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EX-32.1 - EXHIBIT 32.1 - Roka BioScience, Inc.a12312016ex-321.htm
EX-31.2 - EXHIBIT 31.2 - Roka BioScience, Inc.a12312016ex-312.htm
EX-31.1 - EXHIBIT 31.1 - Roka BioScience, Inc.a12312016ex-311.htm
EX-23.1 - EXHIBIT 23.1 - Roka BioScience, Inc.a12312016ex231.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549   
FORM 10-K
 
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     
Commission file number: 001-36538
 
ROKA BIOSCIENCE, INC.
(Exact name of registrant as specified in its charter)

 
DELAWARE
 
27-0881542
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
20 Independence Boulevard
Warren, NJ
 
07059
(Address of principal executive offices)
 
(Zip code)
(908) 605-4700
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share
 
NASDAQ Global Market

 
 
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  ¨    No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  ý
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  ý    No  ¨
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 (§232.405 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  ý    No  ¨
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 registrant’s 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.  ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý

The aggregate market value of the Common Stock held by non-affiliates of the registrant, based upon the last sale price of the Common Stock reported on The NASDAQ Stock Market LLC on June 30, 2016, was $4,353,996.

The number of shares outstanding of the registrant’s common stock, par value of $0.001 per share, as of March 15, 2017 was 5,007,742.

DOCUMENTS INCORPORATED BY REFERENCE
None.




ROKA BIOSCIENCE, INC
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2016
 
 
 
 
 
 
Page
 
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
 
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
 
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
 
PART IV
Item 15
Item 16
 
 
 
 
 
 
 
 



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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS


This Annual Report on Form 10-K, including the sections titled “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains a number of forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under 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”). Forward-looking statements in this report include, but are not limited to, statements about:
 
the ability of our Atlas Detection Assays and Atlas instrument to gain market acceptance, particularly from key thought leaders in the industry, major food companies and third-party food safety testing laboratories;
the ability of our Atlas solution to provide our customers with accurate, timely test results and improved laboratory efficiencies;
our ability to increase our revenue, instrument placements and average revenue per instrument;
our relationship with Gen-Probe under our license and supply agreements;
our relationships with key suppliers, including certain single source suppliers such as Gen-Probe, from whom we obtain our Atlas instrument and supplies for Atlas Detection Assays and certain components and materials used in our assays;
our ability to manufacture our complex assays in accordance with precise technological specifications and in sufficient quantities, on a timely basis;
our ability to enhance existing products and to develop, introduce and commercialize new products;
our ability to protect our intellectual property rights, including the patent rights we license from Gen-Probe;
our ability to defend against any future claims that our Atlas Detection Assays and Atlas instrument infringe the patent rights of any third parties;
our ability to manage lengthy and variable sales cycles and to forecast revenue and operating expenses;
our anticipated cash needs and our estimates regarding our capital requirements and our needs for additional financing;
our ability to secure financing necessary to continue our operations; and
anticipated trends and challenges in our business and the markets in which we operate.
 
These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management’s current beliefs and assumptions. Any statements contained herein (including, without limitation, statements to the effect that we “believe”, “expect”, “anticipate”, “plan” and similar expressions) that are not statements of historical fact should be considered forward-looking statements.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Item 1A. Risk factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations.
You should read this report and the documents that we reference in this report and have filed with the Securities and Exchange Commission as exhibits to this report with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

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BUSINESS
Overview

We are a molecular diagnostics company initially focused on providing advanced testing solutions for the detection of foodborne pathogens. The proprietary molecular technology used in our assays enables us to offer accurate and rapid testing solutions while our fully automated instrument helps our customers reduce labor costs and minimize operator error. In late 2012, we launched our proprietary Atlas Detection Assays and Atlas instrument in the North American food safety testing market and we have worldwide rights to develop and commercialize our advanced molecular testing solutions for a wide range of other industrial applications.

Our company was founded in 2009 through the acquisition of the industrial application market assets of Gen-Probe Incorporated, which was subsequently acquired by Hologic, Inc. (herein referred to as "Gen-Probe"). The acquisition included a worldwide license for Gen-Probe’s molecular assay technologies in the industrial testing field, access to certain instrument platforms as well as certain key development personnel. Following the acquisition, we entered into supply agreements with Gen-Probe pursuant to which we purchase from Gen-Probe our Atlas instruments, certain proprietary disposable components and certain proprietary reagents and universal reagents that we use to manufacture our Atlas Detection Assays, which assays also contain our proprietary compositions and methods. Gen-Probe is recognized as a global leader in the development of innovative assay technology and instrument platforms and Gen-Probe’s assay technology and instrument platforms are supported by an extensive portfolio of issued patents. Our advanced molecular assays and automated instruments are derived from this Gen-Probe technology, which Gen-Probe has validated for use in the highly regulated clinical diagnostics and blood screening markets.
    
We are focused on the commercialization of a comprehensive menu of molecular diagnostic products for the detection of foodborne pathogens under the Atlas brand name. The detection of foodborne pathogens has historically been accomplished using:

culture-based assays, which depend on the growth and visualization of pathogens in culture media and are generally accurate, but the method is laborious, requires skilled labor and typically requires three to five days before test results are available;

immunochemical-based assays, which depend on an antibody binding reaction for detection of pathogens and are generally more rapid than culture-based assays, but the method is less accurate than culture-based methods, is laborious and typically requires two to three days before test results are available; and

molecular-based assays, which depend on the extraction and amplification of DNA for detection of pathogens and are generally more accurate and rapid than immunochemical-based assays, but the method is complex, laborious, may be negatively impacted by sample type and typically requires one to two days before test results are available.
 
We believe our Atlas solution addresses the significant performance gaps that traditional pathogen detection methods have with respect to accuracy, time to results and automation. Our Atlas Detection Assays incorporate our advanced molecular technologies and are performed on our “sample-in-result-out” Atlas instrument that automates all aspects of molecular diagnostic testing on a single, integrated platform, which is designed to provide our customers with accurate and rapid test results with reduced labor costs and improved laboratory efficiencies.
 
We expect the food safety testing market to grow due to enactment of new government regulations and initiatives to improve food safety, quality improvement initiatives by food processors and consumer demand for safe food. We believe we are uniquely positioned to gain share in the food safety testing market given our key strengths:

innovative molecular-based assays, designed to deliver accurate and rapid test results;

fully automated instrument, designed to reduce labor costs and operator error;

dedicated sales force, customer service organization and customer applications laboratory;

highly scalable business model with significant operating leverage potential;

significant technical expertise and extensive understanding of food safety customers; and

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 experienced management team with a proven track record of performance.

We believe we have the potential to transform microbiological testing in the industrial application markets by delivering enhanced molecular-based testing solutions with respect to assay accuracy, time to results and automation. We have worldwide rights, except for certain rights retained by Gen-Probe, to Gen-Probe’s broad intellectual property portfolio including assay technologies and instrument platforms for microbiological testing in industrial application markets including food safety, pharmaceutical process, personal care products, water and environmental, veterinary, biothreat and infection control in healthcare facilities including testing for Hospital Acquired Infections, or HAIs.

The Food Safety Industry

Foodborne illness is a public health imperative.

Foodborne illness caused by microorganisms is a substantial and growing public health problem. The World Health Organization, or WHO, estimates that approximately one in three people in industrialized countries may be affected by foodborne disease each year. The U.S. Centers for Disease Control and Prevention, or CDC, estimates that one in six Americans becomes ill, 128,000 are hospitalized and 3,000 die of foodborne disease annually in the United States. The most common clinical presentation of foodborne diseases takes the form of gastrointestinal symptoms, but such diseases can also lead to chronic, life-threatening diseases, including neurological, gynecological or immunological disorders and cancers, as well as multi-organ failure and death. The number and magnitude of food recalls have increased significantly in recent years and averages 30 recalls a week in the United States and 20 recalls a week in Europe.

The public health imperative to ensure a safe food supply is becoming more challenging due to the growing industrialization and globalization of food production. The risk of foodborne disease is increased by foods being sourced and distributed globally, the increased consumption of raw and minimally processed foods that often lack a microbial kill step, such as cooking or processing, and the growth of population groups that are particularly susceptible to foodborne disease, such as older adults, young children and immune-compromised individuals.

Increased regulation is expected to drive growth in food safety testing.

Globally, governments have enacted new regulations to improve food safety.

In 2011, the United States signed into law the Food Safety Modernization Act, or FSMA. The FSMA is designed to better protect public health and strengthen the food safety system by giving the FDA the authority to prevent outbreaks rather than simply reacting after an outbreak occurs. The FSMA mandates comprehensive, prevention-based controls by food processors to protect the U.S. food supply and provides the FDA with new enforcement authority. The FDA, pursuant to the FSMA, continued to promulgate and implement key regulations under the FSMA through 2016. The required controls for microbial hazards in the FSMA legislation is expected to continue to drive increased pathogen testing by the food industry.
In addition to increasing regulation in the United States, governments around the world are taking action to address food safety concerns. For example, the European Union established the European Food Safety Authority in 2002 following a series of foodborne pathogen outbreaks in the late 1990s, as a keystone of European Union risk assessment approach to food safety. Similarly, the People’s Republic of China established the State Food and Drug Administration of China in 2003, as part of China’s efforts to improve food safety, and passed The PRC Food Safety Law in 2009 to further strengthen the government’s supervisory powers, unify food safety standards and increase liabilities for non-compliance by food processors after a 2008 contaminated milk powder incident, which resulted in the reported deaths of six babies and the sickness of 300,000 babies.

Contaminant testing is necessary as a result of updated food safety regulations.

The detection of contaminants such as pathogens, indicator organisms, allergens and chemical toxins is an important component of the food safety plans employed by food companies in response to regulations to improve food safety. In the United States, the food industry uses quality control programs such as Hazard Analysis and Critical Control Points, or HACCP, in order to comply with food safety regulations. HACCP is a management system in which food safety is addressed through the analysis and control of microbiological, chemical, and physical hazards from raw material production through finished product. The primary goal of a HACCP program is to prevent harmful contaminants from entering the food supply.

Under a HACCP system, potential hazards are identified and risks are analyzed at each stage of production. Critical control points for preventing or eliminating such hazards are identified and monitored with corrective actions taken as needed.

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Verification is conducted to ensure that the system is working and all elements of the process are documented. Pathogen testing is done on raw materials, environmental samples and finished products as part of a HACCP program.

Regulators are applying impactful technologies in enforcement of regulations

In the United States, regulators of the food safety industry, the FDA and the USDA, collaborate with the Centers for Disease Controls, or the CDC, in applying a common database that connects outbreaks of foodborne illness to their origin in the food supply. The database uses DNA fingerprinting, or patterns of bacteria making people sick, obtained from clinical specimens and from food suppliers and retailers, which are matched to identify the sources of thousands of local and multistate outbreaks.


Limitations of Competing Pathogen Testing Methods

Complexities and Challenges of Pathogen Testing

The presence of a single pathogenic bacterial cell may be sufficient to cause foodborne disease in a person consuming or handling contaminated food. Current pathogen testing standards require the detection of a single pathogenic bacterial cell in a food sample ranging in size from 25 to 375 grams, a challenge sometimes compared to finding a needle in a haystack. Food samples must therefore be incubated in culture media until the pathogen has grown to levels that can be detected by the specific testing method, a process known as sample enrichment. Sample enrichment is the first step in current methods used to detect pathogens in food. Sample enrichment is time-consuming, labor-intensive and generally a limiting factor in the time to results. The length of time required for the sample enrichment process, as well as the need for multiple enrichment processes, primarily depend upon the growth rate of the pathogen, the sample type and the sensitivity and specificity of the foodborne pathogen testing method.
 
Pathogen Testing Methods

A description of each method and its limitations follows below:
 
Culture - detection of the target pathogen is achieved through incubation of the food sample in a selective enrichment media until visual confirmation of the microorganism is possible. While the culture-based method is generally accurate and inexpensive, it is labor-intensive and the time to results is typically three to five days. In addition, culture-based methods may not be able to identify viable but non-culturable cells.

Immunochemical - detection of the target pathogen is achieved through a highly specific antibody:antigen binding reaction combined with a detectable optical label. Immunochemical technologies are faster than culture methods with typical time to results of two to three days. However, immunochemical methods are labor-intensive and hampered by increased false positives and false negatives, which varies by food and sample type.

Molecular - detection of the target pathogen is achieved through extraction, amplification and detection of its DNA or RNA. Molecular technologies such as polymerase chain reaction, or PCR, are faster than culture-based and immunochemical methods, with typical time to results of one to two days. However, PCR is a more complex and labor-intensive method and may be impacted by the presence of inhibitors and cross reactors, which varies by food and sample type.

Susceptibility to Inaccurate Test Results of Current Pathogen Testing Methods

In 2012, the American Proficiency Institute, one of the largest proficiency testing providers for the proficiency testing needs of hospital laboratories, physician offices, clinics, and point-of care testing sites, reported a 9.7% overall incidence of false negative or false positive test results on standard pathogen proficiency panels, which highlights the challenge of obtaining accurate test results for the presence of foodborne pathogens. A false positive test result indicates that a pathogen is present in the food sample when the pathogen is not present in the food sample. A false negative test result indicates that a pathogen is not present in the food sample, when the pathogen is present in the food sample. The microbiological analysis of food is made difficult by the complexity and wide variety of food sample types, the heterogeneous distribution of low levels of pathogens, the need to detect and discriminate closely related species and the technical limitations of current pathogen testing methods.


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The complexity and labor-intensity of current pathogen testing methods also contributes to the challenge of obtaining accurate test results. Current pathogen test methods involve approximately 40 process steps and approximately 30 manual touches per sample for a typical PCR-based method. The high number of technical process steps and manual touches per sample in current pathogen test methods significantly increases the likelihood of operator error. In addition, in light of the increased sensitivity of molecular pathogen testing methods relative to other testing methods, failure to adopt and sufficiently train personnel on appropriate laboratory practices and processes increases the likelihood of operator error and inaccurate test results.

Economic Repercussions of Inaccurate Pathogen Test Results

Large operational costs and lost revenue opportunities may be associated with a false positive test result and may include the following: extensive additional pathogen testing of raw materials, surfaces and equipment; disassembly and cleaning of processing equipment for the affected product; diversion, treatment or destruction of the potentially contaminated product; and withdrawal or recall of product that has entered the distribution channel.

The cost of a false positive test result for highly perishable products, such as ground beef or fresh produce, can be high as illustrated by the following examples. A presumptive positive result for E. coli O157:H7 in a production lot of ground beef typically results in the diversion of up to a 10,000 pound lot of the ground beef to cooking for pathogen destruction and could result in a 40% or greater reduction in value for the product. A presumptive positive test result for Salmonella or E. coli O157:H7 in fresh produce may result in the destruction of the associated crop. In both cases, producers will often act on a presumptive positive result, rather than waiting several days for a cultural confirmation, due to the perishability of the product.
Significant lost revenue, brand erosion, public health concerns and product recall costs may be associated with a false negative test result. According to Food Sentry data, between July 2012 and July 2013, there were 610 food recalls. The primary reason for recall during this period was contamination of the food product with pathogens, such as Salmonella (38% of total) and Listeria monocytogenes (20% of total). Recalls are typically initiated by the food manufacturer, but may also result from regulatory action by government authorities.

According to estimates prepared in 2014 from the U.S. Department of Agriculture’s Economic Research Service, the cost of foodborne illnesses in the U.S., during 2013, from 3 major disease-causing microorganisms (Salmonella, Listeria monocytogenes and E. coli O157:H7) was $6.8 billion. These cost estimates for foodborne pathogens inform policymakers and provide a foundation for economic analysis of food safety policy.

The Grocery Manufacturers Association, or GMA, conducted a survey of 36 U.S.-based companies in 2011 on the costs associated with food recalls. Key survey findings were that 58% of respondents had been affected by a product recall event in the last five years, 52% of respondents experienced recalls that had a financial impact greater than $10 million due to product disposal and business interruption, and 81% of respondents deemed financial risk from recalls as significant to catastrophic. Furthermore, the GMA expects that the frequency and impact of food recalls will continue to rise due to the complexities of an increasingly global supply chain, advances in technical and scientific expertise and more robust regulatory surveillance.

Performance Gaps of Current Pathogen Testing
    
We believe that current pathogen test methods have significant performance gaps in areas of critical importance to food processors, third-party contract testing laboratories and the government agencies that regulate food safety. We believe customers are seeking improvements in pathogen testing in the following areas:
 
Accuracy - new methods that enable the delivery of more accurate test results, regardless of sample type, in order to reduce the significant lost revenue, brand erosion and operational costs associated with false positive and false negative test results.

Time to results - new methods that enable the delivery of faster test results in order to reduce the delay in operational response to pathogen control, to potentially reduce working capital needs due to longer product release times and support a longer shelf life for perishable products.

Automation - new methods that enable higher test volume throughput with reduced labor costs, reduced training requirements, improved accuracy through reduction of operator error and complete electronic data traceability and audit trail.


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While customers seeking improvement in pathogen testing methods have moved towards adopting molecular PCR-based methods, the workflow for PCR-based methods is complex and labor-intensive. The workflow for a commonly used molecular PCR-based pathogen detection method for Salmonella and Listeria is illustrated below.

Molecular PCR-Based Testing Workflow
 pcrbasedtestingworka03.jpg
Our Solution
Our Atlas solution delivers accurate, rapid and cost-effective molecular diagnostic test results for foodborne pathogens in three steps: enrich, transfer and automate.
 
Enrich - a single, shortened sample enrichment step with commercially available media.

Transfer - a single transfer step with no manual preparation of the sample required.

Automate - load sample on the Atlas instrument with complete electronic data traceability and audit trail.

Roka Workflow

rokaworkflow2a03.jpg
    

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We believe our Atlas solution addresses the significant performance gaps facing today’s food testing market by delivering improved accuracy, faster time to results and full automation compared to competitive pathogen test methods. Our Atlas Detection Assays for foodborne pathogen testing are performed on the “sample-in-result-out” Atlas instrument that automates all aspects of molecular diagnostic testing on a single, integrated platform.

Roka Products

We sell our Atlas Detection Assays and related consumable supplies for use with our Atlas instruments.

The Atlas Instrument

Our Atlas instrument is a fully automated molecular diagnostic testing instrument designed to reduce labor costs and operator error in high-volume foodborne pathogen testing laboratories. The Atlas instrument is a “sample-in-result-out” instrument that eliminates the need for batch processing and automates all aspects of molecular diagnostic testing on a single, integrated platform. The Atlas instrument’s key advantages are described below:

Speed and Productivity - our Atlas instrument is high throughput; using our Atlas instrument a single operator can process up to 300 tests per eight-hour shift and up to 500 tests per 12-hour shifts resulting in significant labor savings. Multiple assays can be processed concurrently from a single sample. Flexible continuous access sample loading eliminates the need to batch samples and enables optimized workflow and enhanced laboratory efficiency.

Ease of Use - no manual sample preparation is required when using our Atlas instrument. Processing molecular diagnostic tests on our “sample-in-result-out” Atlas instrument requires only approximately 19 manual touches. Instrument operators require minimal training to run the instrument and a trained operator can easily oversee the operation of two systems at the same time. Our Atlas instrument has intuitive software and touch screen operation with a customer driven design.

Customer Integration - our Atlas instrument has the flexibility to connect to our customers’ laboratory information management systems, or LIMS, allowing easy and automated downloading and analysis of sample results to customers’ LIMS.

Automated Process Controls - our Atlas instrument includes a series of quality process controls that we believe helps to ensure consistency and quality of resultsOur Atlas instrument permits full sample to result traceability and eliminates manual transcription; all samples, fluids and reagents are barcoded, tracked electronically and managed onboard. Automated reagent inventory control, reagent dispense verification, liquid level sensing and electronic quality control enhance the reliability and accuracy of results and optimization of reagent use. Our Atlas instrument provides customers with positive sample identification alerts.
 
Atlas Detection Assay Technology

We believe the proprietary molecular technologies incorporated in our Atlas Detection Assays enable us to deliver accurate and rapid foodborne pathogen test results regardless of the sample type. The key proprietary molecular technologies are briefly described below:
 
Ribosomal RNA, or rRNA, Target - proprietary molecular targeting technology that increases the accuracy and time to results performance of our Atlas Detection Assays by detection of rRNA, which is a highly conserved and specific target with up to 10,000 copies per bacterial cell compared to only several copies of DNA target per bacterial cell for PCR-based methods. This relatively large number of rRNA targets in foodborne bacteria gives us a distinct sensitivity advantage over our competition, which targets the lower copy DNA targets in their assays. The abundant rRNA targets in bacterial cells significantly shortens enrichment times needed in our pathogen detection assays that provide much faster time to result for our customers. The rRNA sequences that we detect in our Listeria and Salmonella assays are also highly conserved and species specific, allowing us to supply pathogen detection assays that are more accurate than those of our competitors.

Target Capture - proprietary sample purification and target concentration technology that increases the accuracy of our Atlas Detection Assays by using capture oligonucleotides and magnetic microparticles, to

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remove inhibitory materials that can interfere with rRNA target amplification in a food sample. This target capture technology enables our Atlas Detection Assays to identify pathogens in many difficult food types, including food types that are challenging for other molecular methods. Because our Atlas Detection Assays avoid this inhibition problem, our customers do not encounter the high rate of invalid runs and false negative results that they experience with other molecular detection assays.

Transcription-Mediated Amplification, or TMA - proprietary isothermal amplification technology that increases the accuracy and time to results of our Atlas Detection Assays by using a transcription-based amplification system, which uses two different enzymes to produce over a billion copies of rRNA targets in less than 30 minutes in a single reaction tube. This high level of amplification of target rRNA greatly enhances the sensitivity of our Atlas Detection Assays. Also, because we can perform TMA in a single reaction tube, without removing anything, we avoid potential and costly contamination of assay instruments and the testing laboratory environment that is a frequent problem experienced by users of other molecular methods that incorporate amplification methods such as PCR.

Hybridization Protection Assay, or HPA - proprietary molecular detection technology that increases the accuracy of our Atlas Detection Assays by using target specific molecular probes combined with a sensitive chemiluminescent molecule in a detection method that requires no wash steps in a single reaction tube, that eliminates the potential for detection of cross-reacting bacteria. With HPA we are able to design very specific probes to detect only the important pathogenic bacteria present in food and thereby avoid cross reaction and potential false positive results encountered by other molecular methods that often erroneously detect closely related non-pathogenic strains.

Dual Kinetic Assay, or DKA - proprietary molecular detection technology that increases the accuracy of our Atlas Detection Assays by using two types of chemiluminescent molecules that can detect separate targets simultaneously. This allows us to incorporate two different detection probes into each of our pathogen detection assays. One probe is specific for the rRNA sequence of the pathogen and the other is used to detect an internal control that enables users to ensure that all the assay steps in our pathogen detection assays were carried out correctly, giving our customers greater confidence in a more robust result. The use of an internal control in each of our Atlas Detection Assays is a competitive advantage of our technology yielding much lower levels of false negative results experienced by users of other pathogen detection assays.


Our Atlas Detection Assay Menu

Our current menu of Atlas Detection Assays includes tests for SalmonellaListeriaE. coli O157:H7, Shiga toxin-producing E. coli and Listeria monocytogenes, all of which have been certified by the AOAC Research Institute, an independent, third-party, non-government administrator of conformity assessment programs, across a wide variety of sample types, sample sizes, enrichment media and dilution factors.

Our Atlas Detection Assays do not require government approval for commercialization in the United States. However, based on our experience, most food processors and testing laboratories require validation by an independent third party prior to adopting a new testing method. In the United States and many international markets, food processors and third-party testing laboratories generally require testing methods to be certified by the AOAC Research Institute as a Performance Tested Method, or AOAC PTM, which demonstrates that the method meets the manufacturers’ performance claims. Methods are validated against a reference standard, such as the FDA’s Bacteriological Analytical Manual, or BAM, the USDA-FSIS’s Microbiology Laboratory Guidebook, or MLG, or other international standards such as the International Organization for Standardization, or ISO. To obtain AOAC certification, a company typically performs internal and external studies to validate that its methods perform according to documented claims. Then, a company submits its validation data to the AOAC for peer review. If the peer reviewers concur with the recommendation to approve, the Research Institute then grants AOAC Performance Tested Method certification for that method. The certification process often takes six to nine months, but this timeframe can vary greatly for a variety of reasons, including the complexity of the method validation, whether the tested method works the first time and the availability and scheduling of lab resources and peer reviewers. We have obtained AOAC PTM certifications for a wide variety of sample types, sample sizes, enrichment media and dilution factors for our Atlas Detection Assays. In addition, we have performed numerous method comparison and verification studies to confirm the performance of our assays in customer specific food matrices.


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Our Atlas Detection Assay Performance

We believe our Atlas Detection Assays deliver significant performance benefits in areas of critical importance to food safety professionals, including accuracy, time to results and automation.

Accuracy

Below are studies regarding the accuracy of food safety test methods generally, the accuracy of our Atlas Detection Assays as demonstrated in validation studies that we prepared and the accuracy of our Atlas Detection Assays and commonly used PCR-based methods as demonstrated in comparative methods studies.
 
American Proficiency Institute Study

The ability to deliver accurate test results, regardless of sample type, will help customers reduce the operational costs of false positive and false negative test results. In 2012, the American Proficiency Institute, an accredited food testing organization, reported false positive test results of 3.1% and false negative test results of 6.6% in proficiency testing for certain commercially available culture, immunochemical and molecular-based test methods (not including our Atlas Detection Assays) involving more than 39,500 samples for four foodborne pathogens. These results are the averages of the results obtained from studies completed over a 14-year period.

Atlas Detection Assay Validation Studies
    
Prior to commercial launch, we completed AOAC-RI validation studies to demonstrate the accuracy of our Atlas Detection Assays. We have completed validation studies involving more than 5,500 samples across more than 185 food matrices for four foodborne pathogens. Those studies have demonstrated equal or better performance to the gold standard reference method for all matrices and pathogens utilizing food samples inoculated with varying levels of the target pathogen.

Time to Results

The ability to deliver faster test results has the potential to enable a more rapid operational response for pathogen control, potentially reduce working capital needs and allow for a longer shelf life of perishable products. When compared to competitor PCR methods, the enrichment times and the actual time to run our Salmonella and Listeria Atlas Detection Assays have been shown to enable up to a near 40% improvement in total time to results offering significant operational benefit for challenging sample matrices.

Automation

The ability to offer fully automated, high-throughput molecular diagnostic testing has the potential to reduce labor costs and increase assay accuracy through a reduction of operator error. We completed workflow efficiency studies to evaluate the use of our Atlas solution as compared to a representative PCR-based molecular method for Listeria and Salmonella detection. As part of these studies, operators at a representative customer laboratory were observed using their existing PCR-based methods. Subsequently, an Atlas instrument was installed at such customer laboratory and following training, operators were observed conducting the same tests while using our Atlas instrument. Based on the workflow efficiency studies that we completed, our Atlas instrument demonstrated a 45% reduction in labor time per sample compared with a commonly used PCR-based method. We believe that the amount of costs savings which a laboratory may recognize by using our Atlas solution varies depending on the testing volume, workflow and competitive test methods used in a customer’s particular laboratory.

Additionally, we completed an evaluation of the number of process steps and manual touch points that occur when utilizing the Atlas system in comparison to a representative PCR-based method across a variety of sample types. This evaluation demonstrated a greater than 50% reduction in the process steps and a greater than 40% reduction in manual sample touch points for the Atlas solution as compared to PCR.

Our Commercialization Strategy

We intend to drive adoption of our Atlas solution for foodborne pathogen testing by executing on our commercialization strategy. Our customers are food processors, third-party contract testing laboratories and government regulatory authorities. Based on our experience, our customers require that testing methods be validated by an independent third party, such as the AOAC Research Institute, prior to adopting a new testing method. As a result, we seek AOAC certification of our products in order to enhance their marketability. The AOAC Research Institute is an independent, third-

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party, non-government administrator of conformity assessment programs including the AOAC PTM, which is a method certification program. To obtain AOAC certification, we complete studies demonstrating the accuracy, reliability, and robustness of our Atlas Detection Assays and submit studies to the AOAC for peer review. In addition, the complexities of testing for foodborne pathogens typically necessitate a lengthy and in-depth product evaluation period by prospective customers. Based on our experience to date, our sales cycle, which we calculate as the time from initial contact with a prospective customer to routine commercial utilization of Atlas Detection Assays, can often be 12 months or longer. We believe our Atlas Detection Assays represent a significant advancement in foodborne pathogen testing, which we expect will create an attractive revenue stream due to the competitive strengths of our pathogen testing solution and the high costs associated with switching from our Atlas instrument to a competitive rapid test method.

We have a direct sales team in the United States, which is currently composed of segment specialists and field applications specialists. Our sales efforts are reinforced by our customer support organization, which assists customers with internal comparative methods and verification studies for our Atlas Detection Assays, supports the installation and maintenance of the Atlas instrument and provides technical proficiency training for operators of the Atlas instrument. Collectively, our sales and customer service teams have significant experience in the food industry and working with food processors and third-party contract laboratories on food safety testing solutions.

Our sales team and customer service organization have experience executing our commercial strategies, which include:

Target high-volume throughput laboratories that are currently using molecular test methods.

Our sales team is targeting high-volume throughput laboratories that are typically performing 75 to 150 molecular tests per instrument per day. We estimate that there are approximately 300-400 third-party contract testing laboratories in North America and that approximately half of pathogen testing is conducted by third-party contract testing laboratories with the balance performed at food processor laboratories. We are initially focusing on high-volume molecular laboratories because of the critical importance of accuracy, time to results and automation for this group of customers. We believe our Atlas solution delivers improved performance against these critical customer needs compared to current PCR-based methods. In addition, a focus on high-volume testing laboratories allows for efficient customer reach, call frequency and sales force productivity.

Demonstrate the technical advantages of our Atlas solution by conducting comparative method and verification studies.

We actively solicit and support comparative methods studies for the most challenging food samples from our customers in order to demonstrate the superior accuracy, robustness and time to results performance for our proprietary Atlas Detection Assays as compared to existing methods. In addition, we work with our customers to conduct extensive internal evaluation, validation and verification studies to ensure that our Atlas instrument and testing methods perform accurately on the specific food types tested in the potential customer’s labs. These verification activities are time and resource-intensive for our customers and often customers have to delay verification activities until their internal resources are available. Therefore, we seek to work collaboratively with prospective customers to conduct these studies using our resources, either in our modern customer applications laboratory or at the customer’s laboratory. We find that this collaborative approach enables prospective customers to complete their verification activities more efficiently, thereby facilitating adoption of our Atlas instrument and testing methods.
 
Demonstrate the economic benefits of automation derived from the Atlas instrument by conducting total value analysis studies in collaboration with our customers.

We have sponsored total value analysis studies with independent productivity consultants to demonstrate the potential for direct labor and supplies cost savings, excluding the cost of the assay reagents itself, that are possible with the adoption of our Atlas instrument. These studies seek to demonstrate that our Atlas instrument enables a significant reduction in the number of process steps, touches per sample and labor time per sample compared to other rapid testing methods. Based on the studies we have completed to date, we believe that our Atlas solution has demonstrated meaningful direct labor cost savings for our customers and that the amount of costs savings vary depending on the testing volume, workflow, labor rates and competitive test methods used in a customer’s particular laboratory.


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Partner with customers in the sales and implementation process to minimize the learning curve associated with adopting a new molecular testing method.

We seek to minimize the learning curve associated with adopting a new molecular testing method by leveraging our technical support organization to partner with our customers and potential customers to implement appropriate process workflows and laboratory practices and extensive training programs in connection with the use of our Atlas solution. In light of the increased sensitivity of molecular pathogen testing methods relative to other testing methods, failure to adopt and sufficiently train personnel on appropriate laboratory practices and process workflows increases the likelihood of operator error and inaccurate test results, which we are aware has been an issue with certain of our customers and potential customers, particularly with our original Listeria assay.

Minimize barriers to adoption of our Atlas solution with a flexible instrument placement strategy.

We seek to accelerate the market adoption of our Atlas Detection Assays by reducing the barriers to placement of an Atlas instrument in customer laboratories. We offer flexible Atlas instrument placement options, which include sale of the instrument, monthly lease of the instrument or a reagent rental model agreement, pursuant to which we recover the cost of the instrument through the cost per test price we charge for our Atlas Detection Assays. To date, most customers have elected a reagent rental model for Atlas instrument placements and we believe most future customers will elect a reagent rental model for Atlas instrument placements to avoid or minimize a sometimes lengthy approval process associated with the purchase of capital equipment.


Collaborate with food safety thought leaders and regulatory authorities to support the evaluation and adoption of our Atlas Detection Assays.

We collaborate with food safety thought leaders to support the evaluation and adoption of Atlas Detection Assays. For instance, Mérieux NutriSciences Corporation and Marshfield Food Safety, LLC, which are leading contract testing labs, and General Mills, a well-known food processor, have installed Atlas instruments as part of their ongoing commitment to find the best possible solutions to food safety testing challenges. We are also working with the FDA and USDA to drive adoption by these regulatory agencies of Atlas Detection Assays for use in routine regulatory testing of samples collected by FDA and USDA field-based inspectors. In 2013 and 2016, the FDA purchased Atlas instruments in order to validate our Atlas Detection Assays for Salmonella and Listeria for use in the FDA’s routine regulatory testing and we placed an instrument with the USDA under a non-commercial arrangement, pursuant to which the USDA has no financial obligation to us during the evaluation period and we retain ownership of the instrument, to allow the USDA to validate our Atlas instrument and Atlas Detection Assays for use in the USDA’s routine regulatory testing. Additionally, the instrument installed with the USDA is being used by the USDA Agricultural Research Service to support our ongoing research collaborations on Shiga toxin-producing E. coli. We believe that validation or use of a commercial food safety testing system by a government regulatory agency would contribute significantly to market acceptance and adoption for use by the food industry.

Due to the early stage nature of our commercial operations and our limited sales and marketing activities to date, we have historically derived a significant portion of our revenue from a limited number of customers. For the year ended December 31, 2016 each of Marshfield Food Safety, LLC and PrimusLabs accounted for 10% or more of our total revenue and for the year ended December 31, 2015, each of Marshfield Food Safety, LLC, MVTL Laboratories, Inc., PrimusLabs and Mérieux NutriSciences Corporation, accounted for 10% or more of our total revenue.

Research and Development Initiatives

We are committed to developing diagnostic products that provide accurate, rapid and cost-effective test results on fully automated instrument platforms for use in the food safety testing market and a range of other industrial application markets. We are pursuing the research and development initiatives described below.

Develop additional Atlas Detection Assays for Foodborne Pathogens

Our current menu of Atlas Detection Assays includes molecular tests for SalmonellaListeriaE. coli O157:H7, Shiga toxin-producing E.coli and Listeria monocytogenes. We are currently evaluating opportunities to develop next generation versions of our molecular tests, which we believe will provide improved performance. For example, in late 2014, we commenced an initiative to develop a new Listeria assay, specifically for use in environmental testing, intended to be less

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susceptible to inadvertent sample contamination. In July 2015, we announced that we received AOAC approval for our new Listeria assay, the Atlas Listeria Environmental Detection Assay. We made this new assay available to customers in the fourth quarter of 2015.

Low-volume Molecular Instrument

We are exploring the development of a molecular diagnostic instrument designed to address the needs of lower-volume throughput customers. We believe there is an attractive market opportunity in low-volume throughput laboratories. This instrument is being developed in collaboration with an external development partner with expertise in system design. We believe such an instrument will allow us to extend the benefits of accuracy, ease of use and time to results performance to low-volume throughput customers. A low-volume throughput instrument may have applications in other industrial markets such as personal care products, veterinary, environmental and other applications with low-volume throughput requirements.

Molecular Amplification Technology

We are in the early stages of developing a molecular amplification chemistry, which potentially provides a significant reduction in the time required to detect the presence of nucleic acids in a broad range of sample types, including food and human clinical samples.

Chemical Contaminant Tests

The customer base that we serve with our pathogen detection products has other food safety testing needs, including the detection of chemical contaminants. We intend to leverage our development expertise, commercial infrastructure, relationships with our customers and knowledge of the regulatory environment applicable to our customers to deliver innovative technological solutions to our customers for these broader testing needs in food safety testing. The chemical contaminants testing segment of the food safety market includes tests for food allergens, antibiotic residues, and mycotoxins, or chemicals produced by fungi and molds that contaminate a variety of agricultural commodities. In the long term, we aim to develop innovative diagnostic products for the detection of chemical contaminants that deliver improved performance with respect to accuracy, quantitation, multiplexing, ease of use and cost-effectiveness versus currently commercialized methods. To that end, we have begun preliminary research and development activities with respect to developing assays for the detection of allergens and mycotoxins and are exploring opportunities to develop or acquire related technology platforms.

Operations and Quality Systems

We operated in one reportable business segment, food safety, and derived nearly all of our revenues from the United States during the years ended December 31, 2016, 2015 and 2014, respectively.

Operations
    
We purchase our Atlas instruments from Gen-Probe. Gen-Probe sub-contracts Atlas manufacturing from a sole-source supplier that meets FDA and ISO standards governing diagnostic medical device products. We have a long term supply agreement with Gen-Probe for the supply of Atlas instruments, spare parts, universal fluids, ancillary components and other components necessary to manufacture our assays.

We manufacture and assemble our proprietary assay kits, assay calibrators, universal fluids, and transport tubes and ancillary reagents in our approximately 45,000 square foot, ISO-certified facility in San Diego, California. We have people and equipment to formulate reagents, perform quality control testing, automated bottle filling and labeling, large scale lyophilization and kit assembly under ISO-9001 quality guidelines. Our raw materials, including many of the universal fluids, are commercially available from a large number of vendors. We purchase Atlas universal reagents and Atlas ancillary disposables from Gen-Probe, which are re-labeled with Roka specific labels. We believe we have equipment and facilities in place to meet our current and future manufacturing and research and development needs.

We rely on a limited number of suppliers for certain components and materials in our system. We have established supply agreements with a number of these suppliers. We have an agreement with FedEx to warehouse and distribute our finished products. We have a separate agreement with another vendor to warehouse and ship our Atlas instruments. These offsite warehouses allow us to more efficiently distribute our products to our customers.

Quality Systems


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All Roka products are subject to strict internal quality controls to ensure consistent performance at customer sites. We are certified under ISO-9001 quality standards. We have developed a comprehensive quality system based on FDA in-vitro diagnostic product development and Good Manufacturing Practice, or GMP, standards. These regulations carefully control the design, manufacture, testing and release of diagnostics products as well as raw material receipt and control. We utilize electronic documentation integrated with our enterprise resource planning system to track manufacturing activities, product development and customer support. We also have controlled methods for the consistent manufacturing of our Atlas Detection Assays and reagents at our facilities. All key outsourcing partners are ISO-certified to help assure a continual supply of high quality components. We monitor our quality through a variety of indicators, including performance indicators, internal and external audits, customer inquiries and complaints. Product inquiries or quality concerns are trended and subject to risk assessment, root cause analysis and corrective action plans which are reviewed on a periodic basis.

We plan to continue manufacturing components that we determine to be highly proprietary or highly custom to produce. We believe we have an effective quality system in place to meet our quality policy to design, develop and manufacture molecular products that comply with applicable U.S. and international regulatory requirements, to maintain the effectiveness of the quality management system, continually explore opportunities to improve the effectiveness of the quality management system and to meet or exceed customer’s expectations.

Competitors

Our industry is highly competitive and subject to rapid and significant technological change. We face competition from companies that offer molecular, immunochemical and /or culture-based testing products. Key competitors offering molecular pathogen testing solutions include Hygiena, Bio-Rad Laboratories, Inc., Merck KGaA, Life Technologies Corporation, Sample6 Technologies and 3M Food Safety. Key competitors offering immunochemical testing solutions include bioMérieux, S.A. and Neogen Corporation. Key competitors offering culture testing solutions include 3M, bioMérieux and Neogen. These companies compete with us primarily on the basis of technology, quality, reputation, accuracy, ease of use, price, reliability, range of product offerings, including the ability to offer a broader range of testing methods than we can offer, the timing of new product introductions and product line offerings. We believe our success will be driven by the robustness and accuracy of our proprietary sample preparation and assay chemistries, the simplified, efficient work flow that is enabled by our proprietary Roka transfer tube and advanced Atlas instrument, and our sole focus on the industrial application markets.

Many of our existing competitors or new market entrants have, or may have, significantly greater financial, marketing, sales, manufacturing, distribution and technological resources than we do. Additionally, our existing competitors or new market entrants may have substantially greater expertise in conducting research and development, may have greater ability to obtain necessary intellectual property, may be in a better position than we are to respond quickly to new or emerging technologies, may be able to undertake more extensive marketing campaigns, may adopt more aggressive pricing strategies, may have greater brand recognition and may be more successful in attracting potential customers.

Intellectual Property

Our business relies upon proprietary technologies, methods and processes, product designs and branding which we have invented, developed or licensed. Our policy is to seek patent protection and trademark registration for commercially valuable assets we develop, as appropriate, and maintain as trade secrets other aspects of our proprietary platform, processes, and know-how.
    
Through our license agreement with Gen-Probe, we have worldwide rights, except for certain rights retained by Gen-Probe, to Gen-Probe’s molecular diagnostic technology patent portfolio (including patents relating to assays and instrument platforms) for use in instruments and certain industrial application markets.

In addition, we are seeking to obtain patent protection for certain compositions and methods of using or related to the technology used in our products, as well as other inventions that are important to our business. We do not currently own any issued patents. Our patent portfolio includes pending U.S. provisional and non-provisional applications, strategically focused corresponding international applications filed via the Patent Cooperation Treaty, or PCT, and foreign national applications. As of the date of this report, we have filed five PCT applications relating to detection probes and detection methodology. U.S. national applications based on three of these PCT applications, and foreign national applications based on two of these PCT applications are pending. We plan to file U.S. and foreign national or regional counterpart applications based on the pending PCT, where we deem commercially appropriate, beginning in April 2017. We believe our portfolio of patent applications will protect aspects of our business in the United States and in foreign jurisdictions in which we elect to pursue and are successful in obtaining patent rights.


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Trade Secrets and Trademarks
    
In addition to our broad patent portfolio, we rely on trade secrets and know-how to develop and maintain our competitive position. We protect trade secrets and know-how by establishing confidentiality agreements and invention assignment agreements with our employees, consultants, scientific advisors, contractors and commercial partners. These agreements generally provide that all confidential information developed or made known during the course of an individual or entity’s relationship with us must be kept confidential during and after the relationship and that all inventions or developments resulting from work performed for us or relating to our business and conceived or completed during the period of employment or assignment, as applicable, shall be our exclusive property. In addition, we take other appropriate precautions, such as physical and technological security measures, to guard against misappropriation of the proprietary technology used in our products by third parties. We have also adopted policies and conduct training that provides guidance on our expectations, and our advice for best practices, in protecting our trade secrets.

We also seek trademark protection in the United States and in foreign jurisdictions where available and when appropriate. The “Roka Bioscience” trademark and our corporate logo are registered in applicable trademark agencies in the United States, European Community, Canada, Japan and China. The “Atlas” trademark and the Atlas logo are registered in applicable trademark agencies in the European Community and the United States.

Collaborations and Licenses

License Agreement from Gen-Probe

In September 2009 we entered into a license agreement with Gen-Probe. Under the terms of this license agreement, Gen-Probe granted us a worldwide, royalty-bearing license under Gen-Probe’s molecular diagnostic technology patent portfolio and know-how (including technology, trade secrets, inventions, methods, designs, materials, and data) for use in instruments for the following industrial testing applications: food manufacturing, water testing, biopharmaceutical manufacturing, environmental, veterinary, bioterrorism and infection control. The definitions in the agreement for each of the industrial testing applications include limited exclusions, including the exclusion of any right by us to test samples from humans or animals for the purpose of clinical diagnostics, including as part of clinical trials, and also excludes testing of human blood, tissue, plasma or other blood products intended for direct transfusion or other administration to humans or animals, or screening of any human organs, tissues or other biological materials. In addition, we granted Gen-Probe an exclusive license to technology and intellectual property developed by us, for use outside the field of industrial applications. The license also grants us the right to develop, manufacture, use, distribute, promote, sell, import and export nucleic acid tests and other consumables using the Gen-Probe technology for these industrial testing applications on molecular diagnostic instruments, including the Gen-Probe fully automated Panther instrument system that we commercialize as the Atlas System. The license is exclusive with respect to these industrial testing applications, except for the following rights retained by Gen-Probe: (i) rights granted by Gen-Probe under six agreements existing as of the effective date of the license, which do not affect our ability to manufacture and commercialize our products but do not prevent such parties from competing with us, (ii) Gen-Probe’s right to continue to commercialize five specific assay products in existence as of the date the license was executed, only one of which, an assay for Listeria monocytogenes, has application to the food safety market, and (iii) the Company’s rights as to infection control applications, which are non-exclusive except with respect to certain patents that are relevant to a portable detection instrument design (called “CUDA”), which Gen-Probe licensed to us, but which is not part of our Atlas solution. Although the license agreement has certain limited exceptions to its exclusivity, we believe that these exceptions are limited in nature and do not enable these third parties to use any of the high throughput automation technology specific to our Atlas solution, or permit Gen-Probe to compete with us in the food safety market. The license became nonexclusive with respect to veterinary applications and bioterrorism applications in September 2015. Our rights to Gen-Probe’s patents and know-how under this license agreement also includes patents and know-how that Gen-Probe develops or otherwise acquires control of during the term of the license agreement that are necessary, used in or useful for our development of new products and technology for these industrial testing applications. Pursuant to the Gen-Probe license agreement, we are obligated to make royalty payments to Gen-Probe based on net sales of products that incorporate the licensed Gen-Probe technology. Currently we pay Gen-Probe a royalty of 8% on net sales of our Atlas Detection Assays. As discussed below, we may reduce the royalty rate by 4% based upon potential future milestone payment fees. Our obligation to make royalty payments under this agreement is on a country-by-country basis in each country in which the applicable product is manufactured or sold, and expires upon the later of (i) the expiration, revocation or rejection of the last of the patents covering the technology that we use in our products in that country, or (ii) 10 years after the first sale of products in such country. The patents currently covered by the license agreement expire from time to time; we currently expect the last relevant U.S. patent to expire in 2030. We have analyzed Gen-Probe patents that are material to our business and do not believe that the Gen-Probe patents that expire in the next five years will cumulatively have a material impact on our ability to protect ourselves from copying by our competitors.
 

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Our license agreement may be terminated by Gen-Probe or us upon a material breach of the agreement that is not cured following 60 days’ notice. Gen-Probe also may terminate the license agreement if we are in breach of any payment obligation under the agreement that is not cured within 30 days following notice of the breach. In addition, Gen-Probe has the right to terminate the agreement immediately upon written notice if (i) we or any of our affiliates, licensees or sublicensees commence any formal challenge to any of the patents licensed to us by Gen-Probe, or (ii) we declare bankruptcy, become insolvent or initiate dissolution proceedings. Upon any termination, all patent, know-how and other intellectual property rights granted to us by Gen-Probe shall terminate.

We do not have the right to enforce any of the patents licensed to us under the license agreement with Gen-Probe. Gen-Probe has the right, but not the obligation, to sue third parties for infringement of the licensed patents. If Gen-Probe does not bring an action against an alleged infringer within 60 days after written notice from us, we may request that Gen-Probe consider bringing an action. Gen-Probe will also control any action to enforce the licensed patents, and has the sole right to prosecute, issue and maintain the licensed patents and patent applications.

Our license agreement with Gen-Probe also granted us a sublicense under a co-exclusive patent license agreement between Gen-Probe and Stanford University to make, use, and sell nucleic acid tests and other consumables for use in instruments for the food manufacturing, water testing, biopharmaceutical manufacturing, environmental, veterinary, bioterrorism and infection control testing applications. Under the patent license agreement between Stanford and Gen-Probe, Stanford granted co-exclusive license rights to Gen-Probe under specified patents owned by Stanford covering certain nucleic acid amplification methods related to TMA. Under the sublicense, we are obligated to make royalty payments to Stanford through Gen-Probe and based on net sales of products incorporating the licensed technology. Our obligation to make royalty payments under this sublicense agreement terminates when the patents constituting the Stanford amplification technology expire, which is expected to occur in July 2017. The sublicense remains in effect until our license agreement with Gen-Probe expires or is terminated, and in the event that Stanford terminates its license with Gen-Probe, our sublicense rights shall continue directly with Stanford, provided we are not in default, and agree to assume the obligations of Gen-Probe under the Stanford license to the extent they correspond to the scope of the sublicense.

In June 2014, we entered into an amendment to our license agreement with Gen-Probe which granted us a two-year option to reduce the royalty rate we pay to Gen-Probe in exchange for an option payment of $2.5 million in cash. We exercised the option simultaneously with the closing of our initial public offering in July 2014 and made the following considerations to Gen-Probe: (i) we issued 865,063 shares of our common stock to Gen-Probe, and (ii) using a portion of the net proceeds from our initial public offering, we made a cash payment of $8.0 million to Gen-Probe. Additional future payments required based upon the terms of the option exercise include: (i) on January 1, 2018, we must make a cash payment of $5.0 million and (ii) on January 1, 2020, we must make a cash payment of $5.0 million. Upon exercise of the option, our royalty rate was reduced from 12% to 8%. In addition, if we achieve certain revenue milestones, we will pay additional milestone fees of up to $6.0 million and the royalty rate will be further reduced. We may elect to accelerate the royalty rate reduction by paying the additional milestone fees in advance of achieving the applicable revenue milestone. Upon making the additional payments under the certain revenue milestones, the royalty rate we pay to Gen-Probe for sales of our Atlas Detection Assays, will be reduced to 4%.
 
Supply Agreements with Third Parties for Materials and Instrumentation Used in Our Products

Material Supply Agreement with Gen-Probe
In September 2009, we entered into a long-term material supply and purchase agreement with Gen-Probe, which was amended in May 2011. Under this agreement, Gen-Probe is obligated to supply us with a number of proprietary reagents that we use as components in the manufacture of our assays. Under this agreement, we also purchase from Gen-Probe bulk universal reagents that we use with all of our assays that run on the Atlas instrument as well as certain proprietary disposable components necessary to run our pathogen detection assays on the Atlas instrument. We pay Gen-Probe a transfer price for each of the individual materials supplied under this agreement. The initial term of this agreement expires on May 27, 2018. At the end of the initial term, the agreement automatically renews for successive two-year periods unless we give 180 days’ prior notice of our intention not to renew. The material supply agreement may be terminated by Gen-Probe only (i) for cause based on a breach by us that remains uncured for at least 60 days, or (ii) in the event we file for bankruptcy protection, or otherwise formally declare insolvency or commence dissolution or similar proceedings.

Atlas Instrument Supply Agreement
In May 2011, we entered into a supply agreement with Gen-Probe pursuant to which Gen-Probe supplies us with its integrated fully automated Panther instrument system, which we commercialize under the Atlas brand name. During the term of the agreement Gen-Probe will supply us with instruments, reagents, other consumables and software updates for use with our Atlas instruments. During the term of the supply agreement we are required to make a quarterly rolling forecast of our expected

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needs for instruments for a twelve-month period. Under the terms of the agreement, we must purchase all of our requirements for Atlas instruments from Gen-Probe at a price equal to 200% (or 150% in the case of the first 75 instruments we purchased from Gen-Probe) of the transfer price portion of Gen-Probe’s manufacturing cost, plus one hundred percent (100%) of the portion of Gen-Probe’s manufacturing cost comprising applicable taxes and costs relating to storage, shipping and handling, with no additional profit mark-up to Gen-Probe. We pay one-half (or two-thirds in the case of the first 75 instruments we purchased from Gen-Probe) of the invoice amount within 45 days of the delivery of the invoice or instrument, whichever is later, and we pay the remaining one-half (or one-third in the case of the first 75 instruments we purchased from Gen-Probe) over time in increments computed as 1.00% of our net sales over the following 54 months, provided that the remaining invoice amount remaining unpaid is due in full by the end of the 54th month after delivery of such instrument. The term of the agreement is for an initial period of seven years, with automatic renewals for successive two-year periods, unless either party provides notice at least one year in advance of its intent not to renew the agreement. In the event that Gen-Probe ceases production of the instrument, fails to supply us with certain quantities of the instrument as specified in the supply agreement, or chooses not to renew the supply agreement, we have the right to contract with an alternative supplier reasonably acceptable to Gen-Probe to manufacture and supply us with the Atlas instrument, and Gen-Probe is required to license the alternative supplier under any Gen-Probe intellectual property or know-how needed to manufacture the Atlas instrument, and supply reasonable technical assistance. The current manufacturer of the instrument, Stratec Biomedical AG, is deemed an acceptable alternative supplier under the agreement.

Government Regulation in the United States

Pathogen tests used in food safety testing currently do not require government approval prior to commercialization in the United States. However, government regulation is a key driver of food safety testing in the United States and internationally, and each country has its own set of regulatory policies aimed at protecting the safety of the food supply. The increasing focus on food safety by nations around the world and their related regulators serve as a long term growth driver.

The principal U.S. federal agencies involved in food safety are the USDA’s Food Safety and Inspection Service, or FSIS, the FDA, and the CDC. Numerous other federal, state and local agencies also play a role, in close collaboration with FSIS, the FDA and the CDC, in the areas of inspection, food surveillance, reporting and tracking foodborne disease, regulation of retail food establishments and other food safety functions.
 
The CDC provides a system of health surveillance to monitor and prevent disease outbreaks, implements disease prevention strategies, and maintains national health statistics. The CDC leads FoodNet, a collaborative project with the FDA, the USDA, the FSIS and certain state health departments to improve data collection on foodborne illness outbreaks, and PulseNet, a national laboratory network that connects foodborne illness cases to detect and define outbreaks through “fingerprinting” of bacterial DNA. The CDC does not test food products independently.

The FDA and FSIS have primary responsibility for ensuring that the nation’s domestic and imported commercial food supply is safe, wholesome, and correctly labeled and packaged. FSIS regulates the safety of approximately 20 percent of the food supply, including most meats, poultry, and processed egg products; the FDA regulates the remaining 80 percent.
The FDA and FSIS conduct the following activities related to food safety in their respective areas of responsibility:
 
inspect food production facilities, conduct recalls of contaminated foods, and work with other agencies and industry on inspections, surveillance, and outbreak tracebacks;

review and approve food processor programs, such as HACCP, that demonstrate products are wholesome and safe;

set standards for pathogen levels and testing methods in regulated foods;

develop, evaluate and validate methods for regulatory use; publish and update the Bacteriological analytical Manual, or BAM (FDA) and the Microbiology Laboratory Guide, or MLG (FSIS), and establish reference methods;

regulate and inspect imported foods; and

establish new regulations and guidelines to ensure safety of the food supply.

 

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The FDA and FSIS exert an important influence on pathogen testing through regulatory, surveillance and inspection functions. Testing is a fundamental element of most HACCP plans; currently, HACCP plans are required by FSIS for the meat and poultry segments and by the FDA for seafood and fruit juice. Implementation of the FSMA should significantly expand the number of food producing segments and establishments required to implement HACCP-like programs.

The Food Safety Modernization Act

Signed into law in January, 2011, the Food Safety Modernization Act, or FSMA, represents the first major overhaul of food safety legislation in the United States in more than 70 years. The FDA, pursuant to the FSMA, will be promulgating and finalizing the FSMA, implementing regulations through 2016, including the final rules related to the foreign supplier verification program, accreditation of third-party auditors and produce safety standards, which were issued in November 2015. The FSMA has the following components:
 
food facility registration requirements;

requirements for food processors to analyze food safety hazards and implement risk-based preventive controls;

mandatory produce safety standards;

mandated FDA inspection frequency based on facility risk;

mandatory record access;

mandatory recall and suspension of registration;

enhanced product tracing;

redesign of the FDA’s import safety control system by coupling third-party certification and private-sector verification with FDA inspection of foreign food facilities; and

accreditation of laboratories for import analyses.


The FSMA reflects a shift in the FDA’s mandate from inspection and outbreak response to prevention and the use of flexible, risk-based management practices. The preventive controls provision of the FSMA requires food establishments to identify potential chemical, physical, or biological hazards to which the company’s food products or processes may be vulnerable, implement controls to minimize each of the hazards, monitor the performance of the controls and maintain records substantiating the monitoring and compliance with each control.

We expect the preventive controls provision of the FSMA will likely lead to an increase in product and environmental testing by mid-size to small processors. We expect that food establishments will likely utilize product and environmental sampling to validate interventions in their food safety systems and to monitor intervention effectiveness on a regular basis. Pursuant to the record maintenance provision of the FSMA, establishments will need to document sampling activities and results on a routine basis, as well as document corrective actions for positive test results.

In response to the growing number of imported food products, countries of origin, and number of foreign registered firms, the FSMA provides tools for the FDA to ensure that imported foods meet U.S. standards and are safe for U.S. consumers. The FSMA has a strong focus on importer accountability: for the first time, importers have an explicit responsibility to verify that their foreign suppliers have adequate preventive controls in place to ensure that the food they produce is safe. As with domestic producers, foreign suppliers will have to document sampling activities and results on a routine basis.

The FSMA’s Produce Safety Standards extend the focus on prevention of the production of raw agricultural commodities. The FSMA mandates the FDA to establish science-based, minimum standards for the safe growing, harvesting, packing, and holding of produce on farms to minimize contamination that could cause serious adverse health consequences or death. As with other preventive controls provisions of the FSMA, we expect that the final produce rules will lead to increased product, raw material and environmental testing in order to demonstrate that produce is safe.

Select International Regulation

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The objective of the European Union’s food safety policy is to protect consumer health and interests while guaranteeing the smooth operation of the single market.

The European Union’s policy underwent reform in the early 2000’s, resulting in adoption by the Council of the European Union and the European Parliament Regulation (EC) No. 178/2002, which laid out the General Food Law, or GFL, and created the European Food Safety Authority. The GFL is a Farm to Fork approach to food safety at all stages of production and distribution of European-produced and imported foods. The objective of the Food Law is to ensure consumers’ right to safe food and to accurate and honest information while guaranteeing the smooth operation of the single market. The GFL encompasses the following principles:

protection of consumer interests from unsafe food;

free circulation of safe and high-quality products within the internal market and with other countries;

responsibilities of food producers to apply the food safety legislation at all stages of the food chain, including withdrawal of unsafe product from the market;

improved objectivity, transparency and communication regarding food safety and scientific risk assessment and prevention;

 food producers’ responsibility for traceability of foods at all stages of production, processing and distribution; and

communication and cooperation within and among European Union member states regarding disease surveillance and outbreak response.

 
The European Food Safety Authority, or the EFSA, provides scientific advice, technical support and European Union-wide coordination of food safety activities. The European Union institutions and the Member States are responsible for risk management, and individual European Union member countries have passed laws to come into conformance with the GFL.
The objective of China’s food safety policy and regulatory agencies is to take preventive measures to reduce risks on food safety. China’s food safety system has been undergoing significant reform since the early 2000s in an effort to consolidate agencies overseeing food manufacturing and distribution and provide better oversight for what the public has seen as a major problem. China recently established the China Food and Drug Administration, or the CFDA, to oversee all food and drug regulation, investigation, testing, and enforcement while the Ministry of Health, under CFDA supervision, is responsible for risk assessment and standards. In October 2013, the CFDA released a draft of new food safety regulations; these place primary responsibility on manufacturers, require tracking systems to be put in place and increase penalties for violations. Additionally, the new regulations place responsibility on retailers to take joint liability with suppliers for the safety of the products they sell. The CFDA will take an increased supervisory role, increasing surprise audits and oversight.

Brazil’s food safety policy is heavily influenced by its role as a major agricultural exporter. With the strictest global regulations existing in the United States and European Union, two of its chief export destinations, a system of Ministries and agencies share jurisdiction over compliance with these international standards as well as securing the safety of the domestic food supply and monitoring imports. The two main federal institutions, the Ministry of Agriculture, Livestock, and Food Supply, or MAPA, and the Ministry of Health through its National Agency of Sanitary Surveillance, or ANVISA, split responsibility for regulation and enforcement of raw agricultural goods and processed foods, respectively. MAPA and ANVISA each have processes in place for regulation, inspection, and enforcement of food safety.

Employees

As of December 31, 2016, we employed 90 full-time employees, including 32 employees engaged in sales, marketing and commercial operations, 17 employees engaged in research and development functions, 21 employees engaged in manufacturing and 20 employees engaged in general and administrative functions. We have never had a work stoppage, and none of our employees are represented by a labor organization or under any collective bargaining arrangements. We consider our employee relations to be good.

Research and Development Expenses

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Research and development expense decreased by $0.4 million to $7.3 million for the year ended December 31, 2016, from $7.7 million for the year ended December 31, 2015. The decrease was primarily due to a decrease of $0.6 million in supplies, a decrease of $0.5 million in payroll and benefits expenses due to a decrease in headcount, and a decrease in overhead and depreciation of $0.2 million, partially offset by an increase in external research and other outside services of $0.9 million.

Research and development expense decreased by $0.2 million to $7.7 million for the year ended December 31, 2015, from $7.9 million for the year ended December 31, 2014. The decrease was primarily due to a decrease of $0.4 million in payroll and benefits expenses due to a decrease in headcount and a decrease in depreciation of $0.2 million, partially offset by an increase in supplies used of $0.3 million.


Implications of Being an Emerging Growth Company
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and, for as long as we continue to be an “emerging growth company,” we are permitted to, and intend to, rely on exemptions from certain disclosure requirements, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and reduced disclosure obligations regarding executive compensation. In addition, the JOBS Act provides that an “emerging growth company” can take advantage of an extended transition period for complying with new or revised accounting standards, delaying the adoption of these accounting standards until they would apply to private companies. However, we are electing not to take advantage of such extended transition period, and as a result we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to not take advantage of the extended transition period for complying with new or revised accounting standards is irrevocable. We will remain an “emerging growth company” until the earliest of (i) December 31, 2019, the end of the fiscal year following the fifth anniversary of our initial public offering, (ii) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (iii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, amended, or the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iv) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.
Corporate and Available Information
We were incorporated in Delaware under the name Roka Bioscience, Inc. in September 2009. Our principal executive offices are located at 20 Independence Boulevard, Warren, New Jersey 07059, and our telephone number is (908) 605-4700. Our website address is www.rokabio.com. Our website and the information contained on, or that can be accessed through, our website will not be deemed to be incorporated by reference into this Annual Report on Form 10-K or any other report we file with or furnish to the SEC.
We make available on our website, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or the SEC. Our SEC reports can be accessed through the Investors section of our internet website. Further, a copy of this Annual Report on Form 10-K is located at the SEC’s Public Reference Rooms at 100 F Street, N.E., Washington, D. C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements and other information regarding our filings at http://www.sec.gov.
We own various U.S. federal trademark registrations and applications, and unregistered trademarks and servicemarks, including Roka Bioscience®, our corporate logo, Atlas®, the Atlas logo, and mini AtlasTM. All other trademarks or trade names referred to in this prospectus are the property of their respective owners. Solely for convenience, the trademarks and trade names in this prospectus are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend the use or display of other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

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Item 1A. RISK FACTORS
Risks Relating to the Commercialization of Our Products
We may not be able to generate sufficient revenue from the commercialization of our Atlas Detection Assays and Atlas instrument to achieve or sustain profitability.
Currently, we rely solely on the commercialization of our Atlas Detection Assays and Atlas instrument to generate revenue. We believe that our commercialization success is dependent upon our ability to significantly increase the number of customers that are using our products. We achieved our first commercial sales in late 2012 and have experienced limited revenue and customer adoption to date. In addition, demand for our Atlas products may not increase as quickly as planned and we may be unable to increase our revenue levels as expected. We are currently not profitable and even if we succeed in increasing adoption of our Atlas solution by the food safety testing market, maintaining and creating relationships with our existing and new customers and developing and commercializing additional molecular testing products, we may not be able to generate sufficient revenue to achieve or sustain profitability which could have a material adverse effect on our financial condition. In addition, our inability to achieve or sustain profitability could result in future write-offs of intangible assets or goodwill if events or changes in circumstances indicate that the carrying value of such assets is not recoverable and if such assets are found to be impaired, which could have a material adverse effect on our financial condition and results of operations.
The loss or significant reduction in business with key customers could have a material adverse effect on our revenue, results of operations and business.
We have a limited number of customers and have derived a significant portion of our revenue from a subset of these customers. For the year ended December 31, 2016, our top two customers, Marshfield Food Safety, LLC, and PrimusLabs, accounted for an aggregate of 50% of our total revenue. Each of these customers accounted for more than 10% of our total revenue for the period. We do not have any long term contracts and our customer contracts are terminable at will by either party. The complete loss of, or significant reduction in business from these key customers or any significant future customers could have a material adverse effect on our revenue, results of operations and business.
Our Atlas Detection Assays and Atlas instrument may never achieve significant commercial market acceptance.

Our success depends on our ability to develop and market products that are recognized in the food safety testing market as accurate, rapid and cost-effective. Most of our potential customers currently use molecular or immunochemical testing methods and may be reluctant to change those methods to a new technology. Market acceptance will depend on many factors, including our ability to convince potential customers that our Atlas solution is an attractive alternative to existing molecular and immunochemical testing systems. We will need to demonstrate that our products provide accurate, time saving and cost-effective alternatives to existing testing methods. Compared to most competing technologies, our molecular technology is relatively new, and most potential customers have limited knowledge of, or experience with, our products. Prior to adopting our solution, potential customers are required to devote significant time and effort to testing and validating our Atlas Detection Assays and Atlas instrument. In addition, during the implementation phase, customers may be required to devote significant time and effort to training their personnel on appropriate laboratory practices to ensure accurate results due to the highly sensitive nature of our assays. Any failure of our Atlas solution to meet benchmarks or expectations of potential or existing customers could result in an inability to obtain new business or the loss of current business.

Many factors influence the perception of a system, including its use by leaders in the industry, such as major food processors, third-party food safety testing laboratories, government agencies and thought leaders. If we are unable to continue to move major food processors, third-party food safety testing laboratories and thought leaders in the food safety testing market to adopt our Atlas solution, acceptance and adoption of our products could be slowed. In addition, if our products fail to gain significant acceptance in the marketplace and we are unable to expand our customer base, we may never generate sufficient revenue to achieve or sustain profitability.
Our sales cycle is lengthy and variable, which makes it difficult for us to forecast revenue and other operating results.
The sales cycle for our Atlas solution is lengthy and unpredictable, which makes it difficult for us to accurately forecast revenues in a given period, and may cause revenue and operating results to vary significantly from period to period. Most of our potential customers currently use molecular or immunochemical testing methods and we need to persuade potential customers to change their testing methods and adopt our Atlas solution. These customers may be reluctant to change those methods to a new testing method or may delay any decisions to change their testing methods. Potential customers for our

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products typically need to commit significant time and resources to evaluate the technology used in our products and their decision to purchase our products may be further limited by budgetary constraints and numerous layers of internal review and approval, which are beyond our control. We spend substantial time and effort assisting potential customers in evaluating our Atlas solution, including providing demonstrations and validation on the food types that they test. Even then, customers may decide to continue to evaluate our Atlas solution and delay any decision to change their testing methods. Furthermore, even after initial approval by appropriate decision makers, the negotiation and documentation processes for the actual adoption of our Atlas solution can be lengthy. As a result of these factors, based on our experience to date, our sales cycle, the time from initial contact with a prospective customer to routine commercial utilization of our Atlas Detection Assays, has varied considerably and can often be 12 months or longer, which has made it difficult for us to accurately project revenues and other operating results. In addition, the revenue generated from sales of our Atlas Detection Assays may fluctuate from time to time due to changes in the testing volumes of our customers. As a result, our financial results may fluctuate on a quarterly basis which may adversely affect the price of our common stock.
We have limited experience in marketing and selling our products, and if we are unable to adequately address our customers’ needs, it could negatively impact sales and market acceptance of our product and we may never generate sufficient revenue to achieve or sustain profitability.
We sell our Atlas solution through our own direct sales force. We have limited experience in marketing and selling these products, which had their formal commercial launch in late 2012. In addition, our assays and instrument are a new technology to the food safety testing market. Our future sales will depend in large part on our ability to increase our marketing efforts and adequately address our customers’ needs. The food safety testing industry is a large and diverse market. As a result, we believe it is necessary to maintain a sales force that includes sales representatives with specific technical backgrounds that can support our customers’ needs. We will also need to attract and develop sales and marketing personnel with industry expertise. Competition for such employees is intense. We may not be able to attract and retain sufficient personnel to maintain an effective sales and marketing force. If we are unable to adequately address our customers’ needs, it could negatively impact sales and market acceptance of our products and we may never generate sufficient revenue to achieve or sustain profitability.
We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.
We commenced our commercial launch in late 2012 and anticipate growth in our business operations. Since our inception in 2009, we have increased our number of employees to 90 as of December 31, 2016 and we may increase our number of employees further as our business grows. This future growth could create strain on our organizational, administrative and operational infrastructure, including laboratory operations, quality control, customer service and sales and marketing. Our ability to manage our growth properly will require us to continue to improve our operational, financial, and management controls, as well as our reporting systems and procedures. If our current infrastructure is unable to handle our growth, we may need to expand our infrastructure and staff and implement new reporting systems. The time and resources required to implement such expansion and systems could adversely affect our operations. Our expected future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, and integrate additional employees. Our future financial performance and our ability to commercialize our products and to compete effectively will depend, in part, on our ability to manage this potential future growth effectively, without compromising quality.

If we cannot compete successfully with our competitors, we may be unable to increase or sustain our revenue or achieve or sustain profitability.
The food safety testing industry is highly competitive and we face competition from companies that offer molecular, immunochemical and culture testing products. In order to achieve market acceptance for our products, we may be required to demonstrate that our products provide accurate, cost-effective and time saving alternatives to traditional testing platforms and products made by our competitors.
Key competitors offering molecular pathogen testing solutions include Hygiena, Bio-Rad Laboratories, Inc., Merck KGaA, Life Technologies Corporation, Sample6 Technologies and 3M Food Safety. Key competitors offering immunochemical testing solutions include bioMérieux, S.A. and Neogen Corporation. Key competitors offering culture testing solutions include 3M, bioMérieux and Neogen. These companies compete with us primarily on the basis of technology, quality, reputation, accuracy, ease of use, price, reliability, range of product offerings, including the ability to offer a broader range of testing methods than we can offer, the timing of new product introductions and product line offerings. Our existing competitors or new market entrants may be in a better position than we are to respond quickly to new or emerging technologies, may be able to undertake more extensive marketing campaigns, may adopt more aggressive pricing strategies and may be more successful in attracting potential customers. Many of our existing competitors or new market entrants have, or may have, significantly greater financial, marketing, sales, manufacturing, distribution and technological resources than we do. Additionally, these companies may have substantially greater expertise in conducting research and development, greater ability to obtain necessary

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intellectual property and greater brand recognition than we do, any of which may adversely affect our ability to obtain new customers or retain existing customers.
Risks Relating to Our Business and Strategy
If our products do not perform as expected, whether as a result of operator error or otherwise, it would impair our operating results and reputation.
Our success depends on the food safety market’s confidence that we can provide reliable, high-quality molecular food safety testing products. We believe that our customers are likely to be particularly sensitive to product defects and operator errors, including if our assays fail to accurately detect pathogens in food samples or if the failure to detect pathogens leads to a product recall. In addition, our reputation and the reputation of our products can be adversely affected if our assays fail to perform as expected, which performance could be negatively impacted by failure to adopt or modify laboratory practices and processes to support the adoption of our solution, errors made by operators of the Atlas instrument, or if such operators improperly prepare their testing samples or fail to properly enrich them. For example, while we have many customers who have adopted our assays without incident, particularly when sufficient resources have been allocated to training personnel and good laboratory practices and our recommended processes have been appropriately implemented, in the spring of 2014, several of our customers experienced sporadic false positive test results due to sample contamination in their early-stage implementation of our Listeria assay, primarily in connection with environmental testing. In collaboration with our customers, we developed revised sample workflow procedures that we believed successfully minimized the risk of sample contamination with our Listeria assay. However, in late August 2014, we became aware that while some of our customers successfully implemented the revised sample workflow procedures, one of our high-volume customers found it difficult to consistently follow these revised sample workflow procedures and sporadically experienced false positive test results due to inadvertent sample contamination, primarily in connection with environmental testing. These difficulties caused the customer to delay further implementation of the Listeria assay. In late 2014, we commenced an initiative to develop a new Listeria assay, specifically for use in environmental testing, intended to be less susceptible to inadvertent sample contamination. In July 2015, we announced that we received AOAC approval for our new Listeria assay, the Atlas Listeria Environmental Detection Assay. We made this new assay available to customers in the fourth quarter of 2015. We are currently unable to accurately forecast customer adoption of the new assay, as current and potential customers are expected to conduct thorough evaluations of the new assay. The outcome of such customer evaluations is uncertain. Any failure of our Atlas solution to meet customer benchmarks or expectations could result in customers choosing to retain their existing testing methods or to adopt systems other than ours. Even if our new Listeria assay meets customer expectations, we may experience only modest impact on our sales in the near term. As a result, we do not expect our revenue to increase significantly in the near term until we place additional instruments and successfully commercialize the new Atlas Listeria Environmental Detection Assay as well as our other assays. The failure or perceived failure of our products to perform as expected, has had, and in the future could have, a material adverse effect on our revenue, results of operations and business.
If we are sued for product liability, we could face substantial liabilities that exceed our resources.
The marketing, sale and use of our products could lead to the filing of product liability claims against us were someone to allege that our products failed to identify, or inaccurately or incompletely identified, information regarding the specific pathogens being testing using our products. For instance, in the event a customer using our products is required to recall its food products, such customer may make a claim against us. We may also be subject to liability for errors in, a misunderstanding of, or inappropriate reliance upon, the information we provide in the ordinary course of our business activities. A product liability claim could result in substantial damages to us and be costly and time-consuming for us to defend.
We maintain product liability insurance, but this insurance may not fully protect us from the financial impact of defending against product liability claims. Any product or liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. Additionally, any product liability lawsuit could damage our reputation, or cause current customers and potential customers to seek other products, any of which could have a material adverse effect on our revenue, results of operations and business.
If our facility in San Diego, California becomes damaged or inoperable or we are required to vacate this facility, our ability to continue manufacturing our assays will be disrupted, which could have a material adverse effect on our business.
We manufacture our Atlas Detection Assays and conduct our research and development activities in our facility in San Diego, California. In addition, our San Diego facility is the center for quality assurance and distribution operations and instrument service and customer technical support. Our facility and the equipment we use to manufacture our assays would be costly, and would require substantial lead-time, to repair or replace. San Diego is situated near active earthquake fault lines. The facility may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, power outages, communications failure or terrorism, which may render it difficult or impossible for us to produce our assays or continue our

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research and development activities for some period of time. This inability to manufacture our assays for even a short period of time may result in the loss of customers or harm to our reputation, and we may be unable to regain those customers or repair our reputation in the future. We carry insurance for damage to our property and the disruption of our business, but this insurance may not cover all of the risks associated with damage or disruption to our business, may not provide coverage in amounts sufficient to cover our potential losses, and may not continue to be available to us on acceptable terms, if at all.
Failure to manufacture our assays in accordance with product specifications could result in increased costs, lost revenue, customer dissatisfaction or voluntary product recalls, any of which could have a material adverse effect on our revenue, results of operations and business.
Properly manufacturing our Atlas Detection Assays requires precise technological execution and strict compliance with our guidelines. We may experience problems in the manufacturing process for a number of reasons, such as equipment malfunction, failure to follow specific protocols or human error. If problems arise during the production of a particular product lot, that product lot may need to be discarded or destroyed. This could among other things, result in increased costs, lost revenue, customer dissatisfaction and injury to our reputation. If problems are not discovered before the product lot is released to the market, we may incur recall and product liability costs. Any failure to manufacture our products in accordance with product specifications could have a material adverse effect on our revenue, results of operations and business.

If we are unable to manufacture our assays in sufficient quantities, on a timely basis, and at acceptable costs, our ability to sell our products will be harmed.
Our Atlas Detection Assays must be manufactured in sufficient quantities and on a timely basis, while maintaining product quality and acceptable manufacturing costs and complying with our requirements. In determining the required quantities of assays and the manufacturing schedule, we must make significant judgments and estimates based on historical experience, inventory levels, current market trends and other related factors. There could be significant differences between our estimates and the actual amounts of products we and our customers require, which could have a material adverse effect on our revenue, results of operations and business.
Additional work will be required for scaling-up manufacturing of each new assay prior to commercialization, and we may not successfully complete this work. Manufacturing and quality control problems may arise in the future as we attempt to scale up our manufacturing of a new assay, and we may not achieve scale-up in a timely manner, at a commercially reasonable cost or at all. New assays that detect or quantify more than one target pathogen may contain significantly more complex reagents, which will increase the cost of our manufacturing processes and quality control testing. We may not be able to manufacture these products at a cost or in quantities that would make these products commercially viable. If we are unable to develop or contract for manufacturing capabilities on acceptable terms for our products under development, we may not be able to expand our product offerings.
If we are unable to support demand for our Atlas Detection Assays, Atlas instrument or our future products, including ensuring that we have adequate capacity to meet increased demand, it could have a material adverse effect on our revenue, results of operations and business.
As our business grows, we will need to continue to increase our workflow capacity for sales, customer service and support, billing and general process improvements, expand our internal quality assurance program and expand our manufacturing capability. We will need additional personnel to support an expansion of our business. We will also need to purchase additional equipment, some of which can take several months or more to procure, setup, and validate, and increase our software and computing capacity to meet increased demand. There is no assurance that any of these increases in scale, expansion of personnel, equipment, software and computing capacities, or process enhancements will be successfully implemented. Failure to manage this growth could result in an inability to supply our products as needed, higher product costs, declining product quality, deteriorating customer service, and slower responses to competitive challenges. A failure in any one of these areas could make it difficult for us to meet market expectations for our products, which could have a material adverse effect on our revenue, results of operations and business.
Our future success may depend in part upon our ability to enhance existing products and to develop, introduce and commercialize new products. New product development involves a lengthy and complex process and we may be unable to commercialize new or improved assays or any other products we may develop on a timely basis, or at all.
The market for our products is characterized by changing technology, evolving industry standards and new product introductions, which could make our competitors’ products more attractive and our existing products obsolete. Our future success will depend in part upon our ability to enhance our existing products and to develop new innovative products that meet our customer’s needs and expectations. Our failure to successfully develop new products on a timely basis could have a material adverse effect on our revenue, results of operations and business.

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The development of new or enhanced assays is a complex and uncertain process requiring the accurate anticipation of technological, market and industry trends, as well as precise technological execution. In addition, the successful development of new products may depend on the development of new technologies. We may be required to undertake time-consuming and costly development activities. We may experience difficulties that could delay or prevent the successful development, commercialization and marketing of these new products. Before we can commercialize any new products, we will need to expend significant funds in order to conduct substantial research and development, including validation studies.

Our product development process involves a high degree of risk, and product development efforts may fail for many reasons, including a failure to demonstrate the performance of the product or an inability to obtain any required certification or regulatory approval, if any.
As we develop products, we will have to make significant investments in product development, as well as sales and marketing resources. In addition, competitors may develop and commercialize competing products faster than we are able to do so, which could have a material adverse effect on our revenue, results of operations and business.
If we cannot provide quality technical support, we could lose customers, which could have a material adverse effect on our revenue, results of operations and business.
The placement of our products at new customer sites, the introduction of the technology used in our products and ongoing customer support can be complex. Accordingly, we need highly trained technical support personnel to support the installation and maintenance of the Atlas instrument and provide technical proficiency training for operators of the Atlas instrument. Attracting and retaining technical support personnel is very competitive in our industry. Customers are particularly sensitive to any interruptions or downtime with respect to our Atlas instruments and therefore we need to retain sufficient technical support staff to service and maintain the Atlas instruments that we place. In addition, extensive training is required to learn and understand our Atlas Detection Assays and Atlas instrument. In order to manage our growth and effectively support potential new customers and the expanding needs of our current customers, we may need to expand our technical support staff. If we are unable to attract, train or retain the number of highly qualified technical services personnel that our business may need or if we are unable to provide our customers with the technical support that they need, we may be unable to retain our customers, which could have a material adverse effect on our revenue, results of operations and business.
The loss of any member of our senior management team or our inability to attract and retain highly skilled personnel could have a material adverse effect on our business.
Our success depends on the skills, experience and performance of key members of our senior management team, including Mary Duseau, our President and Chief Executive Officer. The individual and collective efforts of our senior management team will be important as we continue to expand our commercial activities and develop additional products. The loss or incapacity of existing members of our senior management team could adversely affect our operations if we experience difficulties in hiring qualified successors. Our executive officers have employment agreements; however, the existence of an employment agreement does not guarantee the retention of the executive officer for any period of time. We do not maintain “key person” insurance on any of our employees.
Our research and development programs and laboratory operations depend on our ability to attract and retain highly skilled scientists and technicians. We may not be able to attract or retain qualified scientists and technicians in the future due to the competition for such qualified personnel. We also face competition from universities and public and private research institutions in recruiting and retaining highly qualified scientific personnel. All of our employees are at-will, which means that either we or the employee may terminate their employment at any time. We may have difficulties locating, recruiting or retaining qualified sales people. Recruiting and retention difficulties can limit our ability to support our research and development and sales programs. The loss of any member of our senior management team or our inability to attract and retain highly skilled scientists, technicians and sales personnel could have a material adverse effect on our business.

We may acquire other businesses or form joint ventures or make investments in other companies or technologies that could negatively affect our operating results, dilute our stockholders’ ownership, increase our debt or cause us to incur significant expense.
We may pursue acquisitions of businesses and assets. We also may pursue strategic alliances and joint ventures that leverage the proprietary molecular technology used in our assays and industry experience to expand our offerings or distribution. We have no history of acquiring other companies or with forming strategic partnerships. We may not be able to find suitable partners or acquisition candidates, and we may not be able to complete such transactions on favorable terms, if at all. If we make any acquisitions, we may not be able to integrate these acquisitions successfully into our existing business, and we could assume unknown or contingent liabilities. Any future acquisitions also could result in the issuance of equity securities, incurrence of debt, contingent liabilities or future write-offs of intangible assets or goodwill, any of which could

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have a material adverse effect on our financial condition, results of operations, and cash flows. Integration of an acquired company also may disrupt ongoing operations and require management resources that we would otherwise focus on developing our existing business. We may experience losses related to investments in other companies, which could have a material negative effect on our results of operations and financial condition. We may not realize the anticipated benefits of any acquisition, technology license, strategic alliance, or joint venture.
To finance any acquisitions or joint ventures, we may choose to issue shares of our common stock as consideration, which would dilute the ownership of our stockholders. Additional funds may not be available on terms that are favorable to us, or at all. If the price of our common stock is low or volatile, we may not be able to acquire other companies or fund a joint venture project using our stock as consideration.
If we use hazardous materials in a manner that causes injury, we could be liable for damages.
Our activities currently require the use of hazardous materials. We cannot eliminate the risk of accidental contamination or injury to employees or third parties from the use, storage, handling, or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could exceed our resources 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 may become significant. The use of hazardous materials in our business could have a material adverse effect on our business.
Our customers and potential customers expect our products to have third party certifications, such as AOAC, and it may be time-consuming and expensive to achieve and maintain such certifications for our Atlas Detection Assays or any new assays that we develop in the future.
Our customers expect that our assays will be certified by a third party, such as the AOAC. Any certification process, including the AOAC certification process utilized by us, can be expensive, time-consuming and subject to unexpected delays and we may not achieve such certification. Our current assays are certified by the AOAC; however, if new or expanded validation standards are required by our customers or governmental agencies, we may need to expand the validation of our certified assays to meet such requirements, which we may not be able to achieve. In addition, our competitors may have or achieve certifications for their assays that we have not yet obtained which could give our competitors an advantage and could have a material adverse effect on our ability to effectively expand commercialization of our products to existing and new customers.
Although our products are not currently subject to regulation by the U.S. Food and Drug Administration or other U.S. government regulatory agencies, they could become subject to U.S. or international government regulation in the future, which could have a material adverse effect on our results of operations and business.
Our products are not currently subject to regulation by the U.S. Food and Drug Administration, or the FDA, U.S. Department of Agriculture, or the USDA. However, the FDA, the USDA or comparable agencies in other countries could expand their jurisdiction over our products, which could impose restrictions on our ability to market and sell our products. A significant change in the way that the FDA, the USDA or comparable agencies in other countries regulate our products could require us to change our business model in order to maintain compliance with these laws or requirements. Such compliance could be time-consuming and expensive and could have a material adverse effect on our results of operations and business.

Our customers are required to implement food safety testing programs, and regulatory changes in the future that are implemented by the U.S. Food and Drug Administration or other regulatory agencies could have a material adverse effect on our results of operations and business.
Our customers are required by regulatory agencies to implement food safety testing programs. In the future, the FDA, the USDA, or comparable agencies in other countries could require customers to use testing methods that are different than ours or require customers to test for different types of pathogens, organisms or chemicals than we offer, both of which could give our competitors an advantage if their products meet those requirements. A significant change in the way that the FDA, the USDA or equivalent agencies in other countries regulates the testing procedures or methods used by our customers could require us to change our business model in order to maintain compliance with these laws or requirements. Such compliance could be time consuming and expensive and could have a material adverse effect on our results of operations and business.
If we expand our operations internationally, our business may be exposed to additional business, regulatory, political, operational, financial, and economic risks associated with doing business outside of the United States.

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We currently have no international operations and our revenues from international sales are limited, but we intend to selectively expand our operations internationally. Doing business internationally involves a number of risks, including:
multiple, conflicting and changing laws and regulations such as privacy regulations, tax laws, export and import restrictions, employment laws, regulatory requirements, and other governmental approvals, permits, and licenses;
additional potentially relevant third-party patent rights;
complexities and difficulties in obtaining protection and enforcing our intellectual property;
difficulties in staffing and managing foreign operations;
financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the impact of local and regional financial crises on demand and payment for our products, and exposure to foreign currency exchange rate fluctuations;
natural disasters, political and economic instability, including wars, terrorism, and political unrest, outbreak of disease, boycotts, curtailment of trade, and other business restrictions; and
regulatory and compliance risks that relate to maintaining accurate information and control over sales and distributors’ activities that may fall within the purview of the U.S. Foreign Corrupt Practices Act, or FCPA, its books and records provisions, or its anti-bribery provisions.
Any of these factors could significantly harm any future international expansion and operations and, consequently, could adversely affect our business prospects.
We depend on our information technology systems, and any failure of these systems could have a material adverse effect on our revenue, results of operations and business.
We depend on information technology and telecommunications systems for significant elements of our operations, including our enterprise resource planning system, our laboratory information management system, our computational biology system and our customer relationship management system. These information technology and telecommunications systems support a variety of functions, including laboratory operations, test validation, sample tracking, quality control, customer service support, billing and reimbursement, research and development activities and financial and general administrative activities. Information technology and telecommunications systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses, and similar disruptive problems. Any disruption or loss of information technology or telecommunications systems on which critical aspects of our operations depend could have a material adverse effect on our revenue, results of operations and business.

Prolonged negative economic conditions could adversely affect us, our customers and suppliers, which could harm our business.
We are subject to the risks arising from adverse changes in general economic and market conditions. Uncertainty remains in the U.S. economy as it continues to recover from a severe economic recession. The U.S. economy continues to experience market volatility, difficulties in the financial services sector, diminished liquidity and availability of credit, concerns regarding inflation, increases in the cost of commodities, continuing high unemployment rates, reduced consumer spending and consumer confidence and continuing economic uncertainties. The economic turmoil and uncertainty about future economic conditions could adversely impact our expenses and cause delays or other problems with our customers and key suppliers, including Gen-Probe and Stratec Biomedical AG. In addition there is a risk that one or more of our current customers, suppliers or other third parties with which we conduct business may not survive these difficult economic times, which could directly affect our ability to attain our operating goals on schedule and on budget.
Risks Related to Reliance on Third Parties
We are dependent on Gen-Probe and Gen-Probe’s contract manufacturer as our sole source of supply for the Atlas instrument pursuant to our supply agreement with Gen-Probe. If Gen-Probe terminates our supply agreement or Gen-Probe or its contract manufacturer fails to timely supply the Atlas instrument as needed by us, our business and our product sales will suffer.
We rely on Gen-Probe as our sole source of supply for the Atlas instrument. Under the terms of our supply agreement with Gen-Probe, Gen-Probe is required to use commercially reasonable efforts to deliver the instruments we order from them consistent with our forecasting obligations. However, Gen-Probe does not manufacture the Atlas instrument, but relies on one third-party manufacturer, Stratec, to produce the Atlas instrument which Gen-Probe receives from Stratec and then delivers to us. Our dependence on Gen-Probe and Gen-Probe’s dependence on Stratec exposes us to increased risks associated with production delays, delivery schedules, manufacturing capability at Stratec, quality control, quality assurance and costs. Gen-

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Probe utilizes its Panther instrument for clinical diagnostic testing. The Panther instrument, which is what we commercialize as the Atlas instrument, is also produced solely by Stratec and, in the event Gen-Probe’s demand for Panther instruments increases, our ability to obtain our Atlas instruments on a timely basis could be adversely impacted if Stratec’s manufacturing capability is insufficient to handle the demand for Panther and Atlas instruments.
If either Gen-Probe or Stratec experiences delays, disruptions, capacity constraints or quality control problems in their manufacturing operations or becomes insolvent or otherwise fails to supply us with the Atlas instrument in sufficient quantities, then instrument shipments to us and our customers could be adversely impacted, which could restrict our growth and harm our competitive position and reputation. Further, because Gen-Probe places its orders with Stratec based on forecasts of expected demand for its instruments, including the Atlas instrument, if we or Gen-Probe inaccurately forecast demand, Gen-Probe may be unable to obtain adequate quantities of the Atlas instrument as needed by us and to meet our customer’s delivery requirements or we may accumulate excess inventories. In determining the required quantities of Atlas instruments, we must make significant judgments and estimates based on historical experience, inventory levels, current market trends and other related factors. Because of the inherent nature of estimates, there could be significant differences between our estimates and the actual amount of Atlas instruments we and our customers require, which could harm our business and results of operations. An interruption in our sales and operations would occur if we encounter delays or difficulties in securing the Atlas instrument from Gen-Probe. Any such interruption could significantly affect our business, financial condition, results of operations and reputation. Since we rely on Gen-Probe as the sole supplier of the Atlas system, any disruption in Gen-Probe’s operations could impact our supply chain and our ability to conduct our business and generate revenue.

Under our supply agreement with Gen-Probe, we have the right to terminate the supply agreement under certain circumstances and obtain an alternate supplier, including Stratec, for the Atlas instrument. However, we may be unable to negotiate an arrangement with Stratec or another manufacturer that is acceptable to us. Transitioning to a new manufacturer would be time consuming and expensive, may result in interruptions in our operations and could affect the performance specifications of our Atlas instrument.
We are dependent on single source suppliers for some of our components and materials used in our products, and the loss of any of these suppliers could have a material adverse effect on our business.
We rely on single source suppliers, including Gen-Probe, for certain components and materials used in our products, including our assays. Gen-Probe in turn relies on an independent third-party single source supplier for certain of these components and raw materials. Since our contracts with these suppliers, including Gen-Probe, do not commit them to carry inventory or to make available any particular quantities, they may give other customers’ needs higher priority than ours and we may be unable to obtain adequate supplies in a timely manner or on commercially reasonable terms. We periodically forecast our needs for such components and raw materials and enter into standard purchase orders with our suppliers. In determining the required quantities of Atlas supplies, we must make significant judgments and estimates based on historical experience, inventory levels, current market trends and other related factors. Because of the inherent nature of estimates, there could be significant differences between our estimates and the actual amount of components and raw materials we and our customers require, which could harm our business and results of operations. However, if we lose such suppliers or our suppliers encounter financial hardships unrelated to our demand for our components and raw materials, we may not be able to identify or enter into agreements with alternative suppliers on a timely basis on acceptable terms, if at all. Transitioning to a new supplier would be time consuming and expensive, may result in interruptions in our operations and could affect the performance specifications of our assays. If we should encounter delays or difficulties in securing the quality and quantity of materials we require for our products, our ability to manufacture our products would be interrupted which could adversely affect our sales. In addition, an impurity or variation from specification in our raw materials we receive could significantly delay our ability to manufacture our products. If any of these events occur, it could have a material adverse effect on our business.
We rely on FedEx for the storage and distribution of our products and, if FedEx incurs any damage to the facilities where our products are stored or is unable to distribute our products as needed, it could have a material adverse effect on our results of operations and business.
We rely on FedEx for the storage and distribution of our products. The facilities where our products are stored by FedEx may also be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, power outages, communications failure or terrorism. Any material destruction to the facilities where our products are stored could adversely affect our inventory and the ability of FedEx to meet the needs of our customers. In addition, an inability to maintain our contract with FedEx when it comes up for renewal or a disruption or slowdown in the operations of FedEx, including as a result of damage to the facilities of FedEx or a strike by FedEx, could cause delays in our ability to fulfill customer orders and may cause orders to be canceled, lost or delivered late, our products to be returned or receipt of products to be refused, any of which could adversely affect our business and our results of operations. Our contract with FedEx is generally terminable upon 90 days’ prior written notice by either party for convenience without cause. If we are unable to maintain our contract with FedEx,

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we would be required to retain a new third party logistics company and we may be unable to retain such third party at a cost that is acceptable to us. If our shipping costs were to increase as a result of an increase by FedEx or as a result of obtaining a new third-party logistics company and if we are unable to pass on these higher costs to our customers, it could have a material adverse effect on our results of operations and business.

Intellectual Property Risks Related to Our Business
We depend on certain technologies that are licensed to us. We do not control these technologies and any loss of our rights to them could prevent us from selling our products.
We are dependent on licenses from third parties for some of our key technologies, all of which we have licensed or sublicensed from Gen-Probe. We do not own the patents that underlie these licenses. Our rights to use the technology we license are subject to the negotiation of, continuation of and compliance with the terms of those licenses. In some cases, such as the patents we license from Gen-Probe, we do not control the prosecution, maintenance, or filing of the patents to which we hold licenses, or the enforcement of these patents against third parties. Some of our patents and patent applications were either acquired from another company who acquired those patents and patent applications from yet another company, or are licensed from a third party. Thus, these patents and patent applications are not written by us or our attorneys, and we did not have control over the drafting and prosecution. The former patent owners and our licensors might not have given the same attention to the drafting and prosecution of these patents and applications as we would have if we had been the owners of the patents and applications and had control over the drafting and prosecution. We cannot be certain that drafting and/or prosecution of the licensed patents and patent applications by the licensors have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents and other intellectual property rights.
Our rights to use the technology we license are subject to the validity of the owner’s intellectual property rights. Enforcement of our licensed patents or defense or any claims asserting the invalidity of these patents is often subject to the control or cooperation of our licensors. Legal action could be initiated against the owners of the intellectual property that we license and an adverse outcome in such legal action could harm our business because it might prevent such companies or institutions from continuing to license intellectual property that we may need to operate our business. In addition, such licensors may resolve such litigation in a way that benefits them but adversely affects our ability to use the licensed technology for our products.
Certain of our licenses contained in our agreement with Gen-Probe contain provisions that allow the licensor to terminate the license if (i) we breach any payment obligation or other material provision under the agreement and fail to cure the breach within a fixed time following written notice of termination, (ii) we or any of our affiliates, licensees or sublicensees directly or indirectly challenge the validity, enforceability, or extension of any of the licensed patents or (iii) we declare bankruptcy or dissolve. Our rights under the licenses are subject to our continued compliance with the terms of the license, including the payment of royalties due under the license. Termination of these licenses could prevent us from marketing some or all of our products. Because of the complexity of our products and the patents we have licensed, determining the scope of the license and related royalty obligations can be difficult and can lead to disputes between us and the licensor. An unfavorable resolution of such a dispute could lead to an increase in the royalties payable pursuant to the license. If a licensor believed we were not paying the royalties due under the license or were otherwise not in compliance with the terms of the license, the licensor might attempt to revoke the license. If such an attempt were successful, we might be barred from producing and selling some or all of our products.
The prosecution and enforcement of patents licensed to us by third parties are not within our control. Without these technologies, our products may not be successful and our business would be harmed if the patents were infringed or misappropriated without action by such third parties.
In some cases, such as pursuant to the Gen-Probe agreement, we do not have the right to control the prosecution, issuance, filing and maintenance of the patents and patent applications we have licensed and are reliant on our licensors. Therefore, we cannot be certain that these patents and patent applications will be controlled in a manner consistent with the best interests of our business. This may result in the rights we have licensed being reduced or eliminated and may adversely affect the coverage, scope and jurisdictional reach of the patent rights encompassing our commercial offerings. In some cases, such as pursuant to the Gen-Probe agreement, we also do not have the right to bring and control a patent infringement action against third parties, based on the patents to which we hold licenses. In these situations, we are reliant on our licensors to bring and control such action and our licensors are under no obligation to do so, even in fields for which we have an exclusive license. This may adversely affect our ability to compete successfully with our competitors. While certain of the licenses under which we have rights provide us with exclusive rights in specified fields, the scope of our rights under these and other licenses may be subject to dispute. In addition, our rights to practice the inventions claimed in the licensed patents and patent applications are subject to our licensors abiding by the terms of those licenses and not terminating them. Our

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licenses may be terminated by the licensor if we are in breach of certain terms or conditions of the license agreement or in certain other circumstances.

Claims that our molecular assays and instruments infringe the patent rights of third parties could result in costly litigation or, in the event of an unfavorable outcome, could have an adverse impact on our ability to commercialize our current or future products, grow and maintain profitability and could have a material adverse impact on our business.
We cannot guarantee that our products, or the use of our products, do not infringe third-party patents. Third parties might allege that we are infringing their patent rights or that we have misappropriated their trade secrets. Such third parties might resort to litigation against us. The basis of such litigation could be existing patents or patents that issue in the future.
We may not be aware of all relevant third-party patents or patent applications. Furthermore, applications filed before November 29, 2000 and certain applications filed after that date that will not be filed outside the United States remain confidential until patents issue. Patent applications in the United States and elsewhere are published approximately 18 months after the earliest filing, which is referred to as the priority date. Therefore, patent applications covering our products or their use could have been filed by others without our knowledge. Third parties may have obtained, and may in the future obtain, patents under which such third parties may claim that the use of our products constitutes patent infringement. Furthermore, as we continue to commercialize our molecular assays and instruments in their current or future form, launch new products, and enter new markets, we expect that competitors may claim that our products infringe their intellectual property rights as part of business strategies designed to impede our successful commercialization and entry into new markets. We may receive letters from third parties inviting us to take licenses under, or alleging our infringement of their patents.
For example, we are aware of a U.S. patent owned by Enzo Life Sciences, Inc., or Enzo, which filed lawsuits in 2012 against Gen-Probe alleging that certain of Gen-Probe’s molecular diagnostic products infringe Enzo’s patent. Action was also filed against several other companies. Enzo sought permanent injunctive relief and unspecified damages. Enzo’s patent contains claims to oligonucleotides containing certain modified nucleotides. We use oligonucleotides containing modified nucleotides in our hybridization protection and dual kinetic assays. If we are eventually named as a party to the litigation between Enzo and Gen-Probe, if Enzo files a separate lawsuit against us, or if any other third party sues us alleging patent infringement, we may be unable to successfully defend such action and an unfavorable outcome could have a material adverse effect on our business. In addition, Gen-Probe may resolve such litigation in a way that benefits them but adversely affects our ability to use the licensed technology for our products. We are also aware of a third-party U.S. patent that expired in 2015, which has some claims that are relevant to nucleic acid hybridization and detection. As a result, we could be subject to litigation for patent infringement, and could be liable for damages for sales occurring prior to the expiration of the patent if we did not prevail in such litigation, and an unfavorable outcome could have a material adverse effect on our business.
If a third-party patent is successfully asserted against us, we could be barred from commercializing our current products and may owe a substantial damages award, all of which could have a material adverse impact on our cash position and business and financial condition. We could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against any of these claims. Any adverse ruling or perception of an adverse ruling in defending ourselves against these claims could have a material adverse impact on our cash position and stock price. If we were to challenge the validity of any issued U.S. patent in court, we would need to overcome a statutory presumption of validity that attaches to every U.S. patent. This means that in order to prevail, we would have to present clear and convincing evidence as to the invalidity of the patent’s claims. There is no assurance that a court would find in our favor on questions of infringement or validity.
In the event of a successful claim of infringement or misappropriation against us, we may be required to pay damages and obtain one or more licenses from third parties, or be prohibited from commercializing our current products. We may be unable to obtain these licenses at a reasonable cost, if at all. We could therefore incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our gross margins. Moreover, we could encounter delays in product introductions while we attempt to develop alternative methods or products. Defense of any lawsuit or failure to obtain any of these licenses on favorable terms could prevent us from commercializing products, and the prohibition of sale of any of our products could materially affect our ability to commercialize our current or future products, grow and maintain profitability and have a material adverse effect on our business.
Developments in patent law could have a negative impact on our business.
From time to time, the U.S. Supreme Court, or the Supreme Court, other federal courts, the U.S. Congress or the U.S. Patent and Trademark Office, or the USPTO, may change the standards of patentability and any such changes could have a material adverse effect on our business.

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The Leahy-Smith America Invents Act, or the America Invents Act, which was signed into law in 2011, includes a number of significant changes to U.S. patent law. These changes include a transition from a “first-to-invent” system to a “first-to-file” system, changes to the way issued patents are challenged, and changes to the way patent applications are disputed during the examination process. These changes may favor larger and more established companies that have greater resources to devote to patent application filing and prosecution. The USPTO has developed new and untested regulations and procedures to govern the full implementation of the America Invents Act, and many of the substantive changes to patent law associated with the America Invents Act, and, in particular, the first-to-file provisions, became effective on March 16, 2013. Substantive changes to patent law associated with the America Invents Act may affect our ability to obtain patents, and if obtained, to enforce or defend them. Accordingly, it is not clear what, if any, impact the America Invents Act will ultimately have on the cost of prosecuting our patent applications, our ability to obtain patents based on our discoveries and our ability to enforce or defend any patents that may issue from our patent applications, all of which could have a material adverse effect on our business.
We may be unable to protect or enforce our intellectual property effectively, which could harm our competitive position.
Obtaining and maintaining a strong patent position is important to our business. Our patent applications are in the early stages of prosecution and none have yet issued as patents. Patent law relating to the scope of claims in the technology fields in which we operate is complex and uncertain, so we cannot be assured that we will be able to obtain or maintain patent rights, or that the patent rights we may obtain will be valuable, provide an effective barrier to competitors or otherwise provide competitive advantages. Others have filed, and in the future are likely to file, patent applications that are similar or identical to ours or those of our licensors. To determine the priority of inventions, or demonstrate that we did not derive our invention from another, we may have to participate in interference or derivation proceedings in the USPTO or in court that could result in substantial costs in legal fees and could substantially affect the scope of our patent protection. We cannot be assured our patent applications will prevail over those filed by others. Also, our intellectual property rights may be subject to other challenges by third parties. Patents we obtain could be challenged in litigation or in administrative proceedings such as ex parte reexam, inter partes review, or post grant review in the United States or opposition proceedings in Europe or other jurisdictions.
Obtaining and maintaining a patent portfolio entails significant expense and resources. Part of the expense includes periodic maintenance fees, renewal fees, annuity fees, various other governmental fees on patents and/or applications due in several stages over the lifetime of patents and/or applications, as well as the cost associated with complying with numerous procedural provisions during the patent application process. We may or may not choose to pursue or maintain protection for particular inventions. In addition, there are situations in which failure to make certain payments or noncompliance with certain requirements in the patent process can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If we choose to forgo patent protection or allow a patent application or patent to lapse purposefully or inadvertently, our competitive position could suffer.

Legal actions to enforce our patent rights can be expensive and may involve the diversion of significant management time. In addition, these legal actions could be unsuccessful and could also result in the invalidation of our patents or a finding that they are unenforceable. We may or may not choose to pursue litigation or interferences against those that have infringed on our patents, or used them without authorization, due to the associated expense and time commitment of monitoring these activities. If we fail to protect or to enforce our intellectual property rights successfully, our competitive position could suffer, which could have a material adverse effect on our results of operations and business.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position could be harmed, which could have a material adverse effect on our business.
In addition to patent protection, we also rely upon copyright and trade secret protection, as well as non-disclosure agreements and invention assignment agreements with our employees, consultants and third-parties, to protect our confidential and proprietary information. For example, significant elements of the Atlas system are based on unpatented trade secrets and know-how that are not publicly disclosed. In addition to contractual measures, we try to protect the confidential nature of our proprietary information using physical and technological security measures. Such measures may not, for example, in the case of misappropriation of a trade secret by an employee or third party with authorized access, provide adequate protection for our proprietary information. Our security measures may not prevent an employee or consultant from misappropriating our trade secrets and providing them to a competitor, and legal recourse to which we are entitled against such misconduct may not provide an adequate remedy to protect our interests fully. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive, and time-consuming, and the outcome is unpredictable. In addition, trade secrets may be independently developed by others in a manner that could prevent legal recourse by us. If any of our confidential or proprietary information, such as our trade secrets, were to be disclosed or misappropriated, or if any such information was independently developed by a competitor, our competitive position could be harmed, which could have a material adverse effect on our business.

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We may not be able to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to biotechnology. This could make it difficult for us to stop the infringement of our patents, if obtained, or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.
Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for the technology used in our products and the enforcement of intellectual property.
Third parties may assert ownership or commercial rights to inventions we develop.
Third parties may in the future make claims challenging the inventorship or ownership of our intellectual property. We have written agreements with collaborators that provide for the ownership of intellectual property arising from our collaborations. These agreements provide that we must negotiate certain commercial rights with collaborators with respect to joint inventions or inventions made by our collaborators that arise from the results of the collaboration. In some instances, there may not be adequate written provisions to address clearly the resolution of intellectual property rights that may arise from a collaboration. If we cannot successfully negotiate sufficient ownership and commercial rights to the inventions that result from our use of a third-party collaborator’s materials where required, or if disputes otherwise arise with respect to the intellectual property developed with the use of a collaborator’s samples, we may be limited in our ability to capitalize on the market potential of these inventions. In addition, we may face claims by third parties that our agreements with employees, contractors, or consultants obligating them to assign intellectual property to us are ineffective, or in conflict with prior or competing contractual obligations of assignment, which could result in ownership disputes regarding intellectual property we have developed or will develop and interfere with our ability to capture the commercial value of such inventions. Litigation may be necessary to resolve an ownership dispute, and if we are not successful, we may be precluded from using certain intellectual property, or may lose our exclusive rights in that intellectual property. Either outcome could have a material adverse effect on our business.
Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential information or misappropriated trade secrets.
We employ individuals who were previously employed at universities or other diagnostic, life sciences or food companies, including our competitors or potential competitors. Although we try to ensure that our employees and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third parties. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
Risks Relating to Our Financial Condition and Capital Requirements

We need to raise additional capital to fund our existing operations, commercialize our products and expand our operations.
Based on our current business plan, we currently anticipate that we will have sufficient capital to fund our existing operations through the end of 2017. We need to raise additional capital to fund our existing operations, to repay our outstanding indebtedness, and to make two payments of $5.0 million due to Gen-Probe in each of 2018 and 2020. Our liquidity requirements may be negatively impacted by changes in our business plan, a lengthier sales cycle, lower demand for our products or other risks described elsewhere in this annual report and therefore we may need to raise capital sooner than currently anticipated. We expect to raise additional capital through equity offerings, debt financings, collaborations or licensing

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arrangements. We may also consider raising additional capital in the future to expand our business, to pursue strategic investments, to take advantage of financing opportunities, or for other reasons
Our present and future funding requirements will depend on many factors, including:
our revenue growth rate and ability to generate cash flows from operating activities;
our sales and marketing and research and development activities;
effects of competing technological and market developments;
costs of and potential delays in product development;
changes in regulatory oversight applicable to our products; and
costs related to international expansion.
The various ways we could raise additional capital carry potential risks. If we raise funds by issuing equity securities, dilution to our stockholders could result. Any equity securities issued also could provide for rights, preferences, or privileges senior to those of holders of our common stock. If we raise funds by issuing debt securities, those debt securities would have rights, preferences, and privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings pursuant to a credit agreement could impose significant restrictions on our operations. If we raise funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our platform technologies or products, or grant licenses on terms that are not favorable to us. The credit markets and the financial services industry have experienced a period of unprecedented turmoil and upheaval characterized by the bankruptcy, failure, collapse, or sale of various financial institutions and an unprecedented level of intervention from the U.S. federal government. These events have generally made equity and debt financing more difficult to obtain. Accordingly, additional equity or debt financing might not be available on reasonable terms, if at all. In addition, our current loan and security agreements restrict our ability to raise funds through additional debt or certain other financing options. If we cannot secure additional funding when needed, we may have to delay, reduce the scope of, or eliminate one or more research and development programs or sales and marketing initiatives. In addition, we may have to work with a partner on one or more of our development programs, which could lower the economic value of those programs to us.

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We are an early, commercial-stage company and have a limited operating history, which may make it difficult to evaluate our current business and predict our future performance.
We are an early, commercial-stage company and have a limited operating history. We were incorporated in Delaware and began operations in 2009 following the acquisition of the industrial market assets of Gen-Probe. Our limited operating history, lengthy sales cycle and limited number of customers may make it difficult to evaluate our current business and predict our future performance. Any assessment of our profitability or prediction about our future success or viability is subject to significant uncertainty. We have encountered and will continue to encounter risks and difficulties frequently experienced by early, commercial-stage companies in rapidly evolving industries. If we do not address these risks successfully, it could have a material adverse effect on our revenue, results of operations and business.
We have a history of net losses. We expect to incur net losses in the future and we may never achieve or sustain profitability.
We have historically incurred substantial net losses, including net losses of $30.8 million, $36.6 million and $32.2 million for the years ended December 31, 2016, 2015 and 2014, respectively. At December 31, 2016, we had an accumulated deficit of $208.1 million. Although we have started generating limited revenue, we expect our losses to continue as a result of increased commercialization costs, increased cost of revenue, including manufacturing costs, and research and development expenses. These losses have had, and will continue to have, an adverse effect on our working capital, total assets, and stockholders’ equity. Because of the numerous risks and uncertainties associated with our commercialization efforts, we are unable to predict when we will become profitable, and 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. Our inability to achieve and then sustain profitability would have a material adverse effect on our results of operations and business.

Our independent auditors report for the fiscal year ended December 31, 2016 includes an explanatory paragraph regarding management's conclusion that there is a substantial doubt about our ability to continue as a going concern.

Due to the uncertainty of our ability to meet our current operating and capital expenses, in their report on our audited annual financial statements as of and for the year ended December 31, 2016, our independent auditors included an explanatory paragraph regarding management's conclusion that there is a substantial doubt about our ability to continue as a going concern. Recurring losses from operations raise substantial doubt about our ability to continue as a going concern. If we are unable to continue as a going concern, we might have to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. Under our loan agreement, our loan may become immediately due and payable upon the occurrence of a material adverse change. Additionally, we are subject to customary operational covenants, including limitations on our ability to incur liens or additional debt, pay dividends, redeem stock, make specified investments and engage in merger, consolidation or asset sale transactions, among other restrictions. In addition, the inclusion of an explanatory paragraph regarding management's conclusion that there is a substantial doubt about our ability to continue as a going concern and our lack of cash resources may materially adversely affect our share price and our ability to raise new capital or to enter into critical contractual relations with third parties.

Our loan contains covenants that may limit our flexibility in operating our business and failure to comply with any of these covenants could have a material adverse effect on our business.
In May 2015, we entered into an amended loan and security agreement with Comerica, which is secured by a lien on our assets, excluding certain intellectual property. The loan contains various covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things:
sell, transfer, lease or dispose of certain assets;
engage in certain mergers and consolidations;
incur debt or encumber or permit liens on certain assets, except in the limited circumstances permitted under the loan and security agreements;
make certain restricted payments, including paying dividends on, or repurchasing or making distributions with respect to, our common stock; and
enter into certain transactions with affiliates.
A breach of any of the covenants under the loan and security agreement could result in a default under the loan. Upon the occurrence of an event of default under the loan, Comerica could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. In addition, our loan may become immediately due and payable upon the occurrence of a material adverse change. If we are unable to repay those amounts, Comerica could proceed against the collateral granted to them to secure such indebtedness.

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Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.
In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to annual limitations on its ability to use its pre-change net operating loss carryforwards, or NOLs, or other tax attributes to offset future taxable income or reduce taxes. Our past issuances of stock and other changes in our stock ownership may have resulted in ownership changes within the meaning of Section 382 of the Code; accordingly, our pre-change NOLs may be subject to limitation under Section 382. If we determine that we have not undergone an ownership change, the Internal Revenue Service could challenge our analysis, and our ability to use our NOLs to offset taxable income could be limited by Section 382 of the Code. Future changes in our stock ownership, including changes which are outside of our control, could result in ownership changes under Section 382 of the Code further limiting our ability to utilize our NOLs. Furthermore, our ability to use NOLs of companies that we may acquire in the future may be subject to limitations. For these reasons, we may not be able to use a material portion of the NOLs, even if we attain profitability.
Risks Related to Our Common Stock
Our share price has been and may continue to be volatile, which could subject us to securities class action litigation and our stockholders could incur substantial losses.
The market price of our common stock has historically experienced and may continue to experience significant volatility. From January 2015 through December 2016, the market price of our common stock has fluctuated from a high of $47.30 per share in the first quarter of 2015, to a low of $3.66 per share in the fourth quarter of 2016. The market price of shares of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:
actual or anticipated fluctuations in our financial condition and operating results;
actual or anticipated changes in our growth rate relative to our competitors;
competition from existing products or new products that may emerge;
announcements by us, our partners or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations, or capital commitments;
failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public;
issuance of new or updated research or reports by securities analysts;
fluctuations in the valuation of companies perceived by investors to be comparable to us;
share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
additions or departures of key management or other personnel;
disputes or other developments related to proprietary rights, including patents, litigation matters, and our ability to obtain patent protection for our technologies;
announcement or expectation of additional debt or equity financing efforts;
sales of our common stock by us, our insiders or our other stockholders; and
general economic and market conditions.
These and other market and industry factors may cause the market price and demand for our common stock to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, the stock market in general, and NASDAQ and emerging growth companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. In the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management.

We and certain of our officers and directors have in the past been, and may in the future be, subject to securities class action lawsuits that could result in substantial costs and divert management’s attention.

We, and certain of our officers and directors, were named as defendants in a purported class action lawsuit that generally alleges that we and certain of our officers and directors violated the Securities Act of 1933, as amended (the “Securities Act”) by making allegedly false and misleading statements pertaining to placements of our Atlas instruments and our expectations of future growth and increased market share and by failing to disclose “known trends and uncertainties about the Company’s sales.” The court appointed Stanley Yedlowski as lead plaintiff and The Rosen Law Firm as lead counsel on April 21, 2015. Defendants filed a motion on August 25, 2015 to dismiss, and plaintiffs filed an opposition to that motion on October 9, 2015. The parties entered into a settlement agreement, which was approved by the court in December 2016, to pay approximately $3.3 million. As a result,

36


we have recorded a liability on our Balance Sheet. Additionally, we have recorded a corresponding receivable on our Balance Sheet for the expected reimbursement under our insurance policies.

Furthermore, in the future, we may be subject to securities class action litigation, which if concluded in a manner adverse to us would have an adverse effect on our financial condition and business. Even if we were to be successful in the defense of any such litigation, we could incur substantial costs, significant legal expenses, suffer a significant adverse impact on our reputation and divert management's attention and resources from other priorities, including the execution of business plans and strategies that are important to our ability to grow our business, any of which could have an adverse effect on our business.
Our quarterly operating results may be subject to significant fluctuations.
We are in the early stage of commercializing our Atlas Detection Assays and Atlas instrument, and may experience significant fluctuations in our quarterly operating results in the future. The rate of market acceptance of our Atlas Detection Assays and Atlas instrument could contribute to this quarterly variability. Our longer and unpredictable sales cycle for the adoption of our Atlas solution complicates our ability to project quarterly revenue. For example, in 2016, we placed twelve instruments, whereas in 2015, we placed three Atlas instruments primarily because customers decided to continue to evaluate our Atlas solution further and were waiting for the launch of our new Listeria assay before deciding to change their testing methods and adopt our Atlas solution. In addition, the revenue generated from sales of our Atlas Detection Assays may fluctuate from time to time due to changes in the testing volumes of our customers. Furthermore, our expense levels are based, in part, on expectation of future revenue levels, and a shortfall in expected revenue could, therefore, result in a disproportionate decrease in our net income. As a result, our quarterly operating results may be subject to significant fluctuations.
Our executive officers, directors and principal stockholders exercise substantial influence over our company.
Our executive officers, directors and principal stockholders who are affiliated with certain of our board members and beneficially own more than 5% of our common stock in the aggregate, beneficially owned shares representing approximately 37.2% of our outstanding capital stock as of February 28, 2017. These stockholders, acting together, have significant influence over the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. In addition, these stockholders, acting together, have significant influence over our management and affairs. This concentration of ownership may have the effect of delaying or preventing a change in control of our company and might affect the market price of our common stock.

There may not be an active trading market for our common stock.

We completed our initial public offering in July 2014. Although our common stock is listed on The NASDAQ Global Market, there has been limited trading activity. The lack of an active market for our common stock may impair investors’ ability to sell their shares at the time they wish to sell them or at a price that they consider reasonable, may reduce the fair market value of their shares and may impair our ability to raise additional capital.

A sale of a substantial number of shares of our common stock in the public market could cause the market price of our common stock to drop significantly, even if our business is doing well.

Our stock price could decline as a result of sales of a large number of shares of our common stock or the perception that these sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Holders of approximately 0.8 million common shares, or approximately 17%, of our outstanding common shares as of December 31, 2016, have rights, subject to some conditions, to require us to file registration statements covering the sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We have also registered the offer and sale of all shares of common stock that we may issue under our equity compensation plans.

In addition, in the future, we may issue additional shares of common stock or other equity or debt securities convertible into common stock in connection with a financing, acquisition, litigation settlement, employee arrangements or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and could cause our stock price to decline.

We are an “emerging growth company” and will be able to avail ourselves of reduced disclosure requirements applicable to emerging growth companies, which could make our common stock less attractive to investors.

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We are an “emerging growth company,” as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are electing not to take advantage of such extended transition period, and as a result we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to not take advantage of the extended transition period for complying with new or revised accounting standards is irrevocable. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenue of $1.0 billion or more; (ii) December 31, 2019, the last day of our fiscal year following the fifth anniversary of the date of the completion of our initial public offering; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; and (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
We are incurring significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.
As a public company, we are incurring significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, and rules of the SEC and those of The NASDAQ Stock Market, or the NASDAQ, have imposed various requirements on public companies including requiring establishment and maintenance of effective disclosure and financial controls. Our management and other personnel have and will need to continue to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased and will continue to increase our legal and financial compliance costs and will make some activities more time-consuming and costly.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our compliance with Section 404 of the Sarbanes-Oxley Act, as applicable, requires us to incur substantial accounting expense and expend significant management efforts. Furthermore, if in the future we cease to be an “emerging growth company” as defined in the Jumpstart of Our Business Startups Act of 2012, or the JOBS Act, or a “smaller reporting company” as defined under applicable SEC rules, we will be required to have our independent registered accounting firm attest to the effectiveness of our internal control over financial reporting. If we are not able to comply with the requirements of Section 404, as applicable, in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the NASDAQ, the SEC or other regulatory authorities, which would require additional financial and management resources.
Our ability to successfully implement our business plan and comply with Section 404, as applicable, requires us to be able to prepare timely and accurate financial statements. We expect that we will need to continue to improve existing, and may need to implement new operational and financial systems, procedures and controls to manage our business effectively. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, may cause our operations to suffer and we may be unable to conclude that our internal control over financial reporting is effective. If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, and current and potential stockholders may lose confidence in our financial reporting. This, in turn, could have an adverse impact on trading prices for our common stock, and could adversely affect our ability to raise additional capital.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock.


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Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act of 2002, or any subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.

We are required to disclose changes made in our internal controls and procedures on a quarterly basis and our management is required to assess the effectiveness of these controls annually. However, our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until the first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal controls in the future. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have a material adverse effect on the price of our common stock.

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.
The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The price of our common stock could decline if one or more equity analysts downgrade our common stock or if analysts issue other unfavorable commentary or cease publishing reports about us or our business.
We have never paid dividends on our capital stock and we do not anticipate paying any dividends in the foreseeable future. Consequently, any gains from an investment in our common stock will likely depend on whether the price of our common stock increases.
We have not paid dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of our indebtedness with Comerica prohibit us from paying dividends. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for anyone that invests in our common stock for the foreseeable future. Consequently, in the foreseeable future, anyone that invests in our common stock will likely only experience a gain from their investment in our common stock if the price of our common stock increases.

Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
Our certificate of incorporation, bylaws and Delaware law contain provisions which could have the effect of rendering more difficult, delaying or preventing an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions:
classifying our board of directors into three classes;
authorizing “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend, and other rights superior to our common stock;
limiting the liability of, and providing indemnification to, our directors and officers;
limiting the ability of our stockholders to call and bring business before special meetings;
requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;
controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings; and
providing our board of directors with the express power to postpone previously scheduled annual meetings and to cancel previously scheduled special meetings.
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

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As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock.
Any provision of our certificate of incorporation, bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.
Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.
Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation or our bylaws, or (iv) any action asserting a claim against us governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the provisions of our certificate of incorporation described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could have a material adverse effect on our results of operations and business.


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Item 1B.
UNRESOLVED STAFF COMMENTS
Not applicable.

Item 2.
PROPERTIES

We lease approximately 14,500 square feet of space for our corporate headquarters and a microbiology laboratory in Warren, New Jersey pursuant to leases that expire in January 2018. We also lease approximately 45,000 square feet of space for our research and development facility and manufacturing operations in San Diego, California pursuant to a lease that expires in December 2019. We believe our facilities are adequate for our foreseeable needs.

Item 3. LEGAL PROCEEDINGS
We may periodically become subject to legal proceedings and claims arising in connection with our business. Except as set forth below, we are not currently involved in any legal proceedings nor are there any claims against us pending.
    
A putative securities class action originally captioned Ding v. Roka Bioscience, Inc., Case No. 3:14-cv-8020, was filed against the Company and certain of its officers and directors in the United States District Court for the District of New Jersey on December 24, 2014, on behalf of a putative class of persons and entities who had purchased or otherwise acquired securities pursuant or traceable to the Registration Statement for the Company’s IPO. The original putative class period ran from July 17 through November 6, 2014.  The original complaint asserted claims under the Securities Act of 1933 and contended that the IPO Registration Statement was false and misleading, or omitted allegedly material information, in connection with the Company’s statements about its placement of Atlas instruments and its expectations of future growth and increased market share, and the Company’s alleged failure to disclose “known trends and uncertainties about the Company’s sales.”  The alleged misrepresentations and omissions purportedly came to light when the Company issued its third-quarter 2014 earnings release on November 6, 2014.
Pursuant to the Private Securities Litigation Reform Act of 1995, the court appointed Stanley Yedlowski as lead plaintiff and The Rosen Law Firm as lead counsel on April 21, 2015. The lead plaintiff then filed an amended complaint, captioned Stanley Yedlowski v. Roka Bioscience, Inc., Case No. 14-cv-8020, on June 23, 2015. The amended complaint pled Securities Act claims on behalf of persons and entities who purchased or otherwise acquired Roka securities pursuant or traceable to the IPO Registration Statement during an extended putative class period, running from July 17, 2014 through March 26, 2015. The amended complaint alleged that the Registration Statement was false or misleading in that it failed to disclose that our customers purportedly were experiencing false positives and other usage issues with our Listeria assays apparently arising from the customers’ employees’ inability to follow tour Listeria assay workflow. The amended complaint alleged that the full extent of the purported misstatements and omissions was not revealed until March 26, 2015. Defendants filed a motion on August 25, 2015 to dismiss the amended complaint, and plaintiffs filed an opposition to that motion on October 9, 2015. The parties entered into a settlement agreement, which was approved by the court in December 2016, to pay approximately $3.3 million. As a result, we have recorded a liability on our Balance Sheet. Additionally, we have recorded a corresponding receivable on our Balance Sheet for the expected reimbursement under our insurance policies.


Item 4.
MINE SAFETY DISCLOSURES
Not applicable.




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PART II

Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock began trading on The NASDAQ Global Market on July 17, 2014 under the symbol “ROKA.” Prior to such time, there was no public market for our common stock. The following table sets forth the high and low sales prices per share of our common stock as reported on The NASDAQ Global Market for the periods indicated.
 
 
 
High
 
Low
Year Ended December 31, 2016
 
 
 
 
First Quarter
 
14.00

 
5.00

Second Quarter
 
8.11

 
5.30

Third Quarter
 
16.00

 
5.60

Fourth Quarter
 
8.50

 
3.66

Year Ended December 31, 2015
 
 
 
 
First Quarter
 
47.30

 
32.10

Second Quarter
 
38.50

 
25.04

Third Quarter
 
37.50

 
20.20

Fourth Quarter
 
21.40

 
12.40

Holders of Record
As of March 15, 2017, there were approximately 47 holders of record of our common stock.
Dividend Policy
We have never declared or paid any cash dividends on our common stock, and currently do not plan to declare cash dividends on shares of our common stock in the foreseeable future. We expect that we will retain all of our available funds and future earnings, if any, for use in the operation and expansion of our business. Our loan agreement with Comerica prohibits us from paying cash dividends on our common stock and the terms of any future loan agreement we enter into or any debt securities we may issue are likely to contain similar restrictions on the payment of dividends. Subject to the foregoing, the payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, restrictions imposed by applicable law, our overall financial condition and any other factors deemed relevant by our board of directors.
Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information with respect to our compensation plans under which equity compensation was authorized as of December 31, 2016.


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Number of securities to be issued upon exercise of outstanding options, warrants and rights
 
Weighted average exercise price of outstanding options, warrants and rights
 
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column a)
Plan category
 
(a)
 
(b)
 
(c)(2)
Equity compensation plans approved by security holders(1)
 
197,554

 
$
22.91

 
67,670

Equity compensation plans not approved by security holders
 

 
$

 

Total
 
197.554

 
$
22.91


67,670



(1)
The amounts shown in this row include securities under the Roka Bioscience, Inc. 2009 Equity Incentive Plan (the "2009 Plan") and the Roka Bioscience, Inc. 2014 Equity Incentive Plan (the "2014 Plan").
(2)
Included in the 67,670 shares are 49,169 shares available under the 2009 Plan. Subsequent to our IPO we have not issued equity awards out of the 2009 Plan, and we do not intend to issue additional equity awards out of the 2009 Plan in the future. In accordance with the "evergreen" provision in our 2014 Equity Compensation Plan, an additional 150,081 shares were automatically made available for issuance on the first trading day of 2017, which represents 3% of the number of shares outstanding on December 31, 2016; these shares are excluded from this calculation. On February 28, 2017, our stockholders approved the amended and restated 2014 Equity Incentive Plan, which increased the number of shares available thereunder by 300,000; these shares are excluded from this calculation.


Unregistered Sale of Equity Securities
Not applicable.
Use of Proceeds
On July 16, 2014, our registration statement on Form S-1 (File No. 333-196135) was declared effective by the Securities and Exchange Commission for our initial public offering pursuant to which we sold an aggregate of 5,000,000 shares of our common stock at a price to the public of $12.00 per share. BofA Merrill Lynch and Leerink Partners acted as joint book-running managers for the offering. Cowen and Company and Wedbush PacGrow Life Sciences acted as co-managers. On July 22, 2014, we closed the sale of 5,000,000 shares, resulting in net proceeds to us of $53.2 million after deducting underwriting discounts and commissions and other offering expenses of $2.6 million. No payments were made by us to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates. As of December 31, 2016, we have used $52.0 million of the net proceeds from our initial public offering, of which $8.0 million was paid to Gen-Probe pursuant to the terms of the second amendment to our license agreement with Gen-Probe. We have invested the balance of the net proceeds from the offering in cash equivalents and marketable securities in accordance with our investment policy. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the Securities and Exchange Commission on July 17, 2014 pursuant to Rule 424(b).
Issuer Repurchases of Equity Securities
In connection with the vesting of restricted stock in the year ended December 31, 2016, certain of our employees elected to have shares withheld and transferred back to us in order to cover their income taxes payable as allowed under our equity compensation plans.
No shares of common stock were withheld and transferred back to the Company during the three months ended December 31, 2016.
 



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Item 6.
SELECTED FINANCIAL DATA
Not applicable.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the audited Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion and other parts of this Annual Report contain a number of forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under 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”). These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management’s current beliefs and assumptions. Any statements contained herein (including, without limitation, statements to the effect that we “believe”, “expect”, “anticipate”, “plan” and similar expressions) that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with the Condensed Financial Statements and Notes thereto included in this report and the discussion below. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. There are a number of important factors that could cause actual results to differ materially from those indicated by such forward-looking statements. Such factors include those set forth in the section entitled “Item 1A – Risk Factors” discussed elsewhere in this Annual Report on Form 10-K. The risks and uncertainties described therein and herein are not the only ones we face. Additional risks and uncertainties, including those not presently known to us or that we currently deem immaterial, may also impair the business. We expressly disclaim any obligation to update any forward-looking statements, except as may be required by law.
Overview
Background
We are a molecular diagnostics company initially focused on providing advanced testing solutions for the detection of foodborne pathogens. The proprietary molecular technology used in our assays enables us to offer accurate and rapid testing solutions while our fully automated Atlas instrument helps our customers reduce labor costs and minimize operator error. In late 2012, we launched our proprietary Atlas Detection Assays and Atlas instrument in the North American food safety testing market and we have worldwide rights to develop and commercialize our advanced molecular testing solutions for a wide range of other industrial applications.
Our company was founded in 2009 through the acquisition of the industrial application market assets of Gen-Probe. The acquisition included a worldwide license for Gen-Probe’s molecular assay technologies in the industrial application markets, access to certain instrument platforms as well as certain key development personnel. Our advanced molecular assays and automated instruments are derived from Gen-Probe technologies, which Gen-Probe uses in the highly regulated clinical diagnostics and blood screening markets.
We are focused on the commercialization of a comprehensive menu of molecular diagnostic products for the detection of foodborne pathogens under the Atlas brand name. We believe that other available pathogen test methods have significant performance gaps with respect to accuracy, time to results and automation, which are areas of critical importance to food processors, third-party contract testing laboratories and the government agencies that regulate food safety. Our Atlas solution is designed to provide our customers with accurate and rapid test results with reduced labor costs and improved laboratory efficiencies. In addition, we are developing a molecular chemistry and instrument platform, which is expected to address the needs of lower-volume throughput food safety customers, and to have potential clinical applications.
Our commercial success is dependent upon our ability to successfully market our Atlas Detection Assays and Atlas instrument. Our sales cycle is lengthy, often lasting longer than 12 months, which makes it difficult for us to accurately forecast revenue and other operating results. As of December 31, 2016, we have installed 53 Atlas instruments pursuant to commercial agreements, and for the year ended December 31, 2016, we generated approximately $7.2 million in revenue, which was derived from a small number of customers. Since our inception in 2009, we have devoted substantially all of our resources to the development and commercialization of our advanced molecular testing solutions. We have incurred significant losses since our inception, and as of December 31, 2016, our accumulated deficit was $208.1 million. We expect to continue to incur operating losses over the near term as we pursue our commercial strategy, operate as a public company and continue

44


development of products and technology. In order to achieve and sustain profitability, we will need to significantly increase our revenue and the number of customers that are using our products.

45


Financial Operations Overview
Revenue
Our revenue is derived primarily from the sale of our Atlas Detection Assays and consumable supplies for our Atlas instruments. Our Atlas Detection Assays and our consumable supplies are designed to be used only on our Atlas instruments and our Atlas instruments will only accept our Atlas Detection Assays and our consumable supplies. This closed system model enables us to generate recurring revenue from the sale of our Atlas Detection Assays and other consumable supplies for use with each Atlas instrument we place. We mostly place our Atlas instruments with customers through reagent rental agreements, and recover the cost of providing the Atlas instruments, including services related to instrument maintenance, repairs, installation and training to our customers, in the amount charged for our Atlas Detection Assays. The reagent rental agreements are typically for a one-year initial period with automatic renewal provisions and have no minimum purchase obligations.
Shipping and handling costs incurred by us are included in our billings to customers. Revenue is generally recognized when our Atlas Detection Assays and other consumable supplies are shipped to the customer.
In addition to sales of our Atlas Detection Assays, we generate limited revenue from instrument rental and service and maintenance contracts. Revenue from instrument rental and service and maintenance contracts is recognized ratably over the term of the contract. We also offer our Atlas instruments for sale, and for the year ended December 31, 2016, we sold two Atlas instruments.
Potential customers for our products typically need to commit significant time and resources to evaluate our products, due to the nature and cost of our products and their impact on the potential customers’ businesses. Because of customers' extended evaluations of our products, it is difficult for us to accurately project revenues and other operating results. In addition, the revenue generated from sales of our Atlas Detection Assays may fluctuate due to changes in the testing volumes of our customers. As a result, our revenues and financial results may fluctuate on a quarterly or annual basis.
Our future revenue growth depends on our ability to place additional commercial instruments with customers and increase our customers' usage of our Atlas Detection Assays. During 2016, we placed twelve instruments with customers.
Operating Expenses
Cost of revenue
Cost of revenue primarily consists of the cost of materials, direct labor and manufacturing overhead costs associated with the production and distribution of our Atlas Detection Assays and consumable supplies for our Atlas instruments. Cost of revenue also includes depreciation on Atlas instruments installed with our customers under reagent rental or rental agreements, expenses related to service and maintenance of instruments, and royalties payable under a technology license agreement with Gen-Probe.

We manufacture our Atlas Detection Assays and consumable supplies in our San Diego facility, which has significant capacity for expansion. To date, the underutilized capacity in this facility has contributed to a high cost of revenue relative to revenue.
We expect our cost of revenue to increase as we place additional Atlas instruments and manufacture and sell an increasing number of our Atlas Detection Assays and consumable supplies. We believe cost of revenue as a percentage of revenue will decrease in future periods as our manufacturing and sales volumes of Atlas Detection Assays increase, which can allow us to achieve better utilization of our manufacturing capacity.
Research and development
Our research and development expenses are primarily associated with costs incurred for development, improvements and support activities for our Atlas instruments and Atlas Detection Assays. These expenses consist principally of payroll, employee benefits, as well as fees for contract research, consulting services and laboratory supplies. We expense all research and development costs as incurred.
We expect to remain focused on improving our existing Atlas Detection Assays as well as developing additional assays and instrument platforms in the near term. In addition, we are currently developing a molecular chemistry and instrument platform, which is expected to address the needs of lower-volume throughput food safety customers and to have potential clinical applications. Due to the completion of development of most assays for the Atlas instrument, we expect our research and development expenses to decrease from their current level.
    

46


Selling, general and administrative
Our selling, general and administrative expenses include costs associated with our sales organization as well as our executive, accounting, information technology and human resources functions. These expenses consist principally of payroll, employee benefits, travel, and stock-based compensation, as well as professional services fees such as consulting, audit, tax and legal fees, and general corporate costs. We expense all general and administrative costs as incurred.
We expect our selling, general and administrative expenses to decrease from their current level, primarily as a result of efficiencies achieved through reductions made to our organization and efficiencies gained in the execution of our commercial strategy.
Amortization of Intangible Assets
In connection with the acquisition of the industrial application market assets of Gen-Probe, we acquired certain in-process research and development projects that were recorded as an intangible asset with an indefinite life. Upon completion of the development of our first Atlas Detection Assay in January 2012, this asset was transferred from in-process research and development to a definite life intangible asset and we initiated amortization of the asset over its estimated useful life of 10 years. In June 2014, we entered into an amendment to our license agreement with Gen-Probe. Under the amendment, we obtained a two-year option to reduce the royalty rate we pay to Gen-Probe in exchange for an option payment of $2.5 million. Upon completion of our IPO we exercised our option and issued to Gen-Probe 86,506 shares of common stock and made a cash payment of $8.0 million. We are required to make additional cash payments of $5.0 million on January 1, 2018 and $5.0 million on January 1, 2020. The aggregate cash and stock payments made to Gen-Probe along with the present value of the two $5.0 million payments described above were recorded as a $26.6 million addition to our intangible technology asset in Intangible assets on the Balance Sheet and will be amortized through December 31, 2021, which is the end of the estimated remaining life of the technology asset. In addition to the payments outlined above, the amendment to the license agreement provides for additional milestone payments of up to $6.0 million to further reduce the royalty rate paid by us. As a result, if these additional milestone payments are made by us, amortization expenses for these intangible assets may increase in future periods. We assess our intangible and other long-lived assets for impairment whenever events or other changes in circumstances suggest that the carrying value of an asset group may not be recoverable based on its undiscounted future cash flows. For example, if our commercialization efforts are not successful, or if commercialization progress takes longer than anticipated, we may recognize a non-cash impairment charge with respect to the asset group including our intangible asset and other long-lived assets in future periods.
Other Income (Expenses)
Change in Fair Value of Financial Instruments
We recognize changes in fair value of certain financial instruments outstanding during the reporting period. Historically, these instruments were comprised of warrants and rights to purchase our preferred stock. Upon completion of our initial public offering in July 2014, the preferred stock warrants then outstanding were automatically converted into warrants to purchase common stock, and were reclassified into additional paid-in capital at that time. Periods beyond 2014 do not have any change in fair value of certain financial instruments recognized due to these warrants.
Interest Income (Expense), net
Interest income is derived from cash and cash equivalents held with our banking institution as well as our short-term and long-term marketable securities. Interest income fluctuates based on the current interest rate available from our banking institution and the amount of funds held in cash accounts and marketable securities. Interest expense for the periods presented is associated with the debt outstanding under the two loan and security agreements we entered into in November 2013, the repayment of the TriplePoint loan and the amendment to the Comerica loan in the three months ended June 30, 2015, the two individual $5.0 million payments due to Gen-Probe on January 1, 2018 and January 1, 2020, respectively, under the terms of the royalty reduction option exercised under the terms of the amendment to our license agreement, as well as the extended payment terms provided to us by Gen-Probe on the purchase of Atlas instruments. See “—Liquidity and Capital Resources” below for further details.
Our interest expense has decreased as the balances due on our Comerica loan and under the extended payment terms provided to us by Gen-Probe on the purchase of Atlas instruments have been paid down. However, our interest expense may increase if we purchase additional instruments to be placed with customers.

47


Results Of Operations

Comparison of the Year Ended December 31, 2016 to the Year Ended December 31, 2015
 
 
Year Ended December 31,
 
Change
 
2016
 
2015
 
$
 
%
 
(amounts in thousands, except percentages)
Statement of Operations Data:
 
 
 
 
 
 
 
Revenue
$
7,242

 
$
5,985

 
$
1,257

 
21
 %
Operating Expenses
 
 
 
 
 
 
 
Cost of revenue
7,974

 
7,704

 
270

 
4
 %
Research and development
7,253

 
7,689

 
(436
)
 
(6
)%
Selling, general and administrative
17,739

 
21,778

 
(4,039
)
 
(19
)%
Amortization of intangible asset
3,758

 
3,748

 
10

 
 %
Impairment of goodwill

 
360

 
(360
)
 

Total operating expenses
36,724

 
41,279

 
(4,555
)
 
(11
)%
Loss from operations
(29,482
)
 
(35,294
)
 
5,812

 
(16
)%
Other (expense) income:
 
 
 
 
 
 


Interest income (expense), net
(1,550
)
 
(2,006
)
 
456

 
(23
)%
Income tax provision (benefit)
(245
)
 
(700
)
 
455

 
(65
)%
Net loss and comprehensive loss
$
(30,787
)
 
$
(36,600
)
 
$
5,813

 
(16
)%
Revenue
Revenue increased by $1.3 million, to $7.2 million for the year ended December 31, 2016, from $6.0 million for the year ended December 31, 2015. During the year ended December 31, 2016, we sold 851,000 Atlas Detection Assays compared to 705,000 in the year ended December 31, 2015. The increased demand for our Atlas Detection Assays was primarily the result of an increase in the number of Atlas instruments placed with commercial customers.
As of December 31, 2016, we had 53 instruments placed with customers under commercial agreements, compared to 41 instruments as of December 31, 2015. For the year ended December 31, 2016, the average revenue per instrument placed under commercial agreements was approximately $157,000, compared to $146,000 for the year ended December 31, 2015. This increase was due to higher utilization of the instruments placed under commercial agreements. Our two largest customers, which each accounted for more than 10% of revenues, generated approximately $3.6 million of revenue in the year ended December 31, 2016.
Operating Expenses
Cost of Revenue
Cost of revenue increased by $0.3 million, to $8.0 million for the year ended December 31, 2016, from $7.7 million for the year ended December 31, 2015. The increase was primarily due to higher sales volumes of Atlas Detection Assays. Cost of revenue, as a percentage of revenue, decreased in 2016 compared to 2015 due to better utilization of our manufacturing capacity.
Research and Development
Research and development expense decreased by $0.4 million to $7.3 million for the year ended December 31, 2016, from $7.7 million for the year ended December 31, 2015. The decrease was primarily due to a decrease of $0.6 million in supplies, a decrease of $0.5 million in payroll and benefits expenses due to a decrease in headcount, and a decrease in overhead and depreciation of $0.2 million, partially offset by an increase in external research and other outside services of $0.9 million.

Selling, General and Administrative
Selling, general and administrative expense decreased by $4.0 million to $17.7 million for the year ended December 31, 2016 from $21.8 million for the year ended December 31, 2015. The decrease was primarily due to a decrease of $2.5 million in payroll and benefits expenses due to a decrease in headcount, a decrease in legal and audit fees of $1.3 million and a

48


decrease in depreciation of $0.2 million, partially offset by an increase in other general and administrative expenses of $0.1 million
Amortization of intangible assets
Amortization of intangibles remained unchanged at $3.8 million for the year ended December 31, 2016 compared to $3.8 million for the year ended December 31, 2015.
Impairment of goodwill
We conducted our annual impairment test of goodwill as of December 31, 2015 in accordance with ASC 350, Intangibles-Goodwill and Other (“ASC-350”). At that time, it was determined the goodwill was impaired. Consequently, we recorded an impairment charge of approximately $0.4 million, reducing the goodwill balance to zero as of December 31, 2015.
Other (Expense) Income
Interest Income (Expense), net
Net interest expense decreased by $0.5 million to $1.6 million for the year ended December 31, 2016, from net interest expense of $2.0 million for the year ended December 31, 2015. The decrease was primarily due to a decrease in the balance of our term loan as well as a decrease in the balance of amounts due to Gen-Probe under the deferred repayment provisions for instrument purchases.

Income tax (provision) benefit

The income tax benefit decreased by $0.5 million to a benefit of $0.2 million for the year ended December 31, 2016, from a benefit of $0.7 million for the year ended December 31, 2015. The decrease was primarily driven by a decrease in the value of net operating losses sold under the State of New Jersey’s Technology Business Tax Certificate Program. The benefit recognized in 2016 related to the sale of $30.3 million of our New Jersey state tax net operating losses in November 2016. The benefit recognized in 2015 related to the sale of $29.4 million of our New Jersey state tax net operating losses in December 2015.

49



Comparison of the Year Ended December 31, 2015 to the Year Ended December 31, 2014
 
 
Year Ended December 31,
 
Change
 
2015
 
2014
 
$
 
%
 
(amounts in thousands, except percentages)
Statement of Operations Data:
 
 
 
 
 
 
 
Revenue
$
5,985

 
$
5,057

 
$
928

 
18
 %
Operating Expenses
 
 
 
 
 
 
 
Cost of revenue
7,704

 
7,847

 
(143
)
 
(2
)%
Research and development
7,689

 
7,934

 
(245
)
 
(3
)%
Selling, general and administrative
21,778

 
19,101

 
2,677

 
14
 %
Amortization of intangible asset
3,748

 
1,767

 
1,981

 
112
 %
Impairment of goodwill
360

 

 
360

 

Total operating expenses
41,279

 
36,649

 
4,630

 
13
 %
Loss from operations
(35,294
)
 
(31,592
)
 
(3,702
)
 
12
 %
Other (expense) income:
 
 
 
 
 
 
 
Change in fair value of financial instruments

 
(785
)
 
785

 
(100
)%
Interest income (expense), net
(2,006
)
 
(1,805
)
 
(201
)
 
11
 %
Income tax provision (benefit)
(700
)
 
(1,952
)
 
1,252

 
(64
)%
Net loss and comprehensive loss
$
(36,600
)
 
$
(32,230
)
 
$
(4,370
)
 
14
 %
Revenue
Revenue increased by $0.9 million, to $6.0 million for the year ended December 31, 2015, from $5.1 million, for the year ended December 31, 2014. During the year ended December 31, 2015, we sold 705,000 Atlas Detection Assays compared to 557,000 in the year ended December 31, 2014. The increased demand for our Atlas Detection Assays was the result of an increase in the number of Atlas instruments placed with commercial customers and increased commercial utilization of our Atlas instruments.
As of December 31, 2015, we had 41 instruments placed with customers under commercial agreements, compared to 38 instruments as of December 31, 2014. For the year ended December 31, 2015, the average revenue per instrument placed under commercial agreements was approximately $146,000, compared to $128,000 for the year ended December 31, 2014. This increase was due to higher utilization of the instruments placed under commercial agreements. Our four largest customers, which each accounted for more than 10% of revenues, generated approximately $4.1 million of revenue in the year ended December 31, 2015.
Operating Expenses
Cost of Revenue
Cost of revenue decreased by $0.1 million, to $7.7 million for the year ended December 31, 2015, from $7.8 million for the year ended December 31, 2014. The decrease was primarily due to a decrease in inventory provisions provided during the year partially offset by higher sales volumes. Additionally, during the year ended December 31, 2014, we incurred charges of approximately $0.5 million due to abnormally low production levels, whereas no such charges were incurred during 2015.
Research and Development
Research and development expense decreased by $0.2 million to $7.7 million for the year ended December 31, 2015, from $7.9 million for the year ended December 31, 2014. The decrease was primarily due to a decrease of $0.4 million in payroll and benefits expenses due to a decrease in headcount and a decrease in depreciation of $0.2 million, partially offset by an increase in supplies used of $0.3 million.

Selling, General and Administrative
Selling, general and administrative expense increased by $2.7 million to $21.8 million for the year ended December 31, 2015 from $19.1 million for the year ended December 31, 2014. The increase was primarily due to an increase of $1.8 million in payroll and benefits expenses, consisting of increased severance charges of $1.4 million, increased stock

50


compensation of $0.6 million and increased bonus expense of $0.4 million, partially offset by decreases of $0.3 million for salaries and $0.2 million for insurance and other benefits. The remaining increase consisted of an increase of $1.2 million in legal fees, primarily related to litigation of a securities class action, a $0.2 million increase in directors' fees and a $0.2 million increase in administrative expenses partially offset by decrease of $0.3 million for supplies, $0.2 million in promotional expenses and $0.1 million in travel and entertainment.
Amortization of intangible assets
Amortization of intangibles increased by $2.0 million to $3.7 million for the year ended December 31, 2015 from $1.8 million for the year ended December 31, 2014. The increase was due to the addition to our intangible asset in July 2014 in connection with the option exercised under our amended license agreement with Gen-Probe.
Impairment of goodwill
We conducted our annual impairment test of goodwill as of December 31, 2015 in accordance with ASC 350, Intangibles-Goodwill and Other (“ASC-350”). As a result, we recorded an impairment charge of approximately $0.4 million, reducing the goodwill balance to zero as of December 31, 2015.
Other (Expense) Income
Change in Fair Value of Financial Instruments
There were no financial instruments held at fair value during the year ended December 31, 2015. In 2014, the $0.8 million impact was due to changes in the fair value of our outstanding Series B and Series E preferred stock warrants from the beginning of the year through the completion of our IPO at which time they were converted into warrants to purchase common stock and were reclassified into additional paid-in capital.
Interest Income (Expense), net
Net interest expense increased by $0.2 million to $2.0 million for the year ended December 31, 2015, from net interest expense of $1.8 million for the year ended December 31, 2014. The increase was primarily due to interest expense related to amendment to our loan with Comerica Bank and the early repayment of our loan with TriplePoint Capital in May 2015, as well as interest expense accretion recognized in accordance with the amounts payable to Gen-Probe on January 1, 2018 and January 1, 2020 in accordance with the exercise of a royalty reduction option under our amended license agreement.

Income tax (provision) benefit

The income tax benefit decreased by $1.3 million to a benefit of $0.7 million for the year ended December 31, 2015, from a benefit of $2.0 million for the year ended December 31, 2014. The decrease was primarily driven by a decrease in the sale of net operating losses under the State of New Jersey’s Technology Business Tax Certificate Program. The benefit recognized in 2015 related to the sale of $29.4 million of our New Jersey state tax net operating losses in December 2015. The benefit recognized in 2014 related to the sale of $41.5 million of our New Jersey state tax net operating losses in December 2014.


51


Liquidity and Capital Resources
Prior to our IPO in July 2014, our operations were primarily financed through private sales of shares of our preferred stock and debt. Upon closing of our IPO on July 22, 2014 we received approximately $53.2 million of net proceeds, after deduction of underwriting discounts, commissions and expenses.  In October 2015, we filed a shelf registration statement with the Securities and Exchange Commission to register for sale any combination of the types of securities described in the filing up to an amount of $100 million. The shelf registration went effective on October 7, 2015, and to date no securities have been sold by us under this shelf registration. In September 2016, we closed a private placement stock offering in which we sold 22,500 shares of Series A Convertible Preferred Stock and five-year warrants to purchase an aggregate of approximately 3,214,299 shares of the Company’s common stock, at a purchase price of $1,000 per share of Preferred Stock. We received approximately $21.3 million in proceeds from the offering after deducting commissions and offering expenses.
We have incurred negative cash flows from operating and investment activities since our inception in 2009 and we expect to continue to incur negative cash flows from operating activities until we achieve a significant increase in our revenue. Since inception, we have devoted our resources to funding research and development and to commercializing the assets and technology acquired from Gen-Probe, as well as development of molecular chemistry and a small volume instrument. At December 31, 2016, we had cash and cash equivalents of $8.8 million, marketable securities of $16.0 million and an accumulated deficit of $208.1 million.
The following table shows a summary of our cash flows for the years ended December 31, 2016, 2015, and 2014, respectively (in thousands):
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Net cash used in operating activities
$
(22,802
)
 
$
(23,746
)
 
(23,515
)
Net cash provided by (used in) investing activities
12,416

 
20,077

 
(60,457
)
Net cash provided by (used in) financing activities
15,777

 
(393
)
 
58,747

Net change in cash and cash equivalents
$
5,391

 
$
(4,062
)
 
$
(25,225
)


Operating Activities
Net cash used in operating activities was $22.8 million for the year ended December 31, 2016 and resulted from a $30.8 million net loss and $1.4 million net changes in operating assets and liabilities, partially offset by $9.4 million in non-cash items, principally depreciation and amortization, share-based compensation expense, non-cash interest expense and provisions for inventory. Net cash used in operating activities was $23.7 million for the year ended December 31, 2015 and resulted from a $36.6 million net loss, partially offset by $10.8 million in non-cash items, principally depreciation and amortization, provisions for inventory, non-cash interest expense, share-based compensation expense and the change in fair value of financial instruments. Net cash used in operating activities was $23.5 million for the year ended December 31, 2014 and resulted from a $32.2 million net loss and a $0.3 million net change in operating assets and liabilities, partially offset by $9.0 million in non-cash items, principally the change in fair value of financial instruments, depreciation and amortization, provisions for inventory, share-based compensation expense and non-cash interest expense.
Investing Activities
Net cash provided by investing activities was $12.4 million for the year ended December 31, 2016 and was primarily the result of maturities of marketable securities of $31.7 million partially offset by purchases of marketable securities of $19.0 million. Net cash provided by investing activities was $20.1 million for the year ended December 31, 2015 and as primarily the result of maturities of marketable securities that were not reinvested. Net cash used in investing activities was $60.5 million for the year ended December 31, 2014 and was primarily the result of the purchase of $52.8 million of marketable securities and $10.5 million paid to Gen-Probe for payments due under the amended license agreement, partially offset by proceeds from the maturity of marketable securities of $3.0 million.
Under the Atlas supply agreement with Gen-Probe, we can defer up to one-half of the invoice amount for each Atlas instrument we purchase for up to 54 months after delivery. Net cash used in investing activities excludes the amounts deferred under the Atlas supply agreement.
Financing Activities
Net cash provided by financing activities was $15.8 million for the year ended December 31, 2016 and consisted primarily of the $21.3 million of net proceeds from the issuance of convertible preferred stock and warrants in September 2016,

52


partially offset by repayment of amounts outstanding under our loan and security agreement with Comerica of $4.0 million, and deferred payments made to Gen-Probe under our supply agreement of $1.5 million. Net cash used by financing activities for the year ended December 31, 2015 was $0.4 million and consisted primarily of the repayment of amounts outstanding under our loan and security agreement with TriplePoint Capital of $5.4 million, partially offset by proceeds under the amendment of our loan and security agreement with Comerica of $5.0 million. Net cash provided by financing activities for the year ended December 31, 2014 consisted of proceeds from our initial public offering of $53.6 million, which excludes offering expenses of $0.4 million paid in 2013, borrowings under our loan and security agreements of $5.0 million and $0.3 million of proceeds from the exercise of stock options.
Operating Capital Requirements
We have limited capital resources, have experienced negative cash flows from operations and have incurred net losses since inception. We expect to continue to experience negative cash flows from operations and incur net losses in the near term as we devote substantially all of our efforts on commercialization of our products and continued product development. We expect future operating, investment and financing activities to be funded by our product revenue, our existing cash and cash equivalents, and from cash raised through debt or equity offerings in the future. Based on our current business plan, we currently anticipate that we will have sufficient capital to fund our existing operations through the end of 2017. Our liquidity requirements may be negatively impacted by changes to our business plan, a lengthier sales cycle, lower demand for our products or other risks described elsewhere in this annual report, and therefore we may need to raise capital sooner than currently anticipated. These factors create substantial doubt about our ability to continue as a going concern. Our liquidity requirements have and will continue to consist of sales, marketing, research and development expenses, capital expenditures, working capital and general corporate expenses. Our future liquidity requirements will also include interest and principal payments on our debt and anticipated future payments to Gen-Probe of $5.0 million on January 1, 2018 and $5.0 million on January 1, 2020 as well as general and administrative expenses, such as insurance costs and professional fees associated with being a public company. As demand for our products increases, we expect that our capital requirements will increase in order to purchase additional Atlas instruments for placement with customers and cause increased working capital requirements, such as inventory and accounts receivable.
Our present and future funding requirements will depend on many factors, including our revenue growth and ability to generate cash flows from operating activities; the level of our sales and marketing and research and development activities; the effect of competing technological and market developments; the cost of and potential delays in product development; any change in regulatory oversight applicable to our products; and potential costs related to international expansion.
We expect to need to raise additional capital to fund our existing operations and commercialize our products. Additional capital may not be available on reasonable terms, if at all. We may seek to sell common or preferred equity or convertible debt securities, enter into an additional credit facility or another form of third-party funding, or seek other debt financing. In addition, we may raise additional capital to expand our business, to pursue strategic investments, to take advantage of financing opportunities, or for other reasons. The sale of equity or convertible debt securities may result in dilution to our stockholders and those securities may have rights senior to those of our common shares. If we raise additional funds through the issuance of preferred stock, convertible debt securities or other debt financing, these securities or other debt could contain covenants that may restrict our operations. Any other third-party funding arrangement could require us to relinquish valuable rights.

These statements regarding our future liquidity requirements are forward-looking statements and involve risks and uncertainties and actual results could vary materially and negatively as a result of a number of factors, including the factors discussed in the section “Risk Factors” of this report. We have based our estimates regarding our future liquidity requirements on assumptions that may prove to be wrong and we could exhaust our available capital resources sooner than we currently expect. If we cannot expand our operations, or otherwise capitalize on our business opportunities, because we lack sufficient capital, our business, financial condition, and results of operations could be materially adversely affected.
Term Loan and Security Agreements
In November 2013, we entered into loan and security agreements with each of Comerica Bank, or Comerica, and with TriplePoint Capital LLC, or TriplePoint.
Under the terms of our loan agreement with Comerica, we borrowed $5.0 million in November 2013. The Comerica loan bears interest at Comerica’s Prime Referenced Rate (as defined in the loan agreement with Comerica), subject to a floor of the daily adjusting LIBOR rate plus 2.5%, plus 3.15 %, which was 6.65% as of December 31, 2016.

53


Pursuant to the terms of our loan agreement with TriplePoint, we borrowed $5.0 million in March 2014. The borrowings under the TriplePoint loan accrued interest at the Prime Rate plus 6.25%, but not less than 9.5% and were repayable over 36 months from the borrowing date with an interest-only period of 12 months, and equal monthly installments of principal and interest over the remaining term of the loan after the interest only period.
In May 2015, we paid off the remaining amounts due under the TriplePoint Loan, which consisted of $4.6 million in principal and a $350,000 final payment fee and simultaneously amended the Comerica Loan (the “Comerica Amendment”). The Comerica Amendment increased the borrowing under the Comerica Loan to $10.0 million, extended the interest-only period from June 1, 2015 until December 31, 2015 and extended the overall term by 12 months. In January 2016, we began to make monthly payments which consist of accrued interest and equal principal payments in accordance with a 30-month amortization schedule. The interest rate under the Comerica Amendment remains unchanged.
Pursuant to the Comerica Amendment we are required to maintain at least $5,000,000 of unrestricted cash and/or marketable securities with Comerica at all times. As of December 31, 2016 and during the period since we entered into the Comerica Amendment, we have been in compliance with this requirement. Additionally, the Comerica Loan contains various covenants that limit our ability to engage in specified types of transactions, including limiting our ability to; sell, transfer, lease or dispose of certain assets; engage in certain mergers and consolidations; incur debt or encumber or permit liens on certain assets, make certain restricted payments, including paying dividends on, or repurchasing or making distributions with respect to, our Common Stock; and enter into certain transactions with affiliates.
As of December 31, 2016, we had $6.0 million outstanding under the amended Comerica Loan. We may prepay the loan to Comerica, in full or in part at any time, provided that no event of default has occurred and is continuing.
In connection with entering into the loan and security agreements in November 2013, we issued to Comerica a ten-year warrant to purchase an aggregate of 117,647 shares of our Series E preferred stock at an exercise price of $1.28 per share, and we issued to TriplePoint ten-year warrants to purchase an aggregate of 235,294 shares of our Series E preferred stock at an exercise price of $1.28 per share. In connection with the borrowings in March 2014, the TriplePoint warrants became exercisable for an additional 156,863 shares. The warrants issued to TriplePoint contain net issuance exercise provisions. The Comerica and TriplePoint warrants contain anti-dilution adjustment provisions for stock splits, dividends, combinations, reclassifications or exchanges and as such in connection with the IPO, these warrants converted into warrants to purchase common stock at their conversion rate of approximately 0.0906 common warrant shares to one Series E warrant share. As a result, and subsequent to the reverse stock split conducted in October 2016, such warrants became exercisable for 4,618 shares of common stock with an exercise price of $140.80.
In connection with the Comerica Amendment in May 2015, we issued an additional warrant to Comerica to purchase up to an aggregate of 5,227 shares of Common Stock at $28.70 per share and modified the exercise price of the original warrant granted to Comerica to purchase up to an aggregate of 1,066 shares of common stock from $140.80 per share to $28.70 per share.
As of December 31, 2016, there were 3,460,830 warrant shares outstanding with a weighted average exercise price of $7.18 per share. The Comerica and TriplePoint warrants have the same “piggyback” registration rights as holders of registrable securities under the investors' rights agreement. Such rights will expire upon the earlier of (i) five years after our IPO and (ii) as to any holder, at such time as all registrable securities held by such holder may be sold without restriction under Rule 144.

Controlled Equity OfferingSM Sales Agreement

We entered into a Controlled Equity OfferingSM Sales Agreement (the "Sales Agreement"), dated October 30, 2015, with Cantor Fitzgerald & Co., as sales agent, pursuant to which we may offer and sell, from time to time, through Cantor Fitzgerald shares of our common stock for an aggregate offering price of up to $6,750,000, provided, however, that in no event shall we issue or sell through Cantor Fitgerald such number or dollar amount of shares that exceed the number or dollar amount of shares permitted to be sold under Form S-3 (including General Instruction I.B.6 thereof). We are not obligated to sell any shares under the Sales Agreement. Subject to the terms and conditions of the Sales Agreement, Cantor Fitzgerald will use commercially reasonable efforts consistent with its normal trading and sales practices, applicable state and federal law, rules and regulations and the rules of The NASDAQ Global Market to sell shares from time to time based upon our instructions, including any price, time or size limits specified by us. Under the Sales Agreement, we must pay Cantor Fitzgerald a commission of 3.0% of the aggregate gross proceeds from each sale of shares and reimburse Cantor Fitzgerald for certain specified expenses.  As of February 28, 2017, we had not sold any shares under this Sales Agreement, and we had $6.75 million remaining in aggregate offering price available under the Sales Agreement. 



54


Contractual Obligations and Commitments
The following is a summary of our contractual obligations as of December 31, 2016 (in thousands):
 
 
Total
 
Less than 1
year
 
1-3 years
 
3-5 years
 
More than 5
years
Deferred payment obligations(1)
$
13,212

 
$
2,076

 
$
6,136

 
$
5,000

 
$

Operating lease obligations(2)
2,882

 
1,080

 
1,604

 
198

 

Purchase obligations(3)
1,251

 
1,251

 

 

 

Notes payable(4)
6,040

 
6,040

 

 

 

Total contractual obligations
$
23,385

 
$
10,447

 
$
7,740

 
$
5,198

 
$

 
(1)
The deferred payment obligations are based upon the gross deferred amounts outstanding for instruments purchased from Gen-Probe as of December 31, 2016, as disclosed in the notes to our audited financial statements included elsewhere in this Form 10-K. Such amounts are recorded at their aggregate present value of $3.0 million on the Balance Sheet as of December 31, 2016. The timing of when these payments are due reflects our current estimates of repayment. We do not believe that future revisions of estimates will have a significant impact on the timing of payments. Additionally, amounts due beyond one year represent the two separate $5.0 million lump-sum payments payable to Gen-Probe in accordance with the amendment to our licensing agreement discussed in "Results of Operations". Such amounts are recorded at their aggregate present value of $8.5 million on the Balance Sheet as of December 31, 2016.
(2)
Our operating lease obligations represent the contractual payments due for the lease of our corporate office in Warren, NJ, our laboratory in Warren, NJ and our facility in San Diego, CA.
(3)
Our purchase obligations represent the total cost of instruments and supplies which we are committed to purchase from Gen-Probe as well as additional obligations due under other agreements entered into in the normal course of business. In accordance with the supply agreement we entered into with Gen-Probe, our purchases of Atlas instruments are defined in rolling quarterly forecasts, and these forecasts become binding commitments for approximately nine months of Atlas instrument purchases at any given time. Our obligation to purchase supplies from Gen-Probe is defined in an annual purchase order submitted in the third quarter of each year.
(4)
Such amounts include total principal repayments of $6.0 million and final payment fees of $40,000, of which approximately $4.0 million is due within one year from the Balance Sheet date and the remaining amounts are shown as being due in less than one year as our loan agreements contain material adverse change clauses which allow the lenders to call the debt based on subjective factors regarding our business and performance. Amounts which are or may become payable as interest are excluded from the table, but are estimated to approximate $0.3 million during 2017.


Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under the rules and regulations of the Securities and Exchange Commission.


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Critical Accounting Policies and Significant Estimates
We have prepared our financial statements in accordance with U.S. generally accepted accounting principles. Our preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, expenses and related disclosures at the date of the financial statements, as well as revenue and expenses recorded during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from these estimates under different assumptions or conditions.

Revenue Recognition

We generate revenue from the sale of our Atlas Detection Assays and consumable supplies for use with our Atlas instruments, as well as limited revenue from instrument rentals and service and maintenance contracts on our Atlas instruments. We generally provide Atlas instruments free of charge under a reagent rental agreement, under which we retain title to the instrument and it remains capitalized on our balance sheet under property and equipment. We recover the cost of providing the Atlas instruments in the amount we charge for Atlas Detection Assays. The reagent rental agreements are typically for one-year periods, and they do not contain minimum purchase obligations. Revenue is recognized over the term of the reagent rental agreement as Atlas Detection Assays and other consumable supplies are shipped. Shipping and handling costs incurred by us are included in our billings to customers.

We recognize revenue from product sales and contract arrangements, net of discounts and sales related taxes where applicable. We recognize product revenue upon shipment provided there is persuasive evidence of an arrangement, there are no uncertainties regarding acceptance, the sales price is fixed or determinable and collection of the resulting receivable is reasonably assured. There is no customer right of return for the Atlas Detection Assays in our sales agreements.
Revenue for leases and service and maintenance contracts are recognized ratably over the term of the contract. Revenue for the sale of Atlas instruments are recognized upon shipment provided that there is persuasive evidence of an arrangement, there are no uncertainties regarding acceptance, the sales price is fixed or determinable and collection of the resulting receivable is reasonably assured.

Trade Accounts Receivable

We evaluate the creditworthiness of each customer on a regular basis. We use judgments as to our ability to collect outstanding receivables and provide allowances for the portion of receivables if and when collection becomes doubtful, and we also assess on an ongoing basis whether collectibility is reasonably assured at the time of sale. Changes to allowances and adjustments for declines in customers’ creditworthiness are recorded as bad debt expense as a component of selling, general and administrative expense. We have not experienced any material losses related to receivables from individual customers, or groups of customers. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be probable in our accounts receivable.

Income Taxes

We apply the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect for years in which the temporary differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. We recognize the benefit of an uncertain tax position that we have taken or expect to take on income tax returns we file if such tax position is more likely than not to be sustained. Our deferred tax assets have been fully offset by a valuation allowance due to uncertainties surrounding our ability to realize these tax benefits.

Inventories

Inventories include raw materials and supplies used for manufacturing of Atlas Detection Assays and finished products held for sale. Our inventories are stated at the lower of cost or market. Cost includes amounts related to materials, applicable labor and manufacturing overhead, and is determined in a manner which approximates the first-in first-out cost method. Manufacturing overhead is capitalized based on the normal capacity of our production facilities. We recognize costs associated with abnormal production and underutilized capacity in the period in which they are incurred. Reserves are recorded for expiry,

56


obsolescence and net realizable value, based on management’s review of inventories on hand, compared to estimated future demand, shelf-life and the likelihood of obsolescence.

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

Prior to our IPO, there was no active public market for our common stock. Therefore, our board of directors, with the assistance and upon the recommendation of management, for financial reporting purposes periodically determined the estimated per share fair value of our common stock at various dates after considering numerous factors, including business progress and developments at our company, market conditions and contemporaneous independent third-party valuations consistent with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, also known as the Practice Aid. We performed these contemporaneous valuations as of December 31, 2012, December 31, 2013 and March 31, 2014 and to coincide with our Series E preferred stock issuances at June 15, 2013 and November 20, 2013. In conducting these valuations, we considered all objective and subjective factors that we believed to be relevant in each valuation conducted, including management’s best estimate of our business condition, prospects, and operating performance at each valuation date.

Intangible assets

We evaluate potential impairments of amortizable intangible assets if events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. Our evaluation is based on an assessment of potential indicators of impairment, such as current or forecast changes in the timing or number of customer acquisitions, instrument placements, average number of tests run per instrument and the average selling price per assay.

Impairment exists when the carrying amount of an amortizable intangible asset is not recoverable and its carrying value exceeds its estimated fair value. We assess recoverability of the intangible asset using an undiscounted cash flow analysis. Estimates and assumptions used in our undiscounted cash flow model include timing of customer acquisitions, instrument placements, average number of tests run per instrument and the average selling price per test. A change in any of these estimates and assumptions could result in a different assessment of recoverability of the intangible asset, which in turn could have a material impact on our results of operations.

During the fourth quarter of 2016, we prepared revised projections for revenue and expenses, which indicated continued cash flow losses for the Company, and as a result, we determined a triggering event had occurred. We completed an assessment of the asset group including the intangible asset for recoverability. The recoverability assessment was based upon probability-weighted cash flow estimates resulting from updated revenue and expense projections and an appropriate terminal value. Based on the impairment assessment, we determined that the asset group including the intangible asset was not impaired. If actual results or an amendment to projections vary from the revenue and expense projections used in the assessment during the fourth quarter of 2016, an impairment could be realized in future periods.



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ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2016, our cash and cash equivalents of $8.8 million were primarily held in money market deposit accounts. Our primary exposure to market risk for our cash and cash equivalents is interest income sensitivity, which is affected by changes in the general level of U.S interest rates. However, because of the short-term nature of the instruments in our portfolio, a sudden change in the interest rates associated with these instruments is not expected to have a material impact on our financial condition or results of operations.
As of December 31, 2016, we had $16.0 million of marketable securities classified as held-to-maturity on our balance sheet which had a fair value of $16.0 million. As our intention is to hold these investments through maturity, any interest rate fluctuation changing the fair value of such marketable securities would only be realized if the Company sold the investments prior to maturity.
As of December 31, 2016, we had $6.0 million of variable interest-rate debt outstanding under the Amendment to the loan and security agreement with Comerica. Considering the amount outstanding and available under the loan and security agreement, we do not believe a 1.0% increase in the interest rate would have a material impact on our financial condition or results of operations.
We do not have any foreign currency or other derivative financial instruments.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements are included in pages F-1 to F-26 of this annual report on Form 10-K.

Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
 

Item 9A.
CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Our management, with the participation of the principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2016. Based on this evaluation, the principal executive officer and principal financial officer concluded that these disclosure controls and procedures are effective at the reasonable assurance level.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and Rule 15d-15(f) of the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for

58


external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(ii) 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 our management and directors; and
(iii) 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.

The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute, assurances. 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. Our management assessed the effectiveness of Roka Bioscience's internal control over financial reporting as of December 31, 2016. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on our assessment using those criteria, our management, including the Company’s CEO and CFO, has concluded that our internal control over financial reporting was effective as of December 31, 2016.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended December 31, 2016 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.
OTHER INFORMATION
Not applicable.



59


PART III

Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers and Directors
The following table sets forth the name, age and position of each of our directors and executive officers as of February 28, 2017.
 
Name
  
Age
 
Position(s)
  
Served as an
Officer or Director
Since
 
Mary Duseau
  
52
  
President, Chief Executive Officer and Director
  
2015
  
Lars Boesgaard
  
47
  
Vice President, Chief Financial Officer and Treasurer
  
2015
  
Paul G. Thomas
  
61
  
Chairman of the Board
  
2009
  
M. James Barrett, Ph.D.(1)
  
74
  
Director
  
2009
  
Fred E. Cohen, Ph.D., M.D.(1)(3)
  
60
  
Director
  
2009
  
Michael P. Doyle, Ph.D.(1)
  
67
  
Director
  
2010
  
David W. J. McGirr(2)(3)
  
62
  
Director
  
2013
  
Nicholas J. Valeriani.(2)(3)
  
60
  
Director
  
2015
  
 
(1)
Member of the Compensation Committee.
(2)
Member of the Audit Committee.
(3)
Member of the Nominating and Corporate Governance Committee.

Mary Duseau has served as our president and chief executive officer since January 2017. From February 2015 until January 2017, Ms. Duseau served as our senior vice president and chief commercial officer. From October 2012 until January 2015, Ms. Duseau held various positions at Andor Technology plc (“Andor”), a division of Oxford Instruments plc and leader in the global scientific digital camera market, and since February 2014 has served as Global Sales Director at Andor where she oversaw the company’s global sales organization. Prior to joining Andor, Ms. Duseau held various sales and management roles of increasing responsibility with PerkinElmer, Inc. (NYSE: PKI) from 2000 through September 2012, including the position of Vice-President Sales & Marketing, Bio-discovery, from 2008 to September 2012, where she led the sales and marketing of the company’s life science tools business. Ms. Duseau received her Bachelor of Science in Biochemistry with a minor in Neuroscience from the University of Massachusetts, Amherst.

Lars Boesgaard has served as our vice president, chief financial officer and treasurer since November 2015. Mr. Boesgaard joined Roka in October 2009 as Controller and was promoted to Vice President, Finance in January 2012. Previously from 2007 to 2009, Mr. Boesgaard served as Vice President, Finance at Insulet Corporation (NASDAQ:PODD). From 2004 to 2007, he was Senior Director, Financial Services at Alexion Pharmaceuticals, Inc. (NASDAQ: ALXN). From 2000 to 2004, Mr. Boesgaard served in various financial roles at The Nielsen Company. From 1995 to 2000, he served in various financial roles at Novo Nordisk A/S (NYSE:NVO). Mr. Boesgaard earned a Bachelor of Science degree from Copenhagen Business School and a Masters in Business Administration from Western University in London, Ontario.

Paul G. Thomas has served as our chairman of the board since January 2017. From our founding in September 2009 until January 2017, Mr. Thomas served as our president and chief executive officer. Previously, from October 1998 until September 2008, he served as chairman, chief executive officer, and president of LifeCell Corporation, a publicly traded company focused on developing and marketing reconstructive surgical products, which was acquired by Kinetic Concepts, Inc., a global medical technology company, in May 2008. Prior to joining LifeCell, Mr. Thomas held various senior positions during his 15-year tenure with the pharmaceutical products division of Ohmeda Inc., now a Baxter Company. Mr. Thomas currently serves as a member of the board of directors of the following publicly-held companies: ABIOMED, Inc. (NASDAQ: ABMD), a medical devices company

60


focused on products that provide circulatory support, since May 2011 and RTI Surgical (NASDAQ: RTIX), a global surgical implant company, since 2016. Mr. Thomas previously served as a member of the board of directors for Aegerion Pharmaceuticals, Inc. (NASDAQ: AEGR), a biopharmaceutical company focused on development and commercialization of innovative, life-altering therapies for patients with debilitating, often fatal, rare diseases, until its merger in 2016 with Novelion Therapeutics (NASDAQ: NVLN). Mr. Thomas received his Master of Business Administration from Columbia University, and completed his postgraduate studies in chemistry at the University of Georgia. He received his Bachelor of Science in Chemistry from St. Michael’s College. In addition to Mr. Thomas’ extensive leadership experience with public companies in the life sciences industry, we believe Mr. Thomas’ perspective as one of our founders, and his extensive leadership and experience as our chief executive officer since our founding, his knowledge of our operations bring to our board of directors critical strategic planning and operational leadership that qualify him to serve as a member of our board of directors.


M. James Barrett, Ph.D.  served as our chairman of the board from our founding in September 2009 until January 2017. Dr. Barrett has served as a general partner of New Enterprise Associates, a venture capital fund, since August 2001. From January 1997 to 2001 he served as chairman of the board of directors of Sensors for Medicine and Science, Inc., a medical device company which he founded in 1997. Dr. Barrett currently serves on the board of directors of each of the following publicly-held companies: Clovis Oncology, Inc. (NASDAQ:CLVS), a biopharmaceutical company focused on anti-cancer agents, since April 2009; GlycoMimetics, Inc. (NASDAQ GLYC), since 2003, Proteostasis Therapeutics, Inc. (NASDAQ: PTI), since 2015, Senseonics Holdings, Inc. (NASDAQ: SENS), since 1996 and Zosano Pharma Corporation (NASDAQ: ZSAN), a specialty pharmaceutical company, since 2012. In addition, Dr. Barrett currently serves as a member of the board of directors of a number of private companies. In addition, within the past five years, Dr. Barrett has previously served on the board of directors of each of the following publicly-held companies: Supernus Pharmaceuticals, Inc. (NASDAQ: SUPN), a specialty pharamaceutical company, Loxo Oncology, Inc. (NASDAQ: LOXO), a biopharmaceutical company focused on targeted cancer therapies, Zosano Pharma Corporation (NASDAQ: ZSAN), a specialty pharmaceutical company, Targacept, Inc., (NASDAQ: TRGT), a clinical-stage biopharmaceutical company, from 2002 until May 2013; Amicus Therapeutics, Inc. (NASDAQ: FOLD), a publicly traded biopharmaceutical company focused on therapies for rare and orphan diseases, from August 2009 to February 2015; Inhibitex, Inc. from 2002 until it was sold to Bristol-Myers Squibb Company (NYSE: BMY), a global biopharmaceutical company, in 2012; and YM Biosciences, Inc. (NYSE MKT: YMI, TSX: YM), a Canadian-based biopharmaceutical company subsequently acquired by Gilead Sciences, Inc. (NASDAQ: GILD). Dr. Barrett received a B.S. in Chemistry from Boston College, a Ph.D. in Biochemistry from the University of Tennessee and an M.B.A. from the University of Santa Clara. We believe that Dr. Barrett’s extensive experience as a venture capital investor focused on the healthcare industry, as a founder of numerous companies and entrepreneur, as a director of numerous publicly-traded pharmaceutical companies, and his strong capital markets experience qualifies him to serve as a member of our board of directors.

Fred E. Cohen, M.D., D.Phil., F.A.C.P., has served as a member of our board of directors since our founding in September 2009. Dr. Cohen is a Senior Advisor with TPG Capital, or TPG, a private equity firm, and previously served as a partner and managing director of TPG. Dr. Cohen joined TPG in 2001. Dr. Cohen is also a former member of the faculty at the University of California, San Francisco, where he taught and conducted research from 1988 through 2014. Dr. Cohen currently serves on the board of directors of each of the following publicly-held companies: Genomic Health, Inc. (NASDAQ: GHDX), a company focused on providing actionable genomic health information; Five Prime Therapeutics, Inc. (NASDAQ: FPRX), a clinical-stage biotechnology company focused on discovering and developing novel protein therapeutics; Veracyte, Inc. (NASDAQ: VCYT), a diagnostics company in the field of molecular cytology; Tandem Diabetes Care, Inc. (NASDAQ: TNDM), a medical device company that designs, develops and commercializes products for people with insulin-dependent diabetes; and BioCyrst Pharmaceuticals, Inc. (NASDAQ: BCRX), a pharmaceutical company focused on the development of novel small-molecule drugs that block key enzymes involved in infectious and rare diseases; and CareDx, Inc. (NASDAQ: CDNA), a molecular diagnostics business focused on organ transplant recipients. Dr. Cohen previously served on the board of directors of Quintiles IMS Holdings, Inc. (NYSE: Q) from 2007 until November 2015. He is a member of the Institute of Medicine of the National Academy of Sciences and the American Academy of Arts and Sciences. Dr. Cohen holds a Bachelor of Science degree in Molecular Biophysics and Biochemistry from Yale University, a D.Phil. in Molecular Biophysics from Oxford University, where he was a Rhodes Scholar, and an M.D. from Stanford University. We believe that Dr. Cohen’s extensive experience as a venture capital investor focused on biotechnology companies and as a director of several publicly-traded life sciences companies qualifies him to serve as a member of our board of directors.

Michael P. Doyle, Ph.D. has served as a member of our board of directors since March 2010. Dr. Doyle has served as a Professor of Food Microbiology since March 1991. Dr. Doyle served as the Director of the Center for Food Safety at the University of Georgia from March 1993 through June 2016. He is a researcher in the area of food safety and security and works closely with the food industry, government agencies, and consumer groups on issues related to the microbiological safety of foods. He serves on food safety committees of many scientific organizations and has served as a scientific advisor to many groups, including the World Health Organization, the Institute of Medicine, the National Academy of Science-National Research Council, the

61


International Life Sciences Institute-North America, the Food and Drug Administration, the U.S. Department of Agriculture, the U.S. Department of Defense, and the U.S. Environmental Protection Agency. He is a Fellow of the American Academy of Microbiology, the International Association for Food Protection and the Institute of Food Technologists, and is a member of the Institute of Medicine of the National Academies. We believe that Dr. Doyle’s extensive experience in the food safety industry, including as an advisor to agencies that regulate food safety, qualifies him to serve as a member of our board of directors.
 
David W. J. McGirr has served as a member of our board of directors since December 2013. Mr. McGirr served as a senior advisor of Cubist Pharmaceuticals, Inc. (NASDAQ: CBST), a biopharmaceutical company focused on products for the acute care environment, from March 2013 to June 2014, and as senior vice president and chief financial officer from 2002 to March 2013. Prior to Cubist, Mr. McGirr was the president and chief operating officer of hippo inc, a privately-held internet technology company, and served as a member of their board of directors. Prior to hippo, Mr. McGirr was the president, and also served as chief executive officer, of GAB Robins North America, Inc., a risk management company. Prior to that, Mr. McGirr served in various positions within the S.G. Warburg Group, an investment bank, ultimately serving as chief financial officer, chief administrative officer and managing director of its subsidiary S.G. Warburg & Co., Inc. Mr. McGirr currently serves as a member of the board of directors and chairman of the audit committee of each of Insmed Incorporated (NASDAQ CM: INSM), a biopharmaceutical company focused on developing an inhaled anti-infective to treat patients battling serious lung diseases and Rhythm Pharmaceuticals, Inc. a biopharmaceutical company focused on developing and commercializing peptide therapeutics for the treatment of rare genetic deficiencies. In addition, Mr. McGirr served on the board of directors of Relypsa (NASDAQ: RLYP) from November 2012 until Relypsa was acquired by Galenica Group (SIX: GALN) in September 2016. Mr. McGirr received a B.Sc. in Civil Engineering from the University of Glasgow and an M.B.A. from the Wharton School at the University of Pennsylvania. We believe that Mr. McGirr’s management experience, including his experience as chief financial officer of a publicly traded biopharmaceutical company, his experience as a director and audit committee member of other publicly-traded companies and his experience in the financial sector qualifies him to serve as a member of our board of directors.

Nicholas J. Valeriani has served as a member of our board of directors since August 2015. Mr. Valeriani was the Chief Executive Officer of the Gary and Mary West Health Institute, an independent, nonprofit medical research organization that works to create new, more effective ways of delivering care at lower costs from 2012 through September 2015. Since September 2015, Mr. Valeriani has served on the Gary and Mary West Health Institute’s board of directors and the Gary and Mary West Health Policy Center’s board. Prior to joining West Health in 2012, Mr. Valeriani spent 34 years at Johnson & Johnson (NYSE: JNJ) and served as a member of its executive committee. Currently, Mr. Valeriani serves on the boards of directors of RTI Surgical, Inc. (NASDAQ: RTIX), a global surgical implant company and Edwards Lifesciences Corporation (NYSE: EW). Mr. Valeriani has a master's degree in business administration from Rutgers University, Graduate School of Management, and a bachelor's degree in industrial engineering from Rutgers University, College of Engineering. We believe that Mr. Valeriani's management, experience, including his experience as an executive at Johnson & Johnson, and his experience as a director of other publicly-traded companies and his experience in the financial sector qualifies him to serve as a member of our board of directors.

Corporate Governance Matters

Board of Director Composition

Our board of directors currently consists of seven members. Our directors hold office until their successors have been elected and qualified or until the earlier of their resignation or removal.

We have no formal policy regarding board diversity. Our priority in selection of board members is identification of members who will further the interests of our stockholders through his or her established record of professional accomplishment, the ability to contribute positively to the collaborative culture among board members, knowledge of our business and understanding of the competitive landscape.


 
Board Committees

Our board of directors has established an audit committee, a compensation committee, and a nominating and corporate governance committee. Each of these committees operates under a charter that has been approved by our board of directors. The charters are available on our corporate governance section of our website www.rokabio.com.

Audit Committee


62


Our audit committee currently consists of Mr. McGirr, as chairman, Dr. Barrett and Mr. Valeriani, each of whom is “independent” as that term is defined under applicable SEC rules and NASDAQ listing standards. Our board of directors has determined that Mr. McGirr qualifies as an audit committee financial expert within the meaning of SEC regulations and The NASDAQ Marketplace Rules. In making this determination, our board has considered the formal education and nature and scope of his previous experience, coupled with past and present service on various audit committees. Our audit committee assists our board of directors in its oversight of our accounting and financial reporting process and the audits of our financial statements.

Our audit committee’s responsibilities include:

appointing, evaluating, retaining and, when necessary, terminating the engagement of our independent registered public accounting firm;
overseeing the independence of our independent registered public accounting firm, including obtaining and reviewing reports from the firm;
setting the compensation of our independent registered public accounting firm;
overseeing the work of our independent registered public accounting firm, including receiving and considering reports made by our independent registered public accounting firm regarding accounting policies and procedures, financial reporting and disclosure controls;
reviewing and discussing with management and our independent registered public accounting firm our audited financial statements and related disclosures;
preparing the annual audit committee report required by SEC rules;
coordinating internal control over financial reporting, disclosure controls and procedures and code of conduct;
reviewing our policies with respect to risk assessment and risk management;
establishing procedures related to the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submission by employees of concerns regarding accounting or auditing matters;
reviewing our policies and procedures for reviewing and approving or ratifying related person transactions, including our related person transaction policy; and
meeting independently with management and our independent registered public accounting firm.
 

All audit services to be provided to us and all non-audit services to be provided to us by our independent registered public accounting firm must be approved in advance by our audit committee.

Compensation Committee

Our compensation committee currently consists of Dr. Barrett, as chairman, Dr. Cohen and Mr. Valeriani, each of whom are “independent” as that term is defined under applicable SEC rules and NASDAQ listing standards. Our compensation committee assists our board of directors in the discharge of its responsibilities relating to the compensation of our executive officers. Our compensation committee’s responsibilities include:

reviewing and recommending to the board of directors our chief executive officer’s compensation, and approving the compensation of our other executive officers reporting directly to our chief executive officer;
overseeing the evaluation of our senior executives;
overseeing, administering, reviewing and making recommendations to the board of directors with respect to our incentive compensation and equity-based plans;
reviewing and making recommendations to the board of directors with respect to director compensation;
reviewing and discussing with management the compensation discussion and analysis required by SEC rules; and
preparing the annual compensation committee report required by SEC rules.
 

Nominating and Corporate Governance Committee
Our nominating and corporate governance committee currently consists of Mr. Valeriani, as chairman, Drs. Cohen and Doyle, each of whom are “independent” as that term is defined under applicable NASDAQ listing standards. The nominating and corporate governance committee’s responsibilities include:

recommending to the board of directors the persons to be nominated for election as directors or to fill any vacancies on the board of directors, and to be appointed to each of the board’s committees;
developing and recommending to the board of directors corporate governance guidelines; and
overseeing an annual self-evaluation of the board of directors.
 

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Stockholder nominations for directorships

Stockholders may recommend individuals to the Nominating and Corporate Governance Committee for consideration as potential director candidates by submitting their names and background to the Secretary of the Company at the address set forth below under “Stockholder Communications.” All such recommendations will be forwarded to the Nominating and Corporate Governance Committee, which will review and only consider such recommendations if appropriate biographical and other information is provided, as described below, on a timely basis. All security holder recommendations for director candidates must be received by the Company in the timeframe(s) set forth under the heading “Stockholder Proposals” below.

the name and address of record of the security holder;
a representation that the security holder is a record holder of the Company’s securities, or if the security holder is not a record holder, evidence of ownership in accordance with Rule 14a-8(b)(2) of the Securities Exchange Act of 1934;
the name, age, business and residential address, educational background, current principal occupation or employment, and principal occupation or employment for the preceding five (5) full fiscal years of the proposed director candidate;
a description of the qualifications and background of the proposed director candidate and a representation that the proposed director candidate meets applicable independence requirements;
a description of any arrangements or understandings between the security holder and the proposed director candidate; and
the consent of the proposed director candidate to be named in the proxy statement relating to the Company’s annual meeting of stockholders and to serve as a director if elected at such annual meeting.

Assuming that appropriate information is provided for candidates recommended by stockholders, the Nominating and Corporate Governance Committee will evaluate those candidates by following substantially the same process, and applying substantially the same criteria, as for candidates submitted by members of the Board or other persons, as described above and as set forth in its written charter.

Board Leadership Structure and Role in Risk Oversight

The positions of our chairman of the board and chief executive officer are separated. Separating these positions allows our chief executive officer to focus on our day-to-day business, while allowing the chairman of the board to lead the board of directors in its fundamental role of providing advice to and independent oversight of management. Our board of directors recognizes the time, effort and energy that the chief executive officer must devote to his position in the current business environment, as well as the commitment required to serve as our chairman, particularly as the board of directors’ oversight responsibilities continue to grow. Our board of directors also believes that this structure ensures a greater role for the independent directors in the oversight of our company and active participation of the independent directors in setting agendas and establishing priorities and procedures for the work of our board of directors. This leadership structure also is preferred by a significant number of our stockholders. Our board of directors believes its administration of its risk oversight function has not affected its leadership structure.

Although our bylaws do not require our chairman and chief executive officer positions to be separate, our board of directors believes that having separate positions is the appropriate leadership structure for us at this time and demonstrates our commitment to good corporate governance.

Risk is inherent with every business, and how well a business manages risk can ultimately determine its success. Our board of directors is actively involved in oversight of risks that could affect us. This oversight is conducted primarily by our full board of directors, which has responsibility for general oversight of risks, and our standing board committees.

Our board of directors satisfies this responsibility through full reports by each committee chair regarding the committee’s considerations and actions, as well as through regular reports directly from officers responsible for oversight of particular risks within our company. Our board of directors believes that full and open communication between management and the board of directors is essential for effective risk management and oversight.

Code of Business Conduct and Ethics


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We adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A current copy of the code is posted on the Corporate Governance section of our website, which is located at www.rokabio.com. If we make any substantive amendments to, or grant any waivers from, the code of business conduct and ethics for any officer or director, we will disclose the nature of such amendment or waiver on our website or in a current report on Form 8-K.

Section 16(a) Beneficial Ownership Reporting Compliance
 
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive, officers, and persons who are beneficial owners of more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the “SEC”). These persons are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.

To our knowledge, based solely on a review of the copies of such reports furnished to us, and written representations that no other reports were required during the fiscal year ended December 31, 2016, all reports required to be filed under Section 16(a) were filed on a timely basis.

Item 11.
EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION

Summary Compensation Table - 2016

The following table shows the compensation awarded to or earned by our principal executive officer, and all individuals who served as principal executive officer at any time during the fiscal year ended December 31, 2016, our two other most highly compensated executive officers who were serving as executive officers as of December 31, 2016 and up to two additional individuals for whom disclosure would have been provided but for the fact that the individual was not serving as an executive officer as of December 31, 2016. The persons listed in the following table are referred to herein as the “named executive officers".

Name and Principal
Position(1)
 
Year
 
Salary
($)
 
Bonus
($)
 
Stock Awards(1)
($)
 
Option
Awards(1) ($)
 
Non-equity Incentive Plan Compensation ($)
 
All Other Compensation(2) ($)
 
Total
($)
Paul G. Thomas
 
2016
 
$
495,325

 
$
99,065

 

 
108,863

 
 
 
$
19,226

 
$
722,479

Former President and Chief Executive Officer
 
2015
 
$
480,875

 
$
168,307

 

 
718,166

 

 
$
18,048

 
$
1,385,396

Lars Boesgaard
 
2016
 
$
250,000

 
$
44,766

 

 
34,033

 
 
 
$
17,461

 
$
346,260

Vice President and Chief Financial Officer
 
2015
 
$
218,472

 
$
41,333

 
107,847

 
75,596

 

 
$
16,086

 
$
459,334

Mary Duseau
 
2016
 
$
339,487

 
$
114,778

 

 
33,431

 
 
 
$
27,426

 
$
515,122

President and Chief Executive Officer and former Senior Vice President, Chief Commercial Officer
 
2015
 
$
298,864

 
$
78,144

 

 
313,301

 

 
$
22,593

 
$
712,902



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(1)
Amounts reflect the grant date fair value of stock and option awards granted in 2016 and 2015 in accordance with Accounting Standards Codification Topic 718, Compensation - Stock Compensation. For information regarding assumptions underlying the valuation of equity awards, see note 16 to our financial statements and the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Significant Estimates-Stock-Based Compensation” included elsewhere in this report and in our annual report for the year ended December 31, 2015. These amounts do not correspond to the actual value that may be realized by the named executive officers upon vesting of stock or exercise of stock options.
 
 
(2)
These amounts for 2016 include for Mr. Thomas, (i) $18,025 in employer paid health insurance, (ii) $439 in employer paid life insurance and (iii) $762 in employer paid disability insurance; for Mr. Boesgaard, (i) $15,833 in employer paid health insurance, (ii) $366 in employer paid life insurance, (iii) $762 in employer paid disability insurance and (iv) $500 for a contribution to a Health Savings Account; and for Ms. Duseau, (i) $18,025 in employer paid health insurance, (ii) $439 in employer paid life insurance, (iii) $762 in employer paid disability insurance, (iv) $1,000 for a 401(k) match and (v) $7,200 for a car allowance.

These amounts for 2015 include for Mr. Thomas, (i) $16,847 in employer paid health insurance, (ii) $439 in employer paid life insurance and (iii) $762 in employer paid disability insurance; for Mr. Boesgaard, (i) $15,018 in employer paid health insurance, (ii) $306 in employer paid life insurance, and (iii) $762 in employer paid disability insurance; and for Ms. Duseau, (i) $13,992 in employer paid health insurance, (ii) $366 in employer paid life insurance, (iii) $635 in employer paid life insurance, (iv) $1,000 for a 401(k) match and (v) $6,600 for a car allowance.

Narrative Disclosure to Summary Compensation Table

Employment Agreements with Our Named Executive Officers

We have entered into an employment agreement with each of the named executive officers.

Paul G. Thomas

The following is a description of Mr. Thomas's employment agreement as in-effect during the year ended December 31, 2016. Subsequent to year-end, in connection with his resignation as President and Chief Executive Officer, we and Mr. Thomas agreed to amend his employment agreement, effective January 17, 2017, to remove the severance provisions and adjust his title and role.

On September 10, 2009, we entered into a five year employment agreement with Mr. Thomas for the position of President and Chief Executive Officer. The employment agreement automatically renews for successive one year terms unless we or Mr. Thomas provide at least 90 days prior notice of intent not to extend the term of the employment agreement. In the event of a change of control, as described below, occurs within the last twelve months of the applicable term, the term of his employment agreement will automatically renew for an additional twelve months. The expiration of the employment agreement following a notice of non-renewal by either us or Mr. Thomas is not considered termination without cause. Mr. Thomas currently receives a base salary of $495,325, which is subject to periodic review and increase by the compensation committee. Mr. Thomas is also eligible for an annual bonus with a target amount of 50% of his base salary, based on the achievement of certain individual and/or corporate performance targets established by the board or compensation committee. The actual amount of such bonus, which may be more or less than the target bonus, will be determined annually based upon individual and/or our achievement of certain performance targets, as determined by the compensation committee, in its reasonable discretion. Mr. Thomas is eligible to participate in employee benefit plans generally available to our executive employees, subject to the terms of those plans.

Payments Provided upon Termination without Cause or with Good Reason

In the event of termination for good reason or without cause, as described below, subject to the execution and non-revocation of a release agreement, resignation from any and all positions and return of all company property, Mr. Thomas will be entitled to receive (i) the amount of his accrued but unpaid salary, earned but unpaid bonus, and any accrued but unused vacation as of the date of termination, (ii) reimbursement of any expenses properly incurred on our behalf prior to any such termination and not yet reimbursed, (iii) continuation of his base salary in effect immediately prior to the termination of his employment for a period of twelve months after the effective date of termination, and (iv) continuation of group health plan benefits, with the cost of such benefits shared in the same relative proportion by us and Mr. Thomas until the earlier of (x) eighteen months after termination and (y) the date Mr. Thomas becomes eligible for benefits through another employer.

Payments Provided upon Termination without Cause or with Good Reason following a Change of Control


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In the event of termination for good reason or without cause within six months following a change of control, as described below, subject to the execution and non-revocation of a release agreement, resignation from any and all positions and return of all company property, Mr. Thomas will be entitled to receive (i) the amount of his accrued but unpaid salary, earned but unpaid bonus, and any accrued but unused vacation as of the date of termination, (ii) reimbursement of any expenses properly incurred on our behalf prior to any such termination and not yet reimbursed, (iii) a lump sum payment equal to his annual base salary in effect immediately prior to the termination of his employment and (iv) continuation of group health plan benefits, with the cost of such benefits shared in the same relative proportion by us and Mr. Thomas until the earlier of (x) eighteen months after termination and (y) the date Mr. Thomas becomes eligible for benefits through another employer and (v) 100% acceleration of vesting for any unvested restricted stock grants.

Payments upon Change of Control

In addition to the payments described above, upon the occurrence of a change of control transaction, as described below, all shares of restricted stock will fully and immediately vest.
 
Under Mr. Thomas’ employment agreement, the terms below are generally defined as follows:

“cause” means: (i) the continued and willful failure to perform substantially the material duties and responsibilities of the position after receiving written demand for substantial performance; (ii) the conviction of, or plea of guilty or no contest to a felony or a crime involving dishonesty or theft; (iii) the executive’s uncured breach of the employment agreement or covenants agreements with us; (iv) the executive’s uncured and willful failure to comply with a material policy of ours; and (v) acts of gross negligence or gross misconduct by the executive, as determined by the board of directors;

“change of control” means (i) the liquidation, dissolution or winding up of the company; (ii) the acquisition, directly or indirectly, in a transaction or series of related transactions, other than a bona fide equity financing, of more than fifty (50%) or more of the total voting power of all the then-outstanding voting securities of the company; (iii) the acquisition of the company by means of any transaction or series of related transactions in which the company’s stockholders immediately prior to such transaction hold less than sixty-six percent (66%) of the voting power of the surviving or acquiring entity; or (iv) the sale, conveyance or other disposal of all or substantially all of our assets; provided that a change of control will not include a merger or consolidation with a subsidiary or affiliate of the company; and

“good reason” means that the employee has complied with the appropriate notice procedures following the occurrence of any of the following without the executive’s prior written consent: (i) prior to the consummation of a change of control, (x) the executive is not elected or re-elected to serve of our board of directors, (y) assignment to the executive of any duties or reporting obligations inconsistent with the executive’s title, position, authority or responsibility, or (z) the material diminution in the executive’s responsibilities, authority and function; (ii) a reduction in the executive’s base salary or target annual bonus that is not pursuant to a salary reduction program affecting substantially all senior level employees; (iii) failure to continue to provide the executive with benefits substantially similar to those enjoyed by the executive under employee benefit plans generally available to our executive employees; (iv) a change in the executive’s principal office location of more than twenty-five (25) miles; (v) failure to pay the executive any amount due under his employment agreement or any other breach by us of the executive’s employment agreement or (vi) failure to require a successor entity to assume the executive’s employment agreement.


Lars Boesgaard

We and Mr. Boesgaard are party to an employment agreement dated July 1, 2012. The employment agreement provides for “at will” employment. Mr. Boesgaard currently receives a base salary of $250,000, which is subject to periodic adjustment by the chief executive officer, the board or the compensation committee. Mr. Boesgaard is also eligible for an annual bonus with a target amount of 30% of his base salary, based on the achievement of certain individual and/or corporate performance targets established by the board or compensation committee. The actual amount of such bonus will be determined annually based upon individual and/or corporate achievement of certain performance targets, as determined by the compensation committee, in its reasonable discretion. Mr. Boesgaard is eligible to participate in employee benefit plans generally available to our employees, subject to the terms of those plans.

Payments Provided upon Termination without Cause or with Good Reason

In the event of termination for good reason or without cause, as described below, subject to the execution and non-revocation of a release agreement, resignation from any and all positions and return of all company property, Mr. Boesgaard will be entitled to receive (i) the amount of his accrued but unpaid salary, earned but unpaid bonus, and any accrued but unused vacation

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as of the date of termination, (ii) reimbursement of any expenses properly incurred on our behalf prior to any such termination and not yet reimbursed, (iii) continuation of his base salary for a period of nine months after the effective date of termination and (iv) continuation of group health plan benefits, with the cost of such benefits shared in the same relative proportion by us and Mr. Boesgaard until the earlier of (x) nine months after termination and (y) the date Mr. Boesgaard becomes eligible for benefits through another employer.

Under Mr. Boesgaard’s employment agreement, the terms below are generally defined as follows:

“cause” means: (i) the conviction of, or plea of guilty or no contest to a felony or a crime involving dishonesty or theft; (ii) commission a fraudulent, dishonest or illegal act the executive (iii) acts of gross negligence or gross misconduct by the executive; (iv) willful violation of a federal state or local law or regulation applicable to our business; (v) material and uncured violation of the company’s policies and procedures; (vi) material and uncured failure to satisfactorily perform executive’s duties; (vii) executive’s breach of the terms the confidentiality, inventions and non-interference agreement; and (viii) executive’s uncured breach of the employment agreement or related agreements with us; and

“good reason” means that the employee has complied with the appropriate notice procedures following the occurrence of any of the following without the employee’s advance written consent: (i) a reduction in the employee’s base salary that is not pursuant to a salary reduction program affecting substantially all senior level employees or (ii) a change in the employee’s principal office location of more than fifty (50) miles.

Mary Duseau

On February 4, 2015, we entered into an employment agreement with Ms. Duseau for the position of Senior Vice President, Chief Commercial Officer. Ms. Duseau currently receives a base salary of $400,000, which is subject to periodic review and increase by the compensation committee. Ms. Duseau is also eligible for an annual bonus with a target amount, currently of 40% of her base salary, based on the achievement of certain individual and/or corporate performance targets established by the board or compensation committee. The actual amount of such bonus, which may be more or less than the target bonus, will be determined annually based upon individual and/or our achievement of certain performance targets, as determined by the compensation committee, in its reasonable discretion. The employment agreement further provides for (i) a vehicle allowance of $7,200 payable in semi-monthly installments, and (ii) two special payments, each in the amount of $40,000, less applicable withholdings and customary payroll deductions (the first payment was made on the first anniversary of the commencement date and the second payment to be paid out on the next regular pay date following the second anniversary of the commencement date, subject to Ms. Duseau’s continued employment) Ms. Duseau is eligible to participate in employee benefit plans generally available to our executive employees, subject to the terms of those plans. In connection with the commencement of her employment, we agreed to grant Ms. Duseau 10,449 stock options. Twenty-five percent of such stock options vested on February 4, 2016 and the remaining shares vest in 36 equal monthly installments thereafter.

Payments Provided upon Termination without Cause or with Good Reason

In the event of termination for good reason or without cause, as described below, subject to the execution and non-revocation of a release agreement, resignation from any and all positions and return of all company property, Ms. Duseau will be entitled to receive (i) the amount of her accrued but unpaid salary and any accrued but unused vacation as of the date of termination, (ii) reimbursement of any expenses properly incurred on our behalf prior to any such termination and not yet reimbursed, (iii) continuation of her base salary in effect immediately prior to the termination of her employment for a period of nine months after the effective date of termination and (iv) continuation of group health plan benefits, with the employee's healthcare continuation payments waived by the Company until the earlier of (x) nine months after termination and (y) the date Ms. Duseau becomes eligible for benefits through another employer, subject to the execution and non-revocation of a release agreement, resignation from any and all positions and return of all Company property.

Under Ms. Duseau’s employment agreement, the terms below are generally defined as follows:

“cause” shall mean Employee’s (i) conviction of, or guilty plea or plea of no contest to, a felony or other crime involving dishonesty, theft or moral turpitude, (ii) commission of a fraudulent, illegal or dishonest act in respect of Employer, its affiliates or any of their respective clients/customers, (iii) willful misconduct or gross negligence that is, or reasonably could be expected to be, injurious to the business, operations or reputation of Employer or its affiliates (monetarily or otherwise), (iv) willful violation of a federal, state or local law or regulation applicable to the business of Employer or its affiliates, (v) material violation of Employer's policies or procedures in effect from time to time, (vi) material failure to satisfactorily perform Employee’s duties as assigned to Employee from time to time, (vii) breach of the terms of the Covenants Agreement, or (viii) other material breach of Employee’s representations, warranties, covenants and other obligation under this Agreement; provided, however, to the extent

68


that any violation, failure or breach described in clauses (v), (vi), or (viii) is subject to cure (as determined by Employer in its reasonable discretion), then such violation, failure or breach shall not constitute “Cause” unless Employer provides Employee with written notice of such violation, failure or breach and Employee fails to cure such violation, failure or breach within ten (10) days of receipt of such notice.

“good reason” means the occurrence, without Employee's advance written consent, of any one or more of the following events: (a) a reduction in Employee’s Base Salary, unless a proportionate reduction is made with respect to all of its other executive level employees; or (b) relocation of Employee's principal office location to a location that is anywhere outside of a 50 mile radius of Warren, New Jersey. No event described in clauses (a) or (b) above shall constitute "Good Reason" unless Employee provides the CEO and the Board with written notice of Employee's objection to such event within thirty (30) days after such event first occurs, Employer is afforded an opportunity to cure such event within thirty (30) days after the CEO's and the Board's receipt of such notice (the "Good Reason Cure Period") and such event is not cured during the Good Reason Cure Period. If Employee fails to provide the notice and Good Reason Cure Period prior to her resignation, or resigns more than ninety (90) days after the initial existence of the condition, her resignation will not be deemed to be for “Good Reason” and any claim of such circumstances as “Good Reason” shall be deemed irrevocably waived by Employee.

Employee Confidentiality, Inventions and Non-interference Agreements

Each of our named executive officers has entered into a standard form agreement with respect to confidential information, assignment of inventions, non-solicitation and non-interference restrictions. Among other things, this agreement obligates each named executive officer to refrain from disclosing any of our proprietary information received during the course of employment, to assign to us any inventions conceived or developed during the course of employment, to refrain from soliciting or hiring any of our employees, consultants or independent contractors for a period of one year after the termination of such executive’s employment and to refrain from engaging in a competitive business for a period of one year after the termination of such executive’s employment.

Outstanding Equity Awards at Fiscal Year-End Table - 2016

The following table summarizes, for each of the named executive officers, the number of shares of common stock underlying outstanding stock options and restricted common stock awards held as of December 31, 2016.

 
 
Option Awards
 
Stock Awards
 
 
Number of securities
underlying unexercised
options (#)
 
 
Option
exercise
price ($)
 
Option
expiration
date
 
Number of Shares That Have Not Vested (#)
 
 
Market Value of Shares or Units of Stock That Have Not Vested(1) ($)
Name
 
exercisable
 
unexercisable
 
 
Paul G. Thomas
 
10,467

 
11,382

(2)
 
$
43.60

 
1/1/2025

 

 
 

 
 

 
13,999

(3)
 
$
11.30

 
1/3/26

 

 
 

 
 

 

 
 

 

 
13,597

(4)
 
$
57,651

Lars Boesgaard
 
675

 

(5)
 
$
17.68

 
4/1/2020

 

  
 

 
 
456

 

(6)
 
$
17.68

 
6/29/2020

 

  
 

 
 
2,038

 

(7)
 
$
36.43

 
1/31/2022

 

  
 

 
 
996

 
 
(8)
 
$
9.94

 
12/31/2022

 
 
 
 
 
 
 
1,101

 
1,199

(2)
 
$
43.60

 
1/1/2025

 
 
 
 
 
 
 

 
4,300

(3)
 
$
11.30

 
1/3/2026

 
 
 
 
 
 
 
 
 
 
 
 

 

 
3,905

(9)
 
16,557

Mary Duseau
 
4,792

 
5,657

(10)
 
$
39.90

 
2/3/2025

 

 
 

 
 

 
4,299

(3)
 
$
11.30

 
1/3/2026

 
 
 
 
 

(1)
The value is based upon the closing market price of our common stock on December 31, 2016, $4.24.
(2)
Represents options to purchase shares of our common stock granted on January 2, 2015. The shares underlying this option vest 25% on the anniversary of the grant date with the remaining shares vesting in equal monthly installments over the following 36 months.

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(3)
Represents options to purchase shares of our common stock granted on January 4, 2016. The shares underlying this option vest 25% on the anniversary of the grant date with the remaining shares vesting in equal monthly installments over the following 36 months.
(4)
The number of shares displayed represents the unvested shares from the following grant: 21,738 shares granted on December 6, 2013. One-half of the grant vests 25% on the anniversary of the grant date with the remaining shares vesting in equal monthly installments over the following 36 months, the other half of the December 6, 2013 grant vests upon the per share value of common stock reaching $281.50 (as may be adjusted for changes in capitalization).
(5)
Represents options to purchase shares of our common stock granted on April 2, 2010. The shares underlying this option vested 25% on the anniversary of the grant date with the remaining shares vesting in equal monthly installments over the following 36 months.
(6)
Represents options to purchase shares of our common stock granted on June 30, 2010. The shares underlying this option vested 25% on the anniversary of the grant date with the remaining shares vesting in equal monthly installments over the following 36 months.
(7)
Represents options to purchase shares of our common stock granted on April 1, 2012. The shares underlying this option vested 25% on the anniversary of the grant date with the remaining shares vesting in equal monthly installments over the following 36 months.
(8)
Represents options to purchase shares of our common stock granted on May 13, 2013. The shares underlying this option vested 25% on the anniversary of the grant date with the remaining shares vesting in equal monthly installments over the following 36 months.
(9)
The number of shares displayed represents the unvested shares from the following grants: 3,622 shares granted on December 6, 2013; and 2,473 shares granted on January 2, 2015. One-half of the 2013 grant vests 25% on the anniversary of the grant date with the remaining shares vesting in equal monthly installments over the following 36 months the second half of the December 6, 2013 grant, vests upon the per share value of common stock reaching $281.50 (as may be adjusted for changes in capitalization). The January 2, 2015 grant vests 33% on the one year anniversary of the grant date and 67% on the second anniversary
(10)
Represents options to purchase shares of our common stock granted on February 2, 2015. The shares underlying this option vested 25% on the anniversary of the grant date with the remaining shares vesting in equal monthly installments over the following 36 months.

Equity Compensation Plans

The two equity incentive plans described in this section are the Roka Bioscience, Inc. 2009 Equity Incentive Plan, or the 2009 Plan, and the Roka Bioscience, Inc. 2014 Equity Incentive Plan, or the 2014 Plan. Prior to our initial public offering, we granted awards to eligible participants under the 2009 Plan. Following the closing of our initial public offering, we expect to grant awards to eligible participants only under the 2014 Plan.

2009 Equity Incentive Plan

The 2009 Plan was approved by our board of directors and our stockholders on September 10, 2009, and was most recently amended on June 13, 2013. The 2009 Plan reserved 202,885 shares of common stock for issuance.

The 2009 Plan permits us to make grants of incentive stock options to employees, and non-statutory options, incentive options, restricted stock, and unrestricted stock to employees, non-employee board members and consultants of our company and our affiliates. In no event shall the number of shares of stock covered by options or other awards granted to any one person in any one calendar year exceed 25% of the aggregate number of shares of stock subject to the 2009 Plan.

The 2009 Plan is administered by our compensation committee of our board of directors, although our board of directors may at any time itself exercise any of the powers and responsibilities assigned to the compensation committee. We refer to the compensation committee as the committee. The committee has the authority to:

determine which employees, consultants or directors shall be granted awards, and the form of award;
interpret the 2009 Plan;
prescribe, amend and rescind rules and regulations relating to the 2009 Plan;
determine the terms and provisions of award agreements; and
make all other determinations necessary or advisable for the administration of the 2009 Plan.

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The committee may, in its discretion, provide that awards of non-statutory options or restricted stock may be transferred by the recipient to a family member, without payment of any consideration, provided that no transfer shall be valid unless first approved by the committee, acting in its sole discretion. Except as provided in the preceding sentence, awards under the 2009 Plan are not transferable, other than by will or by the laws of descent and distribution.
 
The exercise price of each incentive stock option granted under the 2009 Plan is determined by our board of directors and may not be less than fair market value of a share of our common stock on the grant date (110% for ten percent owners). This limit does not apply to non-statutory options.

In the event of a change in control, subject to provisions of outstanding awards granting greater rights, outstanding options and restricted awards granted to individuals who have been employed by or associated with the company and our affiliates for less than twelve months shall vest as if the time of reference were six months later than otherwise. Options and restricted stock granted to other employees shall vest as if the time of reference were twelve months later than otherwise.

In addition, upon certain transactions, the committee may take any one or more of the following actions as to outstanding options: (1) provide that an acquiring or succeeding entity shall assume such options or substitute substantially equivalent options; (2) upon written notice to option holders, provide that unexercised options will terminate immediately prior to such transaction unless exercised within a specified period; (3) provide that outstanding options shall become exercisable in whole or in part prior to or upon the transaction; (4) terminate options in exchange for cash payments, net of applicable tax withholding, equal to the excess, if any, of (i) the acquisition price times the number of shares of stock subject to an option over (ii) the aggregate exercise price for all shares of stock subject to the option; (5) in connection with a liquidation or dissolution of the company, provide that options shall convert into the right to receive liquidation proceeds, net of the exercise price and any applicable tax withholdings; or (6) any combination of the foregoing.
Upon certain transactions other than a liquidation or dissolution of the company that is not part of another transaction, the repurchase and other rights of the company under outstanding restricted stock awards shall inure to the benefit of the company’s successor, and shall, unless the committee determines otherwise, apply to the to the cash, securities or other property which the restricted stock was converted into or exchanged for pursuant to such transaction in the same manner and to the same extent as they applied to the restricted stock award.

Our board of directors may at any time modify or terminate the 2009 Plan, but no amendment of the 2009 Plan may affect the terms of any award outstanding on the date of such amendment, unless the board of directors expressly provides otherwise. The committee may amend the terms of any award, prospectively or retroactively, provided such amendment is consistent with the terms of the 2009 Plan. No amendment or modification of the 2009 Plan by our board of directors, or of an outstanding award by the Committee, shall impair the rights of the recipient of any award outstanding on the date of such amendment or modification without the participant’s consent. No such consent is required if (i) the board of directors or the Committee determines in its sole discretion that such amendment or alteration either is required or advisable for the company, the 2009 Plan, or the award to satisfy any law or regulation, or to meet the requirements of or avoid adverse financial accounting consequences under any accounting standard, or (ii) the board of directors or the committee determines in its sole discretion that such amendment or alteration is not reasonably likely to significantly diminish the benefits provided under the award, or that any such diminution has been adequately compensated.

As of December 31, 2016, options to purchase 24,563 shares of common stock and 17,542 shares of restricted stock were outstanding under the 2009 Plan.

Amended and Restated 2014 Equity Incentive Plan

Our 2014 Equity Incentive Plan was adopted by our board of directors on June 26, 2014 and approved by our shareholders on July 2, 2014, which became effective upon the date of closing of our initial public offering. On January 17, 2017, our board of directors approved, subject to stockholder approval, the amendment and restatement of the 2014 Plan to increase the number of shares reserved for issuance thereunder by 300,000 to 665,340 and to reflect the impact of the reverse stock splits implemented by us subsequent to the original adoption of the 2014 Plan. On February 28, 2017, upon approval of our stockholders, the Amended and Restated 2014 Equity Incentive Plan became effective. We refer to this plan as the 2014 Plan.
 
The 2014 Plan permits us to make grants of incentive stock options to our employees, and for the grant of nonqualified stock options, stock appreciation rights, restricted stock, stock units, performance shares, performance units, incentive bonus awards, other cash-based awards and other stock-based awards to our employees, directors, consultants, advisors, or other individual service providers of our company or any subsidiary, as well as to any persons determined by our committee that administers our

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2014 Plan to be prospective employees, officers, directors, consultants, advisors, or other individual service providers of our company or any subsidiary.

Following the amendment and restatement, the 2014 Plan reserved 468,582 shares of common stock for future issuance. The number of shares available for issuance is subject to customary adjustments for stock splits, stock dividends or similar transactions. In addition, the 2014 Plan contains an “evergreen” provision allowing for an annual increase in the number of shares of our common stock available for issuance under the 2014 Plan on January 1 of each year during the period beginning January 1, 2018, and ending on (and including) January 1, 2027. The annual increase in the number of shares shall be equal to 3% of the total number of shares of common stock outstanding on December 31st of the preceding calendar year; provided, however, that our board of directors may act prior to the first day of any calendar year to provide that there shall be no increase for such calendar year, or that the increase shall be a lesser number of shares of common stock than would otherwise occur.

The 2014 Plan is administered by a committee of our board of directors. The committee has the authority to determine:

which individuals shall be granted awards;
number of shares, units or other rights subject to each award;
exercise, base or purchase price of each award (if any);
schedule upon which awards will become vested, exercisable or payable;
performance criteria, performance goals and other conditions of each award;
duration of each award; and
all other terms of each award.
 
For awards that are intended to be exempt from the deductibility limit of Code Section 162(m), no participant may receive in any one fiscal year options or stock appreciation rights with respect to more than 18,116 shares of our common stock in the aggregate, or restricted stock, stock units, performance shares awards, incentive bonus awards and other stock-based awards that are denominated in shares of our common stock relating to more than 18,116 shares in the aggregate. In addition, the maximum dollar value payable to any participant in any one fiscal year of the company with respect to stock units, performance units or incentive bonus awards or other stock-based awards that may be settled in cash or other property (other than common stock) and that are intended to be exempt from the deductibility limit of Code Section 162(m) is $2,000,000.

In general, awards may not be transferred other than by will or by the laws of descent and distribution. However, the committee may provide in an award agreement that non-qualified stock options, share-settled stock appreciation rights, restricted stock, performance shares or share-settled other stock-based awards may be transferred to certain family members, to a family trust for estate planning purposes, or by gift to charitable institutions.
 
The committee may, upon the grant of an award, provide for the effect of a change in control on any award, including:

acceleration or extension of the time periods for exercising, vesting in, or realizing gain from any award;
elimination or modification of performance or other conditions of an award;
provision for the cash settlement of an award for an equivalent cash value; or
such other modification or adjustment to an award as the committee deems appropriate to maintain and protect the rights and interests of participants upon or following a change in control.
 
The committee may also, in its discretion, take one or more of the following actions contingent upon a change in control, unless otherwise provided by an award agreement:

cause any or all outstanding options and stock appreciation rights affected by the change in control to become vested and immediately exercisable, in whole or in part;
cause any other awards affected by the change in control to become non-forfeitable, in whole or in part;
cancel any option or stock appreciation right in exchange for a substitute option;
cancel any award of restricted stock, stock units, performance shares or performance units in exchange for a similar award in respect of the capital stock of any successor corporation;
redeem any restricted stock for cash and/or other substitute consideration with a value equal to the fair market value of an unrestricted share of our common stock on the date of the change in control;
cancel any option or stock appreciation right affected by the change in control in exchange for cash and/or other substitute considerationand cancel any option or stock appreciation right without any payment of consideration if its exercise price is not less than the value of our common stock on the date of the change in control;

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cancel any stock unit or performance unit affected by the change in control in exchange for cash and/or other substitute consideration (provided such cancellation and exchange does not violate Section 409A of the Code); or
make such other modifications, adjustments or amendments to outstanding awards or the 2014 Plan as it deems necessary or appropriate.
 
The committee may amend the terms of awards in any manner not inconsistent with the 2014 Plan, provided that no amendment shall adversely affect the rights of a participant with respect to an outstanding award without such participant’s consent. In addition, our board of directors may at any time amend, suspend, or terminate the 2014 Plan, provided that (i) no such amendment, suspension or termination shall materially and adversely affect the rights of any participant under any outstanding award without the consent of such participant, (ii) the company shall obtain stockholder approval of any amendment to the 2014 Plan to the extent necessary and desirable to comply with any applicable law, regulation, or stock exchange rule, and (iii) stockholder approval is required for any amendment to the 2014 Plan that (x) increases the number of shares of common stock available for issuance under the 2014 Plan, or (y) changes the persons or class of persons eligible to receive awards.

 
401(k) Plan and Other Benefits


We maintain a tax-qualified retirement plan that provides eligible employees in the United States with an opportunity to save for retirement on a tax-advantaged basis. All participants’ interests in their contributions are 100% vested when contributed. Pre-tax or after-tax contributions are allocated to each participant’s individual account and are then invested in selected investment alternatives according to the participants’ directions. The retirement plan is intended to qualify under Sections 401(a) and 501(a) of the Code. We currently provide matching contributions under the 401(k) Plan up to an aggregate maximum match of $1,000 per person, which vests 50% upon the one-year anniversary of employment and the remaining 50% upon the two-year anniversary of employment. We also contribute to medical, life, disability and other standard insurance for our employees.


DIRECTOR COMPENSATION

Non-Employee Director Compensation Policy

Our board of directors approved a director compensation policy for our non-employee directors. Other than reimbursement for reasonable expenses incurred in connection with attending board of director and committee meetings, this policy excludes any non-employee directors designated to the board by our current investors. In December 2015, our board of directors approved amendments to the compensation policy for our non-employee directors. The amended policy provides for the following compensation amounts payable in cash, or upon election by all non-employee directors, in shares of unrestricted common stock:
each non-employee director is entitled to receive an annual fee from us of $42,000;
the chair of our audit committee is entitled to receive an annual fee from us of $12,500 and other members of our audit committee are entitled to receive $7,500;
the chair of our compensation committee is entitled to receive an annual fee from us of $8,000 and other members of our compensation committee are entitled to receive $5,000; and
the chair of our nominating and corporate governance committee is entitled to receive an annual fee from us of $7,000 and other members are entitled to receive $4,000.
 
Each non-employee director that joins our board of directors is entitled to receive an initial option grant upon commencement of service to purchase 6,000 shares of our common stock under our existing equity incentive plan, or any other equity incentive plan we may adopt in the future, which shall vest in 36 equal monthly installments. Subsequent to the initial option grant, as of the date of each annual meeting of the shareholders, each non-employee director will receive an option grant to purchase 3,000 shares of our common stock under our existing equity incentive plan, or any other equity incentive plan we may adopt in the future, which shall vest on the one year anniversary of the grant date. Upon a change in control of us, as defined in our equity incentive plan, 100% of the shares underlying these options shall become vested and exercisable immediately prior to such change in control.

All fees under the director compensation policy are paid on a quarterly basis in arrears and no per meeting fees are paid. All fees may be paid in unrestricted shares of common stock at the election of the director. We also reimburse non-employee directors for reasonable expenses incurred in connection with attending board of director and committee meetings.


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Director Compensation Table - 2016

The following table sets forth information concerning the compensation paid to our non-employee directors during 2016.
 

Name
 
Fees Earned
or Paid in
Cash ($)
 
Option
Awards
($)
(1)
 
Total
($)
M. James Barrett
 
$
57,500

 
$
14,448

 
$
71,948

Fred Cohen
 
$
51,000

 
$
14,448

 
$
65,448

Michael P. Doyle, Ph.D.
 
$
46,250

 
$
14,448

 
$
60,698

David W. J. McGirr
 
$
55,500

 
$
14,448

 
$
69,948

Jonathan T. Silverstein(2)
 
$
56,500

 
$
14,448

 
$
70,948

Nicholas J. Valeriani
 
$
45,750

 
$
14,448

 
$
60,198

 
1)
Amount reflects the grant date fair value of option awards granted in 2016 in accordance with Accounting Standards Codification Topic 718, Compensation - Stock Compensation. These amounts do not correspond to the actual value that may be realized by the directors upon exercise of such options.
2)
Mr. Silverstein resigned from our board of directors as of January 17, 2017.


Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
The following table sets forth certain information as of February 1, 2017 with respect to the beneficial ownership of common stock of the Company by the following: (i) each of the Company’s current directors; (ii) each of the named executive officers; (iii) each of the current executive officers; (iv) all of the current executive officers and directors as a group; and (v) each person known by the Company to own beneficially more than five percent (5%) of the outstanding shares of the Company’s common stock.

For purposes of the following table, beneficial ownership is determined in accordance with the applicable SEC rules and the information is not necessarily indicative of beneficial ownership for any other purpose. Except as otherwise noted in the footnotes to the table, we believe that each person or entity named in the table has sole voting and investment power with respect to all shares of the Company’s common stock shown as beneficially owned by that person or entity (or shares such power with his or her spouse). Under the SEC’s rules, shares of the Company’s common stock issuable under exercise of any options or warrants that are exercisable on or within 60 days after March 1, 2017 are deemed beneficially owned by the holder thereof and therefore are included in the number of shares reported as beneficially owned by a person or entity named in the table and are used to compute the percentage of the common stock beneficially owned by that person or entity. These shares are not, however, deemed outstanding for computing the percentage of the common stock beneficially owned by any other person or entity.

The percentage of the common stock beneficially owned by each person or entity named in the following table is based on 5,007,742 shares of common stock issued and outstanding as of March 1, 2017 plus any shares issuable upon exercise of options or warrants that are exercisable on or within 60 days after March 1, 2017 held by such person or entity.

Except as otherwise noted below, the address for persons listed in the table is c/o Roka Bioscience, Inc., 20 Independence Boulevard, Warren, New Jersey 07059. Beneficial ownership representing less than 1% is denoted with an asterisk (*).


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ROKA BIOSCIENCE, INC.
NOTES TO FINANCIAL STATEMENTS


Name of Beneficial Owner
 
Number of Shares Beneficially Owned 
 
Percentage Of Shares Beneficially Owned
5% Stockholders
 
 
 
 
Entities Affiliated with New Enterprise Associates(1)
 
1,464,900

 
26.3
%
Entities Affiliated with OrbiMed(2)
 
1,465,638

 
26.3
%
TPG Biotechnology Partners III, L.P.(3)
 
1,441,786

 
25.8
%
Sabby Management, LLC(4)
 
365,220

 
7.3
%
Named Executive Officers, Executive Officers and Directors:
 
 
 
 
M. James Barrett(5)
 
1,465,802

 
26.3
%
Fred E. Cohen(6)
 
902

 
*

Michael P. Doyle(7)
 
1,398

 
*

David W. J. McGirr(8)
 
6,354

 
*

Paul G. Thomas(9)
 
109,309

 
2.2
%
Nicholas J. Valeriani(10)
 
15,946

 
*

Lars Boesgaard(11)
 
19,310

 
*

Mary Duseau(12)
 
9,865

 
*

All current directors and executive officers as a group (8 persons)
 
1,628,886

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