(154,822 |
) |
|
$ |
(91 |
) |
|
$ |
(4,740 |
) |
|
|
|
|
Issuance of warrants |
|
|
|
|
|
|
|
|
|
|
600 |
|
|
|
|
|
|
|
|
|
|
|
600 |
|
|
|
|
|
Exercise of warrants |
|
|
1,869 |
|
|
|
19 |
|
|
|
2,062 |
|
|
|
|
|
|
|
|
|
|
|
2,081 |
|
|
|
|
|
Exercise of stock options |
|
|
382 |
|
|
|
4 |
|
|
|
544 |
|
|
|
|
|
|
|
|
|
|
|
548 |
|
|
|
|
|
Issuance of common stock
(excluding common stock issued
as consideration for a
completed business
acquisition) |
|
|
92 |
|
|
|
1 |
|
|
|
216 |
|
|
|
|
|
|
|
|
|
|
|
217 |
|
|
|
|
|
Issuance of restricted stock |
|
|
673 |
|
|
|
6 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled restricted stock |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense related to stock
options and restricted stock |
|
|
|
|
|
|
|
|
|
|
2,181 |
|
|
|
|
|
|
|
|
|
|
|
2,181 |
|
|
|
|
|
Stock options issued as
consideration for a completed
business acquisition |
|
|
|
|
|
|
|
|
|
|
744 |
|
|
|
|
|
|
|
|
|
|
|
744 |
|
|
|
|
|
Common stock issued as
consideration for a completed
business acquisition |
|
|
4,090 |
|
|
|
41 |
|
|
|
10,103 |
|
|
|
|
|
|
|
|
|
|
|
10,144 |
|
|
|
|
|
Stock options expected to be
issued as consideration for a
completed business acquisition |
|
|
|
|
|
|
|
|
|
|
424 |
|
|
|
|
|
|
|
|
|
|
|
424 |
|
|
|
|
|
Common stock expected to be
issued as consideration for a
completed business acquisition |
|
|
|
|
|
|
|
|
|
|
1,639 |
|
|
|
|
|
|
|
|
|
|
|
1,639 |
|
|
|
|
|
Series A preferred stock
beneficial conversion feature |
|
|
|
|
|
|
|
|
|
|
4,290 |
|
|
|
(4,290 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,052 |
) |
|
|
|
|
|
|
(6,052 |
) |
|
$ |
(6,052 |
) |
Foreign currency translation
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91 |
|
|
|
91 |
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(5,961 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31,
2009 |
|
|
84,092 |
|
|
$ |
841 |
|
|
$ |
172,200 |
|
|
$ |
(165,164 |
) |
|
$ |
|
|
|
$ |
7,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
54
CLARIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(6,052 |
) |
|
$ |
(9,645 |
) |
|
$ |
(8,757 |
) |
Gain from discontinued operations (see Notes 4 and 18) |
|
|
(901 |
) |
|
|
|
|
|
|
(3,301 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
3,803 |
|
|
|
3,275 |
|
|
|
3,342 |
|
Bad debt expense |
|
|
12,953 |
|
|
|
12,199 |
|
|
|
3,558 |
|
Amortization of warrants to related party interest expense |
|
|
2,506 |
|
|
|
5,378 |
|
|
|
133 |
|
Amortization of deferred financing and offering costs |
|
|
446 |
|
|
|
588 |
|
|
|
470 |
|
Amortization of intangible assets |
|
|
45 |
|
|
|
|
|
|
|
|
|
Interest on related party debt |
|
|
|
|
|
|
1,259 |
|
|
|
21 |
|
Stock-based compensation |
|
|
2,398 |
|
|
|
1,711 |
|
|
|
1,820 |
|
Income tax benefit (see Notes 4, 14, and 18) |
|
|
(599 |
) |
|
|
|
|
|
|
(2,088 |
) |
Changes in operating assets and liabilities, net of acquisition of ownership interest: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on restricted cash |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(14,206 |
) |
|
|
(20,494 |
) |
|
|
(6,413 |
) |
Inventories |
|
|
(770 |
) |
|
|
92 |
|
|
|
(80 |
) |
Prepaid expenses and other assets |
|
|
(738 |
) |
|
|
80 |
|
|
|
(636 |
) |
Accounts payable |
|
|
(1,256 |
) |
|
|
922 |
|
|
|
(1,140 |
) |
Accrued payroll |
|
|
191 |
|
|
|
1,844 |
|
|
|
496 |
|
Accrued interest on related party debt |
|
|
(1,259 |
) |
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities |
|
|
1,219 |
|
|
|
(1,628 |
) |
|
|
1,319 |
|
Deferred rent and other non-current liabilities |
|
|
(915 |
) |
|
|
(129 |
) |
|
|
448 |
|
Cash flows from operating activities of discontinued operations |
|
|
|
|
|
|
|
|
|
|
(751 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(3,147 |
) |
|
|
(4,548 |
) |
|
|
(11,582 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(4,587 |
) |
|
|
(3,502 |
) |
|
|
(3,864 |
) |
Proceeds from sale of discontinued operations, net of selling costs |
|
|
1,500 |
|
|
|
|
|
|
|
10,329 |
|
Increase in restricted cash |
|
|
(2,067 |
) |
|
|
|
|
|
|
|
|
Acquisition of ownership interest, net of cash acquired |
|
|
5 |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities of discontinued operations |
|
|
|
|
|
|
|
|
|
|
(132 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(5,149 |
) |
|
|
(3,502 |
) |
|
|
6,333 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of preferred stock |
|
|
40,000 |
|
|
|
|
|
|
|
|
|
Offering costs from sale of preferred stock |
|
|
(1,414 |
) |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options and warrants |
|
|
2,629 |
|
|
|
827 |
|
|
|
606 |
|
Repayments on capital lease obligations |
|
|
(359 |
) |
|
|
(2,574 |
) |
|
|
(2,011 |
) |
Borrowings on revolving lines of credit |
|
|
76,425 |
|
|
|
37,538 |
|
|
|
33,858 |
|
Repayments on revolving lines of credit |
|
|
(87,851 |
) |
|
|
(37,526 |
) |
|
|
(27,829 |
) |
Borrowings on related party debt |
|
|
5,800 |
|
|
|
15,020 |
|
|
|
2,000 |
|
Repayments on related party debt |
|
|
(17,908 |
) |
|
|
(4,913 |
) |
|
|
|
|
Debt issuance costs |
|
|
(52 |
) |
|
|
|
|
|
|
|
|
Cash flows from financing activities of discontinued operations |
|
|
|
|
|
|
|
|
|
|
(230 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
17,270 |
|
|
|
8,372 |
|
|
|
6,394 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
91 |
|
|
|
|
|
|
|
(77 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
9,065 |
|
|
|
322 |
|
|
|
1,068 |
|
Cash and cash equivalents at beginning of year |
|
|
1,838 |
|
|
|
1,516 |
|
|
|
448 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
10,903 |
|
|
$ |
1,838 |
|
|
$ |
1,516 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
2,887 |
|
|
$ |
1,112 |
|
|
$ |
1,605 |
|
Cash paid for income taxes |
|
|
|
|
|
|
6 |
|
|
|
23 |
|
Non cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment financed by capital leases |
|
|
1,127 |
|
|
|
767 |
|
|
|
449 |
|
Beneficial conversion feature of Series A convertible preferred stock |
|
|
4,290 |
|
|
|
|
|
|
|
|
|
Issuance of warrants in connection with borrowings from related party |
|
|
600 |
|
|
|
7,020 |
|
|
|
396 |
|
Issuance of common stock and stock options in connection with acquisition of
ownership interest (Note 15) |
|
|
15,601 |
|
|
|
|
|
|
|
|
|
Issuance of common stock in consideration for research and development services |
|
|
217 |
|
|
|
49 |
|
|
|
136 |
|
See accompanying notes to Consolidated Financial Statements.
55
CLARIENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except per share amounts)
(1) Description of Business, Basis of Presentation, Operating Segment, and Going Concern
(a) Description of Business
Clarient, Inc. and its wholly-owned subsidiaries (the Company) comprise an advanced oncology
diagnostic services company, headquartered in Aliso Viejo, California. The Companys mission is to
help improve the lives of those affected by cancer through translating cancer discoveries into
better patient care. The Company combines innovative technologies, clinically meaningful
diagnostic tests, and world-class pathology expertise to provide advanced diagnostic services that
assess and characterize cancer for physicians treating their patients, as well as for
biopharmaceutical companies in process of clinically testing various therapies. The Companys
customers are connected to its Internet-based portal, PATHSiTE®, that delivers high resolution
images and interpretative reports resulting from our diagnostic testing services.
California prohibits general corporations from engaging in the practice of medicine pursuant
to both statutory and common law principles commonly known as the Corporate Practice of Medicine
Doctrine (CPMD). In general, the CPMD prohibits non-professional corporations from employing
physicians and certain other healthcare professionals who provide professional medical services.
All of the Companys pathology services are provided by, or are under the supervision of, Clarient
Pathology Services, Inc. (CPS) under a long-term, exclusive professional services agreement by
and between the Company and CPS, as amended on September 1, 2009 (the Professional Services
Agreement). Kenneth J. Bloom, M.D. is the sole stockholder and president of CPS. Dr. Bloom also
serves as the Companys Chief Medical Officer (CMO), a senior management function primarily
involving the technical oversight of the Companys diagnostics services laboratory.
The Company is responsible to perform a variety of non-medical administrative services for
CPS, as required under the Professional Services Agreement. The Company bills and collects for the
pathology services provided by CPS. The Company in turn pays CPS a monthly professional services
fee equal to the aggregate of all estimated CPS physician salaries and benefits, and all other
operating costs of CPS.
(b) Basis of Presentation
The accompanying audited Consolidated Financial Statements of the Company were prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP)
and the financial statements rules and regulations of the United States Securities and Exchange
Commission (SEC). These financial statements include the financial position, results of
operations, and cash flows of the Company, and the accounts of CPS, which are consolidated as
required by applicable GAAP. All inter-company accounts and transactions have been eliminated in
consolidation.
Certain prior period amounts have been reclassified to properly conform to current period
financial statement classification and presentation requirements, or to correct prior period
financial statement misclassifications (see Note 18).
The preparation of the accompanying audited Consolidated Financial Statements in conformity
with GAAP requires management to make estimates and assumptions. Such estimates and assumptions
affect the amounts reported in the Consolidated Financial Statements and accompanying notes
thereto. The Companys most significant estimates relate to revenue recognition, allowance for
doubtful accounts, and stock-based compensation expense. Actual results could differ from those
estimates. As part of the financial statement preparation process, the Company also has evaluated
whether any significant events have occurred after the balance sheet date of December 31, 2009
through March 16, 2010, representing the date this Annual Report on Form 10-K was filed with the
SEC, and concluded that no additional disclosures or adjustments were required.
56
(c) Operating Segment
The Company has one reportable operating segment that delivers advanced oncology diagnostic
services to community pathologists, oncologists, and biopharmaceutical companies. As of December
31, 2009, all of the Companys services were provided within the United States, and substantially
all of the Companys assets were located within the United States.
(d) Going Concern
As of December 31, 2008, the Company expressed substantial doubt about its ability to continue
as a going concern because it suffered recurring losses from operations, had negative cash flows
from operations, and had working capital and net capital deficiencies. In addition, it was not
probable that the Company would remain in compliance with the restrictive financial covenants in
its bank credit facilities.
The Company took several actions during 2009 to address these matters, including (i) the
issuance and sale of an aggregate of 5.3 million shares of Series A preferred stock for aggregate
gross consideration of $40.0 million (see Note 12), (ii) the full repayment and retirement of
credit facilities with Safeguard and Comerica, utilizing a portion of the proceeds from the Series
A preferred stock issuance and sale (see Note 7), and (iii) the realization of general improvements
in 2009 cash collections as compared to 2008. Therefore, as of December 31, 2009, the Company no
longer believes there is substantial doubt about its ability to continue as a going concern.
(2) Summary of Significant Accounting Policies
(a) Revenue Recognition
Net revenue for the Companys diagnostic services is recognized on an accrual basis at the
time discreet diagnostic tests are completed. Each test performed relates to a specimen encounter
derived from a patient, and received by the Company on a specific date (such encounter is commonly
referred to as an accession). The Companys services are billed to various payors, including
Medicare, private health insurance companies, healthcare institutions, biopharmaceutical companies,
and patients. The Company reports net revenue from contracted payors, including certain private
health insurance companies, healthcare institutions, and biopharmaceutical companies, based on the
contracted rate, or in certain instances, the Companys estimate of the amount expected to be
collected for the services provided. For billing to Medicare, the Company uses the published fee
schedules, net of standard discounts (commonly referred to as contractual allowances). The
Company reports net revenue from non-contracted payors, including certain private health insurance
companies, based on the amount expected to be collected for the services provided. Revenue from
patient payors is based on a multiple of the Centers for Medicare & Medicaid Services (CMS)
reimbursement schedule, or as applicable, patients co-pay or deductible obligations.
(b) Allowance for Doubtful Accounts and Bad Debt Expense
An allowance for doubtful accounts is recorded for estimated uncollectible amounts due from
the Companys various payor groups. The process for estimating the allowance for doubtful accounts
involves significant assumptions and judgments. Specifically, the allowance for doubtful accounts
is adjusted periodically, and is principally based upon an evaluation of historical collection
experience of accounts receivable by age for the Companys various payor classes. After
appropriate collection efforts, accounts receivable are written off and deducted from the allowance
for doubtful accounts. Additions to the allowance for doubtful accounts are charged to bad debt
expense. The payment realization cycle for certain governmental and managed care payors can be
lengthy, involving denial, appeal, and adjudication processes, and is subject to periodic
adjustments that may be significant.
During the third quarter of 2009, the Company refined its model for estimating an appropriate
allowance for doubtful accounts at each period end, utilizing historical payment information by
payor class and receivable age, which was not previously available to the Company in sufficient
form and content. The Company also further refined its identification of contractual allowances
during the third quarter of 2009, which resulted in the recognition of an immaterial amount of
additional contractual allowances.
57
(c) Stock-Based Compensation
The Company records compensation expense related to stock-based awards, including stock
options and restricted stock, based on the fair value of the award, which is determined using the
Black-Scholes option-pricing model. Stock-based compensation expense recognized during the period
is based on the fair value of the portion of the stock-based awards that are ultimately expected to
vest, and thus, the gross expense is reduced for estimated forfeitures. The Company recognizes
stock-based compensation expense over the vesting period using the straight-line method for
employees and ratably as tranches vest for non-employees. The Company classifies compensation
expense related to these awards based on the department to which the recipient reports.
(d) Long-Lived Assets
The Company evaluates the possible impairment of its long-lived assets when events or changes
in circumstances occur that indicate that the carrying value of its assets may not be recoverable.
Recoverability of assets to be held and used is measured by the comparison of the carrying value
of such assets to the Companys pretax cash flows (undiscounted and without interest charges)
expected to be generated from their use in Company operations. If such assets are considered to be
impaired, the impairment to be recognized is measured as the amount by which the carrying amount of
the assets exceeds fair value. Assets held for sale, when applicable, are reported at the lower of
the carrying amount or fair value, less costs to sell.
One potential impairment indicator is current-period operating and/or cash flow loss, combined
with a history of operating and/or cash flow losses. Because this condition applies to the
Company, management evaluates the Companys asset group for impairment at the end of each reporting
period. The asset group tested for impairment comprises the Companys entire laboratory operation,
representing the lowest level of its separately identifiable cash flows. The impairment evaluation
uses the Companys operating plan and associated cash flow projection in determining the
undiscounted cash flows expected to be generated by its asset group through continuing operations.
Such undiscounted cash flows are next compared to the carrying amount of the asset group to
determine if an impairment of the asset group is indicated.
The undiscounted net cash flows expected to be generated by the Companys asset group exceeded
the carrying amount of the asset group as of December 31, 2009 and 2008, therefore, the Companys
asset group is not considered to be impaired. Such conclusion is based upon significant management
judgments and estimates inherent in the operating plan and associated cash flow projections,
including assumptions pertaining to net revenue growth, expense trends, and working capital
management. Accordingly, changes in circumstances or assumptions could adversely impact the
results of the Companys long-lived asset impairment test.
(e) Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under such
method, deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis, and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. Deferred taxes are reduced by a valuation allowance to an amount which is
more likely than not to be realized. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period of enactment.
(f) Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of amounts held as bank deposits and any certificates or
notes with an original maturity of three months or less.
Restricted cash is held as bank deposits, and serves as security deposits for the Companys
Aliso Viejo, California facility lease and a certain significant capital lease of computer
hardware. Interest accrues to the Company for such accounts. The classification of restricted
cash as current or non-current is dependent upon whether the contractual terms for such deposits
provide for the complete release of restrictions within one year of the balance sheet date.
The Company has not experienced any significant losses on cash and cash equivalents and does
not believe it is exposed to any significant loss risk due to the high-ratings of the institutions
in which its balances are deposited. The
Companys unrestricted and restricted cash balances on deposit that exceed the Federal Deposit
Insurance Corporation (F.D.I.C.) limits were approximately $11.6 million at December 31, 2009.
58
(g) Supplies Inventory
Supplies inventory consists of laboratory and research and development supplies and are stated
at the lower of cost or market. Supplies inventory is accounted for under the first-in, first-out
method (FIFO).
(h) Property and Equipment and Depreciation
Property and equipment are depreciated using the straight-line method over the following
estimated useful lives:
|
|
|
Office furniture, computer, software, and laboratory equipment |
|
Three to five years |
Leasehold improvements |
|
Shorter of useful life or remaining term of lease |
Expenditures for maintenance, repairs, and minor improvements are charged to expense as
incurred. Depreciation expense is recognized on the first day of the month subsequent to being
placed into service. Leasehold improvements are capitalized and amortized over the shorter of their
estimated useful lives or the remaining lease term. All reimbursed leasehold improvements received
from the Companys landlord are recorded to deferred rent and recovered ratably through a reduction
of rent expense over the term of the lease.
(i) Capitalized Internal-Use Software Costs
The Company capitalizes eligible internal-use computer software costs. Amortization begins
when the internal-use computer software is ready for its intended use, and is amortized over a
three to five-year period using the straight-line method.
(j) Research and Development
Research and development costs are expensed as incurred. Research and development expenses
consist of compensation and benefits for research and development personnel, license fees, related
supplies inventory, certain information technology personnel, arrangements with consultants and
other third parties, and allocated facility-related costs.
(k) Intangible Assets, net
Intangible assets, net, primarily consist of intellectual property represented by
proprietary biomarkers in development and substantially ready for use within the Companys
diagnostic testing activities (acquired through the AGI Acquisition, discussed in Note 15).
These intangible assets have associated patents or patents in process, and are amortized
on a straight-line basis over estimated useful lives of seven years. The amortization
period commences upon the commercialization of the related biomarker.
(l) Goodwill
Goodwill is recorded when the purchase price paid for an acquisition exceeds the
estimated fair value of the net identified tangible and intangible assets acquired. The
Company performs a two-step process on an annual basis, or more frequently if necessary, to
determine 1) whether the fair value of the relevant reporting unit exceeds carrying value,
and 2) to measure the amount of an impairment loss, if any. The reporting unit tested
for goodwill impairment comprises the Companys entire laboratory operation, representing
its single operating segment. The fair value of the Companys reporting unit is
represented by the Companys total market capitalization on the NASDAQ Capital Market as of
the close of the business day on December 1, which represents our annual impairment testing
date.
59
(m) Fair Value Measurements
The Company applies relevant GAAP in measuring the fair value of its Variable Shares (see Note
15). Fair value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date.
GAAP establishes a fair value hierarchy that distinguishes between (i) market participant
assumptions developed based on market data obtained from independent sources (observable inputs)
and (ii) an entitys own assumptions about market participant assumptions developed based on the
best information available in the circumstances (unobservable inputs). The fair value hierarchy
consists of three broad levels, which gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or liabilities.
Level 2 Inputs other than quoted prices included within Level 1 that are observable
for the asset or liability, either directly or indirectly, including quoted prices for
similar assets or liabilities in active markets and quoted prices for identical or similar
assets or liabilities in markets that are not active; inputs other than quoted prices that
are observable for the asset or liability (e.g. interest rates); and inputs that are
derived principally from or corroborated by observable market data by correlation or other
means.
Level 3 Inputs that are both significant to the fair value measurement and
unobservable.
(3) Balance Sheet Detail
(a) Allowance for Doubtful Accounts
The following is the 2008 and 2009 summary of activity for the allowance for doubtful accounts:
|
|
|
|
|
Ending balance, December 31, 2007 |
|
$ |
3,370 |
|
Bad debt expense |
|
|
12,199 |
|
Write-offs |
|
|
(7,524 |
) |
|
|
|
|
Ending balance, December 31, 2008 |
|
|
8,045 |
|
Bad debt expense |
|
|
12,927 |
|
Write-offs |
|
|
(12,225 |
) |
|
|
|
|
Ending balance, December 31, 2009 |
|
$ |
8,747 |
|
|
|
|
|
(b) Property and Equipment
The following is a summary of property and equipment:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Office furniture, computer hardware and software, and laboratory equipment |
|
$ |
21,480 |
|
|
$ |
16,341 |
|
Leasehold improvements |
|
|
9,650 |
|
|
|
8,551 |
|
|
|
|
|
|
|
|
Total |
|
|
31,130 |
|
|
|
24,892 |
|
Less: accumulated depreciation and amortization |
|
|
(16,784 |
) |
|
|
(12,981 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
14,346 |
|
|
$ |
11,911 |
|
|
|
|
|
|
|
|
As of December 31, 2009 and 2008, the Companys associated capital lease obligations were $1.2
million and $0.6 million, respectively.
60
(c) Intangible assets
The following is a summary of intangible assets (see Note 15 for further discussion):
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
Biomarkers |
|
$ |
11,349 |
|
In-process research and development |
|
|
76 |
|
Issued patents |
|
|
26 |
|
Patent applications |
|
|
123 |
|
Non-compete agreements |
|
|
110 |
|
Less: accumulated amortization |
|
|
(45 |
) |
|
|
|
|
Intangible assets, net |
|
$ |
11,639 |
|
|
|
|
|
The following is a summary of the estimated useful life, estimated annual amortization
expense, and expense classification of the Companys intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
|
|
Useful Life |
|
|
Estimated Annual |
|
|
Consolidated Statement of Operations |
|
|
|
(years) |
|
|
Amortization |
|
|
Classification |
|
Biomarkers |
|
|
7 |
|
|
$ |
1,621 |
|
|
Cost of services |
In-process research and development |
|
|
7 |
|
|
|
11 |
|
|
Research and development |
Issued patents |
|
|
7 |
|
|
|
4 |
|
|
Cost of services |
Patent applications |
|
|
7 |
|
|
|
18 |
|
|
Cost of services |
Non-competition agreements |
|
|
3 |
|
|
|
37 |
|
|
Research and development |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
1,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) Discontinued Operations
On March 8, 2007, the Company sold its instrument systems business (the ACIS Business),
consisting of certain tangible assets, inventory, intellectual property (including the Companys
former patent portfolio and the ACIS and ChromaVision trademarks), contracts, and related assets to
Carl Zeiss MicroImaging, Inc. and one of its subsidiaries (collectively, Zeiss) for an aggregate
purchase price of $12.5 million. The $12.5 million consisted of $11.0 million in cash and an
additional $1.5 million in contingent purchase price, subject to the satisfaction of certain
post-closing conditions through March 8, 2009 relating to transferred intellectual property (the
ACIS Sale). As part of the ACIS Sale, the Company entered into a license agreement with Zeiss
that granted the Company a non-exclusive, perpetual and royalty-free license to certain of the
transferred patents, copyrights, and software code for use in connection with imaging applications
(excluding sales of imaging instruments) and the Companys oncology diagnostic services business.
The ACIS Business is reported in discontinued operations for all periods presented. The
Company recognized a gain on sale for the year ended December 31, 2007, which is calculated as
follows:
|
|
|
|
|
|
|
|
|
Proceeds from ACIS Business sale |
|
|
|
|
|
$ |
11,000 |
|
Less: Selling costs |
|
|
|
|
|
|
(671 |
) |
|
|
|
|
|
|
|
|
Net proceeds from ACIS Business sale |
|
|
|
|
|
|
10,329 |
|
Inventories |
|
|
(1,480 |
) |
|
|
|
|
Property and equipment, net |
|
|
(473 |
) |
|
|
|
|
Goodwill and intangibles, net |
|
|
(4,042 |
) |
|
|
|
|
Other assets |
|
|
(518 |
) |
|
|
|
|
Deferred revenue |
|
|
692 |
|
|
|
|
|
Debt |
|
|
1,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets sold |
|
|
|
|
|
|
(4,205 |
) |
|
|
|
|
|
|
|
|
Gain on sale of ACIS Business |
|
|
|
|
|
$ |
6,124 |
|
|
|
|
|
|
|
|
|
61
Results of discontinued operations included within the Consolidated Statements of Operations,
as adjusted (see Note 18), were as follows:
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
|
2007 |
|
Net revenue |
|
$ |
864 |
|
Cost of revenue |
|
|
364 |
|
Operating expenses |
|
|
1,180 |
|
Interest expense |
|
|
32 |
|
|
|
|
|
Net loss from discontinued operations |
|
|
(712 |
) |
Gain on sale of ACIS Business |
|
|
6,124 |
|
|
|
|
|
Subtotal |
|
$ |
5,412 |
|
Income tax expense on gain on sale of ACIS Business |
|
|
(2,111 |
) |
|
|
|
|
Income from discontinued operations, net of income taxes |
|
$ |
3,301 |
|
|
|
|
|
In March 2009, Zeiss management acknowledged the satisfaction of the post-closing conditions
of the ACIS Sale and the associated $1.5 million payment due, which the Company subsequently
received on April 8, 2009. The Company recorded the $0.9 million as income from discontinued
operations, net of income taxes (see Note 18), within the accompanying Consolidated Statements of
Operations for the year ended December 31, 2009.
The Company retains certain indemnification obligations to Zeiss for any third party claims
surviving through the applicable statute of limitations. The Company believes the likelihood of a
raised claim(s) is remote and, in any case, would be immaterial in value.
(5) Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) Accounting Standards
CodificationTM (FASB Codification) became the single source of authoritative
nongovernmental GAAP on July 1, 2009. The FASB Codification became effective for financial
statements that cover interim and annual periods ending after September 15, 2009. Other than
resolving certain minor inconsistencies in current GAAP, the FASB Codification does not affect
GAAP, but rather organizes historical accounting pronouncements by approximately 90 accounting
topics. Accordingly, the Company describes herein, in general, pertinent GAAP where applicable
and/or cites the associated FASB Codification reference, rather than the historical reference for
such GAAP guidance.
In September 2006, a common definition for fair value was established and is required to be
applied to GAAP as applicable. The guidance also establishes a framework for measuring fair value
and expands disclosure about such fair value measurements, and became effective for financial
assets and financial liabilities for fiscal years beginning after November 15, 2007. Subsequent
GAAP guidance deferred the effective date for all nonfinancial assets and nonfinancial liabilities
to fiscal years beginning after November 15, 2008. The adoption of the aforementioned GAAP for
financial assets and financial liabilities, effective January 1, 2008, did not have a material
impact on the Companys consolidated financial position and
results of operations. The adoption of aforementioned GAAP for nonfinancial assets and nonfinancial
liabilities, effective January 1, 2009, had no impact on the Companys consolidated financial
position, results of operations, and cash flows.
In December 2007, developments in GAAP significantly changed the accounting and required
financial statement disclosures for business combinations for acquisitions occurring on or after
January 1, 2009. See Note 15 for the Companys business combination accounting disclosure in 2009.
Under such guidance, an acquiring entity is required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date at fair value with limited exceptions.
Further changes in the accounting treatment for certain specific items include:
|
|
|
Transaction costs are generally expensed as incurred. These costs were previously
treated as costs of the acquisition; |
|
|
|
Contingent consideration is recorded at fair value as an element of purchase price
with subsequent adjustments recognized in operations. Contingent consideration was
previously accounted for as a subsequent adjustment of purchase price; |
|
|
|
In-process research and development (IPR&D) is recorded at fair value as an
indefinite-lived intangible asset at the acquisition date; |
|
|
|
Restructuring costs associated with a business combination are generally expensed
subsequent to the acquisition date; and |
|
|
|
Subsequent decreases in valuation allowances on acquired deferred tax assets are
recognized in operations after the measurement period. Such changes were previously
considered to be subsequent changes in consideration and were recorded as decreases in
goodwill. |
62
In April 2009, additional GAAP guidance was released that affects the accounting for assets
acquired and liabilities assumed in a business combination that arise from contingencies, which
amends the accounting for assets and liabilities arising from contingencies in a business
combination. Such guidance was effective January 1, 2009, and requires pre-acquisition
contingencies to be recognized at fair value, if fair value can be reasonably determined during the
measurement period. If fair value cannot be reasonably determined, measurement is required to be
based on the recognition and measurement criteria of GAAP applicable for accounting for
contingencies. See Note 15 for the impact of Companys business combination accounting in 2009.
In June 2008, GAAP guidance was released for determining whether instruments granted in
share-based payment transactions are participating securities. Under such guidance, unvested
share-based payment awards that contain non-forfeitable rights to dividends or dividend
equivalents, whether they are paid or unpaid, are considered participating securities and should be
included in the computation of earnings per share pursuant to the two-class method. As required,
the Company adopted such guidance retrospectively effective January 1, 2009, though it did not
affect the Companys consolidated financial position, results of operations, cash flows, or loss
per common share in prior periods. Income (loss) per share attributable to common stockholders was
affected in the year ended December 31, 2009, as disclosed in Note 9.
(6) Significant Risks and Uncertainties
Credit risk with respect to the Companys accounts receivable is generally diversified due to
the large number of payors that comprise its customer base. The Company has significant receivable
balances with government payors, health insurance carriers, health care institutions,
biopharmaceutical companies, and patients. The Companys receivable balances are not supported by
collateral.
The laboratory services industry faces challenging billing and collection procedures. The
cash realization cycle for certain governmental and managed care payors can be lengthy and may
involve denial, appeal, and adjudication processes.
Collection of governmental, private health insurer, and client receivables are generally a function
of providing complete and accurate billing information to such parties within the various filing
deadlines. Receivables due from clients and patients, in particular, are generally subject to
increased credit risk as compared to the Companys other payors, due to the clients and patients
credit worthiness or inability to pay.
The percentage of the Companys gross accounts receivable of $30.3 million and $28.4 million
as of December 31, 2009 and 2008, respectively, by primary payor class is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Governmental (Medicare and Medicaid) |
|
|
20 |
% |
|
|
24 |
% |
Private health insurers |
|
|
43 |
% |
|
|
40 |
% |
Clients (pathologists, hospitals, clinics, and biopharmaceutical companies) |
|
|
18 |
% |
|
|
18 |
% |
Patients (indirect bill) |
|
|
10 |
% |
|
|
5 |
% |
Patients (direct bill) |
|
|
9 |
% |
|
|
13 |
% |
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
63
The Companys aged gross accounts receivable in total, and by payor class, as of December 31,
2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
As of December 31, 2009 - Total |
|
Gross Amount |
|
|
Percent of Total |
|
Total |
|
$ |
30,315 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Unbilled |
|
|
4,819 |
|
|
|
16 |
% |
Current |
|
|
5,817 |
|
|
|
19 |
% |
31-60 days past due |
|
|
4,341 |
|
|
|
14 |
% |
61-90 days past due |
|
|
2,799 |
|
|
|
9 |
% |
91-120 days past due |
|
|
1,963 |
|
|
|
6 |
% |
121-150 days past due |
|
|
1,299 |
|
|
|
4 |
% |
Greater than 150 days past due |
|
|
9,277 |
|
|
|
32 |
% |
|
|
|
|
|
|
|
|
|
Governmental payors (Medicare and Medicaid) |
|
Gross Amount |
|
|
Percent of Total |
|
Total |
|
$ |
5,989 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Unbilled |
|
|
1,508 |
|
|
|
25 |
% |
Current |
|
|
1,332 |
|
|
|
22 |
% |
31-60 days past due |
|
|
517 |
|
|
|
9 |
% |
61-90 days past due |
|
|
335 |
|
|
|
6 |
% |
91-120 days past due |
|
|
228 |
|
|
|
4 |
% |
121-150 days past due |
|
|
204 |
|
|
|
3 |
% |
Greater than 150 days past due |
|
|
1,864 |
|
|
|
31 |
% |
|
|
|
|
|
|
|
|
|
Private health insurer payors |
|
Gross Amount |
|
|
Percent of Total |
|
Total |
|
$ |
13,009 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Unbilled |
|
|
2,391 |
|
|
|
18 |
% |
Current |
|
|
1,989 |
|
|
|
15 |
% |
31-60 days past due |
|
|
1,395 |
|
|
|
11 |
% |
61-90 days past due |
|
|
1,069 |
|
|
|
8 |
% |
91-120 days past due |
|
|
728 |
|
|
|
6 |
% |
121-150 days past due |
|
|
580 |
|
|
|
5 |
% |
Greater than 150 days past due |
|
|
4,857 |
|
|
|
37 |
% |
|
|
|
|
|
|
|
|
|
Client (pathologists, hospitals, clinics, and biopharmaceutical) payors |
|
Gross Amount |
|
|
Percent of Total |
|
Total |
|
$ |
5,433 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Unbilled |
|
|
585 |
|
|
|
11 |
% |
Current |
|
|
1,791 |
|
|
|
33 |
% |
31-60 days past due |
|
|
1,570 |
|
|
|
29 |
% |
61-90 days past due |
|
|
530 |
|
|
|
10 |
% |
91-120 days past due |
|
|
299 |
|
|
|
5 |
% |
121-150 days past due |
|
|
164 |
|
|
|
3 |
% |
Greater than 150 days past due |
|
|
494 |
|
|
|
9 |
% |
64
|
|
|
|
|
|
|
|
|
Patient payors (indirect bill) |
|
Gross Amount |
|
|
Percent of Total |
|
Total |
|
$ |
2,992 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Unbilled |
|
|
|
|
|
|
|
|
Current |
|
|
137 |
|
|
|
5 |
% |
31-60 days past due |
|
|
343 |
|
|
|
11 |
% |
61-90 days past due |
|
|
337 |
|
|
|
11 |
% |
91-120 days past due |
|
|
302 |
|
|
|
10 |
% |
121-150 days past due |
|
|
275 |
|
|
|
9 |
% |
Greater than 150 days past due |
|
|
1,598 |
|
|
|
54 |
% |
|
|
|
|
|
|
|
|
|
Patient payors (direct bill) |
|
Gross Amount |
|
|
Percent of Total |
|
Total |
|
$ |
2,892 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Unbilled |
|
|
335 |
|
|
|
12 |
% |
Current |
|
|
569 |
|
|
|
19 |
% |
31-60 days past due |
|
|
516 |
|
|
|
18 |
% |
61-90 days past due |
|
|
528 |
|
|
|
18 |
% |
91-120 days past due |
|
|
405 |
|
|
|
14 |
% |
121-150 days past due |
|
|
76 |
|
|
|
3 |
% |
Greater than 150 days past due |
|
|
463 |
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
As of December 31, 2008 Total |
|
Gross Amount |
|
|
Percent of Total |
|
Total |
|
$ |
28,360 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Unbilled |
|
|
4,532 |
|
|
|
16 |
% |
Current |
|
|
4,636 |
|
|
|
16 |
% |
31-60 days past due |
|
|
4,119 |
|
|
|
15 |
% |
61-90 days past due |
|
|
3,403 |
|
|
|
12 |
% |
91-120 days past due |
|
|
2,713 |
|
|
|
9 |
% |
121-150 days past due |
|
|
2,166 |
|
|
|
8 |
% |
Greater than 150 days past due |
|
|
6,791 |
|
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
Governmental payors (Medicare and Medicaid) |
|
Gross Amount |
|
|
Percent of Total |
|
Total |
|
$ |
6,732 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Unbilled |
|
|
1,124 |
|
|
|
16 |
% |
Current |
|
|
1,202 |
|
|
|
18 |
% |
31-60 days past due |
|
|
1,156 |
|
|
|
17 |
% |
61-90 days past due |
|
|
790 |
|
|
|
12 |
% |
91-120 days past due |
|
|
729 |
|
|
|
11 |
% |
121-150 days past due |
|
|
584 |
|
|
|
9 |
% |
Greater than 150 days past due |
|
|
1,147 |
|
|
|
17 |
% |
65
|
|
|
|
|
|
|
|
|
Private health insurer payors |
|
Gross Amount |
|
|
Percent of Total |
|
Total |
|
$ |
11,367 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Unbilled |
|
|
2,384 |
|
|
|
21 |
% |
Current |
|
|
1,242 |
|
|
|
11 |
% |
31-60 days past due |
|
|
1,529 |
|
|
|
13 |
% |
61-90 days past due |
|
|
1,349 |
|
|
|
12 |
% |
91-120 days past due |
|
|
992 |
|
|
|
9 |
% |
121-150 days past due |
|
|
948 |
|
|
|
8 |
% |
Greater than 150 days past due |
|
|
2,923 |
|
|
|
26 |
% |
|
|
|
|
|
|
|
|
|
Client (pathologists, hospitals, clinics, and biopharmaceutical) payors |
|
Gross Amount |
|
|
Percent of Total |
|
Total |
|
$ |
5,213 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Unbilled |
|
|
703 |
|
|
|
13 |
% |
Current |
|
|
1,661 |
|
|
|
32 |
% |
31-60 days past due |
|
|
818 |
|
|
|
16 |
% |
61-90 days past due |
|
|
588 |
|
|
|
11 |
% |
91-120 days past due |
|
|
417 |
|
|
|
8 |
% |
121-150 days past due |
|
|
141 |
|
|
|
3 |
% |
Greater than 150 days past due |
|
|
885 |
|
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
Patient payors (indirect bill) |
|
Gross Amount |
|
|
Percent of Total |
|
Total |
|
$ |
1,302 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Unbilled |
|
|
|
|
|
|
|
% |
Current |
|
|
205 |
|
|
|
16 |
% |
31-60 days past due |
|
|
241 |
|
|
|
18 |
% |
61-90 days past due |
|
|
212 |
|
|
|
16 |
% |
91-120 days past due |
|
|
138 |
|
|
|
11 |
% |
121-150 days past due |
|
|
166 |
|
|
|
13 |
% |
Greater than 150 days past due |
|
|
340 |
|
|
|
26 |
% |
|
|
|
|
|
|
|
|
|
Patient payors (direct bill) |
|
Gross Amount |
|
|
Percent of Total |
|
Total |
|
$ |
3,746 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Unbilled |
|
|
320 |
|
|
|
9 |
% |
Current |
|
|
328 |
|
|
|
9 |
% |
31-60 days past due |
|
|
376 |
|
|
|
10 |
% |
61-90 days past due |
|
|
464 |
|
|
|
12 |
% |
91-120 days past due |
|
|
436 |
|
|
|
12 |
% |
121-150 days past due |
|
|
327 |
|
|
|
9 |
% |
Greater than 150 days past due |
|
|
1,495 |
|
|
|
39 |
% |
As of December 31, 2009, the Company maintained an $8.7 million allowance for doubtful
accounts in order to carry accounts receivable at the estimated net realizable value of $21.6
million, as presented within the accompanying Consolidated Balance Sheets. The allowance for
doubtful accounts is an estimate that involves considerable professional judgment. As such, the
Companys actual collection of its December 31, 2009 accounts receivable may materially differ from
managements estimate for reasons including, but not limited to: customer mix, concentration of
customers within the healthcare sector, and the general downturn in the United States economy.
66
(7) Lines of Credit
The following table summarizes the Companys outstanding debt at its carrying value at
December 31, 2009 and 2008. The Company believes the carrying amount of its outstanding debt
approximates fair value based upon its short-term
nature and associated interest rate.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Gemino Facility |
|
$ |
2,678 |
|
|
$ |
5,104 |
|
Capital lease obligations |
|
|
1,249 |
|
|
|
608 |
|
Safeguard Mezzanine Financing |
|
|
|
|
|
|
13,366 |
|
Comerica Facility |
|
|
|
|
|
|
9,000 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
3,927 |
|
|
|
28,078 |
|
Less: Unamortized discount on Mezzanine Facilities |
|
|
|
|
|
|
(1,905 |
) |
|
|
|
|
|
|
|
Total debt |
|
|
3,927 |
|
|
|
26,173 |
|
Less: Short-term debt, including current maturities of capital lease obligations |
|
|
(3,323 |
) |
|
|
(25,828 |
) |
|
|
|
|
|
|
|
Long-term capital lease obligations |
|
$ |
604 |
|
|
$ |
345 |
|
|
|
|
|
|
|
|
On March 25, 2009, the Company entered into the Oak Purchase Agreement, pursuant to which the
Company agreed to sell and issue to Oak, up to an aggregate of 6.6 million shares of convertible
preferred stock in two or more tranches for aggregate consideration of up to $50.0 million. The
Company closed two tranches with Oak in March and May 2009 for an aggregate 5.3 million shares of
convertible preferred stock for aggregate consideration of $40.0 million. After paying investment
banking and legal fees, the Company used a portion of the net proceeds to repay in full and
terminate its revolving credit agreements with Comerica Bank and Safeguard (defined below) during
the first half of 2009.
Gemino Facility
On July 31, 2008, the Company entered into a secured credit agreement (the Gemino Facility)
with Gemino Healthcare Finance, LLC (Gemino), which was amended on February 27, 2009 (the
February 2009 Gemino Amendment), on November 13, 2009 (the November 2009 Gemino Amendment), and
December 21, 2009 (the December 2009 Gemino Amendment). The Gemino Facility is a revolving
facility under which the Company may borrow up to $8.0 million, secured by the Companys accounts
receivable and related assets. The November 2009 Gemino Amendment extended the Gemino Facilitys
maturity date to January 31, 2011. The December 2009 Gemino Amendment joined AGI (see Note 15) as
a borrower under the Gemino Facility.
Outstanding borrowings under the Gemino Facility were $2.7 million at December 31, 2009. The
amount which the Company is entitled to borrow under the Gemino Facility at a particular time is
based on the amount of the Companys qualified accounts receivable and certain liquidity factors
($5.3 million availability as of December 31, 2009). During 2008, borrowings under the Gemino
Facility bore interest at an annual rate equal to 30-day LIBOR (subject to a minimum annual rate of
2.50% at all times) plus an applicable margin of 5.25% during 2008. As a result of the February
2009 Gemino Amendment, borrowings under the Gemino Facility bear interest at an annual rate equal
to 30-day LIBOR (subject to a minimum annual rate of 2.50% at all times) plus an applicable margin
of 6.0% during 2009 and 2010. The Company was also required to pay a commitment fee of 0.75% per
year on the daily average of unused credit availability (reduced to 0.50% with the November 2009
Gemino Amendment, as discussed below), and is required to pay a collateral monitoring fee of 0.40%
per year on the daily average of outstanding borrowings. Interest expense on the Gemino Facility
for the year ended December 31, 2009 and 2008, was $0.5 million and $0.2 million, respectively.
Such amounts are included in interest expense within the accompanying Consolidated Statements of
Operations
The February 2009 Gemino Amendment eliminated the formerly-existing minimum adjusted EBITDA
covenant and replaced it with a covenant that requires the Company to maintain a fixed charge
coverage ratio on an annualized basis of 1.00 through June 30, 2009, 1.10 through September 30,
2009, and 1.20 through December 31, 2009 (though the November 2009 Gemino Amendment removed the
fixed charge coverage ratio through December 31, 2009, as discussed below). The fixed charge
coverage ratio is defined as the ratio of EBITDA (net income plus interest expense, tax expense,
depreciation/amortization expense, and stock-based compensation expense), to the sum of (i)
interest expense paid in cash on the Gemino Facility, (ii) payments made under capital leases,
(iii) unfinanced capital expenditures, and (iv) taxes paid.
67
The February 2009 Gemino Amendment increased the Companys capital expenditure limit to $7.5
million in each fiscal year. For the twelve months ending December 31, 2009, the Companys
aggregate capital expenditures were $4.6 million. The February 2009 Gemino Amendment also modified
the minimum level of excess liquidity covenant, increasing
its threshold from $2.0 million to $3.0 million, though such covenant was subsequently
eliminated with the November 2009 Gemino Amendment, as discussed below.
The November 2009 Gemino Amendment (i) extended the maturity date of the Gemino Facility from
January 31, 2010 to January 31, 2011, (ii) removed the excess liquidity covenant, (iii) increased
the facilitys advance rate from 75% to 85%, (iv) eliminated the minimum fixed charge coverage
ratio covenant through December 31, 2009, (v) includes a maximum loan turnover ratio covenant
(defined as the average monthly loan balance divided by average monthly cash collections multiplied
by 30 days) of 35 days only for the three months ended December 31, 2009 (for the three months
ended December 31, 2009 the Companys calculated maximum loan turnover ratio was 18 days), (vi)
requires a minimum annualized fixed charge coverage ratio covenant of 1.00 for the three months
ending March 31, 2010, 1.10 for six months ending June 30, 2010, 1.20 for the nine months ending
September 30, 2010, and 1.20 for the twelve months ending December 31, 2010 and thereafter, and
(vii) reduced the commitment fee from 0.75% to 0.50% per year on the daily average of unused credit
availability.
The Gemino Facility also contains a material adverse change clause (MAC) clause. If the
Company encountered difficulties that would qualify as a MAC in its (i) operations, (ii) condition
(financial or otherwise), or (iii) ability to repay amounts outstanding under the Gemino Facility,
it could be cancelled at Geminos sole discretion. Gemino could then elect to declare the
indebtedness, together with accrued interest and other fees, to be immediately due and payable and
proceed against any collateral securing such indebtedness.
Comerica Facility
On March 26, 2009, the Company fully repaid the $9.8 million outstanding balance under its
$12.0 million revolving credit agreement with Comerica Bank (the Comerica Facility), using a
portion of the proceeds from the initial closing of the Oak Private Placement. The Comerica
Facility was terminated at such time, as was Safeguards guarantee of the Comerica Facility (as
described below). The Company maintains a $1.5 million standby letter of credit with Comerica Bank
which is fully supported by a restricted cash account for the same amount. The letter of credit is
for the benefit of the Companys landlord of its leased facility in Aliso Viejo, California.
Borrowings under the Comerica Facility bore interest during 2008 and through February 27,
2009, at Comericas prime rate minus 0.5%, or at the Companys option, at a rate equal to 30-day
LIBOR plus 2.45%. The Comerica Facility was amended on February 27, 2009, and as a result, until
its retirement on March 26, 2009, borrowings under the Comerica Facility bore interest at the
Companys option of: (i) 0.5% plus the greater of Comericas prime rate or 1.75%, or (ii) 30-day
LIBOR plus 2.40%. The interest expense on the outstanding balance under the Comerica Facility for
the years ended December 31, 2009, 2008, and 2007 (excluding the usage and guarantee fees charged
by Safeguard as described below), was $0.1 million, $0.4 million, and $0.7 million, respectively.
Such amounts are included in interest expense within the accompanying Consolidated Statements of
Operations.
Safeguard Delaware, Inc., a wholly-owned subsidiary of Safeguard Scientifics, Inc.
(Safeguard), the Companys largest single stockholder, guaranteed the Companys borrowings under
the Comerica Facility in exchange for 0.5% per year of the total amount guaranteed plus 4.5% per
year of the daily-weighted average principal balance outstanding. Additionally, the Company was
required to pay Safeguard a quarterly usage fee of 0.875% of the amount by which the daily average
outstanding principal balance under the Comerica Facility exceeded $5.5 million. The usage and
guarantee fees charged by Safeguard for the Comerica Facility for the years ended December 31,
2009, 2008, and 2007 were $0.1 million, $0.7 million, and $0.6 million, respectively. Such amounts
are included in interest expense to related parties within the accompanying Consolidated Statements
of Operations.
Safeguard Mezzanine Financing
On March 7, 2007, the Company entered into a senior subordinated revolving credit facility
with Safeguard (the Initial Mezzanine Facility). The Initial Mezzanine Facility provided the
Company with up to $12.0 million in working capital funding, but was reduced by $6.0 million as a
result of the ACIS Sale discussed in Note 4. The Initial Mezzanine Facilitys annual interest rate
was 12.0%. In connection with the Initial Mezzanine Facility, the Company issued Safeguard 0.3
million common stock warrants to satisfy Safeguards commitment fees and maintenance and usage
fees. The fair value of these common stock warrants was determined using the Black-Scholes option
pricing model, and was initially expensed over the term of the Initial Mezzanine Facility, though
the term was subsequently extended to coincide with the term of the New Mezzanine Facility (defined
below).
68
On March 14, 2008, the Company entered into an amended and restated senior subordinated
revolving credit facility with Safeguard (the New Mezzanine Facility) to refinance, renew, and
expand the Initial Mezzanine Facility. The New Mezzanine Facility, which had a stated maturity date
of April 15, 2009, provided the Company with up to $21.0 million in working capital funding.
Borrowings under the New Mezzanine Facility bore interest at an annual rate of 12.0% through
September 30, 2008 and 13.0% thereafter. Proceeds from the New Mezzanine Facility were used to
refinance indebtedness under the Initial Mezzanine Facility, for working capital purposes, and to
repay in full and terminate the Companys former credit facility with GE Capital, which included
certain equipment lease obligations.
In connection with the New Mezzanine Facility, the Company issued Safeguard 1.6 million common
stock warrants upon its signing. The Company was also required to issue Safeguard an additional
2.2 million common stock warrants, in four equal tranches of 0.55 million if the balance of the New
Mezzanine Facility had not been reduced to $6.0 million or less on or prior to May 1, 2008, July 1,
2008, September 1, 2008, and November 1, 2008, respectively. Such reduction was not accomplished
and as a result, 0.55 million common stock warrants were issued on each of June 10, 2008, July 2,
2008, September 2, 2008, and November 6, 2008, respectively.
The fair value of the 1.6 million common stock warrants issued on March 14, 2008 and the 2.2
million common stock warrants issued from June 2008 through December 2008 was measured on March 14,
2008, the date of the New Mezzanine Facility commitment. The fair value of any unissued common
stock warrants associated with the New Mezzanine Facility was measured and adjusted at each
subsequent quarter end. The fair value of all such common stock warrants has been treated for
accounting purposes as a debt discount of the New Mezzanine Facility and additional
paid-in-capital. As such, the Company began accreting the debt discount in the first quarter of
2008 (as adjusted for the change in fair value of any contingent warrants at each quarter-end) over
the term of the New Mezzanine Facility through recording interest expense to related parties on a
straight-line basis.
The fair value of the common stock warrants issued to Safeguard in connection with the Initial
Mezzanine Facility and New Mezzanine Facility was determined using the Black-Scholes option pricing
model with the following inputs: zero dividends, a risk-free interest rate ranging from 3.4% to
4.5% (equal to the U.S. Treasury yield curve for the warrants term on the date of issuance), and
expected stock volatility of 66% to 85% (measured using weekly price observations for a period
equal to the warrants term).
On February 27, 2009, the Company entered into an amended and restated senior subordinated
revolving credit facility with Safeguard (the Third Mezzanine Facility) to refinance, renew, and
expand the New Mezzanine Facility. The Third Mezzanine Facility had a stated maturity date of
April 1, 2010 and provided the Company with up to $30.0 million in working capital funding through
March 25, 2009. Borrowings under the Third Mezzanine Facility bore interest at an annual rate of
14.0%, capitalized monthly to the principal balance. Upon the signing of the Third Mezzanine
Facility, the Company issued Safeguard 0.5 million fully vested common stock warrants with a five
year term and an exercise price equal to $1.376.
In connection with the Initial Oak Closing on March 26, 2009, the Company repaid $14.0 million
of the outstanding balance under the Third Mezzanine Facility. Also on March 26, 2009, the Company
and Safeguard amended the Third Mezzanine Facility, which resulted in the reduction of its total
availability from $30.0 million to $10.0 million. The Second Oak Closing occurred on May 14, 2009,
and at such time, the Company repaid the remaining outstanding balance (including accrued interest)
of the Third Mezzanine Facility of $5.7 million, which was cancelled upon repayment.
In connection with the $20.0 million reduction in availability of the Third Mezzanine Facility
on March 26, 2009, the Company assessed the associated unamortized debt issuance costs of $1.7
million as of such date. The 67% reduction in borrowing capacity ($20.0 million divided by $30.0
million) resulted in the expensing of debt issuance costs (which included unamortized warrant
expense) in such proportion, totaling $1.1 million, which was recorded to interest expense to
related parties in the first quarter of 2009 and included in interest expense within the
accompanying Consolidated Statements of Operations for the year ended December 31, 2009. The
remaining unamortized debt issuance costs ($0.5 million as of March 31, 2009) was fully amortized
through May 14, 2009, and included in interest expense to related parties within the accompanying
Consolidated Statements of Operations for the year ended December 31, 2009.
The interest expense on the outstanding balance under the Mezzanine Facilities, including the
amortization of the fair value of issued warrants (see tables below), for the years ended December
31, 2009, 2008, and 2007 was $3.6 million, $7.3 million, and $1.1 million respectively. Such
amounts are included in interest expense to related parties within the accompanying Consolidated
Statements of Operations.
69
The table below summarizes the common stock warrant activity associated with the Initial
Mezzanine Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense Recognized |
|
|
|
|
|
|
|
|
|
|
|
Warrant |
|
|
Warrant |
|
|
|
|
|
|
Year |
|
|
Year |
|
|
Year |
|
Number of |
|
Exercise |
|
|
Warrant |
|
|
Issuance |
|
|
Expiration |
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
warrants |
|
Price |
|
|
Term |
|
|
Date |
|
Date |
|
Fair Value |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
125,000* |
|
$ |
0.01 |
|
|
4 years |
|
March 7, 2007 |
|
March 7, 2011 |
|
$ |
204 |
|
|
$ |
23 |
|
|
$ |
88 |
|
|
$ |
93 |
|
62,500 |
|
|
1.39 |
|
|
4 years |
|
March 7, 2007 |
|
March 7, 2011 |
|
|
69 |
|
|
|
8 |
|
|
|
30 |
|
|
|
31 |
|
31,250* |
|
|
0.01 |
|
|
4 years |
|
November 14, 2007 |
|
November 14, 2011 |
|
|
62 |
|
|
|
11 |
|
|
|
42 |
|
|
|
9 |
|
31,250* |
|
|
0.01 |
|
|
4 years |
|
December 17, 2007 |
|
December 17, 2011 |
|
|
61 |
|
|
|
13 |
|
|
|
49 |
|
|
|
|
|
31,250* |
|
|
0.01 |
|
|
4 years |
|
March 5, 2008 |
|
March 5, 2012 |
|
|
62 |
|
|
|
16 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
458 |
|
|
$ |
71 |
|
|
$ |
255 |
|
|
$ |
133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below summarizes the common stock warrant activity associated with the New
Mezzanine Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant |
|
|
|
|
|
|
Year |
|
|
Year |
|
|
|
Exercise |
|
|
Warrant |
|
|
Warrant |
|
|
Expiration |
|
|
|
|
|
|
Ended |
|
|
Ended |
|
Number of warrants |
|
Price |
|
|
Term |
|
|
Issuance Date |
|
Date |
|
Fair Value |
|
|
2009 |
|
|
2008 |
|
1,643,750* |
|
$ |
0.01 |
|
|
5 years |
|
March 14, 2008 |
|
March 14, 2013 |
|
$ |
2,666 |
|
|
$ |
703 |
|
|
$ |
1,962 |
|
550,000* |
|
|
0.01 |
|
|
5 years |
|
June 10, 2008 |
|
June 11, 2013 |
|
|
1,140 |
|
|
|
300 |
|
|
|
839 |
|
550,000* |
|
|
0.01 |
|
|
5 years |
|
July 2, 2008 |
|
July 2, 2013 |
|
|
1,095 |
|
|
|
289 |
|
|
|
806 |
|
550,000* |
|
|
0.01 |
|
|
5 years |
|
September 2, 2008 |
|
September 2, 2013 |
|
|
1,167 |
|
|
|
308 |
|
|
|
859 |
|
550,000* |
|
|
0.01 |
|
|
5 years |
|
November 6, 2008 |
|
November 6, 2013 |
|
|
890 |
|
|
|
235 |
|
|
|
657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,958 |
|
|
$ |
1,835 |
|
|
$ |
5,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
On November 20, 2008 Safeguard exercised the indicated common stock warrants plus an
additional 0.1 million warrants issued in January 2007 in connection with its guarantee of
the Comerica Facility. In December 2009, Safeguard exercised 0.5 million warrants issued in
December 2005 in connection with the Companys closing of a $9.0 million private stock
offering. |
The table below summarizes the common stock warrant activity associated with the Third
Mezzanine Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant |
|
|
|
|
|
|
Recognized for the |
|
Number of |
|
Exercise |
|
|
Warrant |
|
|
Warrant |
|
|
Expiration |
|
|
|
|
|
|
Year Ended |
|
Warrants Issued |
|
Price |
|
|
Term |
|
|
Issuance Date |
|
Date |
|
Fair Value |
|
|
2009 |
|
500,000 |
|
$ |
1.376 |
|
|
5 years |
|
February 27, 2009 |
|
February 27, 2014 |
|
$ |
600 |
|
|
$ |
600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
600 |
|
|
$ |
600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8) Equipment Financing
On March 31, 2009, the Company entered into a three-year capital lease with Hitachi Data
Systems Credit Corporation for computer equipment and related software with a fair value on such
date of $1.2 million, associated with the Companys initiative to upgrade its information
technology infrastructure. The Company also has a number of active laboratory equipment and office
equipment leases (capital and operating) with various providers as of December 31, 2009.
The Companys capital lease obligations as of December 31, 2009 are as follows:
|
|
|
|
|
2010 |
|
$ |
733 |
|
2011 |
|
|
498 |
|
2012 |
|
|
141 |
|
|
|
|
|
Subtotal |
|
|
1,372 |
|
Less: interest |
|
|
(123 |
) |
|
|
|
|
Total |
|
|
1,249 |
|
Less: current portion |
|
|
(645 |
) |
|
|
|
|
Capital lease obligations, long-term portion |
|
$ |
604 |
|
|
|
|
|
70
(9) Net Loss Per Share Information
Effective January 1, 2009, the Company adopted applicable GAAP guidance affecting its earnings
per share (EPS) presentation, requiring that unvested stock-based compensation awards containing
non-forfeitable rights to dividends are participating securities and should be included in the
basic EPS calculation using the two-class method. Under the two-class method, all earnings
(distributed and undistributed) are allocated to common stock and participating securities (defined
below), based on their respective rights to receive dividends.
The Company grants restricted stock awards from time to time under its stock-based
compensation plan, which generally entitles recipients to non-forfeitable rights to dividends, if
and when declared. The Companys Series A convertible preferred stockholders (see Note 12) also
have non-forfeitable rights to dividends, if and when declared. Accordingly, such unvested
restricted stock awards and Series A convertible preferred stock are considered participating
securities.
Participating securities are included in the computation of EPS under the two-class method in
periods of net income, but are not included in the computation of EPS in periods of net loss (or
when distributions, or their accounting equivalents such as an amortized beneficial conversion feature, are in excess of net income), since the
contractual terms of the participating securities do not require the holders funding of the
Companys losses. Basic and diluted EPS was computed by dividing net loss applicable to common
stockholders by the weighted-average outstanding common shares during each period, as summarized in
the tables below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Basic and diluted EPS numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations, net of income taxes |
|
$ |
(6,953 |
) |
|
$ |
(9,645 |
) |
|
$ |
(12,058 |
) |
Series A convertible preferred stock beneficial
conversion feature (see Note 12) |
|
|
(4,290 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations applicable to common
stockholders, net of income taxes |
|
$ |
(11,243 |
) |
|
$ |
(9,645 |
) |
|
$ |
(12,058 |
) |
Income from discontinued operations, net of income taxes |
|
|
901 |
|
|
|
|
|
|
|
3,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders |
|
$ |
(10,342 |
) |
|
$ |
(9,645 |
) |
|
$ |
(8,757 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations, net of income taxes |
|
$ |
(0.14 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.17 |
) |
Income from discontinued operations, net of income taxes |
|
|
0.01 |
|
|
|
|
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stockholders |
|
$ |
(0.13 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.12 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) per share amounts are computed independently for income (loss) from continuing
operations, income (loss) from discontinued operations and net income (loss). As a result, the sum
of per share amounts from continuing operations and discontinued operations may not equal the total
per share amounts for net income (loss). Additionally, income (loss) per share amounts are
computed independently for each quarter. As a result, the sum of the per share amounts for each
quarter may not equal the year-to-date amounts.
71
The following share amounts were used to compute basic and diluted weighted-average
outstanding common shares (in periods of net loss, or when distributions or equivalents were in
excess of net income, the anti dilutive effects of participating securities, stock options, and
warrants, were properly excluded):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Basic and diluted EPS denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average outstanding common
shares |
|
|
77,693 |
|
|
|
72,918 |
|
|
|
71,573 |
|
|
|
|
|
|
|
|
|
|
|
The following Company securities were outstanding at December 31, 2009, 2008, and 2007 and
their weighted average affects were excluded from the above calculations of net income (loss) per
share because their impact would have been anti dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Series A convertible preferred stock (as converted see Note 13) |
|
|
21,053 |
|
|
|
|
|
|
|
|
|
Common stock options |
|
|
8,083 |
|
|
|
6,332 |
|
|
|
5,165 |
|
Common stock warrants |
|
|
1,413 |
|
|
|
3,195 |
|
|
|
5,550 |
|
Unvested restricted stock |
|
|
569 |
|
|
|
218 |
|
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
31,118 |
|
|
|
9,745 |
|
|
|
10,795 |
|
|
|
|
|
|
|
|
|
|
|
(10) Comprehensive Loss
Comprehensive loss consists of net loss and all changes in stockholders deficit from
non-stockholder sources. The following summarizes the components of the Companys comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Net loss |
|
$ |
(6,052 |
) |
|
$ |
(9,645 |
) |
|
$ |
(8,757 |
) |
|
Foreign currency translation adjustment |
|
|
91 |
|
|
|
|
|
|
|
(77 |
) |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(5,961 |
) |
|
$ |
(9,645 |
) |
|
$ |
(8,834 |
) |
|
|
|
|
|
|
|
|
|
|
(11) Stock-Based Compensation
2007 Incentive Award Plan
The Company has one active stockholder-approved stock plan, the 2007 Incentive Award Plan (the
2007 Plan), which replaced the Companys former stockholder-approved stock plan (the 1996
Plan). The 2007 Plan provides for the grant of incentive stock options and nonqualified stock
options, restricted stock awards and restricted stock units, stock appreciation rights, performance
shares, performance stock units, dividend equivalents, stock payments, deferred stock, performance
bonus awards, and performance-based awards.
The maximum number of shares of the Companys common stock available for issuance under the
2007 Plan is 5.0 million shares (which increased from 4.0 million shares due to an
stockholder-approved amendment of the 2007 Plan in June 2009), plus additional availability from
forfeited shares under the 1996 Plan. As of December 31, 2009, 0.6 million shares
were available for grant. The Company does not hold treasury shares, and therefore all shares
issued through exercised stock options are through unissued shares that are authorized and reserved
under the 2007 Plan. It is the Companys policy that before stock is issued through the exercise
of stock options, the Company must first receive all required cash payment for such shares
72
Stock-based awards are governed by agreements between the Company and the recipients.
Incentive stock options and nonqualified stock options may be granted under the 2007 Plan
at an exercise price of not less than 100% of the closing fair market value of the
Companys common stock on the respective date of grant. The grant date is generally the
date the award is approved by the Compensation Committee of the Board of Directors (the
Compensation Committee), though for aggregate awards of 50,000 or less in each quarter,
the grant date is the date the award is approved by the Companys chief executive officer.
The Companys standard stock-based award vests 25% on the first anniversary of the date of
grant, or for new hires, the first anniversary of their initial date of employment with the
Company. Awards vest monthly thereafter on a straight-line basis over 36 months. Stock
options must be exercised, if at all, no later than 10 years from the date of grant. Upon
termination of employment with the Company, vested stock options may be exercised within 90
days from the last date of employment. In the event of an optionees death, disability, or
retirement, the exercise period is 365 days from the last date of employment.
Stock-based Compensation Expense
Stock-based compensation recognized in the Consolidated Statements of Operations, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cost of services |
|
$ |
252 |
|
|
$ |
133 |
|
|
$ |
165 |
|
Operating expenses |
|
|
1,929 |
|
|
|
1,578 |
|
|
|
1,655 |
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
2,181 |
|
|
$ |
1,711 |
|
|
$ |
1,820 |
|
|
|
|
|
|
|
|
|
|
|
Employee stock-based compensation expense for the years ended December 31, 2009, 2008,
and 2007 was calculated based on awards ultimately expected to vest and has been reduced
for estimated forfeitures. Applicable GAAP requires forfeitures to be estimated at the
time of grant and prospectively revised if actual forfeitures differ from those estimates.
The Company estimates forfeitures of stock options using the historical exercise behavior
of its employees. For purposes of this estimate, the Company has identified two groups of
employees. The estimated forfeiture rate of each group is as follows:
|
|
|
|
|
|
|
|
|
|
|
Forfeiture rates |
|
|
|
2009, 2008, 2007 |
|
|
2007 |
|
|
|
(10/1/07 through 12/31/07) |
|
|
(1/1/07 through 9/30/07) |
|
Executive and senior management group |
|
|
5 |
% |
|
|
8 |
% |
Staff group |
|
|
8 |
% |
|
|
35 |
% |
As of December 31, 2009, there was $3.6 million of unamortized stock option compensation
expense, net of expected forfeitures. The Company expects to recognize this expense over a weighted
average period of 2.9 years.
As of December 31, 2009, there was $1.8 million of unamortized compensation expense for
restricted stock awards, net of expected forfeitures, which the Company expects to recognize over a
weighted average period of 3.4 years.
Valuation Assumptions
The fair value of stock options granted was estimated at the date of grant using the
Black-Scholes option-pricing model. The following assumptions were used to determine fair value
for the stock awards granted in the applicable year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Volatility (a) |
|
63% to 70% |
|
68% to 80% |
|
|
87 |
% |
Average expected option life (b) |
|
5.0 years |
|
5.0 years |
|
|
3.5 to 6.1 years |
|
Risk-free interest rate (c) |
|
2.1% to 2.8% |
|
1.6% to 3.4% |
|
3.6% to 4.3% |
|
|
|
(a) |
|
Measured using weekly price observations for a period equal to the stock options
expected term. |
|
(b) |
|
Determined by the historical stock option exercise behavior of the Companys
employees. |
|
(c) |
|
Based upon the U.S. Treasury yield curve in effect at the end of the
quarter that the options were granted (for a period equaling the stock options
expected term). |
73
The fair value of restricted stock awards are determined using the Companys closing stock
price on the date of grant multiplied by the respective number of awards granted.
Stock Option Activity
Stock option activity is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
Term |
|
|
Value* |
|
Outstanding at December 31, 2006 |
|
|
6,570 |
|
|
$ |
1.58 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
380 |
|
|
|
1.92 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(577 |
) |
|
|
1.20 |
|
|
|
|
|
|
|
|
|
Options forfeited and cancelled |
|
|
(1,208 |
) |
|
|
2.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007 |
|
|
5,165 |
|
|
$ |
1.44 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
2,720 |
|
|
|
1.76 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(675 |
) |
|
|
1.16 |
|
|
|
|
|
|
|
|
|
Options forfeited and cancelled |
|
|
(878 |
) |
|
|
1.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
6,332 |
|
|
$ |
1.55 |
|
|
|
|
|
|
|
|
|
Options granted** |
|
|
2,575 |
|
|
|
2.00 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(382 |
) |
|
|
1.43 |
|
|
|
|
|
|
|
|
|
Options forfeited and cancelled |
|
|
(442 |
) |
|
|
2.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
8,083 |
|
|
$ |
1.67 |
|
|
6.21 years |
|
$ |
8,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at December 31, 2009 |
|
|
7,844 |
|
|
$ |
1.66 |
|
|
6.15 years |
|
$ |
8,086 |
|
Options exercisable (fully vested) at December 31, 2009 |
|
|
4,571 |
|
|
$ |
1.42 |
|
|
4.38 years |
|
$ |
5,672 |
|
|
|
|
* |
|
Represents the total difference between the Companys closing stock price on the last
trading day of 2009 and the stock option exercise price, multiplied by the number of in-the-money options as of
December 31, 2009.
The amount of intrinsic value will change based on the fair market value of the Companys
stock. |
|
** |
|
Amount includes 0.6 million stock option grants issued outside of the 2007 Plan in
connection with the acquisition of AGI (see Note 15). As part of the terms of the
acquisition, the Company was obligated to exchange all outstanding AGI stock options to
Company stock options in accordance with a contractual exchange rate and exercise price,
resulting in the issuance of 0.6 million options with an exercise price of $0.40 per share. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Aggregate grant date fair value of options |
|
$ |
2,048 |
|
|
$ |
3,100 |
|
|
$ |
500 |
|
Weighted-average grant date fair value |
|
$1.22 per option |
|
|
$1.14 per option |
|
|
$1.40 per option |
|
The total intrinsic value of options exercised
(stock price at exercise minus exercise price) |
|
$ |
927 |
|
|
$ |
551 |
|
|
$ |
500 |
|
Cash received by the Company from option
exercises |
|
$ |
548 |
|
|
$ |
785 |
|
|
$ |
692 |
|
Tax benefit to the Company for tax deductions
from options exercised (see Note 14) |
|
$ |
486 |
|
|
$ |
514 |
|
|
$ |
314 |
|
74
Restricted Stock Award Activity
The Companys restricted stock awards activity is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Shares |
|
|
Grant Date Fair Value |
|
Unvested at December 31, 2006 |
|
|
260 |
|
|
$ |
1.05 |
|
Vested |
|
|
(156 |
) |
|
$ |
1.72 |
|
Released |
|
|
(24 |
) |
|
$ |
1.11 |
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2007 |
|
|
80 |
|
|
$ |
2.05 |
|
Granted |
|
|
200 |
|
|
$ |
2.39 |
|
Released |
|
|
(62 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2008 |
|
|
218 |
|
|
$ |
2.36 |
|
Granted |
|
|
477 |
|
|
$ |
4.03 |
|
Released |
|
|
(126 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2009 |
|
|
569 |
|
|
$ |
3.73 |
|
|
|
|
|
|
|
|
|
Acquisition of Applied Genomics, Inc.
On December 21, 2009, the Company completed the acquisition of all the issued and outstanding
stock of Applied Genomics, Inc. (AGI) in accordance with the terms and conditions of the
Agreement and Plan of Merger and Reorganization, dated as of December 21, 2009, by and between the
Company and AGI. The purchase price for AGI consisted of 4.4 million of the Companys common
shares, and a maximum of an additional 3.2 million of its common shares to the former AGI
stockholders (inclusive of exchanged stock option awards), upon the achievement of certain revenue
and scientific publication milestones by December 31, 2012. See Note 15 for further discussion of
the AGI acquisition.
Stock Purchase Agreement with Oak Investment Partners XII, Limited Partnership
On March 25, 2009, the Company entered into a stock purchase agreement (Oak Purchase
Agreement) with Oak Investment Partners XII, Limited Partnership (Oak). In reliance on
Section 4(2) of the Securities Act of 1933, as amended (the Securities Act), the Company agreed
to sell Oak up to an aggregate of 6.6 million shares of its Series A convertible preferred stock,
$0.01 par value (the Preferred Shares) in two or more tranches (the Oak Private Placement) for
aggregate consideration of up to $50.0 million. The initial closing of the Oak Private Placement
occurred on March 26, 2009, at which time the Company issued and sold an aggregate of 3.8 million
Preferred Shares (the Initial Oak Closing Shares) for aggregate consideration of $29.1 million.
The second closing of the Oak Private Placement occurred on May 14, 2009, at which time the
Company issued and sold an aggregate of 1.4 million Preferred Shares (the Second Oak Closing
Shares) for aggregate consideration of $10.9 million. Upon the sale of the Second Oak Closing
Shares, Safeguards ownership of issued and outstanding voting securities decreased from 50.2% to
47.3%, and Oaks ownership of issued and outstanding voting securities increased from 16.6% to
21.4% (on an if-converted basis for Preferred Shares), though it is 20.0% as of December 31, 2009,
as adjusted for certain stock activity since May 2009.
On March 25, 2009, the effective date of the Oak Purchase Agreement, the Companys stock price
on the NASDAQ Capital Market closed at $1.71 per share, however, the applicable conversion price of
the Preferred Shares under the Oak Purchase Agreement is initially $1.90 per common share. On May
14, 2009, the date of the Second Oak Closing, the Companys stock price on the NASDAQ Capital
Market closed at $2.65 per share. The non-detachable conversion feature of the 1.4 million
Preferred Shares, allows conversion into 5.7 million common shares. The non-detachable conversion
feature was in-the-money at the deemed commitment date of the Second Oak Closing of May 14, 2009
($2.65 per common share, less $1.90 per common share). For purposes of measuring the beneficial
conversion option (further described
below), the commitment date of the Second Oak Closing was May 14, 2009, the date of the Second
Oak Closing, rather than March 25, 2009, the date of the Oak Purchase Agreement, since the Oak
Purchase Agreement contains a Material Adverse Effect (MAE) clause which could have allowed Oak,
at their sole discretion, to have never completed the Second Oak Closing due to their rights under
the Oak Purchase Agreement. Oaks discretion in completing the Second Oak Closing due to the MAE,
combined with the in-the-money non-detachable conversion feature of the Preferred Shares, required
the Company to account for the resulting beneficial conversion feature. Accordingly, the Company
recorded a $4.3 million increase to accumulated deficit for the immediate accretion of the related
preferred stock discount and a coinciding increase of additional paid-in capital ($0.75 multiplied
by 5.7 million common shares) which is included in the accompanying Consolidated Balance Sheets as
of December 31, 2009.
75
Sale by Safeguard Scientifics, Inc.
In August and September 2009, Safeguard, through its wholly owned subsidiaries, completed the
sale of an aggregate 18.4 million shares of its holdings in the common stock of the Company in an
underwritten public offering which was pursuant to an effective registration statement filed with
the SEC. The Company did not, and will not, receive any proceeds from the sale of such shares.
The Company was nonetheless obligated to pay certain costs, expenses, and fees of $0.2 million
which were incident to Safeguards sale, pursuant to an Amended and Restated Registration Rights
Agreement dated as of February 27, 2009, by and among the Company, Safeguard, and certain of
Safeguards wholly-owned subsidiaries. Such amount was recorded to general and administrative
expenses in the accompanying Consolidated Statement of Operations for the year ended December 31,
2009. As a result of Safeguards sale of such shares and the earlier consummation of the Initial
and Second Oak Closings, and other stock activity, its ownership of the Companys issued and
outstanding voting securities decreased to 28.0% as of December 31, 2009 (on an if-converted basis
for Preferred Shares).
Share Registration Obligations of the Company
As required by the terms of the Oak Purchase Agreement, the Company entered into a
Registration Rights Agreement with Oak on March 26, 2009, obligating the Company to register for
resale the shares of common stock issuable upon the conversion of the Preferred Shares on a
registration statement on Form S-3 to be filed with the SEC at least 90 days prior to March 26,
2010, which was filed with the SEC on December 22, 2009. The Company has from time to
time completed several other private placements of its equity securities. In connection therewith,
the Company has entered into certain agreements which require the Company to register, for resale,
such investors securities under the Securities Act. The Company has concluded that it does not
meet the conditions to accrue the estimated costs of preparing and filing such future registration
statements after considering the terms of the registration rights agreements.
Stock Warrant Activity
The Company has issued stock warrants to various parties in connection with entering and
maintaining certain credit facilities, as consideration for various licensing arrangements with
other companies, and in conducting other general business. Stock warrant activity is summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Shares |
|
|
Exercise Price |
|
Warrants outstanding, December 31, 2006 |
|
|
5,301 |
|
|
$ |
1.88 |
|
Granted |
|
|
517 |
|
|
$ |
0.70 |
|
Exercised |
|
|
(17 |
) |
|
$ |
1.35 |
|
Canceled |
|
|
(250 |
) |
|
$ |
4.26 |
|
|
|
|
|
|
|
|
|
Warrants outstanding, December 31, 2007 |
|
|
5,550 |
|
|
$ |
1.66 |
|
Granted |
|
|
3,875 |
|
|
$ |
0.01 |
|
Exercised |
|
|
(4,196 |
) |
|
$ |
0.01 |
|
Canceled |
|
|
(2,034 |
) |
|
$ |
2.89 |
|
|
|
|
|
|
|
|
|
Warrants outstanding, December 31, 2008 |
|
|
3,195 |
|
|
$ |
1.35 |
|
Granted |
|
|
500 |
|
|
$ |
1.38 |
|
Exercised |
|
|
(2,099 |
) |
|
$ |
1.37 |
|
Canceled |
|
|
(183 |
) |
|
$ |
2.00 |
|
|
|
|
|
|
|
|
|
Warrants outstanding, December 31, 2009 |
|
|
1,413 |
|
|
$ |
1.26 |
|
|
|
|
|
|
|
|
|
The 1.4 million outstanding stock warrants as of December 31, 2009 are exercisable and have
various expiration dates beginning June 2010 through February 2014.
76
(13) Redeemable Preferred Stock
In March and May 2009, the Company issued and sold an aggregate of 5.3 million Preferred
Shares to Oak for aggregate gross consideration of $40.0 million. In connection with the issuance
of the Initial and Second Oak Closing Shares, the Company incurred expenses of $1.4 million. These
expenses were related to legal fees and investment banker commissions which were recorded in the
accompanying Consolidated Balance Sheets for the year ended December 31, 2009, as a reduction of
additional paid in capital, rather than expense. Accordingly, the Preferred Shares are presented
at $38.6 million in the accompanying Consolidated Balance Sheets for the year ended December 31,
2009 ($40.0 million of aggregate Oak proceeds less $1.4 million of closing expenses in connection
therewith).
Each Preferred Share will be voted with common shares on an as-converted basis and is
initially convertible, at any time, into four shares of the Companys common stock, though is
subject to broad-based weighted-average anti-dilution protection in the event that the Company
issues additional shares at or below the then-applicable conversion price for such share (initially
$1.90 per share). This provision will not be triggered, however, unless and until the Company
issues shares that, when aggregated with all shares issued after the initial closing, have an
aggregate offer or issue price exceeding $5.0 million. The Preferred Shares will automatically
convert if, at any time beginning 12 months after March 26, 2009, the Companys common stock price
is above $4.75 per share (as adjusted for stock splits, combinations, recapitalizations and the
like) for 20 consecutive trading days over a 30-day trading period (all of which trading days must
fall after March 27, 2010).
The Preferred Shares are senior to the Companys common stock with respect to liquidation
preference and dividends, in the event declared, in proportion to the relative number of common
shares on an as-converted basis. The Preferred Shares do not accrue dividends. Upon any
liquidation of the Company, before any distribution or payment is made to any other stockholders,
each Preferred Share holder is entitled to receive a liquidation payment. The liquidation payment
is the greater of (1) the initial purchase price of $7.60 per Preferred Share (equal to $1.90 per
common share on an if-converted basis, and subject to adjustment for any stock splits, stock
dividends or other recapitalizations) plus declared and unpaid dividends thereon or (2) such amount
per Preferred Share as would have been payable had each Preferred Share been converted into common
stock immediately prior to such liquidation. At any time after March 26, 2013, the Company may,
at its option, redeem all Preferred Shares for an amount equal to its full liquidation
preference.
The Companys stock price on the NASDAQ Capital Market closed at $2.65 per common share on
December 31, 2009, which exceeded the Preferred Shares $1.90 liquidation value per common share on
an if-converted basis. The Company therefore calculated the Preferred Shares liquidation
preference of $55.8 million, disclosed in the accompanying Consolidated Balance Sheets, by
multiplying 21.1 million common shares (on an if-converted basis from Preferred Shares) by the
$2.65 per common share value. The Company has determined that the events included within the Oak
Purchase Agreement, that would give rise to a liquidation payment to the holders of the Preferred
Shares, were of minimal probability of occurrence. There are no planned or developing transactions
known to the Companys management that would result in the liquidation of the Company, or result in
any change of control of the Company, to require such liquidation payment by the Company to the
holders of the Preferred Shares. The carrying amount of the Preferred Shares will be adjusted to
its redemption amount only in the event that redemption becomes probable.
The redemption rights of the Preferred Shares are immediately triggered by the occurrence of
certain business events enumerated in the Stock Purchase Agreement with Oak. All such business
events are deemed to be within the Companys control, except beginning in the third quarter of
2009, an event of a change in control of the Company, whether by acquisition or merger. As of
August 21, 2009, an event of a change of control of the Company became possible with the effective
registration of Safeguards holdings in the Company through a registration statement on Form S-3
filed with the SEC (the Safeguard S-3). The Safeguard S-3 resulted in the ability of a
third-party to acquire over 50% of registered shares of the Company on the open market. Due to
limitations of the resale of Safeguards then unregistered securities of the Company under Rule 144
of the Securities Act, a change of control could not legally occur prior to the effectiveness of
the Safeguard S-3. Accordingly, the Preferred Shares have been reclassified to temporary equity
(rather than permanent equity) within the accompanying Consolidated Balance Sheets, as required
under applicable GAAP, since all such redemption events are not solely at the option of the Company
as of December 31, 2009.
77
(14) Income Taxes
The following table provides the components of income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Provision for income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
(exclusive of gain on sale from
ACIS Business) |
|
$ |
|
|
|
$ |
6 |
|
|
$ |
23 |
|
Gain on sale from ACIS Business |
|
|
(599 |
) |
|
|
|
|
|
|
(2,111 |
) |
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) expense |
|
$ |
(599 |
) |
|
$ |
6 |
|
|
$ |
(2,088 |
) |
|
|
|
|
|
|
|
|
|
|
The following table summarizes the tax effects of temporary differences between the financial
statement carrying amount of existing assets and liabilities and their respective tax basis, less
valuation allowances:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
Accrued vacation |
|
$ |
434 |
|
|
$ |
324 |
|
Contractual allowances |
|
|
953 |
|
|
|
|
|
Allowance for doubtful accounts |
|
|
3,485 |
|
|
|
3,211 |
|
Other |
|
|
54 |
|
|
|
280 |
|
|
|
|
|
|
|
|
Gross current deferred tax assets |
|
|
4,926 |
|
|
|
3,815 |
|
Non-current: |
|
|
|
|
|
|
|
|
Net operating loss carryforward |
|
|
52,014 |
|
|
|
46,663 |
|
Research and development and other tax credits |
|
|
62 |
|
|
|
62 |
|
Depreciation |
|
|
384 |
|
|
|
137 |
|
Intangible assets, net of amortization |
|
|
|
|
|
|
185 |
|
Deferred rent |
|
|
612 |
|
|
|
613 |
|
Landlord reimbursements |
|
|
780 |
|
|
|
956 |
|
Stock-based compensation |
|
|
1,384 |
|
|
|
1,354 |
|
Other |
|
|
62 |
|
|
|
651 |
|
|
|
|
|
|
|
|
Gross non-current deferred tax assets |
|
|
55,298 |
|
|
|
50,621 |
|
|
|
|
|
|
|
|
Total gross deferred tax assets |
|
|
60,224 |
|
|
|
54,436 |
|
|
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
(55,423 |
) |
|
|
(54,436 |
) |
|
|
|
|
|
|
|
Deferred tax assets, net of valuation allowance |
|
$ |
4,801 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability: |
|
|
|
|
|
|
|
|
Intangible assets, net of amortization |
|
$ |
(4,801 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
The Company has evaluated the available evidence supporting the realization of its gross
deferred tax assets, including the amount and timing of future taxable income, and has determined
that it is more likely than not that the deferred tax assets will not be realized. Due to such
uncertainties surrounding the realizability of the deferred tax assets, the Company maintains a
full valuation allowance against its deferred tax assets as of December 31, 2009. Realization of
the deferred tax assets will be primarily dependent upon the Companys ability to generate
sufficient taxable income prior to the expiration of its net operating losses.
The Companys deferred tax assets and valuation allowance increased by $0.9 million as of
December 31, 2009, from December 31, 2008, primarily as a result of the Companys 2009 operating
losses and the deferred tax assets which relate to the AGI acquisition (see Note 15). The
Companys deferred tax assets and valuation allowance increased by $3.2
million as of December 31, 2008, from December 31, 2007, primarily as a result of the Companys
2008 operating losses. The Companys deferred tax assets and valuation allowance decreased by $1.0
million as of December 31, 2007, from December 31, 2006,
primarily as a result of a $3.2 million reduction for tax positions relating to research and development activities, partially offset by
2007 operating losses.
78
The Company did not include potential federal and state research and development credits of
$0.4 million generated by AGI prior to its acquisition by the Company, thus the $60.2 million gross
deferred tax assets balance as of December 31, 2009 excludes such amount. The Company is in
process of evaluating these potential research and development credits and expects to adjust its
gross deferred tax assets balance for such estimated available amount, if any, in 2010.
As of December 31, 2009, the Company had net operating loss carry forwards for federal and
state income tax purposes of approximately $139.7 million and $85.4 million, respectively, which
expire during the years 2011 through 2029.
Included in the net operating loss deferred tax asset above is approximately $1.7 million of
the federal net operating loss carryforwards attributable to excess stock option deductions. Due to
the provisions of accounting for share-based payments concerning the timing of tax benefits related
to excess stock deductions that can be credited to additional paid in capital, the related
valuation allowance cannot be reversed, even if the facts and circumstances indicate that it is
more likely than not that the deferred tax asset can be realized. The valuation allowance will only
be reversed as the related deferred assets are applied to reduce taxes payable. The Company follows
tax law ordering to determine when such net operating loss has been realized.
Due to both historical and recent changes in the capitalization structure of the Company, the
utilization of net operating losses may be limited, pursuant to Section 382 of the Internal Revenue
Code.
The differences between the statutory federal income tax rate and the effective income tax
rate are provided in the following reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Loss from continuing operations before income taxes |
|
$ |
(7,552 |
) |
|
$ |
(9,639 |
) |
|
$ |
(14,146 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory federal income tax rate |
|
|
34 |
% |
|
|
34 |
% |
|
|
34 |
% |
Computed expected federal tax income benefit |
|
|
(2,568 |
) |
|
|
(3,277 |
) |
|
|
(4,810 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes |
|
|
|
|
|
|
4 |
|
|
|
(702 |
) |
Nondeductible expenses |
|
|
559 |
|
|
|
244 |
|
|
|
374 |
|
Change in valuation allowance |
|
|
2,009 |
|
|
|
3,035 |
|
|
|
5,161 |
|
Benefit due to recognized tax expense on ACIS Sale |
|
|
(599 |
) |
|
|
|
|
|
|
(2,111 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) from continuing
operations |
|
$ |
(599 |
) |
|
$ |
6 |
|
|
$ |
(2,088 |
) |
|
|
|
|
|
|
|
|
|
|
On January 1, 2007, the Company adopted applicable GAAP which clarifies the criteria for
recognizing tax benefits related to uncertain tax positions, and requires additional financial
statement disclosure. Such GAAP requires that the Company recognize in its consolidated financial
statements the impact of a tax position if that position is more likely than not to be sustained
upon examination, based on the technical merits of the position.
79
The following is a rollforward of the Companys total gross unrecognized tax benefits,
excluding interest and penalties, for the years ended December 31, 2009, 2008, and 2007. These
amounts relate to unrecognized tax benefits that would impact the effective tax rate if recognized,
absent the valuation allowance:
|
|
|
|
|
|
|
Gross Unrealized Tax |
|
|
|
Benefits |
|
Balance at January 1, 2007 |
|
$ |
3,200 |
|
Additions for tax positions |
|
|
|
|
Decreases for tax positions |
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
3,200 |
|
Additions for tax positions |
|
|
|
|
Decreases for tax positions |
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
3,200 |
|
Additions for tax positions (AGI research and development tax credits) |
|
|
359 |
|
Decreases for tax positions |
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
3,559 |
|
|
|
|
|
The Company will recognize interest and penalties related to unrecognized tax benefits as a
component of income tax expense, but recognized no interest or penalties during the year ended
December 31, 2009. The Company does not expect any significant increases or decreases to its
unrecognized tax benefits within 12 months of December 31, 2009. The Company does not expect any
material increase or decrease in its income tax expense during the next 12 months related to
examinations or changes in uncertain tax positions.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction,
various states, and foreign jurisdictions. Tax years 2006 and forward remain open for examination
for federal tax purposes and tax years 2005 and forward remain open for examination for the
Companys more significant state tax jurisdictions. To the extent used in future years tax
returns, net operating loss and capital loss carryforwards at December 31, 2009 will remain subject
to examination until the respective tax year of utilization is closed.
(15) Business Combination
AGI Acquisition Overview
On December 21, 2009 (the Closing Date), the Company completed the acquisition of all the
issued and outstanding stock of AGI (the AGI Acquisition) in accordance with the terms and
conditions of the Agreement and Plan of Merger and Reorganization, dated as of December 21, 2009,
by and between the Company and AGI (the AGI Agreement). As of the Closing Date, AGI developed 10
prognostic and predictive multivariate immunohistochemistry-based (IHC) biomarkers for use in
assessing the recurrence rates of various cancers, particularly lung cancer, and the likelihood of
favorable response to various treatment options. The Company intends to use the intellectual
property obtained through the AGI Acquisition to expand its menu of oncology diagnostic testing
services. Since December 21, 2009, the results of operations of AGI have been included in the
accompanying Consolidated Statements of Operations.
80
On the Closing Date, two former executive officers of AGI joined the Company as its Chief
Scientific Officer and Senior Vice President and General Manager, Huntsville Facility, and
Technology Assessment. Six other former employees of AGI have also joined the Company in business
development, research and development, and laboratory services roles.
The AGI purchase price consisted of 4.4 million of the Companys common shares (the Upfront
Shares) and a maximum of an additional 3.2 million of its common shares (the Contingent Shares),
upon the achievement of certain revenue and scientific publication milestones (the AGI
Milestones) by December 31, 2012. The Companys management believes that the milestones have a
high probability of being met, thus resulting in the issuance of the Contingent Shares for a total
purchase price consisting of 7.6 million common shares, inclusive of the issuance of 0.6 million
stock option awards, exchanged from AGI stock into Company stock. The 0.6 million exchanged stock
options awards were estimated by the Companys management to be of equal value as of the Closing
Date.
The Companys closing stock price on December 21, 2009 was $2.48 per common share. The AGI
purchase price equates to $15.6 million (7.6 million shares multiplied by $2.48, less $3.2
million). The $3.2 million represents, in the aggregate, the Companys estimate of an appropriate
discount to the purchase price for (i) certain liquidity restrictions on the Upfront and Contingent
Shares, (ii) the contingency associated with the Contingent Shares, and (iii) the volatility
associated with the Companys stock, net of the expected proceeds to the Company from future
exercises of the exchanged stock option awards.
The AGI acquisition was accounted for as a business combination under applicable GAAP,
requiring the use of the acquisition method of accounting. Accordingly, the purchase price was
allocated to the assets acquired and liabilities assumed based on their estimated fair values on
the Closing Date.
As of December 31, 2009, an aggregate 1.4 million of the Contingent Shares met the
requirements for liability accounting under applicable GAAP (the Variable Shares). The Variable
Shares are variable with respect to number of common shares that, depending on the sequence of AGI
Milestone achievements, are issuable by December 31, 2012, though limited to an aggregate issuance
of 3.2 million Contingent Shares. The Company, therefore, recorded a $2.7 million long term
liability reported as contingently issuable common shares on its Consolidated Balance Sheets as
of December 31, 2009. The $2.7 million long term liability was derived from a calculation
performed by the Company that involves the estimated probability and timing of Variable Share
achievement, into a single, present-valued amount, utilizing (i) certain liquidity restrictions on
the Variable Shares, (ii) the contingency associated with the Variable Shares, and (iii) the
volatility associated with the Companys stock.
The fair value of the Variable Shares was determined based on Level 3 inputs (see Note 2(m)).
The following table summarizes the fair value measurements of the Variable Shares:
|
|
|
|
|
|
|
Variable Shares value |
|
December 31, 2008 |
|
$ |
|
|
Issuance of Variable Shares |
|
|
2,650 |
|
Realized/unrealized gains or losses |
|
|
|
|
|
|
|
|
December 31, 2009 |
|
$ |
2,650 |
|
|
|
|
|
Direct Costs of the AGI Acquisition
The Companys direct costs of the AGI Acquisition included legal and accounting fees of $0.3
million. Such amount is included in general and administrative expenses within the accompanying
Consolidated Financial Statements for the year ended December 31, 2009.
81
AGI Purchase Price Allocation
The AGI purchase price of $15.6 million was allocated as follows:
|
|
|
|
|
Cash |
|
$ |
5 |
|
Prepaid expenses |
|
|
21 |
|
Identifiable intangible assets |
|
|
11,684 |
|
Accounts payable and other current liabilities |
|
|
(68 |
) |
|
|
|
|
Total identifiable net assets |
|
|
11,642 |
|
|
|
|
|
|
Goodwill |
|
|
3,959 |
|
|
|
|
|
|
Total purchase price allocation |
|
$ |
15,601 |
|
|
|
|
|
Identified intangible assets associated with the acquisition of AGI will be amortized to cost
of services or research and development over the estimated period of benefit. The below table
summarizes the acquired identifiable intangible assets fair value, estimated useful life,
estimated annual amortization expense, and expense classification in the Consolidated Statement of
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Statement of |
|
|
|
|
|
|
|
Useful Life |
|
|
Estimated Annual |
|
|
Operations |
|
Identified Intangible Assets |
|
Fair Value |
|
|
(years) |
|
|
Amortization Expense |
|
|
Classification |
|
Biomarkers (a) |
|
$ |
11,349 |
|
|
|
7 |
|
|
$ |
1,621 |
|
|
Cost of services |
In-process research and development (a) |
|
|
76 |
|
|
|
7 |
|
|
|
11 |
|
|
Research and development |
Issued patents (b) |
|
|
26 |
|
|
|
7 |
|
|
|
4 |
|
|
Cost of services |
Patent applications(b) |
|
|
123 |
|
|
|
7 |
|
|
|
18 |
|
|
Cost of services |
Non-competition agreements (c) |
|
|
110 |
|
|
|
3 |
|
|
|
37 |
|
|
Research and development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,684 |
|
|
|
|
|
|
$ |
1,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
To estimate fair value of biomarkers, the Company used the income approach which is a
valuation technique that converts the estimated commercialization probability and future
expected net cash flows to be derived from these assets into a single, present-valued
amount. |
|
(b) |
|
To estimate fair value of issued patents and patent applications, the Company used the
cost approach which determines the fair value in terms of cost (i.e. current cash
expenditures) required to recreate or develop the underlying intangible assets. |
|
(c) |
|
To estimate fair value, the Company determined the cash flows that are protected by
the non-competition agreements using a variant of the income approach, called the
postulated loss of income approach. In applying this approach, the Companys cash flows
were forecasted in two separate scenarios: one with and one without the presence of the
non-competition agreements. The difference in cash flows, at present value, represents the
benefit of the non-competition agreements. |
Goodwill
Goodwill of $4.0 million represents the difference of the AGI purchase price of $15.6 million
minus the net identifiable intangible and tangibles assets acquired. None of the goodwill
resulting from the AGI Acquisition is expected to be deductible for tax purposes. In accordance
with GAAP, the Company will not amortize goodwill, though goodwill is subject to periodic
impairment testing.
82
Pro Forma Financial Information
The following unaudited pro forma financial information is presented to reflect the results of
operations for the years ended December 31, 2009 and 2008 as if the acquisition of AGI had occurred
on January 1, 2008. These pro forma results have been prepared for general comparative purposes
only. These pro forma results do not purport to be indicative of what operating results would have
been, had the acquisition actually taken place on January 1, 2008, and may not be indicative of
future operating results:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
(unaudited) |
|
|
|
2009 |
|
|
2008 |
|
Net revenue |
|
$ |
91,599 |
|
|
$ |
73,766 |
|
Net loss |
|
|
(7,676 |
) |
|
|
(11,332 |
) |
Net loss applicable to common stockholders |
|
|
(11,966 |
) |
|
|
(11,332 |
) |
Net loss per share applicable to common stockholders basic and diluted |
|
$ |
(0.14 |
) |
|
$ |
(0.15 |
) |
|
|
|
|
|
|
|
|
|
Weighted average shares basic and diluted |
|
|
81,671 |
|
|
|
77,008 |
|
(16) Quarterly Financial Results (unaudited)
Quarterly Results of Operations
(in thousands except for per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) |
|
|
Income |
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
From |
|
|
From |
|
|
|
|
|
|
Net Loss |
|
|
Loss per Share |
|
|
|
|
|
|
|
|
|
|
|
Continuing |
|
|
Discontinued |
|
|
|
|
|
|
Applicable to |
|
|
Applicable to |
|
|
|
Net |
|
|
Gross |
|
|
Operations, |
|
|
Operations. Net of |
|
|
Net Income |
|
|
Common |
|
|
Common |
|
|
|
Revenue |
|
|
Profit |
|
|
Net of Tax |
|
|
Tax |
|
|
(Loss) |
|
|
Stockholders |
|
|
Stockholders |
|
|
Three Months Ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
$ |
23,252 |
|
|
$ |
12,820 |
|
|
$ |
(2,690 |
) |
|
$ |
|
|
|
$ |
(2,690 |
) |
|
|
(2,690 |
) |
|
$ |
(0.03 |
) |
September 30, 2009 |
|
|
21,425 |
|
|
|
11,629 |
|
|
|
(3,235 |
) |
|
|
|
|
|
|
(3,235 |
) |
|
|
(3,235 |
) |
|
|
(0.04 |
) |
June 30, 2009 |
|
|
23,730 |
|
|
|
13,808 |
|
|
|
29 |
|
|
|
|
|
|
|
29 |
|
|
|
(4,261 |
) |
|
|
(0.06 |
) |
March 31, 2009 (a) |
|
|
23,192 |
|
|
|
14,235 |
|
|
|
(1,057 |
) |
|
|
901 |
|
|
|
(156 |
) |
|
|
(156 |
) |
|
|
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
$ |
21,937 |
|
|
$ |
13,466 |
|
|
$ |
(2,218 |
) |
|
$ |
|
|
|
$ |
(2,218 |
) |
|
$ |
(2,218 |
) |
|
$ |
(0.03 |
) |
September 30, 2008 |
|
|
18,997 |
|
|
|
10,401 |
|
|
|
(2,214 |
) |
|
|
|
|
|
|
(2,214 |
) |
|
|
(2,214 |
) |
|
|
(0.03 |
) |
June 30, 2008 |
|
|
16,916 |
|
|
|
8,425 |
|
|
|
(4,279 |
) |
|
|
|
|
|
|
(4,279 |
) |
|
|
(4,279 |
) |
|
|
(0.06 |
) |
March 31, 2008 |
|
|
15,886 |
|
|
|
8,508 |
|
|
|
(934 |
) |
|
|
|
|
|
|
(934 |
) |
|
|
(934 |
) |
|
|
(0.01 |
) |
|
|
|
(a) |
|
Presented amounts are inclusive of certain adjustments, as discussed in Note
18, and summarized in the below table: |
83
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2009 |
|
|
|
Previously |
|
|
As |
|
|
|
Reported |
|
|
Adjusted |
|
Condensed Consolidated Statements of Operations: |
|
|
|
|
|
|
|
|
Income tax benefit |
|
$ |
|
|
|
$ |
599 |
|
Loss from continuing operations |
|
|
(2,321 |
) |
|
|
(1,057 |
) |
Income from discontinued operations, net of income taxes |
|
|
1,500 |
|
|
|
901 |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share applicable to common
stockholders basic and diluted: |
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(0.03 |
) |
|
$ |
(0.02 |
) |
Income from discontinued operations |
|
|
0.02 |
|
|
|
0.01 |
|
|
|
|
(17) |
|
Commitments and Contingencies |
Significant Operating Leases
The Company has a number of active laboratory equipment and office equipment leases (capital
and operating) with various providers as of December 31, 2009. See Note 8 for a table of the
Companys capital lease obligations as of December 31, 2009. The Companys most significant
operating leases are discussed below.
Corporate Headquarters and Diagnostic Services Laboratory: The Companys corporate
headquarters and diagnostic services laboratory is located in Aliso Viejo, California, where it
leases a facility of approximately 78,000 square feet. The initial ten-year term of the lease
commenced on December 1, 2005, and the Company has the option to extend the lease term for up to
two additional five-year periods. The annual base rent was increased to $1.4 million on December 1,
2008, exclusive of certain maintenance expenses for which the Company is responsible. Thereafter,
the base rent will be increased 3.0% annually effective on December 1 of each year.
The landlord of the Companys Aliso Viejo facility has agreed to reimburse the Company up to
$3.5 million for the costs associated with various facility improvements. Through December 31,
2009, the landlord has reimbursed the Company $3.3 million of such costs.
Research and Development and Biopharmaceutical Services Centers: The Company leases its
research and development and biopharmaceutical services centers in Huntsville, Alabama and
Burlingame, California, comprising approximately 6,500 aggregate square feet. The Huntsville lease
expires in January 2013. The Burlingame lease expires in March 2010 and will not be renewed. The
aggregate annual base rent for these facilities is $0.1 million.
At December 31, 2009, future minimum lease payments for all operating leases were as follows
(in thousands):
|
|
|
|
|
2010 |
|
$ |
1,784 |
|
2011 |
|
|
1,824 |
|
2012 |
|
|
1,847 |
|
2013 |
|
|
1,803 |
|
2014 |
|
|
1,726 |
|
Thereafter |
|
|
1,542 |
|
|
|
|
|
|
|
$ |
10,526 |
|
|
|
|
|
Legal Proceedings
The Company, from time to time, is involved in legal actions arising from the ordinary course
of business. In the opinion of the Companys management, the ultimate disposition of any
threatened or pending legal actions, individually or in the aggregate, would not have a material
adverse effect on the Companys business, financial condition, or results of operations.
84
(18) Corrections of Immaterial Presentation Error in Prior Period
During the third quarter of 2009, the Company determined that it did not properly present the
income tax effect of the ACIS Sale (see Note 4) between continuing operations and discontinued
operations on its Consolidated Statements of Operations for the year ended December 31, 2007, and
its Condensed Consolidated Statements of Operations for the three months ended March 31, 2009 and
six months ended June 30, 2009. Applicable GAAP provides guidance on the process by which an
entity should allocate its total tax provision or benefit to the various components of the income
statement, including continuing and discontinued operations.
The ACIS Sale occurred on March 8, 2007. Previously reported income from discontinued
operations for the year ended December 31, 2007 was $5.4 million. The proper presentation under
applicable GAAP requires the associated income tax benefit within continuing operations, and income
from discontinued operations to be presented net of income taxes, as summarized in the below table.
The Company evaluated the materiality of the errors, which had no impact on previously
reported net loss, from qualitative and quantitative perspectives, and concluded that the errors in
presentation were immaterial to the previously filed consolidated financial statements. The below
table summarizes the adjustments for the year ended December 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, 2007 |
|
|
|
Previously |
|
|
As |
|
|
|
Reported |
|
|
Adjusted |
|
Condensed Consolidated Statements of Operations: |
|
|
|
|
|
|
|
|
Income tax (expense) benefit |
|
$ |
(23 |
) |
|
$ |
2,088 |
|
Loss from continuing operations, net of income taxes |
|
|
(14,169 |
) |
|
|
(12,058 |
) |
Income from discontinued operations, net of income taxes |
|
|
5,412 |
|
|
|
3,301 |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share applicable to common
stockholders basic and diluted: |
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(0.20 |
) |
|
$ |
(0.17 |
) |
Income from discontinued operations |
|
|
0.08 |
|
|
|
0.05 |
|
See Note 16 for a table summarizing the effects of such adjustments for the three months ended
March 31, 2009. Zeiss, the acquirer in the ACIS Sale, acknowledged the satisfaction of certain
post-closing conditions. In connection therewith, a $1.5 million payment was due to the Company in
March 2009, though was received in April 2009. The Company previously recorded the $1.5 million as
income from discontinued operations to its Condensed Consolidated Statements of Operations for the
three months ended March 31, 2009. The proper presentation under applicable GAAP requires the
associated income tax benefit within continuing operations, and income from discontinued operations
to be presented net of income taxes.
85
|
|
|
Item 9. |
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
As previously reported, our Audit Committee conducted a competitive process to select an
independent registered public accounting firm to perform audit and other related services for us
for our 2009 fiscal year. As a result of this selection process, our Audit Committee approved, on
our behalf, the dismissal of KPMG LLP, or KPMG, as our independent registered public accounting
firm, effective September 22, 2009. Our Audit Committee approved, on our behalf, the engagement of
Deloitte & Touche LLP to serve as our independent registered public accounting firm for the 2009
fiscal year.
During the two fiscal years ended December 31, 2008 and the subsequent interim period through
September 22, 2009, there were no disagreements between us and KPMG on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or procedure which, if
not resolved to KPMGs satisfaction, would have caused KPMG to make reference to the subject matter
of the disagreement in connection with its report for such years within the meaning of Item
304(a)(1)(iv) of Regulation S-K. In addition, during the period identified above, there were no
reportable events as defined in Item 304(a)(1)(v) of Regulation S-K, except such material
weaknesses identified by us in Item 9A. Controls and Procedures within our Annual Report on Form
10-K for the fiscal years ended December 31, 2008 and 2007.
We have agreed to
indemnify and hold KPMG harmless against and from any and all legal costs and
expenses incurred by KPMG in successful defense of any legal action or proceeding that arises
as a result of KPMGs consent to the inclusion of its audit report on the Companys past financial
statements included in this Form 10-K.
|
|
|
Item 9A. |
|
Controls and Procedures |
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and
15d-15(e) of the Exchange Act, that are designed to provide reasonable assurance that the
information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms
and (ii) accumulated and communicated to our management, including the Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls
system cannot provide absolute assurance that the objectives of the controls system are met, and no
evaluation of controls can provide absolute assurance that all control issues and instances of
fraud, if any, within a company have been detected. Our management, with the participation of our
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this report. Based on that
evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of December 31, 2009.
(b) Managements Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. Our internal control over financial reporting includes those policies and procedures
that pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets; provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of management and directors; and provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of our assets that could have a material effect on the financial statements contained herein.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a material misstatement
of our annual or interim Consolidated Financial Statements will not be prevented or detected on a
timely basis.
We evaluated our internal control over financial reporting as of December 31, 2009. In making
our assessment, we used the criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We concluded that as
of December 31, 2009, our internal control over financial reporting was effective.
86
Deloitte & Touche LLP, the independent registered public accounting firm that audited our
financial statements included in this Annual Report on Form 10-K, also audited our internal control
over financial reporting as of December 31, 2009 and issued their audit report expressing an
unqualified opinion on our internal control over financial reporting.
(c) Change in Internal Control over Financial Reporting
Remediation of Material Weaknesses identified as of December 31, 2008:
As disclosed in Item 9A of our 2008 Annual Report on Form 10-K, and in our Quarterly Reports
on Form 10-Q filed during the 2009 fiscal year, we identified three material weaknesses in our
internal control over financial reporting as of December 31, 2008, as follows:
Our accounting and finance organization lacks policies and procedures that are
effective at ensuring that financial reporting risks, including changes therein, within
its accounting processes are identified in a timely manner and corresponding control
activities are implemented. This material weakness contributed to the material weaknesses
described below.
Our in-house billing system implemented in June 2008 did not include adequately
designed internal controls to ensure the accuracy of pricing and contractual allowance
information entered into our in-house billing system which is used to determine the amount
of revenue and accounts receivable to recognize, and therefore, such internal controls
were not designed or operating effectively. This material weakness resulted in an
overstatement of accounts receivable and revenue, which was corrected within the annual
consolidated financial statements contained herein.
We did not design and maintain certain internal controls over our estimate of the
allowance for doubtful accounts to ensure that changes in collection experience, and other
relevant factors, were properly considered in the estimate of the allowance for doubtful
accounts. This material weakness resulted in a misstatement of the allowance for doubtful
accounts and bad debt expense. These misstatements were corrected within the annual
consolidated financial statements contained herein.
During 2009, we executed our remediation plan for such material weaknesses, as disclosed in
Item 9A of our 2008 Annual Report on Form 10-K. Our remediation activities involved numerous
enhancements to our financial accounting processes, particularly within the areas of accounts
receivable and revenue, and improvements to our finance department structure. We tested such newly
established policies, procedures, and control activities designed to address the above material
weaknesses. As a result, we believe that all material weaknesses were remediated as of December 31,
2009.
There have been no changes in our internal control over financial reporting during the fourth
quarter of the year ended December 31, 2009 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting, other than completion of the
actions taken to remediate the material weaknesses which existed as of December 31, 2008, as
described above.
|
|
|
Item 9B. |
|
Other Information |
None.
87
PART III
|
|
|
Item 10. |
|
Directors and Corporate Governance |
Directors
We incorporate herein by this reference the information contained under the captions ELECTION
OF DIRECTORS, ELECTION OF DIRECTORSADDITIONAL INFORMATION and BOARD COMMITEES in our
definitive Proxy Statement for our 2010 annual meeting of stockholders, to be filed within 120 days
after the end of the year covered by this Annual Report on Form 10-K pursuant to Regulation 14A
under the Exchange Act.
Section 16(a)Beneficial Ownership Reporting Compliance
We incorporate herein by this reference the information contained under the caption
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE in our definitive Proxy Statement for our
2010 annual meeting of stockholders, to be filed within 120 days after the end of the year covered
by this Annual Report on Form 10-K pursuant to Regulation 14A under the Exchange Act.
Code of Ethics
We incorporate herein by this reference the information contained under the caption Corporate
Governance Guidelines and Code of Ethics in our definitive Proxy Statement for our 2010 annual
meeting of stockholders, to be filed within 120 days after the end of the year covered by this
Annual Report on Form 10-K pursuant to Regulation 14A under the Exchange Act.
|
|
|
Item 11. |
|
Executive Compensation |
We incorporate herein by this reference the information contained under the captions
COMPENSATION DISCUSSION AND ANALYSIS, COMPENSATION COMMITTEE REPORT, EXECUTIVE COMPENSATION
and Compensation Committee Interlocks and Insider Participation in our definitive Proxy Statement
for our 2010 annual meeting of stockholders, to be filed within 120 days after the end of the year
covered by this Annual Report on Form 10-K pursuant to Regulation 14A under the Exchange Act.
The information incorporated herein by reference to the information under the caption
COMPENSATION COMMITTEE REPORT in the definitive Proxy Statement for our 2010 annual meeting of
stockholders shall be deemed furnished, and not filed, in this Report and shall not be deemed
incorporated by reference into any filing under the Securities Act of 1933, as amended, or the
Exchange Act, as a result of this furnishing, except to the extent that we specifically incorporate
it by reference.
|
|
|
Item 12. |
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters |
We incorporate herein by this reference the information contained under the caption SECURITY
OWNERSHIP OF DIRECTORS AND OFFICERS AND BENEFICIAL OWNERS OF MORE THAN 5% OF THE COMPANYS ISSUED
AND OUTSTANDING COMMON STOCK in our definitive Proxy Statement for our 2010 annual meeting of
stockholders, to be filed within 120 days after the end of the year covered by this Annual Report
on Form 10-K pursuant to Regulation 14A under the Exchange Act.
The following table shows aggregated information as of December 31, 2009 with respect to all
of our compensation plans, agreements and arrangements under which our equity securities were
authorized for issuance. More detailed information with respect to our stock-based compensation is
included in Note 11 to the Consolidated Financial Statements.
88
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
|
remaining available for |
|
|
|
Number of securities to be |
|
|
Weighted average exercise |
|
|
future issuance under |
|
|
|
issued upon exercise of |
|
|
price of outstanding |
|
|
equity compensation plans |
|
|
|
outstanding options, |
|
|
options, warrants |
|
|
(excluding securities |
|
|
|
warrants and rights |
|
|
and rights |
|
|
reflected in column(a)) |
|
Plan Category |
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity
compensation plans
approved by
security holders: |
|
|
6,432,754 |
|
|
$ |
1.80 |
|
|
|
580,593 |
|
Equity compensation
not approved by
security holders
(1): |
|
|
1,650,096 |
|
|
|
1.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total: |
|
|
8,082,850 |
|
|
$ |
1.67 |
|
|
|
580,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents (i) inducement stock option grants made to two of our officers upon commencement
of their employment with us, (ii) stock option grants cancelled and re-granted to a former officer
upon his resignation, and (iii) stock option grants made in exchange for the stock options then
held in Applied Genomics, Inc. (AGI), a company we acquired in December 2009. All such awards
were outstanding and unexercised as of December 31, 2009. |
(i) In July 2004, our Board of Directors granted our Chief Executive Officer, as an
inducement to his employment, a stand-alone option agreement to purchase 0.75 million
shares of our common stock for a purchase price of $1.58 per share. In September 2004,
our Board of Directors granted our Chief Medical Officer, as an inducement to his
employment, a stand-alone option agreement to purchase 0.4 million shares of our common
stock of for a purchase price of $1.04. Each option holder may purchase up to 25% of the
shares under each option on the first anniversary of the option grant date, and has the
right to purchase the remaining shares as they vest in equal monthly installments over 36
months, so that each option is fully vested four years after the date of grant.
(ii) Our then Chief Financial Officer resigned during the quarter ended June 30,
2008. In connection with his resignation, the Company cancelled and re-granted 0.2
million fully-vested common stock options for a purchase price of $0.90 and term expiring
in June 2016.
(iii) In December 2009, our Board of Directors approved our acquisition of AGI. As
part of the terms of the acquisition, we were obligated to exchange all outstanding AGI
stock options for our stock options in accordance with a contractual exchange rate and
exercise price, resulting in the issuance of 0.6 million options to purchase our common
stock with an exercise price of $0.40 per share, of which 0.3 million options contain
performance-based conditions, in addition to time-based vesting requirements. Each such
option holder may purchase up to 35% of the shares under each option on the first
anniversary of the option grant date, and has the right to purchase the remaining shares
as they vest in equal monthly installments over 36 months, so that each option is fully
vested four years after the date of grant, subject to performance-based vesting
requirements as applicable.
|
|
|
Item 13. |
|
Certain Relationships and Related Transactions, and Director Independence |
We incorporate herein by this reference the information contained under the caption
TRANSACTIONS WITH RELATED PERSONS, ELECTION OF DIRECTORS-ADDITIONAL INFORMATION and BOARD
COMMITTEES in our definitive Proxy Statement for our 2010 annual meeting of stockholders, to be
filed within 120 days after the end of the year covered by this Annual Report on Form 10-K pursuant
to Regulation 14A under the Exchange Act.
|
|
|
Item 14. |
|
Principal Accounting Fees and Services |
We incorporated herein by reference the information contained under the caption INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRMAudit Fees in our definitive Proxy Statement for our 2010 annual
meeting of stockholders, to be filed within 120 days after the end of the year covered by this
Annual Report on Form 10-K pursuant to Regulation 14A under the Exchange Act.
89
PART IV
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Item 15. |
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Exhibits and Financial Statement Schedules |
(a) Financial Statements and Schedules
The following financial statements and schedules listed below are included in this Form 10-K:
Financial Statements (See Item 8)
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of December 31, 2009 and 2008
Consolidated Statements of Operations for the fiscal years ended December 31, 2009, 2008, and 2007
Consolidated Statements of Stockholders (Deficit) Equity and Comprehensive Loss for the fiscal years
ended December 31, 2009, 2008 and 2007
Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2009, 2008, and 2007
Notes to Consolidated Financial Statements
Financial Statement Schedule:
Schedule IIValuation and Qualifying Accounts for the fiscal years ended December 31, 2009, 2008, and 2007
All other schedules are omitted, as required information is inapplicable or the information is presented
in the consolidated financial statements or related notes
(b) Exhibits
The following is a list of exhibits required by Item 601 of Regulation S-K filed as part of
this Report. For exhibits that previously have been filed, the Registrant incorporates those
exhibits herein by reference. The exhibit table below includes the Form Type and Filing Date of the
previous filing and the original exhibit number in the previous filing which is being incorporated
by reference herein. Documents which are incorporated by reference to filings by parties other than
the Registrant are identified in footnotes to this table.
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Incorporated Filing |
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Reference |
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Original |
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Exhibit |
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Form Type & |
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Exhibit |
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Number |
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Description |
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Filing Date |
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Number |
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2.1 |
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Asset Purchase Agreement, dated March 8, 2007, by and between |
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Form 10-Q |
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2.1 |
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Clarient, Inc., Carl Zeiss Mercury, Inc., and Carl Zeiss |
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5/9/07 |
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MicroImaging, Inc. |
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2.2 |
** |
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Agreement and Plan of Merger and Reorganization, dated as of |
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Form 8-K |
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2.1 |
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December 21, 2009, by and among Clarient, Inc., Clarient |
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12/23/09 |
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Acquisition Corporation, Applied Genomics, Inc., certain
stockholders of Applied Genomics, Inc., and Robert S. Seitz, as
stockholders representative. |
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3.1 |
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Certificate of Incorporation of Clarient, Inc. (as amended). |
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3.2 |
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By-laws of Clarient Inc. (as amended). |
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Form 10-Q 11/5/07 |
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3.1 |
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10.1 |
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Amended and Restated Reimbursement and Indemnity Agreement, dated |
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Form 10-Q |
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10.3 |
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January 17, 2007, by Clarient, Inc. in favor of Safeguard |
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5/9/07 |
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Delaware, Inc. and Safeguard Scientifics (Delaware), Inc. |
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10.2 |
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Common Stock Purchase Warrant, dated January 17, 2007, for |
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Form 10-Q |
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10.7 |
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100,000 shares issued to Safeguard Delaware, Inc. |
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5/9/07 |
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10.3 |
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Common Stock Purchase Warrant, dated March 7, 2007, for 125,000 |
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Form 10-Q |
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10.10 |
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shares issued to Safeguard Delaware, Inc. |
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5/9/07 |
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10.4 |
* |
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Employment Agreement dated as of December 15, 2008 between |
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Form 10-K |
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10.11 |
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Clarient, Inc. and Ronald A. Andrews. |
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3/19/09 |
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10.5 |
* |
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Employment Agreement dated as of December 15, 2008 between |
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Form 10-K |
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10.12 |
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Clarient, Inc. and David J. Daly . |
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3/19/09 |
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10.6 |
* |
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Employment Agreement, dated as of September 17, 2009, by and |
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Form 8-K |
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10.1 |
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between Clarient, Inc. and Dr. Kenneth J. Bloom. |
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9/22/09 |
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90
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Incorporated Filing |
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Reference |
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Original |
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Exhibit |
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Form Type & |
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Exhibit |
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Number |
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Description |
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Filing Date |
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Number |
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10.7 |
* |
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Employment Agreement, dated as of December 2, 2009, by and |
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Form 8-K |
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10.1 |
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between Clarient, Inc. and Michael R. Rodriguez. |
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12/4/09 |
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10.8 |
* |
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Amended and Restated Employment Agreement dated as of February |
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Form 10-Q |
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10.19 |
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26, 2009 between Clarient, Inc. and Dr. Michael J. Pellini. |
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5/11/09 |
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10.9 |
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Separation Agreement and Waiver and Release of All Claims dated |
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as of January 5, 2010 by and among Clarient, Inc. and Raymond J.
Land. |
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10.10 |
* |
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Stock Option Agreement dated May 30, 2008 between Clarient, Inc. |
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Form 10-Q |
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10.3 |
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and Michael Pellini, M.D. |
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8/11/08 |
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10.11 |
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Form of Common Stock Purchase Warrant, dated November 8, 2005, |
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Form 8-K |
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99.3 |
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issued pursuant to Securities Purchase Agreement. |
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11/9/05 |
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10.12 |
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Form of Common Stock Warrant, dated September 22, 2006, to be |
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Form 8-K |
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10.2 |
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issued pursuant to the Securities Purchase Agreement. |
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9/25/06 |
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10.13 |
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Form of Common Stock Purchase Warrant to be issued pursuant to |
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Form 8-K |
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10.3 |
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the Amended and Restated Senior Subordinated Credit Agreement, |
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3/17/08 |
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dated March 14, 2008. |
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10.14 |
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Form of Common Stock Purchase Warrant to be issued to Safeguard |
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Form 10-Q |
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10.12 |
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Delaware, Inc. (for that number of shares to be determined in |
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5/9/07 |
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connection with usage by the Company under the Senior
Subordinated Revolving Credit Agreement by and between
Clarient, Inc. and Safeguard Delaware, Inc.). |
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10.15 |
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Form of Common Stock Purchase Warrant to be issued pursuant to |
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Form 8-K |
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10.5 |
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the Second Amended and Restated Senior Subordinated Revolving |
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3/2/09 |
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Credit Agreement, dated February 27, 2009. |
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10.16 |
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Common Stock Purchase Warrant, dated April 18, 2007, for 166,667 |
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Form 10-Q |
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10.15 |
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shares issued to Safeguard Delaware, Inc. |
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5/9/07 |
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10.17 |
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Warrant to Purchase 50,000 Shares of Common Stock, dated |
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Form 8-K |
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99.4 |
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August 1, 2005, issued to Safeguard Scientifics (Delaware), Inc. |
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8/4/05 |
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10.18 |
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Common Stock Purchase Warrant, dated March 7, 2007, for 62,500 |
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Form 10-Q |
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10.11 |
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shares issued to Safeguard Delaware, Inc. |
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5/9/07 |
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10.19 |
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Form of Common Stock Purchase Warrant to be issued pursuant to |
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Form 8-K |
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10.5 |
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the Second Amended and Restated Senior Subordinated Revolving |
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3/2/09 |
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Credit Agreement, dated February 27, 2009. |
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10.20 |
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Amended and Restated Registration Rights Agreement, dated |
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Form 8-K |
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10.4 |
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February 27, 2009, by and among Clarient, Inc., Safeguard |
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3/2/09 |
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Delaware, Inc., Safeguard Scientifics, Inc., and Safeguard
Scientifics (Delaware), Inc. |
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10.21 |
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Securities Purchase Agreement, dated February 26, 2003, by and |
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Form 8-K |
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99.1 |
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between Clarient, Inc. and Safeguard Delaware, Inc. |
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2/28/03 |
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10.22 |
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Securities Purchase Agreement, dated February 10, 2004, by and |
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Form 8-K |
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99.2 |
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between Clarient, Inc. and Safeguard Delaware, Inc. |
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2/12/04 |
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10.23 |
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Securities Purchase Agreement, dated March 25, 2004, by and among |
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Form 8-K |
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99.1 |
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Clarient, Inc. and the purchasers signatories thereto. |
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4/1/04 |
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10.24 |
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Securities Purchase Agreement, dated November 8, 2005, by and |
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Form 8-K |
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99.1 |
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among the Company and the investors named therein. |
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11/9/05 |
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10.25 |
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Securities Purchase Agreement, dated September 22, 2006, by and |
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Form 8-K |
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10.1 |
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between the Clarient, Inc. and Safeguard Delaware, Inc. |
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9/25/06 |
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10.26 |
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Consulting Agreement dated as of April 8, 2005 between Clarient, |
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Form 8-K |
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10.1 |
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Inc. and Dr. Richard J. Cote. |
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4/15/05 |
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10.27 |
* |
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Compensation SummaryNon-employee Directors. |
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Form 10-K |
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10.20 |
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3/27/07 |
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91
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Incorporated Filing |
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Reference |
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Original |
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Exhibit |
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Form Type & |
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Exhibit |
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Number |
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Description |
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Filing Date |
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Number |
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10.28 |
* |
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1996 Equity Compensation Plan, as amended. |
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Form 10-Q |
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10.12 |
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11/9/04 |
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10.29 |
* |
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2007 Incentive Award Plan, as amended. |
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Form 8-K |
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10.1 |
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6/22/09 |
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10.30 |
* |
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Form of Option Award Certificate. |
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Form 8-K |
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10.1 |
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12/1/04 |
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10.31 |
* |
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Form of Stock Option Grant Certificate to be used in connection |
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Form 8-K |
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99.2 |
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with 2006 option grants to certain management level employees. |
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3/2/06 |
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10.32 |
* |
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Form of Stock Option Agreement (in connection with 2007 Incentive |
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Form 8-K |
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99.1 |
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Award Plan). |
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7/16/07 |
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10.33 |
* |
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Form of Restricted Stock Award (in connection with 2007 Incentive |
|
Form 8-K |
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99.1 |
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Award Plan). |
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11/20/07 |
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10.34 |
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Facility Lease between Clarient, Inc. and 31 Columbia, Inc. dated |
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Form 10-Q |
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10.2 |
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July 20, 2005. |
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8/8/05 |
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10.35 |
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Lease between Applied Genomics, Inc. and Hudson-Alpha Institute |
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for Biotechnology dated January 15, 2008. |
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10.36 |
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First Amendment to Lease between Applied Genomics, Inc. and |
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Hudson-Alpha Institute for Biotechnology dated July 24, 2008. |
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10.37 |
* |
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2009 Management Incentive Plan. |
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10.38 |
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Credit Agreement, dated as of July 31, 2008, by and among |
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Form 8-K |
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10.1 |
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Clarient, Inc., Clarient Diagnostic Services, Inc., ChromaVision |
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8/5/08 |
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International, Inc. and Gemino Healthcare Finance, LLC. |
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10.39 |
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First Amendment to Credit Agreement dated January 30, 2009, by |
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Form 8-K |
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10.1 |
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and among Clarient, Inc., Clarient Diagnostic Services, Inc., |
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2/2/09 |
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ChromaVision International, Inc. and Gemino Healthcare Finance,
LLC. |
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10.40 |
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Second Amendment to Credit Agreement dated February 27, 2009, by |
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Form 8-K |
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10.1 |
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and among Clarient, Inc., Clarient Diagnostic Services, Inc., |
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3/2/09 |
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ChromaVision International, Inc. and Gemino Healthcare Finance,
LLC. |
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10.41 |
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Third Amendment to Credit Agreement dated November 12, 2009, by |
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Form 10-Q |
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10.5 |
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and among Clarient, Inc., Clarient Diagnostic Services, Inc., |
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11/13/09 |
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ChromaVision International, Inc. and Gemino Healthcare Finance,
LLC. |
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10.42 |
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Fourth Amendment and Joinder to Credit Agreement, dated as of |
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Form 8-K |
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10.1 |
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December 21, 2009, by and among Clarient, Inc., Clarient |
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12/23/09 |
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Diagnostic Services, Inc., ChromaVision International, Inc.,
Applied Genomics, Inc. and Gemino Healthcare Finance, LLC. |
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10.43 |
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Fourth Amendment to Amended and Restated Loan Agreement dated |
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Form 8-K |
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10.2 |
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January 27, 2009, by and between Clarient, Inc. and Comerica |
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2/2/09 |
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Bank. |
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10.44 |
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Fifth Amendment to Amended and Restated Loan Agreement dated |
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Form 8-K |
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10.2 |
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February 27, 2009, by and between Clarient, Inc. and Comerica |
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3/2/09 |
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Bank. |
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10.45 |
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Second Amended and Restated Senior Subordinated Revolving Credit |
|
Form 8-K |
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10.3 |
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Agreement, dated February 27, 2009, by and between Clarient, Inc. |
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3/2/09 |
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and Safeguard Delaware, Inc. |
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10.46 |
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Amended and Restated Subordination Agreement, dated February 27, |
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Form 8-K |
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10.6 |
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2009, by and among Gemino Healthcare Finance, LLC, Safeguard |
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3/2/09 |
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Delaware, Inc. and Clarient, Inc. |
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10.47 |
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Affirmation and Amendment to Subordination Agreement, dated |
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Form 8-K |
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10.7 |
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February 27, 2009, by and among Comerica Bank, Safeguard |
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3/2/09 |
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Delaware, Inc., and Clarient, Inc. |
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10.48 |
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Affirmation of Guaranty, dated February 27, 2009, by and among |
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Form 8-K |
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10.8 |
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Comerica Bank, Safeguard Delaware, Inc. and Safeguard Scientifics |
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3/2/09 |
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(Delaware), Inc. |
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92
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Incorporated Filing |
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Reference |
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Original |
|
Exhibit |
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Form Type & |
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Exhibit |
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Number |
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Description |
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Filing Date |
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Number |
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10.49 |
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Third Amendment to Amended and Restated Reimbursement and |
|
Form 8-K |
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10.9 |
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Indemnity Agreement, by and among Clarient, Inc., Safeguard |
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3/2/09 |
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Delaware, Inc., and Safeguard Scientifics (Delaware), Inc. |
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10.50 |
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First Amendment and Consent to the Second Amended and Restated |
|
Form 8-K |
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10.5 |
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Senior Subordinated Revolving Credit Agreement, dated March 26, |
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3/27/09 |
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2009 entered into between the Company and Safeguard Delaware,
Inc. |
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10.51 |
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Fourth Amendment to Credit Agreement dated December 21, 2009, by |
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and among Clarient, Inc., Clarient Diagnostic Services, Inc.,
ChromaVision International, Inc., Applied Genomics, Inc. and
Gemino Healthcare Finance, LLC. |
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10.52 |
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Amended and Restated Professional Services Agreement by and |
|
Form 8-K |
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|
10.1 |
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|
|
between Clarient Diagnostic Services, Inc., Clarient, Inc., and |
|
9/4/09 |
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Clarient Pathology Services, Inc., dated September 1, 2009. |
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|
|
10.53 |
|
|
Amendment to Securities Purchase Agreement, dated March 26, 2009, |
|
Form 8-K |
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|
10.4 |
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|
entered into between Clarient, Inc. and Safeguard Delaware, Inc. |
|
3/27/09 |
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|
10.54 |
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|
Pledge and Security Agreement dated March 26, 2009 by and among |
|
Form 8-K |
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|
10.7 |
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|
|
|
Clarient, Inc. and Comerica Bank. |
|
3/27/09 |
|
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|
10.55 |
|
|
Stock Purchase Agreement, dated as of March 25, 2009, by and |
|
Form 8-K |
|
|
10.1 |
|
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|
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between Clarient, Inc. and Oak Investment Partners XII, Limited |
|
3/27/09 |
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Partnership. |
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10.56 |
|
|
Registration Rights Agreement, dated as of March 26, 2009, by and |
|
Form 8-K |
|
|
10.2 |
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|
|
between Clarient, Inc. and Oak Investment Partners XII, Limited |
|
3/27/09 |
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Partnership. |
|
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|
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10.57 |
|
|
Form of Indemnification Agreement entered into with Ms. Ann H. |
|
Form 8-K |
|
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10.3 |
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|
|
Lamont and Mr. Andrew Adams effective as of March 26, 2009. |
|
3/27/09 |
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10.58 |
|
|
Stockholders Agreement dated March 26, 2009 by and among |
|
Form 8-K |
|
|
10.6 |
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|
Safeguard Delaware, Inc., Safeguard Scientifics, Inc., Safeguard |
|
3/27/09 |
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|
Scientifics (Delaware), Inc., and Oak Investment Partners XII,
Limited Partnership. |
|
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10.59 |
|
|
Pledge and Security Agreement dated March 26, 2009 by and among |
|
Form 8-K |
|
|
10.7 |
|
|
|
|
|
Clarient, Inc. and Comerica Bank. |
|
3/27/09 |
|
|
|
|
|
10.60 |
** |
|
License Agreement, dated January 8, 2008, by and between |
|
Form 10-Q |
|
|
10.3 |
|
|
|
|
|
Prediction Sciences, LLC and Clarient, Inc. for the exclusive |
|
11/13/09 |
|
|
|
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|
|
|
|
license to use Prediction Sciences, LLC mathematical algorithm in
connection with Clarients Insight®Dx Breast Cancer Profile. |
|
|
|
|
|
|
|
10.61 |
** |
|
Amendment No. 1, dated October 1, 2009, to the License Agreement, |
|
Form 10-Q |
|
|
10.4 |
|
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|
|
|
dated January 8, 2008, by and between Prediction Sciences, LLC |
|
11/13/09 |
|
|
|
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|
|
|
and Clarient, Inc. for the exclusive license to use Prediction
Sciences, LLC mathematical algorithm in connection with
Clarients Insight®Dx Breast Cancer Profile. |
|
|
|
|
|
|
|
10.62 |
|
|
Underwriting Agreement, dated August 27, 2009, by and among |
|
Form 8-K |
|
|
1.1 |
|
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|
|
Clarient, Inc., Safeguard Delaware, Inc., Safeguard Scientifics |
|
8/28/09 |
|
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|
|
(Delaware), Inc. and Stephens, Inc., as the representative of
several underwriters. |
|
|
|
|
|
|
|
10.63 |
|
|
Lock-Up Agreement, dated August 27, 2009, between Clarient, Inc. |
|
Form 8-K |
|
|
1.2 |
|
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|
|
|
and Stephens Inc., as the representative of several underwriters. |
|
8/28/09 |
|
|
|
|
|
16.1 |
|
|
Letter from KPMG LLP, dated September 25, 2009, to the Securities |
|
Form 8-K |
|
|
16.1 |
|
|
|
|
|
and Exchange Commission regarding the change in certifying |
|
9/28/09 |
|
|
|
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|
accountant. |
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93
|
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|
Incorporated Filing |
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|
|
Reference |
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|
|
Original |
|
Exhibit |
|
|
|
Form Type & |
|
Exhibit |
|
Number |
|
Description |
|
Filing Date |
|
Number |
|
|
21 |
|
|
Subsidiaries of the Registrant. |
|
|
|
|
|
|
|
23 |
|
|
Consent of Independent Registered Public Accounting FirmKPMG LLP. |
|
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|
|
|
|
23.1 |
|
|
Consent of Independent Registered Public Accounting FirmDeloitte |
|
|
|
|
|
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|
|
& Touche LLP. |
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|
31.1 |
|
|
Certification of Ronald A. Andrews pursuant to Rules 13a-14(a) or |
|
|
|
|
|
|
|
|
|
|
15d-14(a) of the Securities Exchange Act of 1934. |
|
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|
|
31.2 |
|
|
Certification of Michael R. Rodriguez pursuant to Rules 13a-14(a) |
|
|
|
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|
|
|
|
|
|
or 15d-14(a) of the Securities Exchange Act of 1934. |
|
|
|
|
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|
|
32.1 |
|
|
Certification of Ronald A. Andrews pursuant to Rule 13a-14(b) / |
|
|
|
|
|
|
|
|
|
|
15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350. |
|
|
|
|
|
|
|
32.2 |
|
|
Certification of Michael R. Rodriguez pursuant to Rule 13a-14(b) |
|
|
|
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|
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|
|
/ 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350. |
|
|
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|
|
|
|
|
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|
|
Filed herewith |
|
* |
|
These exhibits relate to management contracts or compensatory plans, contracts or
arrangements in which directors and/or executive officers of the Registrant may participate. |
|
** |
|
Portions of this exhibit are omitted and were filed separately with the Secretary of the SEC
pursuant to the Registrants application requesting confidential treatment under Rule 24b-2 of
the Exchange Act. |
94
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto
duly authorized on March 16, 2010.
|
|
|
|
|
|
Clarient, Inc.
|
|
|
By: |
/s/ Ronald A. Andrews
|
|
|
|
Ronald A. Andrews |
|
|
|
Vice Chairman and Chief Executive Officer |
|
|
We, the undersigned directors and officers of Clarient, Inc., do hereby constitute and appoint
Ronald A. Andrews and Michael R. Rodriguez, and each of them, our true and lawful attorney and
agent, to do any and all acts and things in our name and behalf in our capacities as directors and
officers and to execute any and all instruments for us and in our names in the capacities indicated
below, which said attorney and agent may deem necessary or advisable to enable said corporation to
comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, and
requirements of the Securities and Exchange Commission, in connection with this Annual Report on
Form 10-K, including specifically, but without limitation, power and authority to sign for us or
any of us in our names and in the capacities indicated below, any and all amendments hereto and we
do hereby ratify and confirm all that the said attorney and agent shall do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the capacities indicated on
March 16, 2010.
|
|
|
Signatures |
|
Title(s) |
|
|
|
/s/ Ronald A. Andrews
Ronald A. Andrews
|
|
Vice Chairman and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
/s/ MICHAEL R. RODRIGUEZ
Michael R. Rodriguez
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
|
|
/s/ James A. Datin
James A. Datin
|
|
Chairman
of the Board of Directors |
|
|
|
/s/ Peter J. Boni
Peter J. Boni
|
|
Director |
|
|
|
/s/ STEPHEN T. ZARRILLI
Stephen T. Zarrilli
|
|
Director |
|
|
|
/s/ Frank P. Slattery, Jr.
Frank P. Slattery, Jr.
|
|
Director |
|
|
|
/s/ Dennis M. Smith, M.D.
Dennis M. Smith, M.D.
|
|
Director |
|
|
|
/s/ Gregory Waller
Gregory Waller
|
|
Director |
|
|
|
/s/ ANN HUNTRESS LAMONT
Ann Huntress Lamont
|
|
Director |
|
|
|
/s/ ANDREW W. ADAMS
Andrew W. Adams
|
|
Director |
95
CLARIENT, INC. AND SUBSIDIARIES
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
Amounts |
|
|
|
|
|
|
|
|
|
|
Charged to Bad |
|
|
Charged |
|
|
Balance |
|
|
|
Balance at |
|
|
Debt |
|
|
Against Valuation |
|
|
at End |
|
Description |
|
Beginning of Period |
|
|
Expense |
|
|
Account |
|
|
of Period |
|
Year ended December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
1,040 |
|
|
$ |
3,558 |
|
|
$ |
(1,228 |
) |
|
$ |
3,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
3,370 |
|
|
$ |
12,199 |
|
|
$ |
(7,524 |
) |
|
$ |
8,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
8,045 |
|
|
$ |
12,927 |
|
|
$ |
(12,225 |
) |
|
$ |
8,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96