Unassociated Document
As
filed with the Securities and Exchange Commission on September 30,
2010
Registration
No. 333-[__]
|
|
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
(Exact
name of registrant as specified in its charter)
Delaware
|
|
3841
|
|
26-4753208
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(Primary
Standard Industrial
Classification
Code Number)
|
|
(I.R.S.
Employer
Identification
Number)
|
4105
East Madison Street, Suite 320
Seattle,
Washington 98112
(206)
325-6086
(Address,
including zip code, and telephone number, including area code of registrant’s
principal executive offices)
Steven
C. Quay, M.D., Ph.D.
Chairman
and Chief Executive Officer
4105
East Madison Street, Suite 320
Seattle,
Washington 98112
(206)
325-6086
(Name,
address, including zip code, and telephone number, including area code, of agent
for service)
Ryan
Murr
Maggie
Wong
Goodwin
Procter LLP
3
Embarcadero Center, 24th
Floor
San
Francisco, California 94111
Phone:
(415) 733-6000
|
Kyle
Guse
K.
Amar Murugan
McDermott
Will & Emery LLP
275
Middlefield Road
Menlo
Park, California 94025
Phone:
(650) 815-7400
|
Approximate Date of Commencement of
proposed sale to the public: As soon as practicable after the effective
date of this Registration Statement.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier registration statement for the same offering.
¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
number of the earlier effective registration statement for the same offering.
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions “large accelerated filer,” “accelerated file,”
and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company x
(Do not
check if a smaller reporting company)
|
|
CALCULATION
OF REGISTRATION FEE
|
|
|
Proposed Maximum
Aggregate Offering Price (2)
|
|
|
|
|
Units,
each consisting of one share of common stock, par value $0.001, two
Class A Warrants and one Class B Warrant
|
|
$ |
17,250,000 |
|
|
$ |
1,230 |
|
Shares
of common stock underlying Units
|
|
|
— |
|
|
|
— |
|
Class
A Warrants underlying Units
|
|
|
— |
|
|
|
— |
|
Class
B Warrants underlying Units
|
|
|
— |
|
|
|
— |
|
Common
Stock underlying Class A Warrants
|
|
$ |
345,000 |
|
|
$ |
25 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
17,595,000 |
|
|
$ |
1,255 |
|
(1)
|
This
registration statement and the prospectus therein covers the registration
of (A) Units with each Unit consisting of (i) one share of the Company’s
common stock (ii) two Class A Warrants exercisable one year after issuance
for one share of the Company’s common stock and (iii) one Class B Warrant
exercisable for one share of the Company’s common stock, and (B) Common
Stock underlying the Class A
Warrants.
|
(2)
|
Estimated
solely for purposes of calculating the registration fee pursuant to Rule
457(o) under the Securities Act of 1933, as
amended.
|
The
registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission acting pursuant to said section 8(a),
may determine.
The information contained
in this prospectus is not complete and may be changed. A registration
statement relating to these securities
has been filed with the Securities and Exchange Commission and these securities
may not be sold until that registration statement becomes effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these
securities in any state where the offer or sale is not
permitted.
PRELIMINARY
PROSPECTUS
|
SUBJECT
TO COMPLETION
|
|
DATED
SEPTEMBER 30, 2010
|
3,000,000
Units
Comprised
of Common Stock, Class A Warrants and Class B Warrants
This is
the initial public offering of our Units. We are offering 3,000,000 Units,
with each Unit consisting of: (i) one share of common stock, (ii) two Class A
Warrants and (iii) one Class B Warrant.
Each
Class A Warrant will be exercisable, for a period of 10 days beginning on the
sixth trading day after the separation of the securities underlying the Units as
described below, to acquire one share of common stock on a cashless, net
exercise basis at a price of $0.05 per share. Each Class B Warrant
will be exercisable after one year and for a period of five years after the
Class B Warrants are separated from the Units, to acquire one share of common
stock at a price equal to 55% of the Unit offering price. We will have the
right to redeem the Class B Warrants at $0.25 per share of common stock
underlying the Class B Warrants in the event (i) the average of the closing
price of our common stock exceeds 200% of the exercise price for 10 consecutive
trading days while the warrants are exercisable and (ii) there is then an
effective registration statement with a current prospectus on file with the
Securities and Exchange Commission, or the SEC.
We expect
the initial public offering price will be between $5.00 and $7.00 per
Unit. Currently, no public market exists for our securities. We
intend to apply for listing of the Units on the NYSE Amex under the symbol
“ATOSU.” The securities underlying the Units will separate from the Units
on the 90th day
after the date of this prospectus, unless Dawson James Securities, Inc., the
representative of the underwriters, determines that an earlier separation date
is acceptable based on its assessment of the relative strengths of the
securities markets and small capitalization companies in general, and the
trading pattern of, and demand for, our securities in particular. We
intend to issue a press release announcing when such separation will
occur. Once the securities comprising the Units separate, the Units will
automatically cease trading and be cancelled, and the common stock and Class B
Warrants underlying the Units are expected to be listed on the NYSE Amex under
the symbols “ATOS” and “ATOSW,” respectively. The Class A Warrants will
not be listed for trading.
|
|
Per Unit
|
|
|
Total
|
|
Public
offering price
|
|
$ |
|
|
|
$ |
|
|
Underwriting
discount
|
|
$ |
|
|
|
$ |
|
|
Proceeds,
before expenses, to Company
|
|
$ |
|
|
|
$ |
|
|
Investing
in these securities involves a high degree of risk.
See
“Risk Factors” contained in this prospectus beginning on page 7.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
We have
granted the underwriter an option for a period of 45 days to purchase from us,
on the same terms and conditions set forth above, up to an additional 450,000
Units to cover overallotments.
The date
of this prospectus is __________, 2010.
DAWSON JAMES
SECURITIES, INC.
TABLE
OF CONTENTS
|
Page
|
Prospectus
Summary
|
1
|
Risk
Factors
|
7
|
Forward-Looking
Statements
|
18
|
Use
of Proceeds
|
19
|
Dividend
Policy
|
20
|
Capitalization
|
20
|
Dilution
|
21
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
23
|
Business
|
28
|
Management
|
57
|
Director
Compensation
|
59
|
Executive
Compensation
|
62
|
Certain
Relationships and Related Transactions
|
67
|
Principal
Stockholders
|
68
|
Description
of Securities
|
69
|
Shares
Eligible for Future Sale
|
76
|
Certain
Material U.S. Federal Income Tax Considerations
|
77
|
Underwriting
|
83
|
Legal
Matters
|
87
|
Experts
|
87
|
Additional
Information
|
87
|
Index
to Financial Statements
|
|
No
dealer, salesperson or other person is authorized to give any information or to
represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an
offer to sell only the Units and underlying securities offered hereby, but only
under circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its
date.
Unless
the context requires otherwise, in this prospectus the terms “we,” “us” and
“our” as well as the “Company” refer to Atossa Genetics Inc.
PROSPECTUS
SUMMARY
This
summary highlights some information from this prospectus. It may not
contain all the information important to making an investment decision.
You should read the following summary together with the more detailed
information regarding our company and the securities being sold in this
offering, including “Risk Factors” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our financial statements and
related notes, included elsewhere in this prospectus.
The
Company
We are a
development-stage healthcare company focused on the commercialization of
cellular and molecular diagnostic risk assessment products and related services
for the detection of pre-cancerous conditions that could lead to breast cancer,
and on the development of second-generation products and services.
Although current mammography procedures can detect cancer already present in the
breast, our products have the ability to identify pre-cancerous changes in the
breast up to eight years in advance of mammography detection. This
information allows for the implementation of preventive measures such as
lifestyle changes and pharmaceutical interventions that may prevent breast
cancer from developing or treat breast cancer earlier, if it develops. Our
primary focus is the commercialization of the Mammary Aspirate Specimen Cytology
Test, which we call the MASCT System, our patented and U.S. Food and Drug
Administration, or FDA, cleared product and related testing and analysis
services for breast conditions, including cancer.
The MASCT
System is a device and method for the collection, shipment and clinical
laboratory analysis of nipple aspirate fluid, or NAF. The clinical
analysis of NAF, which contains cells and molecular diagnostic biomarkers, is
useful in detecting breast cancer and cellular changes that may be precursors to
breast cancer. The product component of the MASCT System consists of a
reusable hand-held pump for the collection of NAF, a patient kit that includes
two NAF sample vials, and a shipment kit for the transportation of NAF samples
to our specialized cytology and molecular diagnostics laboratory to be
established in Seattle, Washington. Through our laboratory, if
successfully established, we intend to provide the MASCT System services, which
would consist of receiving and accessioning the two NAF samples from each
patient, preparing routine and immunohistochemistry, or IHC, slides from the NAF
samples, and generating a report of the findings.
We have
entered into a lease for laboratory space in Seattle, Washington and expect our
laboratory to be operational in the fourth quarter of 2010. We have also
engaged a contract manufacturer to produce 20 MASCT System pumps and 10,000
testing kits, which we intend to field test for purposes of confirming the
proper operation of the device and its ability to collect adequate NAF
samples in the fourth quarter of 2010. We intend to commence
commercial manufacturing of the MASCT System components following the completion
of this offering and expect our commercial launch of the MASCT System to occur
in the first quarter of 2011. We intend to price our NAF sample collection
device at approximately $200 per device, our patient kits at approximately $50
per kit, and the cytology and molecular diagnostics testing and analysis at
between $106 and $1,202 per patient, depending on the complexity of the analysis
performed and without taking into account any patient reimbursement from
third-party insurers.
We
anticipate that the MASCT System will be used initially in conjunction with
standard mammography or cervical Pap smear exams and has the potential to become
a critical assessment tool for identifying women at high risk for breast
cancer. Our MASCT System test is simple, quick (approximately five
minutes), convenient, painless and safe (no radiation).
Our
founder and chief executive officer, Steven C. Quay, M.D., Ph.D., invented the
MASCT System. Dr. Quay is a board-certified anatomic pathologist with
training from Massachusetts General Hospital and Harvard Medical School, and is
a former faculty member of the pathology department of Stanford University
School of Medicine. We acquired all of the ownership rights for the
patents, as well as foreign counterparts covering the manufacture, use and sale
of the MASCT System, pending patent applications for improvements, as well as
the FDA marketing authorization for the MASCT System from Ensisheim Partners
LLC, or Ensisheim, a limited liability company solely owned by Dr. Quay and his
wife, Dr. Shu-Chih Chen, who is our chief scientific officer and a member of our
board of directors.
We were
incorporated in Delaware in April 2009. Our operations to date have
consisted primarily of securing laboratory and office space, hiring laboratory
personnel, ordering equipment and supplies, engaging a third-party vendor for
the manufacture of the MASCT System in limited quantities for field testing,
securing patent rights and assignments, filing new patent applications,
acquiring FDA market clearances and securing development bids to complete
preparation for manufacturing the MASCT System. We have no other
operations. Assuming the completion of this offering and successful field
testing of the MASCT System, we expect to select one or
more large volume contract medical device manufacturers to begin
manufacturing the MASCT System for commercialization in the fourth quarter of
2010.
We have
experienced operating losses since inception. We have not yet received any
revenue and will not be in a position to expect revenue until we are able to
produce and sell the MASCT System. We anticipate that we will incur
additional losses while establishing the manufacturing of the MASCT Systems and
while we build our laboratory and hire and train personnel for our laboratory
and our sales force. In addition, Medicare and certain private insurance
carriers currently do not reimburse for the NAF collection procedure that will
be used with the MASCT System, which could delay or prevent commercial adoption
of our products and services as the absence of Medicare or insurance coverage
will require patients to fully bear the costs of the sample acquisition.
We intend to seek reimbursement for the MASCT System from third-party payors and
plan to apply for a Current Procedural Terminology, or CPT, code from the
American Medical Association, or AMA, for our device, to enable reimbursement of
the collection procedure.
The
MASCT System
The MASCT
System is intended to supplement, and not replace, mammography and is primarily
a risk assessment tool for identifying women at risk for developing breast
cancer. Using the MASCT System’s NAF collection device, a nurse or
physician’s assistant can collect a sample of NAF, which may contain cells and
molecular diagnostic biomarkers that are useful in detecting cancers and
pre-cancerous cellular changes. These changes include atypical ductal
hyperplasia, or ADH, a condition in which the cells lining the milk ducts of the
breast experience abnormal, premalignant growth, which confers a higher risk of
developing breast cancer. Analysis of the collected fluid can enable
physicians to determine and/or differentiate among normal versus premalignant
versus malignant cells. Pre-cancerous cytology changes in NAF have been
shown to occur up to eight years before cancerous changes can be detected by
mammography.
In a
study of women with normal mammograms who were undergoing breast reduction
surgery, which was conducted at the Virginia Mason Medical Center in Seattle,
Washington and published in Plastic and
Reconstructive Surgery in October 2009, the incidence of ADH was found to
be 4.4%. With approximately 94 million women age 30 and above in the
United States, this suggests that more than four million women in the United
States have undiagnosed ADH. ADH can be definitively diagnosed only by NAF
analysis or a breast tissue biopsy. In a study of approximately 2.5
million screening mammograms done between 1996 and 2005 and collected from
mammography registries participating in the Breast Cancer Surveillance
Consortium Associations, the incidence of biopsy-proven ADH was 0.4%,
suggesting that mammography fails to detect ADH in over 90% of
patients.
A number
of medical devices have been designed over the years that apply negative
pressure to the nipple to induce the expression of NAF, which is then collected
by carefully touching a capillary tube to any apparent drops of
NAF. We believe that in general, these devices are successful in
obtaining NAF from about 20% to 65% of all patients, and that this sample
collection variability has prevented the routine adoption of NAF cytology for
breast cancer screening. The MASCT System was designed to overcome this
shortcoming by placing a hydrophilic, or water seeking, membrane in contact with
the nipple during the cycles of negative pressure to “wick” fluid from the
orifice of the ducts by capillary action, thereby increasing the frequency of
obtaining NAF in women. The results of a clinical trial sponsored by
Nastech Pharmaceutical Company, Inc. of 31 women conducted in 2003 demonstrated
that the MASCT System was able to collect measurable NAF in 97% (30) of the
women tested. The NAF samples collected in this study ranged from one to
37 microliters, with an average of seven microliters, and all samples collected
were deemed to be clinically useful. No adverse events were reported in
the study.
The MASCT
System also requires no use of radiation. A study that analyzed the
results of six peer-reviewed medical research publications reported in December
2009 that low dose radiation from mammograms can increase cancer incidence by
1.5 to 2.5 fold in high-risk women, increasing the complexity of managing
high-risk patients. Unlike a biopsy, the MASCT System is a non-invasive
and painless procedure. We believe these aspects of the MASCT System may
help to generate acceptance of its use for NAF collection and
testing.
Commercialization
Strategy
We
believe that commercialization of the MASCT System will provide us with two main
revenue sources: (i) sales-based revenue from the sale of the MASCT System
device and patient kits to physicians, breast health clinics, and mammography
clinics and (ii) service, or use-based, revenue from the preparation and
interpretation of the NAF samples sent to our laboratory for
analysis.
We intend
to market the MASCT System to physicians, as well as breast health and
mammography clinics, for use in conjunction with other health screening
examinations, including annual physical examinations and regularly scheduled
cervical Pap smears and mammograms. We plan to hire a direct sales force
of approximately eight people initially to commercialize our products and
services in the Northwestern United States, where there are approximately 290
mammography clinics registered with the FDA. We believe the total
addressable market for our products and services in this region is over $100
million. Assuming a successful regional launch, we plan to expand
nationally during the first half of 2012 and intend to grow our sales force to
approximately 100 people in the United States.
We have
leased a facility for our clinical laboratory in Seattle, Washington. We
intend to establish and qualify the operations and procedures of this laboratory
in the fourth quarter of 2010, including submitting applications for
accreditation by the College of American Pathologists and for licensure by state
and federal agencies in order to allow the preparation, screening and
interpretation of cytology and for the molecular diagnostics testing of NAF
patient samples at our facility. We believe that by maintaining our own
clinical laboratory, we will be able to generate additional service revenues
through cytology and molecular diagnostic testing, in addition to the sale of
our MASCT Systems.
Trading
Market
Currently,
there is no trading market for our securities. We intend to apply for
listing of the Units, our common stock and the Class B Warrants on the NYSE Amex
under the symbols “ATOSU,” “ATOS” and “ATOSW,” respectively. The
Class A Warrants will not be listed for trading.
Risk
Factors
Our
business is subject to numerous risks as discussed more fully in the section
entitled “Risk Factors” beginning on page 7. Principal risks of our
business include, but are not limited to, the following:
|
·
|
we
will need significant additional capital to execute our business strategy
as currently contemplated;
|
|
·
|
we
have a history of operating losses and expect to incur losses for the
foreseeable future;
|
|
·
|
we
have not yet engaged any manufacturers for the production of the MASCT
System in commercial quantities and may encounter difficulties in finding
manufacturers for such production at acceptable quantities or
costs;
|
|
·
|
we
may not be successful in commercializing the MASCT System because
physicians and clinicians may be slow to adopt our
product;
|
|
·
|
our
ability to commercialize the MASCT System may be limited because Medicare
and certain insurance carriers are not expected to provide reimbursement
for use of our product;
|
|
·
|
we
may encounter difficulties in establishing, obtaining certification under
the FDA’s Clinical Laboratory Amendments, or CLIA, regulations for or
maintaining our cytology and molecular diagnostics laboratory for the
testing and analysis of NAF samples;
and
|
|
·
|
we
may not be able to hire, train or maintain the sales force necessary to
market and sell our products and services as
planned.
|
Company
Information
We were
incorporated in Delaware in April 2009. Our principal executive offices
are located at 4105 E Madison Street, Suite 320, Seattle, Washington 98112, and
our telephone number is (206) 325-6086. Our website is located at www.atossagenetics.com. Information contained
on, or that can be accessed through, our website is not a part of this
prospectus.
MASCT,
Oxy-MASCT and our name and logo are our trademarks. This prospectus also
includes additional trademarks, trade names and services marks, which are the
property of their respective owners.
Our
company name comes from Queen Atossa, daughter of Cyrius the Great and wife of
Darius I, the King of the Achaemenid Empire. In about 470 BC, she became
the first woman in recorded history to be diagnosed with breast cancer, of which
she died. The Company is dedicated to her and the millions of women who
have been, and continue to be, affected by breast cancer.
THE
OFFERING
Securities
offered by us:
|
|
3,000,000
units, or the Units. Each Unit consists of:
·
one share of our common stock;
·
two Class A Warrants, each exercisable for one share of our common
stock on a cashless, net exercise basis for a period of 10 days beginning
on the sixth trading day after the separation of the securities underlying
the Units at an exercise price of $0.05 per share;
and
·
one Class B Warrant exercisable for one share of common
stock commencing on the first anniversary of the date of this
prospectus, and remaining exercisable until the fifth anniversary of
the separation of the Class B Warrants from the Units at an
exercise price equal to 55% of the Unit offering price. We will
have the right to redeem the Class B Warrants at $0.25 per share of common
stock underlying the Class B Warrants in the event (i) the average of the
closing price of our common stock exceeds 200% of the exercise price for
10 consecutive trading days while the warrants are exercisable and (ii)
there is then an effective registration statement with a current
prospectus on file with the SEC.
|
|
|
|
Use
of proceeds:
|
|
We
intend to use the net proceeds from this offering to engage one or more
contract manufacturers to produce the MASCT System in commercial
quantities, to establish a cytology and molecular diagnostics laboratory
focused on breast cancer and to launch the MASCT System in the
Northwestern United States, including hiring and training sales
personnel. We also intend to use a portion of the proceeds from this
offering to develop a second generation of the MASCT System, to develop
additional laboratory biomarker tests and to launch a national roll-out of
the MASCT System.
|
|
|
|
NYSE
Amex Market trading Symbols:
|
|
We
intend to apply for listing of our common stock, the Units and the Class B
Warrants on the NYSE Amex under the symbols, “ATOS,” “ATOSU” and “ATOSW,”
respectively. The Class A Warrants will not be listed for
trading.
|
|
|
|
Capitalization:
|
|
6,000,063
shares of common stock outstanding before the offering (1).
15,000,063
shares of common stock outstanding after the offering and assuming full
exercise of the Class A Warrants
(1).
|
(1)
|
The
number of shares of our common stock to be outstanding before the offering
is based on 6,000,063 shares (or 13,580,000 shares, prior to the reverse
stock split effected in September 2010) of common stock outstanding as of
June 30, 2010, and excludes 1,000,000 shares of common stock reserved for
future issuance under our 2010 Stock Option and Incentive
Plan.
|
Unless
otherwise indicated, all information in this prospectus:
|
·
|
assumes
that the underwriters do not exercise their right to purchase up to
450,000 additional Units to cover overallotments, if any;
and
|
|
·
|
gives
effect to a one-for-2.26332 reverse split of our common stock effected in
September 2010.
|
SUMMARY
FINANCIAL DATA
The
following summary financial data should be read together with our financial
statements and the related notes and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” appearing elsewhere in this
prospectus. The summary financial data in this section is not intended to
replace our financial statements and the related notes. Our historical
results are not necessarily indicative of the results to be expected for any
future period.
We were
incorporated on April 30, 2009. The following statement of operations
data, including share data, for the year ended December 31, 2009 have been
derived from our audited financial statements and related notes included
elsewhere in this prospectus. The statement of operations data, including
share data, for the six months ended June 30, 2010 and the period from
April 30, 2009 (inception) through June 30, 2009, and the balance sheet data as
of June 30, 2010 have been derived from our unaudited financial statements
included elsewhere in this prospectus. The unaudited interim financial
statements have been prepared on the same basis as the audited financial
statements and reflect all adjustments necessary to fairly state our financial
position as of June 30, 2010 and results of operations for the six months ended
June 30, 2010 and the period from April 30, 2009 (inception) through June 30,
2009. The operating results for any period are not necessarily indicative
of financial results that may be expected for any future period.
|
|
April 30, 2009
(Inception) through
December 31, 2009
|
|
|
Six Months Ended
June 30, 2010
|
|
|
April 30, 2009
(Inception) through
June 30, 2009
|
|
|
|
|
|
|
(Unaudited)
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
$21,250
|
|
|
|
$—
|
|
|
|
$—
|
|
General
and administrative
|
|
|
$101,607
|
|
|
|
274,747 |
|
|
|
524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
operating income:
|
|
|
|
|
|
|
12,500 |
|
|
|
— |
|
Interest
income
|
|
|
— |
|
|
|
453 |
|
|
|
— |
|
Income
taxes
|
|
|
— |
|
|
|
(125 |
) |
|
|
— |
|
Net
loss
|
|
|
$(122,857
|
) |
|
|
$(261,795
|
) |
|
|
$(524
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share—basic and diluted
|
|
|
$(0.03
|
) |
|
|
$(0.04
|
) |
|
|
$(0.00
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of shares used in share calculation—basic and
diluted
|
|
|
4,037,847 |
|
|
|
5,870,334 |
|
|
|
3,976,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
Total
assets
|
|
|
$41,198
|
|
|
|
$16,541,198 |
|
Total
liabilities
|
|
|
98,436 |
|
|
|
98,436 |
|
Stockholders’
(deficit) equity:
|
|
|
|
|
|
|
|
|
Common
Stock, $0.001 par value, 50,000,000 shares authorized and 6,000,063 and
15,000,063 shares outstanding, actual and as-adjusted,
respectively
|
|
|
6,000 |
|
|
|
15,000 |
|
Additional
paid-in capital
|
|
|
321,540 |
|
|
|
16,812,540 |
|
Accumulated
deficit
|
|
|
(384,778 |
) |
|
|
(384,778 |
) |
Total
stockholder’s (deficit) equity
|
|
|
(57,238 |
) |
|
|
16,442,762 |
|
Total
liabilities & stockholder’s equity
|
|
|
$41,198
|
|
|
|
$16,541,198 |
|
The June
30, 2010 actual and as-adjusted balance sheet data do not reflect an
increase in our authorized shares of common stock to 75,000,000 shares effected
in September 2010. The June 30, 2010 as-adjusted balance sheet data reflects
the sale of 3,000,000 Units in this offering at an assumed initial
public offering price of $6.00 per Unit, which is the mid-point of the
price range listed on the cover page of this prospectus, after deducting 10%
estimated underwriting discounts and commissions and estimated offering expenses
payable by us, and assuming the full exercise of the Class A Warrants at an
exercise price of $0.05 per share.
RISK
FACTORS
A
purchase of the Units is an investment in the Company’s securities and involves
a high degree of risk. You should consider carefully the following
information about these risks, together with the other information contained in
this prospectus, before purchasing our securities. If any of the following
risks actually occur, the business, financial condition or results of operations
of the Company would likely suffer. In that case, the value of our
securities, including the market price of the common stock, Units or Class B
Warrants could decline, and you may lose part or all of your investment in our
company.
Risks
Relating to the Company
The
Company has limited operating history and as such an investor cannot assess its
profitability or performance based on past results.
The
Company is a development stage company founded in April 2009 and as such has
limited operating history. The Company’s operations to date have consisted
primarily of securing laboratory and office space, hiring laboratory personnel,
ordering equipment and supplies, engaging a third-party vendor for the
manufacture of the MASCT System in quantities sufficient for initial field
testing, securing patent rights and assignments, filing new patent applications,
acquiring FDA market clearances, and securing development bids to complete
preparation for manufacturing the MASCT System. The Company requires
significant additional capital to achieve its business objectives, and the
inability to obtain such financing on acceptable terms or at all could lead to
closure of the business.
The
Company’s revenue and income potential is uncertain. Any evaluation of the
Company’s business and prospects must be considered in light of these factors
and the risks and uncertainties often encountered by companies in the
development stage. Some of these risks and uncertainties include the
Company’s ability to:
|
·
|
execute
its business plan and commercialization
strategy;
|
|
·
|
engage
one or more contract manufacturers to produce the MASCT System in
commercial quantities;
|
|
·
|
create
brand recognition;
|
|
·
|
respond
effectively to competition;
|
|
·
|
manage
growth in its operations;
|
|
·
|
respond
to changes in applicable government regulations and
legislation;
|
|
·
|
access
additional capital when required;
and
|
|
·
|
attract
and retain key personnel.
|
The
Company’s independent auditors have issued a report questioning the Company’s
ability to continue as a going concern.
The
report of the Company’s independent auditors contained in the Company’s
financial statements explains that the Company has not yet established an
ongoing source of revenues sufficient to cover its operating costs and allow it
to continue as a going concern. The ability of the Company to continue as
a going concern is dependent on the Company obtaining adequate capital to fund
operating losses until it becomes profitable. If the Company is unable to
obtain adequate capital, it could be forced to cease
operations.
Failure
to raise additional capital as needed could adversely affect the Company and its
ability to grow.
The
Company will need considerable amounts of capital to develop its business.
It may raise funds through public or private equity offerings or debt
financings. If the Company cannot raise funds on acceptable terms when
needed, it may not be able to grow or maintain the business. Furthermore,
such lack of funds may inhibit the Company’s ability to respond to competitive
pressures or unanticipated capital needs, or may force the Company to reduce
operating expenses, which could significantly harm the business and development
of operations. Because the Company’s independent auditors have expressed
doubt as to the Company’s ability to continue as a “going concern,” as reported
in the financial statements of the Company, its ability to raise capital may be
severely hampered. Similarly, the Company’s ability to borrow any such
capital may be more expensive and difficult to obtain until this “going concern”
issue is eliminated.
The
Company has a history of operating losses and expects to continue to incur
losses in the future.
The
Company has a limited operating history and has incurred net operating losses of
$384,778 since its inception from April 30, 2009 through June 30, 2010.
The Company has not yet received any revenues and will not be in a position to
generate revenues until it is able to produce and sell the MASCT System.
The Company will incur additional losses in connection with engaging one or more
contract manufacturers to produce the MASCT System for commercial sale, building
a sales force for the product and establishing its laboratory facilities for the
testing and analysis of NAF samples, and may never achieve
profitability.
Raising
funds by issuing equity, or debt securities, could dilute the value of the
common stock and impose restrictions on the Company’s working
capital.
If the
Company were to raise additional capital by issuing equity securities, the book
value of the then outstanding common stock would be reduced unless the
additional equity securities were issued at a price equal to or greater than the
then value of the common stock at the time of issuance of the new
securities. If the additional equity securities were issued at a per share
price less than the per share value of the outstanding shares, then all of the
outstanding shares would suffer a dilution in value with the issuance of such
additional shares. Further, the issuance of debt securities in order to
raise additional funds may impose restrictions on the Company’s operations and
may impair the Company’s working capital as it services any such debt
obligations.
Currently
Medicare and certain insurance carriers will not reimburse for the NAF
collection procedure, which could slow or limit adoption of the MASCT System or
prevent the Company from pricing the MASCT System at desired
levels.
The HALO
System, an NAF collection device similar to the MASCT System, is being sold by
Neomatrix, Inc., or Neomatrix, of Irvine, California. Previously, Cytyc,
Inc., or Cytyc, of Marlboro, Massachusetts, marketed FirstCyte, a device to
collect NAF by ductal lavage. Certain insurance carriers do not currently
reimburse for the HALO System or FirstCyte procedures. For example,
effective March 1, 2009, United Healthcare determined it would not cover the
costs of these procedures because it believes there is insufficient clinical
evidence to support efficacy for the evaluation of patients at risk for breast
cancer. Similarly, Medicare does not reimburse for the NAF collection
procedure. Lack of Medicare or insurance coverage will require patients to
bear the full costs of the NAF sample acquisition process used with the MASCT
System. As a result, and particularly in light of healthcare reform and
cost-containment initiatives being undertaken widely across the United States,
physicians and other healthcare professionals may be slow to adopt the MASCT
System and may not recommend its use in patients. The Company may be
forced to reduce the price of the MASCT System components in response to low
demand, or may not be able to sell the product and services components of the
MASCT System at acceptable margins, which would severely limit the Company’s
ability to generate revenues.
The
MASCT System and second-generation risk assessment tools, diagnostic tests and
other predictive and personalized medicine products that the Company may develop
may never achieve significant commercial market acceptance.
The
Company may not succeed in achieving commercial market acceptance of any of its
products and services. In order to market the MASCT System and to gain
market acceptance for its products and services, the Company will need to
demonstrate to physicians and other healthcare professionals the benefits of the
MASCT System and its practical and economic application for their particular
practice. Despite FDA clearance for the MASCT System, many physicians and
healthcare professionals are hesitant to introduce new services, or techniques,
into their practice for many reasons, including the learning curve associated
with the adoption of such new services or techniques into already established
procedures and the uncertainty of the applicability or reliability of the
results of a new product. In addition, the availability of full or even
partial payment for the Company’s products and tests, whether by third-party
payors (e.g. insurance companies), or the patients themselves, will likely
heavily influence physicians’ decisions to recommend or use the Company’s
products.
The
Company may not be able to establish its cytology and molecular diagnostics
laboratory for the performance of its planned testing and analytical services or
may encounter difficulties in operating or maintaining this laboratory facility,
which could cause delays and unexpected problems.
The
Company has only begun to establish its laboratory and will rely on a single
physical facility for the testing of NAF samples in Seattle, Washington.
The Company will submit applications to obtain certification for its laboratory
under CLIA and Washington state regulations, which will require that the
facility become accredited by the College of American Pathologists and meet
various standards imposed by both federal and state regulatory
authorities. There is no guarantee that the Company’s facility will be
adequate or that the Company will obtain Washington state or federal CLIA
certification for this facility as planned. The Company’s management team
does not have significant prior experience with establishing this type of
laboratory facility. In addition, if established, this facility and
certain pieces of laboratory equipment required for the performance of the
Company’s testing and analytical services would be expected to be difficult and
costly to replace and may require significant replacement lead-time. In
the event that the Company is unable to establish its intended laboratory
facility or, if after completion, such laboratory or equipment is adversely
affected by periodic malfunctions or man-made, or natural disasters, the Company
may be unable to conduct its business and meet potential customer demands for a
significant period of time.
The
loss of the services of the Company’s chief executive officer could adversely
affect its business.
The
Company’s success is dependent in large part upon its ability to execute its
business plan, manufacture the MASCT System, establish its clinical and
diagnostic laboratory, and to attract and retain highly skilled professional,
sales and marketing personnel. In particular, due to the relatively early
stage of the Company’s business, its future success is highly dependent on the
services of Dr. Quay, its chief executive officer and founder, to provide the
necessary experience to execute the Company’s business plan. The Company
does not currently maintain “key man” insurance with respect to Dr. Quay.
The loss of his services for any reason could impede the Company’s ability to
achieve its objectives, such as the commercialization of the MASCT System and
the development of a core of healthcare professionals who use the MASCT System,
particularly initially, as the Company seeks to build a reputation among
physicians and clinicians.
The
Company may experience difficulty in locating, attracting, and retaining
experienced and qualified personnel, which could adversely affect its
business.
The
Company will need to attract, retain, and motivate experienced anatomic
pathologists, cytologists, histotechnologists, skilled laboratory and
information technology staff, experienced sales representatives, and other
personnel, particulary in the Greater Seattle area as it commences its initial
launch of the MASCT System. These employees may not be available in this
geographic region. In addition, competition for these employees is intense
and recruiting and retaining skilled employees is difficult, particularly for a
development-stage organization such as the Company. If the Company is not
able to attract and retain qualified personnel, revenues and earnings may be
adversely affected.
The Company has no prior experience
with commercializing any products or services, and it will need to establish a
sophisticated sales and marketing organization in order to successfully
commercialize the MASCT System.
The
Company intends to build a direct sales force to be comprised initially of eight
sales professionals to target physicians and mammography clinics in the
Northwestern United States and plans eventually to expand its sales team to
include sales professionals nationwide. Marketing the MASCT System to
physicians and healthcare professionals will require the Company to educate them
on the comparative advantages of the MASCT System over other methods currently
used for the detection and diagnosis of breast cancer. Experienced sales
representatives may be difficult to locate and all sales representatives will
need to undergo training. The Company will need to incur significant costs
to build its internal sales force. Based on its current operating plan,
the Company expects to incur costs of approximately $3.5 million in connection
with initial hiring and building its national sales force. The Company
cannot be certain that it will be able to recruit sufficiently skilled sales
representatives, or that any new sales representatives will ultimately become
productive. If the Company is unable to recruit, train and retain
qualified and productive sales personnel, its ability to commercialize the MASCT
System and any second generation products and to generate revenues will be
impaired.
The
Company will need to engage third-party suppliers for the production of the
MASCT System in commercial quantities, and the inability to find such suppliers,
or to maintain relationships with them, could adversely affect the Company’s
business.
The
Company does not currently have any long-term contracts or arrangements with any
laboratory equipment and disposable reagent suppliers, or any device or kit
manufacturers for the production of the MASCT System and its components in
commercial quantities. While the Company has entered into a short-term
contract with a third party medical device manufacturer to produce limited
quantities of the MASCT System to permit the Company to perform field testing
prior to commercial launch, there can be no assurance that commercial quantities
of the MASCT System can be manufactured by this supplier. The Company
anticipates that it will need to rely on third-party suppliers for the continued
manufacture and supply of the MASCT System, NAF collection device and patient
collection kits and for the laboratory instruments, equipment, consumable
supplies, and other materials necessary to perform the specialized diagnostic
tests. If the Company is unable to identify third-party suppliers to
produce the MASCT System in quantities sufficient for the Company’s planned
product launch on acceptable terms, or at all, the Company will not be able to
commercialize the MASCT System and generate revenues from its sales as
planned. In addition, if at any time after commercialization of the MASCT
System, the Company is unable to secure essential equipment or supplies in a
timely, reliable and cost-effective manner, it could experience disruptions in
its services that could adversely affect anticipated results.
The
Company’s intended business to sell predictive medical products exposes the
Company to possible litigation and product liability claims.
The
Company’s business exposes it to potential product liability risks from the
MASCT System inherent in the testing, marketing and processing of predictive, or
personalized medical products. Product liability risks may arise from, but
are not limited to:
|
·
|
the
inability of the MASCT System to extract a sufficient NAF sample from the
breast, which may lead to an NAF sample size that is inadequate for proper
processing at the Company’s laboratory and insufficient for screening,
which could lead to an inaccurate assessment of the health of the
patient;
|
|
·
|
failure
by healthcare professionals to properly safeguard NAF samples collected
using the MASCT System;
|
|
·
|
the
potential loss, mislabeling or misplacement of NAF sample shipments and
test kits;
|
|
·
|
the
MASCT System is a manually operated device, and, as a result, human error
due to fatigue or distraction by the healthcare professional may result in
improper collection of NAF or application of the MASCT
System;
|
|
·
|
inadequate
cleaning of the collection pump between patients resulting in mixing of
NAF samples from two patients or NAF samples attributed to the wrong
patient;
|
|
·
|
improper
fitting of the MASCT System device to the breast;
and
|
|
·
|
inadequate
cleaning of the breast prior to applying the MASCT
System.
|
A
successful product liability claim, or the costs and time commitment involved in
defending against a product liability claim, could have a material adverse
effect on the Company’s business. Any successful product liability claim
may prevent the Company from obtaining adequate product liability insurance, in
the future, on commercially desirable or reasonable terms. An inability to
obtain sufficient insurance coverage at an acceptable cost, or otherwise, to
protect against potential product liability claims could prevent or inhibit the
commercialization of the Company’s products.
The Company’s intention to provide a
laboratory to analyze and read the NAF tests expose it to possible litigation
based on malpractice, data aggregation errors, or
misdiagnoses.
The
Company will need to establish and operate a CLIA-certified laboratory to
analyze and read NAF samples collected using the MASCT System, and intends
to report the results to referring healthcare professionals, researchers
and potential collaborators worldwide. The Company may be subject to
claims by an affected patient, healthcare provider, researcher or collaborator
if laboratory personnel make any of the following mistakes, by way of
example:
|
·
|
errors
in the analysis of the NAF tests;
|
|
·
|
incorrect
aggregation, categorization or labeling of NAF
data;
|
|
·
|
improper,
incorrect or inaccurate development of a computer database which
categorizes, analyzes, or compares NAF test data;
or
|
|
·
|
misinterpretation
of the results of the test or collected
data.
|
We intend
to maintain insurance to protect the Company against such suits, but we cannot
be certain that the insurance will be sufficient to cover potential
damages, or that it will be cost-effective for us to maintain such a
policy. Any outcome against the Company could involve significant monetary
judgments and could severely impact the Company’s financial resources and would
be expected to impair the ability of the Company in the future to obtain
malpractice, or other insurance, for its laboratory services.
If
the Company’s patent positions do not adequately protect its products, others
could compete with the Company more directly, which would adversely affect its
business.
The
Company’s commercial success will depend in part on its ability to obtain new
patents and enforce its existing patents, as well as its ability to maintain
adequate protection of other intellectual property for its technologies and
products in the United States and abroad. If the Company does not
adequately protect its intellectual property, competitors may be able to use its
technologies and erode or negate any competitive advantage it may have, which
could adversely affect its business, negatively affect its position in the
marketplace and limit its ability to commercialize its products. The laws
of some foreign countries do not protect the Company’s proprietary rights to the
same extent as the laws of the United States, and the Company may encounter
significant problems in protecting its proprietary rights in these
countries.
The
patent positions of diagnostic and medical device companies, including ours,
involve complex legal and factual questions, and, therefore, validity and
enforceability cannot be predicted with certainty, nor can we be certain that we
are not infringing the patents of others. Our patents may be challenged,
deemed unenforceable, invalidated or circumvented. The Company will be
able to protect its proprietary rights from unauthorized use by third parties
only to the extent that its proprietary technologies, existing products and any
future products are covered by valid and enforceable patents or are effectively
maintained as trade secrets, and the Company is willing and has the resources to
take enforcement action against such unauthorized use by third
parties.
The
degree of future protection for the Company’s proprietary rights is uncertain,
and the Company cannot ensure that:
|
·
|
it
was the first to make the inventions covered by each of its patents and
pending patent applications;
|
|
·
|
it
was the first to file patent applications for these
inventions;
|
|
·
|
others
will not independently develop similar, or alternative technologies, or
duplicate any of the Company’s
technologies;
|
|
·
|
any
of the Company’s pending patent applications will result in issued
patents;
|
|
·
|
any
of the Company’s issued patents will be valid or
enforceable;
|
|
·
|
any
patents issued to the Company will provide a basis for commercially viable
products, will provide the Company with any competitive advantages or will
not be challenged by third parties;
|
|
·
|
the
Company will develop additional proprietary technologies or products that
are patentable; or
|
|
·
|
the
patents of others will not have an adverse effect on the Company’s
business.
|
The
Company may be unable to adequately prevent disclosure of trade secrets and
other proprietary information.
The
Company relies on trade secrets to protect its proprietary know-how and
technological advances, particularly where it does not believe patent protection
is appropriate or obtainable. However, trade secrets are difficult to
protect. The Company relies in part on confidentiality agreements with its
employees, consultants, outside scientific collaborators and other advisors to
protect its trade secrets and other proprietary information. These
agreements may not effectively prevent disclosure of confidential information
and may not provide an adequate remedy in the event of unauthorized disclosure
of confidential information. In addition, others may independently
discover the Company’s trade secrets and proprietary information. Costly
and time-consuming litigation could be necessary to enforce and determine the
scope of the Company’s proprietary rights. Failure to obtain, or maintain,
trade secret protection could enable competitors to use the Company’s
proprietary information to develop products that compete with the Company’s
products or cause additional, material adverse effects upon the Company’s
competitive business position.
The
Company’s current patent portfolio may not include all patent rights needed for
the full development and commercialization of the Company’s products. The
Company cannot be sure that patent rights it may need in the future will be
available for license on commercially reasonable terms, or at all.
Although
the Company’s patents may prevent others from making, using or selling similar
products, they do not ensure that the Company will not infringe the patent
rights of third parties. The Company may not be aware of all patents or
patent applications that may impact its ability to make, use or sell the MASCT
System or its other proposed product or service offerings. Furthermore,
the Company may not be aware of published or granted conflicting patent
rights. Any conflicts resulting from patent applications and patents of
others could significantly reduce the coverage of its patents and limit its
ability to obtain meaningful patent protection. If others obtain patents
with conflicting claims, the Company may need to obtain licenses to these
patents or to develop or obtain alternative technology.
The
Company may not be able to obtain any licenses or other rights to patents,
technology or know-how from third parties necessary to conduct its business as
described in this prospectus and such licenses, if available at all, may not be
available on commercially reasonable terms. Any failure to obtain such
licenses could delay or prevent the Company from developing or commercializing
its proposed products and services, which would harm its business. Litigation or
patent interference proceedings need to be brought against third parties, as
discussed below, to enforce any of the Company’s patents or other proprietary
rights, or to determine the scope and validity or enforceability of the
proprietary rights of such third parties.
Litigation
regarding patents, patent applications and other proprietary rights may be
expensive and time consuming. If the Company is involved in such
litigation, it could cause delays in bringing product or service candidates to
market and harm its ability to operate.
The
Company’s commercial success will depend in part on its ability to manufacture,
use and sell products and services without infringing patents or other
proprietary rights of third parties. Third parties may challenge or
infringe upon our, or our licensors’ existing, or future patents.
Although the Company is not currently aware of any pending or actual
litigation, or other proceedings, or third-party claims of intellectual property
infringement related to the MASCT System or its product candidates, the medical
device and diagnostic industry is characterized by extensive litigation
regarding patents and other intellectual property rights. Other parties
may obtain patents in the future and allege that the use of the Company’s
technologies infringes these patent claims or that it is employing their
proprietary technology without authorization.
Legal
proceedings involving the Company’s patents or patent applications, or those of
others, could result in adverse decisions regarding the patentability of its
inventions relating to its products or the enforceability, validity or scope of
protection offered by its patents.
Even if
the Company is successful in proceedings involving its intellectual property
rights or those of others, it may incur substantial costs and divert management
time and attention in pursuing these proceedings. If the Company is unable to
avoid infringing the patent rights of others, it may be required to seek a
license, defend an infringement action, or challenge the validity of the patents
in court. Patent litigation is costly and time-consuming and the
Company may not have sufficient resources to bring enforcement actions to a
successful conclusion. In addition, if the Company does not obtain a
license, develop or obtain non-infringing technology, fail to defend an
infringement action successfully or have infringed patents declared invalid, the
Company may incur substantial monetary damages; encounter significant delays in
bringing its product candidates to market; or be precluded from participating in
the manufacture, use or sale of its product candidates or methods of treatment
requiring licenses.
Risks
Related to the Company’s Industry
The
inadvertent or unintentional failure to comply with the complex government
regulations concerning privacy of medical records could impact the Company with
fines and adversely affect its reputation.
The
federal privacy regulations, among other things, restrict the Company’s ability
to use or disclose protected health information in the form of
patient-identifiable laboratory data, without written patient authorization, for
purposes other than payment, treatment, or healthcare operations (as defined
under the Health Insurance Portability and Accountability Act, or HIPAA) except
for disclosures for various public policy purposes and other permitted purposes
outlined in the privacy regulations. The privacy regulations provide
for significant fines and other penalties for wrongful use or disclosure of
protected health information, including potential civil and criminal fines and
penalties. Although the HIPAA statute and regulations do not
expressly provide for a private right of damages, the Company could incur
damages under state laws to private parties for the wrongful use or disclosure
of confidential health information or other private personal
information.
The
Company intends to implement policies and practices that it believes will make
it substantially compliant with the privacy regulations. However, the
documentation and process requirements of the privacy regulations are complex
and subject to interpretation. Failure to comply with the privacy
regulations could subject the Company to sanctions or penalties, loss of
business, and negative publicity.
The HIPAA
privacy regulations establish a “floor” of minimum protection for patients as to
their medical information and do not supersede state laws that are more
stringent. Therefore, the Company is required to comply with both
HIPAA privacy regulations and various state privacy laws. The failure
to do so could subject it to regulatory actions, including significant fines or
penalties, and to private actions by patients, as well as to adverse publicity
and possible loss of business. In addition, federal and state laws
and judicial decisions provide individuals with various rights for violation of
the privacy of their medical information by healthcare providers such as the
Company.
Changes
in regulations, policies, or payor mix may adversely affect reimbursement for
laboratory services and could have a material adverse impact on the Company’s
revenues and profitability.
Most of
the Company’s services will be billed to a party other than the physician who
ordered the test. Reimbursement levels for healthcare services are
subject to continuous and often unexpected changes in
policies. Changes in governmental and third-party reimbursement may
result from statutory and regulatory changes, retroactive rate adjustments,
administrative rulings, competitive bidding initiatives, and other policy
changes. Uncertainty also exists as to the coverage and reimbursement
status of new services. Government payors and insurance companies
have increased their efforts to control the cost, utilization, and delivery of
healthcare services. For example, at least yearly, Congress has
considered and enacted changes in the Medicare fee schedule in conjunction with
budgetary legislation. Further reductions of reimbursement for
Medicare services or changes in policy regarding coverage of tests may be
implemented from time to time. The payment amounts under the Medicare
fee schedules are often used as a reference for the payment amounts set by other
third-party payors. As a result, a reduction in Medicare
reimbursement rates could result in a corresponding reduction in the
reimbursements the Company will receive from such third-party
payors. Changes in test coverage policies of other third-party payors
may also occur. Such reimbursement and coverage changes in the past
have resulted in reduced prices, added costs and reduced accession volume, and
have imposed more complex regulatory and administrative
burdens. Further changes in federal, state, and local third-party
payor laws, regulations, or policies may have a material adverse impact on the
Company’s business.
Failure
to participate as a provider with payors, or operating as a non-contracting
provider, could have a material adverse effect on revenues.
The
healthcare industry has experienced a trend of consolidation among healthcare
insurers, resulting in fewer but larger insurers with significant bargaining
power in negotiating fee arrangements with healthcare providers, including
laboratories. Managed care providers often restrict their contracts
to a small number of laboratories that may be used for tests ordered by
physicians in the managed care provider’s network. If the Company
does not have a contract with a managed care provider, it may be unable to gain
those physicians as clients. In cases in which it will contract with
a specified insurance company as a participating provider, it will be considered
“in-network,” and the reimbursement of third-party payments is governed by
contractual relationships. The Company’s in-network services will be
primarily negotiated on a fee-for-service basis at a discount from the Company’s
patient fee schedule, which could result in price erosion that would adversely
affect revenues. The Company’s failure to obtain managed care
contracts, or participate in new managed care networks, could adversely affect
revenues and profitability. In cases in which the Company does not
have a contractual relationship with an insurance company, or is not an approved
provider for a government program, it will have no contractual right to collect
for services and such payors may refuse to reimburse it for services, which
could lead to a decrease in accession volume and a corresponding decrease in
revenues. As an out-of-network provider, reductions in reimbursement
rates for non-participating providers could also adversely affect the
Company. Third-party payors, with whom the Company does not
participate as a contracted provider, may also require that it enter into
contracts, which may have pricing and other terms that are materially less
favorable to the Company than the terms under which it intends to
operate. While accession volume may increase as a result of these
contracts, revenues per accession may decrease.
Use of
the Company’s laboratory services as a non-participating provider is also
expected to result in greater copayments for the patient unless the Company
elects to treat them as if it were a participating provider in accordance with
applicable law. Treating such patients as if the Company were a
participating provider may adversely impact results of operations because it may
be unable to collect patient copayments and deductibles. In some states,
applicable law prohibits the Company from treating these patients as if it were
a participating provider. As a result, referring physicians may avoid use of the
Company’s services which could result in a decrease in accession volume and
adversely affect revenues.
Changes
in FDA policies regarding the “home brew” exception from FDA review for
laboratory-developed tests and reagents could adversely affect the Company’s
business and results of operations.
Laboratory
diagnostic tests developed and validated by a laboratory for its own use, also
known as laboratory developed tests, which are referred to as LDTs or “home
brew” tests, are regulated by the FDA under the federal Food, Drug and Cosmetic
Act, or FDCA. To date, the FDA has decided, as a matter of
enforcement, not to exercise its authority with respect to most “home brew”
tests performed by high complexity laboratories certified under CLIA, which is
the type of laboratory that the Company intends to establish. The
Company does not believe that the cytology or IHC testing of NAF samples in the
MASCT System are LDTs; however, the Company’s second generation biomarker tests
will be LDTs for which it does not currently intend to apply for FDA premarket
notification or approval. In addition, manufacturers and suppliers of
analyte specific reagents, or ASRs, which the Company may utilize for use in its
LDTs, are required to register with the FDA, conform manufacturing operations to
the FDA’s Quality System Regulation, or QSR, and comply with certain reporting
and other record keeping requirements. The FDA regularly considers
the application of additional regulatory controls over the development and use
of LDTs by laboratories. It is possible that the FDA will require
premarket notification or approval for LDT diagnostic tests that the Company may
develop and perform in the future. The FDA held public hearings in
the third quarter of 2010 to discuss how it will oversee LDTs. No
definitive recommendations or findings have yet come from these hearings, but it
is likely that the FDA will impose additional or new regulations affecting LDTs,
including requiring premarket notification or approval for these
tests. Any premarket notification or approval requirements could
restrict or delay the Company’s ability to provide specialized diagnostic
services and may adversely affect its business. FDA regulation of
LDTs, or increased regulation of the various medical devices used in
laboratory-developed testing, could increase the regulatory burden and generate
additional costs and delays in introducing new tests.
The
failure to comply with complex federal and state laws and regulations related to
submission of claims for services could result in significant monetary damages
and penalties and exclusion from the Medicare and Medicaid
programs.
If the
Company is successful in obtaining reimbursement from government healthcare
program, the Company will be subject to extensive federal and state laws and
regulations relating to the submission of claims for payment for services,
including those that relate to coverage of services under Medicare, Medicaid,
and other governmental healthcare programs, the amounts that may be billed for
services, and to whom claims for services may be submitted, such as billing
Medicare as the secondary, rather than the primary, payor. The
failure to comply with applicable laws and regulations could result in the
Company’s inability to receive payment for its services or attempts by
third-party payors, such as Medicare and Medicaid, to recover payments from the
Company that have already been made. Submission of claims in violation of
certain statutory or regulatory requirements can result in penalties, including
civil money penalties of up to $10,000 for each item or service billed to
Medicare in violation of the legal requirement, and exclusion from participation
in Medicare and Medicaid. Government authorities may also assert that
violations of laws and regulations related to submission of claims violate the
federal False Claims Act or other laws related to fraud and abuse, including
submission of claims for services that were not medically
necessary. The Company will be generally dependent on independent
physicians to determine when its services are medically necessary for a
particular patient. Nevertheless, the Company could be adversely
affected if it was determined that the services it provided were not medically
necessary and not reimbursable, particularly if it were asserted that the
Company contributed to the physician’s referrals to it of unnecessary services.
It is also possible that the government could attempt to hold the Company liable
under fraud and abuse laws for improper claims submitted by an entity for
services that it performed, if it were found to have knowingly participated in
the arrangement that resulted in submission of the improper claims.
The
Company’s business is subject to rapid technological innovation, and the
development by third parties of new or improved diagnostic testing technologies
or information technology systems could have a material adverse effect on the
Company’s business.
The
anatomic pathology industry is characterized by rapid changes in technology,
frequent introductions of new diagnostic tests, and evolving industry standards
and client demands for new diagnostic technologies. Advances in technology may
result in the development of more point-of-care testing equipment that can be
operated by physicians or other healthcare providers in their offices, or by
patients themselves, without the services of freestanding laboratories and
pathologists, thereby reducing demand for the Company’s services. In addition,
advances in technology may result in the creation of enhanced diagnostic tools
that enable other laboratories, hospitals, physicians, patients, or third
parties to provide specialized laboratory services superior to the Company’s or
that are more patient-friendly, efficient, or cost-effective. The
Company’s success depends upon its ability to acquire or license on favorable
terms or develop new and improved technologies for early diagnosis before its
competitors and to obtain appropriate reimbursement for diagnostic tests using
these technologies. Introduction of prophylactic treatments or cures
for breast cancer could substantially reduce or eliminate demand for its
services.
Risks
Related to This Offering, the Securities Markets and Investment in the Company’s
Securities
There
has been no prior public market for the Company’s securities and the lack of
such a market may make resale of the securities difficult.
No prior
public market has existed for the Company’s securities and the Company cannot
assure any investor that a market will develop subsequent to this
offering. The Company intends to apply for listing of its common
stock, the Units and the Class B Warrants on the NYSE
Amex. However, it does not know whether a market for the Company’s
securities will ever develop or continue. If the Company’s securities
are not listed on the NYSE Amex, or a public trading market does not otherwise
develop, you may have difficulty selling your Units, common stock or Class B
Warrants. If the Company is not successful in listing on the NYSE
Amex, it may then apply for listing of its securities on the NASDAQ Capital
Market, or have its securities quoted on the OTC Bulletin Board, or the Pink OTC
Market, Inc., an Internet-based quotation service for over-the-counter
securities. The OTC Bulletin Board and Pink OTC Markets generally
have lower trading volume and liquidity, which could result in lower trading
prices and a decreased ability to sell securities.
The
Class A Warrants to be issued in this offering will not be listed on a
securities exchange and are exercisable for a period of only 10 days beginning
on the sixth trading day after separation of the securities underlying the
Units.
Although
the Company intends to apply for the listing of its common stock, Units and
Class B Warrants on the NYSE Amex, it does not plan to list the Class A Warrants
on any securities exchange. There may be little or no secondary
market for the Class A Warrants. Even if there is a secondary market,
it may not provide enough liquidity to allow you to trade or sell the warrants
easily. Accordingly, you will need to exercise the Class A Warrants
for common stock in order to convert them into securities listed for trading on
an exchange. In addition, the Class A Warrants must be exercised
within 10 days beginning on the sixth trading day after the date on which the
securities underlying the Units separate, and will expire if not exercised
during that ten-day period. The Company intends to issue a press
release announcing the date on which separate trading of the common stock and
Class B Warrants underlying the Units will begin and the date by which the Class
A Warrants must be exercised. If you do not exercise your Class A
Warrants on or before the expiration date, you will lose all value of the Class
A Warrants.
Purchasers
of Units will be entitled to exercise the Class A Warrants and the Class B
Warrants only if they hold the Units through the dates on which the Class A
Warrants and the Class B Warrants become exercisable.
The
Company intends to apply for the listing of the Units on the NYSE Amex so that
the Units will be tradable upon the completion of this offering. The
securities underlying the Units will separate from the Units on the 90th day
after the date of this prospectus, unless Dawson James Securities, Inc.
determines that an earlier separation date is acceptable based on its assessment
of the relative strengths of the securities markets and small capitalization
companies in general, and the trading pattern of, and demand for, the Company’s
securities in particular. Each Class A Warrant will be exercisable
for a period of 10 days beginning on the sixth trading day after the separation
of the securities underlying the Units, and each Class B Warrant will be
exercisable for a period of five years after the separation of the securities
underlying the Units. Because the Class A Warrants and the Class B
Warrants will not be exercisable until the separation of the Units as described
above, purchasers of Units will be required to hold the Units through the
respective dates on which the Class A Warrants and the Class B Warrants become
exercisable in order to have the ability to exercise these
warrants.
Holders
of the Company’s common stock will incur substantial dilution as a result of the
exercise of the Class A Warrants and other issuances of securities by the
Company.
The
Company anticipates that upon the completion of this offering, it will issue
3,000,000 shares of common stock underlying the Units. An additional
6,000,000 shares of common stock are expected to be issued within 10 days after
the sixth trading day following separation of the Units as investors exercise
their Class A Warrants, which are exercisable on a cashless, net exercise basis
at a price of $0.05 per share. The issuance of additional securities
by the Company upon the exercise of these warrants, as well as stock options
that the Company has issued or may issue to employees, officers, directors and
consultants, would result in substantial dilution to the Company’s stockholders
and could adversely affect the trading price for the Company’s common
stock.
The
Company expects to receive only nominal proceeds from the exercise of the Class
A Warrants and may not receive any proceeds from the exercise of the Class B
Warrants to be issued in this offering.
Because
the exercise price of the Class A Warrants is $0.05 per share and because these
warrants are exercisable on a cashless, net exercise basis, the Company expects
to receive no, or nominal proceeds, from any exercises of these
warrants. The Class B Warrants have an exercise price equal to 55% of
the Unit price in this offering, and will be exercisable commencing on the
first anniversary of the date of this prospectus and remaining exercisable until
the fifth anniversary of the seperation of the Class B Warrants from the
Units. The Company’s stock price may trade below the Class B Warrant
exercise price, in which case the holders would not exercise the
warrants. Even if the Company’s stock price trades above the warrant
exercise price, the warrant holders may choose not to exercise these warrants
for a period of several years, or at all, or they may elect the exercise the
Class B Warrants pursuant to the cashless, or net exercise provisions in the
warrants, in which case the Company would not receive any cash proceeds from the
exercise. In addition, the Company has the right to redeem the Class
B Warrants at $0.25 per share of common stock underlying the Class B Warrants in
the event (i) the average of the closing price of the Company’s common stock
exceeds 200% of the exercise price for 10 consecutive trading days while the
warrants are exercisable and (ii) there is then an effective registration
statement with a current prospectus on file with the SEC. As a
result, the Company may not receive any proceeds from the exercise of the Class
B Warrants for several years, if at all.
The
ownership of the Company’s common stock is concentrated among a small number of
stockholders, and if its principal stockholders, directors and officers choose
to act together, they may be able to control the Company’s management and
operations, which may prevent the Company from taking actions that may be
favorable to you.
The
Company’s ownership is concentrated among a small number of stockholders,
including our founders, directors, officers and entities related to these
persons. Upon the completion of this offering, and after giving
effect to the expected full exercise of the Class A Warrants, the Company’s
directors, officers and entities affiliated with them will beneficially own
approximately 36.2% of the outstanding voting securities of the
Company. Accordingly, these stockholders, acting together, will have
the ability to exert substantial influence over all matters requiring approval
by the Company’s stockholders, including the election and removal of directors
and any proposed merger, consolidation or sale of all or substantially all of
its assets. In addition, they could dictate the management of our
business and affairs. This concentration of ownership could have the
effect of delaying, deferring or preventing a change in control of the Company
or impeding a merger or consolidation, takeover or other business combination
that could be favorable to you.
Anti-takeover
provisions in the Company’s charter documents and Delaware law could delay or
prevent a change in control which could limit the market price of the Company’s
common stock and could prevent or frustrate attempts by the Company’s
stockholders to replace or remove current management and the current board of
directors.
The
Company’s amended and restated certificate of incorporation and amended and
restated bylaws, which are to become effective upon the completion of this
offering, contain provisions that could delay or prevent a change in control of
the Company or changes in the board of directors of the Company that our
stockholders might consider favorable. For more information about these
anti-takeover provisions as well as anti-takeover provisions under the Delaware
General Corporation Law, please see “Description of Securities—Anti-Takeover
Devices.” These and other provisions in the Company’s corporate
documents and Delaware law might discourage, delay or prevent a change in
control or changes in the board of directors of the Company. These
provisions could also discourage proxy contests and make it more difficult for
an investor and other stockholders to elect directors and cause the Company to
take other corporate actions. Furthermore, the existence of these
provisions, together with Delaware law, might hinder or delay an attempted
takeover other than through negotiations with the board of
directors.
The
Company does not expect to pay dividends in the future, which means that
investors may not be able to realize the value of their shares except through
sale.
The
Company has never and does not anticipate that it will declare or pay a cash
dividend. The Company expects to retain earnings, if any, for its
business and does not anticipate paying dividends on common stock at any time in
the foreseeable future. Because it does not anticipate paying
dividends in the future, the only opportunity to realize the value of the common
stock will likely be through a sale of those shares.
FORWARD-LOOKING
STATEMENTS
This
prospectus contains, in addition to historical information, certain information,
assumptions and discussions that may constitute forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially than those projected, or anticipated. Actual
results could differ materially from those projected in the forward-looking
statements. Although we believe our assumptions underlying the forward-looking
statements are reasonable, we cannot assure you that the forward-looking
statements set out in this prospectus will prove to be accurate. We
typically identify these forward-looking statements by the use of
forward-looking words such as “expect,” “potential,” “continue,” “may,” “will,”
“should,” “could,” “would,” “seek,” “intend,” “plan,” “estimate,” “anticipate”
or the negative version of those words or other comparable
words. Forward looking statements contained in this prospectus
include, but are not limited to, statements about:
|
·
|
our
expectations relating to the use of proceeds from this
offering;
|
|
·
|
the
progress, timing of, and amount of expenses associated with our
development and commercialization of our products and
services;
|
|
·
|
our
ability to engage third-party suppliers to manufacture the MASCT System
and its components at quantities and costs acceptable to
us;
|
|
·
|
our
ability to satisfy ongoing FDA requirements for the MASCT System and to
obtain regulatory approvals for our other products and services in
development;
|
|
·
|
the
benefits and clinical accuracy of our products and services, and whether
any product or service that we commercialize is safer or more effective
than competing products and
services;
|
|
·
|
our
ability to establish and maintain intellectual property rights covering
our products and services;
|
|
·
|
the
willingness of insurance companies and other third-party payors to approve
our products and services for coverage and
reimbursement;
|
|
·
|
our
ability to establish and maintain a sales force to market the MASCT System
and other products and services that we may
develop;
|
|
·
|
our
ability to sell our products and services at prices acceptable to
us;
|
|
·
|
our
expectations regarding federal, state and foreign regulatory
requirements;
|
|
·
|
the
accuracy of our estimates of the size and characteristics of the markets
that our products and services may
address;
|
|
·
|
our
expectations as to future financial performance, expense levels and
liquidity sources;
|
|
·
|
our
ability to attract and retain key personnel;
and
|
|
·
|
other
factors discussed elsewhere in this
prospectus.
|
This
prospectus also contains estimates and other statistical data made by
independent parties and by us relating to market size and growth and other
industry data. These and other forward-looking statements made in
this prospectus are presented as of the date on which the statements are made.
We have included important factors in the cautionary statements included in this
prospectus, particularly in the section entitled “Risk Factors,” that we believe
could cause actual results or events to differ materially from the
forward-looking statements that we make. Our forward-looking statements do not
reflect the potential impact of any new information, future events or
circumstances that may affect our business. Except as required by
law, we do not intend to update any forward-looking statements after the date on
which the statement is made, whether as a result of new information, future
events or circumstances or otherwise.
USE
OF PROCEEDS
We
estimate that the net proceeds of the sale of the Units that we are offering
will be approximately $16.0 million, or approximately $18.3 million if the
underwriters exercise their over-allotment option in full, assuming an initial
public offering price of $6.00 per Unit, which is the midpoint of the range
listed on the cover page of this prospectus, and after deducting estimated
underwriting discounts and commissions and estimated offering expenses that we
must pay.
A $1.00
increase (decrease) in the assumed initial public offering price of $6.00 per
Unit would increase (decrease) the net proceeds to us from this offering by
approximately $2.7 million, assuming the number of Units offered by us, as set
forth on the cover page of this prospectus, remains the same and after deducting
estimated underwriting discounts and commissions and estimated offering expenses
payable by us.
The
principal purposes of this offering are to obtain additional working capital to
fund anticipated operating expenses, establish a public market for
our common stock and facilitate future access to the public
markets. We estimate that we will use the net proceeds from this
offering primarily for the following purposes:
|
·
|
up
to approximately $750,000 of these net proceeds to establish a cytology
and molecular diagnostics laboratory focused exclusively on breast
cancer;
|
|
·
|
up
to approximately $1.5 million of these net proceeds to manufacture MASCT
System units needed to launch the MASCT System in Northwestern United
States as the initial market for the distribution of the
product;
|
|
·
|
up
to approximately $3.5 million of these net proceeds to hire and train
sales and marketing personnel for initial regional marketing and
subsequent national distribution;
and
|
|
·
|
up
to approximately $3.2 million of these net proceeds to develop and
commence manufacturing and commercialization of second-generation products
and services.
|
We
anticipate using the balance of the net proceeds to develop second generation
biomarker tests for tumor-related indications and complementary molecular
diagnostic assays and for general corporate purposes, such as general and
administrative expenses, capital expenditures, working capital, prosecution and
maintenance of our intellectual property, as well as the potential investment in
technologies or products that complement our business.
The
expected use of net proceeds from this offering represents our current
intentions based upon our present plans and business conditions; however, there
may be circumstances where a reallocation of funds is necessary. The
amount and timing of our actual expenditures depend on numerous factors,
including the costs of seeking regulatory approval in the United States and
abroad, the costs of establishing our planned laboratory, launching and
marketing the MASCT System and developing and testing additional applications of
the MASCT System.
A portion
of the net proceeds may be used to acquire or invest in complementary
businesses, technologies, services or products in the event that we identify
opportunities for such acquisitions, or investments that we believe are in the
best interests of our stockholders. We have no current plans,
agreements or commitments with respect to any such acquisition or investment,
and we are not currently engaged in any negotiations with respect to any such
transaction.
Management
will retain broad discretion in the allocation of the net proceeds of this
offering. An investor will not have the opportunity to evaluate the
economic, financial or other information on which we base our decisions on how
to use the proceeds.
DIVIDEND
POLICY
The
Company does not anticipate that it will declare dividends in the foreseeable
future but rather intends to retain any future earnings for the development of
the business. Payment of future cash dividends, if any, will be at
the discretion of the board of directors of the Company after taking into
account various factors, including the Company’s financial condition, operating
results, current and anticipated cash needs, outstanding indebtedness and plans
for expansion and restrictions imposed by lenders, if any.
CAPITALIZATION
The
following table sets forth the Company’s capitalization as of June 30, 2010
on:
|
·
|
an
as-adjusted basis to reflect the receipt of the net proceeds from the sale
of Units in this offering at an assumed initial public offering price of
$6.00 per Unit, which is the midpoint of the range set forth on
the cover page of this prospectus, after deducting the estimated
underwriting discounts and commissions and estimated offering expenses,
and assuming the full exercise of the Class A
Warrants.
|
A
potential investor should read this capitalization table together with the
financial statements and the related notes appearing elsewhere in this
prospectus, as well as “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and other financial information included in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Cash
and cash equivalents
|
|
$ |
40,098 |
|
|
$ |
16,540,098 |
|
Common
Stock, $0.001 par value, 50,000,000 shares authorized and 6,000,063 and
15,000,063 shares outstanding, actual and as-adjusted, respectively
(1)
|
|
|
6,000 |
|
|
|
15,000 |
|
Additional
paid-in capital
|
|
|
321,540 |
|
|
|
16,812,540 |
|
Deficit
accumulated during development stage
|
|
|
(384,778 |
) |
|
|
(384,778 |
) |
Total
stockholders’ (deficit) equity
|
|
|
(57,238 |
) |
|
|
21,833,012 |
|
(1)
|
The
authorized number of shares of the Company’s common stock does not reflect
an increase in the authorized shares of the Company’s common stock
effected in September 2010. The number of shares of the
Company’s common stock to be outstanding before the offering is based on
6,000,063 shares (or 13,580,000 shares prior to the reverse stock split
effected in September 2010) of common stock outstanding as of June
30, 2010, and excludes 1,000,000 shares of common stock reserved for
future issuance under our 2010 Stock Option and Incentive
Plan.
|
DILUTION
Our net
tangible book value as of June 30, 2010 was $(57,238), or $(0.01) per share
of common stock. Net tangible book value per share represents the
amount of our total tangible assets less our total liabilities, divided by the
number of shares of common stock outstanding as of June 30,
2010. After giving effect to the sale by us of 3,000,000 shares
of common stock underlying the Units being sold in this offering at an assumed
initial public offering price of $6.00 per share, which is the midpoint of the
range listed on the cover page of this prospectus, and issuance of 6,000,000
shares of common stock underlying the Class A Warrants at an assumed exercise
price of $0.05 per share, and after deducting the 10% estimated underwriting
discounts and commissions and estimated offering expenses payable by us, our pro
forma net tangible book value as of June 30, 2010 would have been
approximately $16.4 million, or approximately $1.10 per share. This
amount represents an immediate increase in net tangible book value of $1.11 per
share to our existing stockholders and an immediate dilution in net tangible
book value of approximately $4.90 per share to new
investors.
The
following table illustrates this hypothetical per-share
dilution:
Assumed
initial public offering price
|
|
|
|
|
$ |
6.00 |
|
Net
tangible book value per share as of June 30, 2010 (after giving effect to
reverse stock split effected in September 2010)
|
|
$ |
(0.01 |
) |
|
|
|
|
Increase
per share attributable to new investors
|
|
|
1.11 |
|
|
|
|
|
As-adjusted
net tangible book value per share after this offering
|
|
|
|
|
|
|
1.10 |
|
Dilution
per share to new investors
|
|
|
|
|
|
$ |
(4.90 |
) |
A $1.00
increase (decrease) in the assumed initial public offering price of $6.00 per
Unit would increase (decrease) our adjusted net tangible book value per share
after this offering by approximately $0.18 and would increase (decrease)
dilution per share to new investors by approximately $0.82, assuming that the
number of shares offered by us, as set forth on the cover page of this
prospectus, remains the same and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by
us. In addition, to the extent any outstanding options or warrants
are exercised, you will experience further dilution.
The
following table summarizes, as of June 30, 2010, the number of shares
purchased from us, the total consideration paid or to be paid to us, and the
average price per share paid or to be paid to us by existing stockholders and
new investors purchasing a total of 9,000,000 shares of our common stock, which
represents 3,000,000 shares underlying the Units at an assumed offering price of
$6.00 per share, which is the midpoint of the price range listed on the cover
page of this prospectus, and 6,000,000 shares issuable upon exercise of the
Class A Warrants,at an exercise price of $0.05 per share, before deducting
estimated underwriting discounts and commissions and estimated offering expenses
payable by us.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing
stockholders (after giving effect to reverse stock split)
|
|
|
6,000,063 |
|
|
|
40 |
% |
|
$ |
327,540 |
|
|
|
2 |
% |
|
$ |
0.05 |
|
New
investors
|
|
|
9,000,000 |
|
|
|
60 |
% |
|
|
18,300,000 |
|
|
|
98 |
% |
|
|
2.03 |
|
Total
|
|
|
15,000,063 |
|
|
|
100 |
% |
|
$ |
18,627,540 |
|
|
|
100 |
% |
|
$ |
1.24 |
|
A $1.00
increase (decrease) in the assumed initial public offering price of $6.00 per
Unit would increase (decrease) the total consideration paid by new investors by
$3.0 million and increase (decrease) the percent of total consideration paid by
new investors by 0.25% assuming that the number of shares offered by us, as set
forth on the cover of this prospectus, remains the same and after deducting
estimated underwriting discounts and commissions and estimated offering expenses
payable by us.
Assuming
the underwriters’ over-allotment option is exercised in full, sales by us in
this offering will reduce the percentage of shares held by existing stockholders
to approximately 39% and will increase the number of shares held by our new
investors to approximately 9,450,000, or 61%.
The
number of shares of our common stock to be outstanding after this offering is
based on 6,000,063 shares (or 13,580,000 shares prior to the reverse stock split
effected in September 2010) of our common stock outstanding as of June 30, 2010
and excludes:
|
·
|
3,000,000
shares of common stock issuable upon exercise of the Class B Warrants,
having an exercise price equal to 55% of the Unit offering price;
and
|
|
·
|
1,000,000 shares
of common stock reserved for future issuance under our 2010 Stock Option
and Incentive Plan, which will become effective upon the completion of
this offering.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
The
following discussion of the financial condition and results of operations should
be read in conjunction with the “Summary Financial Information” and the
financial statements and the related notes included elsewhere in this
prospectus. This discussion contains forward-looking statements, which are based
on assumptions about the future of the Company's business. The actual results
will likely differ materially from those contained in the forward-looking
statements. Please read “Forward-Looking Statements” included elsewhere in this
prospectus for additional information regarding forward-looking statements used
in this prospectus.
Overview
We are a
development-stage healthcare company focused on the commercialization of
cellular and molecular diagnostic risk assessment products and related services
for the detection of pre-cancerous conditions that could lead to breast cancer,
and on the development of second-generation products and services. Although
current mammography procedures can detect cancer already present in the breast,
our products have the ability to identify pre-cancerous changes in the breast up
to eight years in advance of mammography detection. This information allows for
the implementation of preventive measures such as lifestyle changes and
pharmaceutical interventions that may prevent breast cancer from developing or
treat breast cancer earlier, if it develops. Our primary focus is the
commercialization of our patented and FDA-cleared product and related testing
and analysis services for breast cancer, the MASCT System.
Current
Operations
We were
incorporated in Delaware in April 2009 and have experienced operating losses
since inception. Our operations to date have consisted primarily of securing
laboratory and office space, hiring laboratory personnel, ordering equipment and
supplies, engaging a third-party vendor for the manufacture of the MASCT System
in limited quantities for field testing, securing patent rights, filing new
patent applications, acquiring FDA market clearances and securing development
bids to complete preparation for manufacturing the MASCT System in commercial
quantities. We have no other operations and have not received any revenues, nor
will we be in a position to expect revenues until we are able to produce and
sell the MASCT System. We expect to select a large volume contract medical
device manufacturer to begin manufacturing the MASCT System for
commercialization in the fourth quarter of 2010 at an estimated cost of
approximately $1.5 million.
We occupy
approximately 330 square feet of office space for our corporate headquarters
rent free. In September 2010, we entered into a month-to-month lease for
approximately 1,300 square feet of laboratory space at a monthly rent of $3,657.
We intend to use this space for the initial development of a laboratory for the
testing and analysis of NAF samples collected using the MASCT System and believe
that this facility will be sufficient for our planned operations over the
next 12 months. We expect that we will need to establish additional office
and laboratory space in the Greater Seattle in the second half of
2011.
We
believe that commercialization of the MASCT System will provide us with two main
revenue sources: (i) sales-based revenue from the sale of the product component
of the MASCT System to physicians, breast health clinics, and mammography
clinics and (ii) service, or use-based, revenue from the preparation and
interpretation of the NAF samples sent to our laboratory for
analysis.
We plan
to develop a specialty trained sales force to market the MASCT System on a
localized territorial basis, thereby developing personal relationships with the
healthcare professionals to whom our sales personnel can provide service and
support. We intend to develop a specialized laboratory for the processing and
analysis of the MASCT System tests submitted by client healthcare professionals.
We anticipate that we will need to develop a staff of anatomic pathologists to
read the test results. In addition to Dr. Quay, we intend to hire other
board-certified pathologists to assist in the interpretation of the NAF
samples.
In order
to execute on our long-range plans, we will use a portion of the proceeds raised
in this offering to produce and market the MASCT System. We are developing a
laboratory that will initially have only a minimal staff until such time, if
ever, that the sales of the MASCT System and demand for laboratory
interpretations can justify additional laboratory staff and sales personnel. If
funds from this offering are not sufficient to produce the MASCT System or to
develop the laboratory, we anticipate that we will have to cease operations if
we cannot obtain funds from other sources.
Critical Accounting Policies and
Estimates
Our
management’s discussion and analysis of our financial condition and results of
operations is based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States,
or GAAP. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities
and expenses. On an ongoing basis, we evaluate these estimates and judgments,
including those described below. We base our estimates on our historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances. These estimates and assumptions form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results and experiences may
differ materially from these estimates.
While our
significant accounting policies are more fully described in Note 3 to our
financial statements included at the end of this prospectus, we believe that the
following accounting policies are the most critical to aid you in fully
understanding and evaluating our reported financial results and affect the more
significant judgments and estimates that we use in the preparation of our
financial statements.
Although
we have yet to generate any revenues, we expect that we will recognize product
and service revenue when the following fundamental criteria are met: (i)
persuasive evidence of an arrangement exists, (ii) delivery has occurred or the
service has been performed, (iii) our price to the customer is fixed or
determinable and (iv) collection of the resulting accounts receivable is
reasonably assured. We will recognize revenue for product sales upon transfer of
title to the customer. We will recognize revenue for services upon performance
of the service. Customer purchase orders and/or contracts will generally be used
to determine the existence of an arrangement. Shipping documents and the
completion of any customer acceptance requirements, when applicable, will be
used to verify product delivery or that services have been rendered. We will
assess whether a price is fixed or determinable based upon the payment terms
associated with the transaction and whether the sales price is subject to refund
or adjustment. We will record reductions to revenue for estimated product
returns and pricing adjustments in the same period that the related revenue is
recorded. These estimates will based on industry-based historical data,
historical sales returns, if any, analysis of credit memo data, and other
factors known at the time.
Cash
and Cash Equivalents
Cash and
cash equivalents include cash and all highly liquid instruments with original
maturities of three months or less.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Accordingly, actual results could differ from those
estimates.
Research
and Development Expenses
Research
and development costs are generally expensed as incurred. Our research and
development expenses consist of costs incurred for internal and external
research and development.
Share
Based Payments
In
December, 2004, the Financial Accounting Standards Board, or the FASB, issued
the Statement of Financial Accounting Standards, or SFAS, No. 123(R),
“Share-Based Payment”, which replaces SFAS No. 123 and supersedes APB Opinion
No. 25. SFAS No. 123(R) is now included in the FASB’s ASC Topic 718,
“Compensation — Stock Compensation.” Under SFAS No. 123(R), companies are
required to measure the compensation costs of share-based compensation
arrangements based on the grant-date fair value and recognize the costs in the
financial statements over the period during which employees or independent
contractors are required to provide services. Share-based compensation
arrangements include stock options and warrants, restricted share plans,
performance-based awards, share appreciation rights and employee share purchase
plans. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, or SAB
107, which expresses views of the staff regarding the interaction between SFAS
No. 123(R) and certain SEC rules and regulations and provides the staff’s views
regarding the valuation of share-based payment arrangements for public
companies. SFAS No. 123(R) permits public companies to adopt its requirements
using one of two methods. On April 14, 2005, the SEC adopted a new rule amending
the compliance dates for SFAS No. 123(R). Companies may elect to apply this
statement either prospectively, or on a modified version of retrospective
application under which financial statements for prior periods are adjusted on a
basis consistent with the pro forma disclosures required for those periods under
SFAS No. 123.
We have
fully adopted the provisions of FASB ASC 718 and related interpretations as
provided by SAB 107. As such, compensation cost is measured on the date of grant
as the fair value of the share-based payments. Such compensation amounts, if
any, are amortized over the respective vesting periods of the option
grant.
Results
of Operations
Discussion
of Fiscal Year Ended December 31, 2009
For the
year ended December 31, 2009, we had no revenues and total expenses of $122,857,
consisting of $21,250 in expenses for research and development, or R&D, and
$101,607 in expenses for general and administrative, or G&A, costs. These
expenses included $16,250 in R&D expenses paid to Ensisheim pursuant to an
exclusive license agreement for the patents and patent applications covering the
MASCT System, and $1,348 in G&A expenses paid to a related party for rent
for our office space. Our license agreement with Ensisheim was terminated in
June 2010.
We have
yet to generate any revenues since our inception on April 30, 2009. The R&D
expenses from April 30, 2009 (inception) through December 31, 2009 totaled
approximately $21,250 and related to design and development work for the MASCT
System.
The
G&A expenses from April 30, 2009 (inception) through December 31, 2009
included $88,522 for legal and professional fees related to company
incorporation, initial set-up, patent prosecution and maintenance fees and
financial accounting and auditing fees.
Comparison of the Six Months Ended
June 30, 2010 and the Period from April 30, 2009 (inception) through June 30,
2009
For the
six months ended June 30, 2010, we had no revenues and total expenses of
$274,747, consisting entirely of G&A costs. This compares to no R&D
expenses and G&A expenses of $524 over the period from April 30, 2009
(inception) through June 30, 2009.
As
discussed below, we expect that our R&D and G&A expenses will continue
to increase in the foreseeable future, and that if we successfully complete this
offering and launch the MASCT System and our related laboratory service
offerings, we would also begin to incur sales and marketing expenses as we build
a regional and ultimately national sales force. We may limit our fixed sales and
marketing costs initially by employing temporary workers or those who are
compensated on a commission basis. However, we expect our expenditures to
increase significantly in future periods.
Research and Development
Expenses. We had no R&D expenses for the six months ended June 30,
2010 or for the period from April 30, 2009 through June 30, 2009. We expect that
R&D expenses will increase as we finalize the product design for the
first-generation MASCT System and develop a second-generation system and related
technologies.
General and Administrative
Expenses.
G&A expenses for the six months ended June 30, 2010 were $274,747,
related principally to legal and professional services in connection with our
preparation for this offering. G&A expenses for the period from April 30,
2009 through June 30, 2009 were $524, related principally to travel expenses.
The increase in expenses was attributed to the longer period in 2010 and an
increase in business activity as we prepared for this offering and engaged in
pre-commercial activity for the MASCT System. We expect that our G&A
expenses will continue to increase if we successfully complete this offering as
we add full-time accounting and finance personnel and incur additional costs as
a publicly traded company. Additionally, G&A costs will rise as we increase
headcount to help with the manufacturing and launch of the MASCT
System.
Liquidity and Capital
Resources
To date,
we have funded our operations primarily through private placements of common
stock and loans from officers. As of June 30, 2010, we had received net proceeds
of approximately $256,540
from the sale of equity securities and, as of that date, we had
approximately $32,098 of cash and cash equivalents. We issued a promissory note
for $100,000 in principal to our Chairman and Chief Executive Officer on June
30, 2010, under which the principal amount of the loan was funded to us on July
12, 2010. The report of our independent auditors contained in our financial
statements explains that we have not yet established an ongoing source of
revenues sufficient to cover operating costs and allow us to continue as a going
concern. Our ability to continue as a going concern is dependent on our
obtaining adequate capital to fund operating losses until we become profitable.
If we are unable to obtain adequate capital, we could be forced to cease
operations.
For the
six months ended June 30, 2010, we incurred a net loss of $261,920. Net cash
used in operating activities was approximately $154,266. Net cash provided by
financing activities was approximately $102,000 and consisted of private
placements of our common stock, through which we received net proceeds of
$102,000. For the year ended December 31, 2009, we incurred a net loss of
$122,857, and net cash used in operating activities was approximately $75,176.
During the year ended December 31, 2009, net cash provided by financing
activities was approximately $159,540, of which $154,540 was raised through
private placements of our common stock.
We expect
to incur substantial expenses and generate ongoing operating losses for the
foreseeable future as we prepare for the manufacturing and launch of the MASCT
System and build and operate our planned diagnostics laboratory. To fund our
operations for at least the next 12 months under our current business plan, we
estimate that we would need between $10 million and $12 million of additional
capital. If we are unable to raise this amount of capital, we could be forced to
curtail or cease operations. Our future capital uses and requirements depend on
numerous forward-looking factors. These factors include the following, among
others:
|
·
|
the
amount of capital raised in this offering and whether investors exercise
the Class B Warrants for cash, thereby providing additional
capital;
|
|
·
|
the
time and expense needed to complete the design and manufacturing of the
MASCT System and the design and build-out of our planned
laboratory;
|
|
·
|
the
expense associated with engaging one or more third-party contractors
to manufacture the MASCT System in commercial
quantities;
|
|
·
|
the
expense associated with building a sales force to market the MASCT System;
and
|
|
·
|
the
degree of patient and physician acceptance of the MASCT System and the
degree to which third-party payors approve the MASCT System and laboratory
analysis for
reimbursement.
|
To date,
we have not generated any revenues. We do not expect to generate revenue unless
or until we are able to manufacture and launch the MASCT System and build and
operate our planned laboratory. We expect our continuing operating losses to
result in increases in cash used in operations over at least the next year. We
expect the proceeds of this offering, together with our existing resources as of
the date of this prospectus, to be sufficient to fund our planned operations for
at least the next 12 months. However, we may require additional funds earlier
than we currently expect to successfully manufacture and commercialize the MASCT
System or build and operate our laboratory. Because of the numerous risks and
uncertainties associated with the development and commercialization of our
products and services, we are unable to estimate the amounts of increased
capital outlays and operating expenditures associated with our current and
anticipated research and development activities.
Additional
funding may not be available to us on acceptable terms or at all. In addition,
the terms of any financing may adversely affect the holdings or the rights of
our stockholders. For example, if we raise additional funds by issuing equity
securities or by selling debt securities, if convertible, further dilution to
our existing stockholders may result. To the extent our capital resources are
insufficient to meet our future capital requirements, we will need to finance
our future cash needs through public or private equity offerings, collaboration
agreements, debt financings or licensing arrangements.
If
adequate funds are not available, we may be required to terminate, significantly
modify or delay our development programs, reduce our planned commercialization
efforts, or obtain funds through collaborators that may require us to relinquish
rights to our technologies or product candidates that we might otherwise seek to
develop or commercialize independently. We may elect to raise additional funds
even before we need them if the conditions for raising capital are
favorable.
Off-Balance Sheet
Arrangements
We do not
currently have, nor have we ever had, any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. In addition, we do not engage in trading activities involving
non-exchange traded contracts.
Recent Accounting
Pronouncements
The
Company has adopted all recently issued accounting pronouncements that
management believes to be applicable to the Company. The adoption of these
accounting pronouncements, including those not yet effective, is not anticipated
to have a material effect on the financial position or results of operations of
the Company.
BUSINESS
Overview
The
Company is a development-stage healthcare company focused on the
commercialization of cellular and molecular diagnostic risk assessment products
and related services for the detection of pre-cancerous conditions that could
lead to breast cancer, and on the development of second-generation products and
services. The Company’s primary focus is the commercialization of the MASCT
System, a patented, FDA-cleared cellular and molecular diagnostic risk
assessment product and related testing and analysis services for the detection
of breast cancer. The Company owns all proprietary rights for the development,
manufacture, use and commercialization of the MASCT System, as well as all
related product rights, including the FDA marketing authorization.
The MASCT
System is a device and method for the collection, shipment and clinical analysis
of NAF. The clinical analysis of NAF, which contains cells and molecular
diagnostic biomarkers, is useful in detecting breast cancer and cellular changes
that may be precursors to breast cancer. The product component of the MASCT
System consists of a reusable hand-held pump for the collection of NAF, a
patient kit that includes two NAF sample vials, and a shipment kit for the
transportation of NAF samples to a specialized cytology and molecular
diagnostics laboratory that the Company intends to establish. Through this
laboratory, if successfully established, the Company intends to provide the
MASCT System services, which would consist of receiving and accessioning the two
NAF samples from each patient, preparing routine and IHC slides from the NAF
samples, and generating a report of the findings. The Company plans to establish
its laboratory in the fourth quarter of 2010 and commence its commercial launch
of the MASCT System in the first quarter of 2011.
Although
current mammography procedures can detect cancer already present in the breast,
the MASCT System has the ability to identify pre-cancerous changes in the breast
up to eight years in advance of mammography detection. This information allows
for the implementation of preventive measures such as lifestyle changes and
pharmaceutical interventions that may prevent breast cancer from developing or
treat breast cancer earlier, if it develops. The Company anticipates that the
MASCT System will initially be used in conjunction with standard mammography
exams and has the potential to become a critical assessment tool for identifying
women at risk for breast cancer. The MASCT System test is simple, quick
(approximately five minutes), convenient, painless and safe (no radiation). The
Company expects to price its NAF sample collection device at approximately $200
per device, its patient kits at approximately $50 per kit, and the cytology and
molecular diagnostics testing and analysis at between $106 and $1,202 per
patient, depending on the complexity of the analysis performed and without
taking into account any patient reimbursement from third-party
payors.
Effective
testing and analysis of the NAF samples collected using the MASCT System
requires both highly skilled pathologists and other medical personnel with
specialized expertise and laboratory facilities with the necessary testing
procedures and equipment. The Company intends to establish a so-called “complex
laboratory” certified under U.S. federal CLIA regulations, specializing in the
processing and analysis of NAF samples. Because NAF samples are among the
smallest medical samples handled by clinical laboratories, specialized
procedures, protocols and equipment will be required to maximize the diagnostic
value of each sample. The Company anticipates that it will use both conventional
cytology and advanced molecular diagnostic technologies in its laboratory and
engage a staff of professional medical personnel to deliver accurate and
comprehensive diagnostic reports. The Company intends to focus on
sample-handling efficiency and swift report turnaround times, providing
physicians with enhanced opportunities to maximize the quality of patient
care.
The MASCT
System requires no use of radiation. A study that analyzed the results of six
peer-reviewed medical research publications reported in December 2009 that low
dose radiation from mammograms can increase cancer incidence by 1.5 to 2.5 fold
in high-risk women, increasing the complexity of managing high-risk patients.
Unlike a biopsy, the MASCT System is a non-invasive and painless procedure. The
Company believes these aspects of the MASCT System may help to generate
acceptance of its use for NAF collection and testing.
The
Company estimates that there are over 8,600 mammography clinics, as well as
dedicated breast health clinics, and obstetrics/gynecology medical practices in
the United States that can utilize the MASCT System. The Company intends to
build an internal sales force to market the MASCT System to physicians and
clinics specializing in women’s health. The Company plans to hire a direct
sales force of approximately eight people initially to commercialize the MASCT
System in the Northwestern United States, where there are approximately 290
mammography clinics registered with the FDA. Following this regional
launch, the Company anticipates expanding nationally during the first half of
2012 and intends to grow its sales force to approximately 100 people in the
United States.
MASCT
System Development and Ownership History
Atossa
Healthcare, Inc. was incorporated in 1998 by Dr. Quay to conduct research on
breast cancer diagnostic tests, from which the MASCT System was
invented. Nastech Pharmaceutical Company, Inc., or Nastech, a company
developing nasal drug delivery products, acquired Atossa Healthcare, Inc. in
August 2000, and Dr. Quay became chairman, chief executive officer and president
of Nastech. In 2003, Nastech conducted clinical trials of the MASCT
System for the collection of NAF for cytological testing, and the product
received FDA clearance in May 2003.
After
receiving FDA clearance, Nastech, which changed its name to MDRNA, Inc., and
recently to Marina Biotech, Inc., did not engage in any further development of
the MASCT System. In January 2009, Ensisheim acquired from Nastech
five issued U.S. patents covering the MASCT System, as well as all related
product rights, including the FDA marketing authorization, for cash and the
assumption of debt related to unpaid patent expenses, in an amount of
approximately $50,000.
The
Company was incorporated in April 2009 as a Delaware corporation and
subsequently acquired from Ensisheim all ownership and commercialization rights
relating to the MASCT System, including the five issued U.S. patents, together
with foreign counterparts, covering the manufacture, use and sale of the MASCT
System, pending patent applications for improvements, and the FDA marketing
authorization for the MASCT System. The Company has no royalty or
other ongoing obligations to Ensisheim relating to the acquired
assets.
Design
of the MASCT System
The MASCT
System is a specially engineered, hand-held, manual breast pump with unique
features that include the ability to wick fluids out of the breast in a very
short period of time (approximately five minutes), as well as a proprietary
collection system that sanitarily captures NAF produced from the breast
ducts. The MASCT System is constructed from injection molded plastic
components with standard material gaskets and parts. The membrane
filter material that makes contact with the nipple is available from multiple
domestic suppliers. In July 2010, the Company entered into an
agreement with a leading medical device design company to produce 20 MASCT
System pumps and 10,000 patient kits for field testing by the Company during the
fourth quarter of 2010.
Breast
Anatomy and Nipple Aspirate Fluid Collection
The
female breast has two main components: glandular tissue (lobes and ducts) and
connective/fatty tissue. The breast is divided into 15 to 20 lobes
that radiate outward from the nipple and contain clusters of milk-producing
glands. The lobes are further divided into smaller compartments
called lobules. Each cluster drains into a duct, which connects the
lobules and the nipple. In the ducts, cells closest to the outer
portions of the lobules are called luminal cells and those deeper in the duct
wall are called basal cells. The molecular biology-based sub-typing
of pre-cancerous changes and cancers includes a molecular determination of
whether the cells are luminal or basal in origin. The breast is held
together by fatty connective tissue, which provides support and contains nerves
as well as blood and lymphatic vessels.

Since the
early studies conducted in the 1950s by Dr. George Papanicolaou, the inventor of
the “Pap smear” for cervical cancer, it has been understood that adult
non-pregnant, non-lactating women continuously secrete fluid into the milk ducts
of the breast. This fluid does not normally escape because the nipple
orifices are occluded by smooth muscle contraction, dried secretions, and
keratinized epithelium. This fluid contains several cell types,
including exfoliated breast epithelial cells, which may be normal, hyperplastic,
atypical, or even malignant. The fluid also contains molecular
diagnostic biomarkers, including associated proteins, complex lipids, RNA and
DNA.
A number
of medical devices have been designed over the years that apply negative
pressure to the nipple to induce the expression of NAF, which is then collected
by carefully touching a capillary tube to any apparent drops of
NAF. The Company believes that in general, these devices are
successful in obtaining NAF from 20% to 65% of all patients, and that this
sample collection variability has prevented the routine adoption of NAF cytology
for breast cancer screening.
The MASCT
System was designed to overcome this shortcoming by placing a hydrophilic, or
water seeking, membrane in contact with the nipple during the cycles of negative
pressure to “wick” fluid from the orifice of the ducts by capillary action,
thereby increasing the frequency of obtaining NAF in women.
Breast
Cancer and Atypical Ductal Hyperplasia
Adenocarcinoma
is a general term that refers to a cancer that starts in glandular tissues
anywhere in the body. Over 85% of breast cancers start in glandular
tissue and therefore are classified as adenocarcinomas. Those that
originate in lobules are known as lobular carcinoma and those that begin in
ducts are ductal carcinomas. The term “noninvasive breast cancer”
refers to adenocarcinomas that are confined to lobules or
ducts. Another term used to describe these cancers is in situ. Invasive
breast cancer refers to a carcinoma that has spread from lobules or ducts to
fatty connective tissue or beyond the breast, or is metastatic.
ADH is a
condition in which the cells lining the breast duct grow excessively and
abnormally. Without other risk factors, it produces a five-fold
increased risk of breast cancer. With a family history of breast
cancer, a diagnosis of ADH increases the risk of breast cancer 11 to 22-fold,
and in one study, one-third of the women with a biopsy of ADH had an occult
cancer growing nearby. Another study examined changes in chromosome
markers in ADH that are typical for invasive ductal cancer to determine if ADH
was monoclonal for these changes, as expected of cancer, or polyclonal, as
expected of hyperplasia, or excessive cell proliferation. The results
of this study showed that 50% of ADH was monoclonal and had the hallmarks of a
cancerous growth.
The
analysis of NAF for these chromosomal changes and the changes in expression of
related proteins may help determine the malignant or non-malignant properties of
ADH in a particular patient and thus provide information allowing a personalized
medicine therapeutic approach.
Clinical
Development of the MASCT System
Under the
direction of Dr. Quay, a clinical trial of the MASCT System was conducted at the
State University of New York, Stony Brook, New York in 2003 to test the
efficiency of NAF collection in normal women. Thirty-one healthy,
non-pregnant, pre-menopausal female volunteer subjects were tested with the
MASCT System device for the ability to collect NAF samples for cytological
examination, using the NAF cytology classification system of the College of
American Pathologists, or CAP, as described in the table below.
Category
|
|
Interpretation
|
|
Cytology Characteristics
|
Category
0
|
|
Scant
ductal epithelial cells and negative for atypical or malignant
cells
|
|
No
or <10 ductal cells. Foam cells, or acellular preparations in a
background of proteinaceous debris.
|
Category
I
|
|
Normal
ductal cytology
|
|
Normal
ductal epithelial cells, with or without foam cells. Some ductal cells
will display apocrine metaplasia
|
Category
II
|
|
Usual
ductal hyperplasia
|
|
Cell
distribution predominately in cohesive groups with >10-50 cells.
Minimal nuclear changes. Fine chromatin.
|
Category
III
|
|
Atypical
ductal hyperplasia
|
|
Distinct
nuclear enlargement, increasing N/C ratio, irregular nuclear borders and
nuclear variation. Coarse chromatin. Prominent
chromocenters.
|
Category
IV
|
|
Suspicious
for malignancy
|
|
Single
cells and groups of cells with nuclear features suspicious for
cancer.
|
Of the 31
subjects, 30, or 97%, had measurable NAF; 24 bilaterally and six
unilaterally. NAF samples ranged from one to 37 microliters, with an
average of seven microliters, and all samples collected were deemed to be
clinically useful. 58 of 60 NAF samples were reported as cytology
Category I, and two of 60 were reported as cytology Category II under the CAP’s
classification system for NAF cytology. No adverse events were
reported in the study. Based on the results of the study, a premarket
notification for the intended use of the MASCT System for the collection of NAF
for cytological testing was submitted to the FDA, indicating that the NAF
collected using the MASCT System can be used in the determination and/or
differentiation of normal versus premalignant versus malignant
cells.
The
Role of Immunohistochemistry (IHC) in the Molecular Classification of Breast
Cancer and Pre-Cancerous Lesions
Standard
pathology and cytology criteria to classify breast cancer and pre-cancerous
changes have limitations in predicting tumor behavior, sensitivity to molecular
targeted treatments, such as Herceptin (trastuzumab), or the development of drug
resistance. A method of predicting tumor behavior and treatment
response that involves identifying molecular biomarkers in breast tissue is
immunohistochemistry, or IHC. IHC is the process of localizing
antigens (e.g. proteins) in cells of a tissue section exploiting the principle
of antibodies binding specifically
to antigens in cells. Specific molecular markers are
characteristic of particular cellular events such as proliferation or cell
death. Visualizing an antibody-antigen interaction can be
accomplished in a number of ways. In the most common instance, an
antibody is conjugated to an enzyme, such as peroxidase, that can catalyze a
color-producing reaction. The use of IHC has become standard of care in many
clinical settings, for example, the measurement of estrogen or progesterone
receptors or HER2 antigens in breast cancer.
In May
2010, an international study from 21 academic institutions involving 42
investigators was published, describing the IHC-based molecular sub-typing of
breast cancers from 10,159 women and the correlation with survival over 15
years. Five IHC biomarkers were used to identify six molecular
sub-types. The five IHC markers were: the estrogen receptor and the
progesterone receptors (two hormone receptors expressed by luminal cells), the
human epidermal growth factors receptor-2 (HER2, a protein marker used to select
specific adjuvant therapies), and cytokeratin 5/6 (CK5/6) and EGFR (proteins
expressed by basal cells). The sub-types had IHC staining patterns,
incidences, and treatment options, as shown in the following table:
Molecular Subtype
|
|
ER/PR
|
|
HER2
|
|
EGFR or CK 5/6
|
|
Incidence
|
|
Treatment Options
|
Luminal
1, Basal Negative
|
|
Either
Positive
|
|
Negative
|
|
Negative
|
|
65%
|
|
Tamoxifen,
Raloxifene
|
Luminal
1, Basal Positive
|
|
Either
Positive
|
|
Negative
|
|
Positive
|
|
6%
|
|
Tamoxifen,
Raloxifene, EGFR inhibitors
|
Luminal
2, Basal Negative
|
|
Either
Positive
|
|
Positive
|
|
Negative
|
|
6%
|
|
Tamoxifen,
Raloxifene, Trastuzumab
|
Non-Luminal
HER2+
|
|
Both
Negative
|
|
Positive
|
|
Positive/Negative
|
|
6%
|
|
Trastuzumab
|
Core
Basal Subgroup
|
|
Both
Negative
|
|
Negative
|
|
Positive
|
|
9%
|
|
EGFR
inhibitors
|
Five
Negative Phenotype
|
|
Both
Negative
|
|
Negative
|
|
Negative
|
|
7%
|
|
Non-receptor
targeted chemotherapy
|
The six
IHC molecular subtypes had very different five and 15 year survival
rates.
These and
other findings indicate that the six subtypes of breast cancer defined by the
expression of five immunohistochemical markers have distinct biological
characteristics that are associated with important differences in short-term and
long-term outcomes. The application of these markers in the clinical
setting could improve the targeting of adjuvant therapies to those women most
likely to benefit.
These
same markers have been studied in pre-cancerous changes and have been found
useful in distinguishing future biological behavior of otherwise cytologically
indistinct samples. For example, CK5/6 expression in usual ductal
hyperplasia is associated with an increased risk of later development of
cancer. Similarly, estrogen or progesterone receptor, HER2, and EGFR
expression in a setting of hyperplasia are found in lesions that more frequently
progress to breast cancer. In fact, ADH and usual ductal hyperplasia
can be distinguished by IHC staining in cases where the cytology is
indistinguishable. Thus, IHC testing on NAF samples with
pre-cancerous changes can provide information about the possibility of future
progression to breast cancer.
The
Company’s issued patents cover the detection of estrogen and progesterone
receptors, CK 5/6, HER2, and EGFR in NAF. In addition to the MASCT
System, the Company intends to offer a panel of IHC markers for testing of all
cases in which ductal hyperplasia is seen. It is estimated that at
least 20% of all patient samples will be studied by IHC using this
panel. Following establishment of the Company’s cytology and
molecular diagnostics laboratory, the Company plans to validate these five IHC
tests for routine clinical use by standard methods and intends to begin offering
the tests as a panel in the first quarter of 2011.
The
Role of NAF Cytology in the Diagnosis and Treatment of Atypical Ductal
Hyperplasia
In a
study of women with normal mammograms who were undergoing breast reduction
surgery, which was conducted at the Virginia Mason Medical Center in Seattle,
Washington and published in Plastic and
Reconstructive Sugery in October 2009, the
incidence of ADH was found to be 4.4%. With approximately 94 million
women ages 30 and above in the United States, this suggests that more than four
million women in the United States may have ADH that remains undiagnosed by
mammography alone. ADH can be definitively diagnosed only by NAF
analysis or a breast tissue biopsy. In a study of approximately 2.5,
screening
mammograms done between 1996 and 2005 and collected from
mammography registries participating in the Breast Cancer Suveillance
Consortium Associations the
incidence of biopsy-proven ADH was 0.4%, suggesting that the use of biopsies in
conjunction with screening mammography fails to detect ADH in over 90% of
patients.
A
comprehensive study of the predictive value of NAF cytology for identifying
women at risk for breast cancer was conducted at the University of California at
San Francisco over a 19 year period. This study, conducted by
Margaret Wrensch and others at the University of California San Francisco,
showed in two studies, the first with a sample size of 4,040 women and the
second with a sample size of 3,627, that women with abnormal cytology in
breast fluid obtained by nipple aspiration had an increased relative
risk of breast cancer compared
with women from whom
fluid was not obtained and with women whose fluid had normal cytology. The
nipple aspirate fluids
were collected from women in the San Francisco Bay Area during the period from
1972 through 1991, classified the women according to the most
severe epithelial cytology
observed in fluid specimens, and
determined
breast cancer incidence
through March 1999. The groups were stratified
into women with acellular, normal, hyperplasia, or atypical NAF cytology and the
incidence of breast cancer determined in the two groups over an average of 21
and nine years follow-up, respectively. The incidence of hyperplasia
by NAF cytology was 13.6% and the incidence of ADH was 1.6%. Breast
cancer occurred in 3.7% of the women with acellular cytology and in 8.2% and
11.0% of the women with hyperplasia and atypia, respectively.
Drug
therapy clinical trials for preventing breast cancer in high risk women are
called chemoprevention trials. In a five year chemoprevention study
of over 19,700 women with ADH or other factors that placed them at a high risk
for invasive breast cancer, the use of either tamoxifen or raloxifene, drugs
that block or interfere with the actions of estrogen receptors, reduced the
incidence of breast cancer by approximately 50%. Side effects were
higher with tamoxifen compared to raloxifene. A separate study of
raloxifene vs. placebo showed a 72% reduction in cancer incidence at four years
and a 66% reduction at eight years.
In a
study of NAF specimens in 33 women at the start and six months after taking
either tamoxifen or raloxifene, NAF cytology was unchanged in 85%, worsened in
4%, and improved in 11% while the biomarker PSA, which has been shown to be
controlled by sex hormones and inversely associated with breast cancer,
increased from abnormally low (37 ng/L) to within the normal range (112 ng/L)
during treatment. United States patent 7,128,877, owned by the
Company, covers the testing of NAF for the biomarker PSA. Other
classes of drugs, including inhibitors of aromatase, an enzyme involved in
making estrogen, are being tested or considered for testing in breast cancer
chemoprevention trials. The Company believes that increased use of
pharmaceutical treatments with chemopreventive agents in high risk women will
lead to more NAF cytology studies to both diagnose ADH and follow the effects of
treatment.
Finally,
changes in diet and/or the use of dietary supplements are considered to have a
possible impact on breast cancer occurrence and can potentially change the
cytology or the presence of biomarkers in NAF. A study of the effect
of dietary intervention in 71 women over a one year period was
conducted. The probability of obtaining a cellular NAF cytology
increased with dietary fat intake, reaching over seven-fold increase for the
highest to lowest quartile of fat intake. Furthermore, cellular NAF
decreased with increasing plasma levels of dietary supplement antioxidants,
lutein and alpha-carotene. The National Cancer Institute, or NCI, is
currently sponsoring seven studies of the use of NAF sample collection and
analysis of cytology and molecular biomarkers as study endpoints to monitor the
efficacy of chemoprevention clinical trials using pharmaceuticals or dietary
supplements. The Company believes the successful outcome of one or
more of these studies could increase the use of NAF analysis.
The
Role of NAF Cytology and Molecular Diagnostic Biomarkers in Screening for Breast
Cancer
The
sensitivity of a test for detecting an abnormality is an important measure in
screening populations for the presence of occult disease. With
mammography as the well accepted standard for the detection of breast cancer, a
comparison of the sensitivity of NAF cytology and molecular diagnostic
biomarkers for detecting cancer against the sensitivity of mammography suggests
that the MASCT System could also serve as a screening tool for breast cancer, in
addition to ADH and other pre-cancerous conditions.
The
following table shows the relative sensitivity of mammography and NAF cytology
and biomarkers for detecting cancers, confirmed by needle biopsy.
Test
|
|
Sensitivity
|
|
Mammography:
40-64 years of age (1)
|
|
|
77-78%
|
|
NAF
biomarkers: DNA Methylation PCR (2)
|
|
|
82%
|
|
Mammography:
dense breasts (1)
|
|
|
68%
|
|
NAF
biomarker: SELDI-TOF Proteomics (3)
|
|
|
75-84%
|
|
Mammography:
under 40 years of age (1)
|
|
|
54%
|
|
NAF
cytology (4)
|
|
|
36%
|
|
(1)
|
Reflects sensitivity of
mammography for the detection of breast cancer in a review of 183,134
screening mammograms in Albuquerque, New
Mexico.
|
(2)
|
Reflects
sensitivity of DNA methylation-specific PCR for the detection of breast
cancer in NAF, in a study of specimens of tumor, normal tissue and NAF
collected from 22 breast cancer patients with ductal carcinomain
situ or stage I
cancer.
|
(3)
|
Reflects
sensitivity of proteomic analysis for the detection of breast cancer in
NAF, in a study of 20 subjects with breast
cancer.
|
(4)
|
Reflects
sensitivity of NAF cytology alone for the detection of residual breast
cancer, as reflected in the results of a study of 70 subjects with ductal
carcinomain
situ or stage I cancer published in the British Journal of Cancer
in 2001.
|
While NAF
cytology seems well suited to identifying ADH, the sensitivity of NAF cytology
alone for detecting cancer is not ideal. However, when its use
is combined with other scientific collection and biomarker methods, which
include DNA methylation and SELDI-TOF proteomics, sensitivity levels are
comparable to those found in mammography. This suggests that NAF
cytology, in combination with other biomarker tests, could serve as an
alternative testing and screening methodology which may be less painful and less
invasive to women than mammography and biopsy and require no exposure to
radiation. The Company intends to explore the development of such
biomarker tests beginning in 2011 (See “—Research and
Development”).
The
Market
United
States Laboratory Testing Market
Anatomic
Pathology. Anatomic pathology involves the diagnosis of cancer
and other medical conditions through the examination of tissues (biopsies) and
the analysis of cells (cytology) taken from patients. Generally, the
anatomic pathology process involves the preparation of slides by trained
histo-technologists or cytologists and the review of those slides by anatomic
pathologists. Although anatomic pathologists do not treat patients,
they establish a definitive diagnosis and may also consult with the referring
physician. As a result of the greater degree of complexity and
sophistication in anatomic pathology services, 2010 Medicare reimbursement rates
for the anatomic pathology services of the type that the Company expects to
perform are between $106 and $1,202 per patient. The patient fee
schedule for these tests can range from two to more than three times the
Medicare reimbursement rate.
Molecular
Diagnostics. Molecular diagnostics typically involve unique
and complex genetic and molecular tests performed by skilled personnel using
sophisticated instruments. As a result, molecular diagnostics are
typically offered by a limited number of commercial
laboratories. According to PriceWaterhouseCoopers, molecular
diagnostics represents one of the fastest growing segments of the $37 billion
market for in vitro
diagnostics, which includes test tube diagnostics such as glucose monitoring for
diabetes care but excludes diagnostics for research use. The Medicare
reimbursement rate in 2010 for microarray-based molecular diagnostics tests is
$1,250 while the reimbursement rate for fluorescent cellular probe-based tests
is $479 per probe. This market segment is expected to grow 14%
annually between 2007 and 2012, from $2.6 billion to $5.0 billion.
Clinical Pathology. The
clinical pathology market generally involves chemical testing and analysis of
body fluids using standardized laboratory tests. These tests
typically do not require the interpretive expertise of a pathologist and are
frequently routine, automated, and performed by large national or regional
clinical laboratory companies and hospital laboratories. The Company
currently does not intend to offer routine, automated, standardized laboratory
tests.
The
Company intends to develop and provide a range of molecular diagnostics to aid
in the management of breast health, premalignant conditions and
cancer.
United
States Market for MASCT System Procedures and Laboratory Tests
Testing
in Women at High Risk for Breast Cancer
The
Company expects that the MASCT System will initially be adopted by physicians
and other healthcare professionals for use in women at high risk for breast
cancer. The Company believes, based on the assumptions described
below, that up to approximately 52.6 million MASCT System studies could be
conducted annually in women at high risk for breast cancer in conjunction with
mammography under current American Cancer Society, or ACS, recommendations for
screening mammography.
Women Undergoing Diagnostic
Mammograms. Breast cancer screening by mammography involves
performing a screening mammogram and typically reviewing the mammogram while the
patient is still present in the clinic. If the screening mammogram
shows suspicious changes, a more extensive diagnostic mammogram is performed,
usually on the same day. In an audit of 46,857 consecutive mammograms
performed in the radiology department at the University of California, San
Francisco between 1997 and 2000, 10,007, or 21%, were diagnostic
mammograms. The audit also documented an increased incidence of
future cancer in those women who underwent a diagnostic mammogram, regardless of
the diagnosis at the time. Applying this frequency to the estimated
38.8 million total mammograms performed each year in the United States yields
approximately 8.1 million diagnostic mammograms. The Company believes
all women undergoing a diagnostic mammogram, who may be at higher risk of
developing breast cancer in the future, would be candidates for MASCT System
testing.
Breast Cancer
Survivors. Women who have had breast cancer are at a higher
risk for the recurrence of cancer or for a new malignancy. The ACS
has estimated that in 2010, there were more than 2.5 million breast cancer
survivors in the United States. The Company believes these women
would be candidates for regular MASCT System screening.
Post Menopausal Breast
Cancer. There is substantial evidence that post menopausal
breast cancer is linked to high levels of estrogen, which induces cancer related
biomarkers such as Cathepsin D. In December 2002, the National
Institute of Environmental Health Sciences added estrogen to its list of known
cancer-causing agents. The
Cathepsin D gene, coding for a ubiquitous Iysosomal aspartyl protease, is
overexpressed in aggressive human breast cancers, and its transcription is
induced by estrogens in hormone-responsive breast cancer cells. Since
the serum levels of estrogen drop significantly when the ovaries stop producing
it at menopause, the source of the hormone in breast cancer was not
understood. In 2006, investigators at Northwestern University
demonstrated that NAF contains estrogen and related sex hormones, that there is
no correlation between serum and the concentrations of these hormones in NAF,
preventing serum tests from identifying these high risk patients, and that the
likely source is synthesis within the breast itself. The authors
concluded that measuring female sex hormone biomarkers like Cathepsin D in NAF
may be useful in identifying post menopausal women at high risk for breast
cancer and in monitoring chemoprevention trials, since the mechanism of action
in these current therapies is interference with female sex hormone
activity. The Company has an issued U.S. patent covering the testing
of NAF for the biomarker Cathepsin D. There are approximately 52
million women age 50 and over, and therefore peri- or post-menopausal, in the
United States, and the Company believes NAF sex hormone screening could help
identify women who have high levels of these hormones in the breast and are thus
at high risk.
High Risk
Women. The Breast Cancer Risk Assessment Tool (based on the
Gail model) has been established by the NCI and the National Surgical Adjuvant
Breast and Bowel Project, or NSABP, to identify women with an increased risk of
breast cancer. The risk factors included in the test are: personal
history of breast abnormalities, age, age at first menarche, age at first live
birth, breast cancer among first-degree relatives (sisters, mother, or
daughters), breast biopsies, obesity and race. Approximately 10
million women in the United States are in the high risk group. A
study of 6,904 women for an average follow up of 14.6 years demonstrated that
NAF cytology may be most useful for women at highest absolute risk by the Risk
Assessment Tool because modest differences in relative risk are
amplified. In this group, the incidence of breast cancer by NAF
cytology ranged from 5.3 to 10.3 per 1,000 women (non-yielder to
hyperplasia/atypia).
Testing
in Normal Risk Women
The
Company believes that if it is able to develop, produce and successfully market
the MASCT System for use as an additional test in conjunction with all
mammography and all cervical cancer screenings (Pap smear), the potential annual
U.S. market size would be between 31.6 million and 55 million
women. This conclusion is based on the following assumptions and
scenarios:
MASCT System in conjunction with
cervical cancer screening (Pap smear), all ages. As indicated
by the National Cancer Institute in 2009, approximately 55 million Pap smear
examinations are performed annually, of which about 3.5 million, or 6%, are
abnormal.
MASCT System in conjunction with
mammography, all ages. According to the MQSA National
Statistics, 38.8 million mammograms have been performed in the United States in
2010.
MASCT System in conjunction with
mammography in women age 60-69. According to the U.S. Census
Bureau, as of July 1, 2009 there were approximately 14.5 million women age
60-69. The ACS’s current screening guidelines recommend annual
mammograms for women in this age group. According to the Centers for
Disease Control, 63.8% of women in this age group follow the guidelines. If the
MASCT System were used in conjunction with mammograms in this age group, there
would be approximately 9.3 million studies per year.
MASCT System in conjunction with
mammography in women age 50-59. According to the U.S. Census
Bureau, as of July 1, 2009 there were approximately 20.9 million women age
50-59. The ACS’s current screening guidelines recommend annual
mammograms for women in this age group. According to the Centers for
Disease Control, 71.8% of women in this age group follow the
guidelines. If the MASCT System were used in conjunction with
mammograms in this age group, there would be approximately 15 million studies
per year.
MASCT System in conjunction with
mammography in women age 40-49. According to the U.S. Census
Bureau, as of July 1, 2009 there were approximately 22 million women age
40-49. The ACS’s current screening guidelines recommend annual
mammograms for women in this age group. According to the Centers for
Disease Control, 63.5% of women in this age group follow the
guidelines. If the MASCT System were used in conjunction with
mammograms in this age group, there would be approximately 14 million studies
per year.
MASCT System in conjunction with
mammography in women age 30-39. On November 19, 2009, the U.S.
Preventive Services Task Force Recommendation, or USTFR, announced that, for normal
risk women, screening mammography should begin at age 50 and be biennial until
age 75. The ACS and other national groups strongly and publicly
objected to the lack of recommendations for women under the age of 50 and the
biennial interval for women over 50. If the USTRF guidelines were
adopted uniformly and the MASCT System were used in conjunction with
mammography, the Company believes that 21.5 million studies could be performed
annually and 10.1 million could be performed in 30-39 year old women in
conjunction with cervical Pap smears, or 31.6 million studies
total. It is also possible that adoption of the USTRF mammography
screening criteria could increase the utilization of the MASCT System as an
alternative to mammography, but the Company has not performed studies to try to
estimate this potential.
MASCT System in conjunction with
cervical screening in women age 30-39. According to the U.S.
Census Bureau, as of July 1, 2009 there were approximately 20 million women age
30-39. The ACS’s current screening guidelines recommend annual
mammograms for women in this age group. One survey indicated that
among women with no prior history of abnormal Pap smears, 55% had Pap smears
annually. If this percentage is representative of the frequency with
which women ages 30-39 have Pap smears, and the MASCT System were used in
conjunction with Pap smear testing in this age group, the Company believes that
there could be over 10 million studies per year in women ages
30-39.
International
Market for MASCT System Procedures and Laboratory Tests
An
article published in Breast Cancer: Basic and Clinical Research indicated that
in 2005, a total of 125.5 million mammograms were performed worldwide, with
approximately 50 million in North America, 50 million in Western Europe, 15
million in Japan, and 10 million in the rest of the world. In
addition, the Company believes that mammography is underutilized in some
international markets, including China and Greater Asia and that there is a
substantial market for its products and services outside the United States, but
has not further quantified the opportunity.
The
Company anticipates that if it is able to develop the MASCT System and
laboratory procedures in the United States, it will then proceed to develop and
market the MASCT System and the laboratory procedures to other
markets outside the United States.
Commercialization
Strategy
The
Company’s commercialization strategy is based on creating two main revenue
sources: (i) product sales-based revenue from the sale of the MASCT System
to physicians, breast health clinics, and mammography clinics and (ii) service-based revenue for
the preparation and interpretation of the NAF samples sent to the Company’s
laboratory. This is intended to result in revenues from both the sale
and the use of the MASCT System.
In order
to achieve its two-pronged revenue base, the Company will need to manufacture,
through medical device suppliers, the MASCT System components, i.e., the
collection device and patient NAF specimen kits and will need to establish a
direct sales force to call on physicians and breast health and mammography
clinics to market and sell the MASCT System. The collection device is
reusable when sanitized between patients. The kit contains the
patient contact materials, preservative fluid for the collected samples, and
bar-coded patient identification labeling. The kit components are
designed to work properly with the collection device and the Company is not
aware of any commercially available parts or components which could be
substituted for the Company’s kits.
The
Company intends to use funds raised from this offering to select and engage an
established medical device contract manufacturer to produce commercial
quantities of the MASCT System during the fourth quarter of 2010 and to commence
such commercial manufacture and production of the MASCT System during the first
quarter of 2011. The Company also plans to begin certification of its
laboratory facility for the analysis of NAF samples during the fourth quarter of
2010 and to begin developing an internal sales and marketing force by the first
quarter of 2011.
The
Company’s product- and service-based income plan is intended to provide revenues
from multiple, different sources with different timing in the procedure
cycle. The Company expects to generate product revenues from the sale
of kits in bulk to clinics and physicians for the testing of their patients, and
laboratory services revenues after its laboratory analyzes the results of these
tests and renders a diagnosis.
Manufacture
of MASCT System
In July
2010, the Company entered into an agreement with a contract manufacturer to
produce 20 MASCT System pumps and 10,000 patient kits for field testing by the
Company to confirm the proper operation of the MASCT System device and its
ability to collect adequate NAF samples during the fourth quarter of
2010. The Company has also received a proposal for completion of the
Computer Aided Design, or CAD, files that will permit high volume, low cost
manufacturing of the MASCT System. The Company plans to
select one or more established medical device contract manufacturers
and commence manufacturing of its MASCT System devices in commercial quantities
during the fourth quarter of 2010 following the completion of field
testing.
Specialty
Sales Team
To market
the MASCT System and its related laboratory diagnostic services, the Company
will need to hire sales representatives with technical knowledge in, for
example, molecular diagnostics, mammography, obstetrics/gynecology office
practices, and women’s health clinics. As a result, the Company will
expect its sales representatives to develop long-lasting, consultative
relationships with the referring physicians they serve. Similarly,
the Company anticipates that each of its client service associates will provide
dedicated support services to its physician clients. The Company
intends to hire representatives who will provide physician clients and their
office staff with a knowledgeable and consistent point of contact, thereby
strengthening the Company’s client relationships.
Once a
member of the Company’s sales team has developed a relationship with a referring
physician, retaining that salesperson will be significant to the Company’s
ability to capitalize on the client relationship. The Company intends
to offer its sales force the opportunity to earn higher compensation, primarily
through commissions on revenues earned over the duration of a physician client’s
account. The Company hopes that this structure will provide the sales
force with incentives to not only establish new clients but to maintain and
enhance relationships with existing clients.
The
specialization and focus of the sales team, including client service associates,
on breast health, disease prevention, and the diagnosis and treatment of cancer
allows them to develop significant expertise and hopefully will lead to strong
consultative relationships with referring physicians and their office
staff.
The
Company will focus its marketing and sales efforts on encouraging physicians and
breast health and mammography clinics to use the MASCT System in conjunction
with other health screening examinations, including annual physical examinations
and regularly scheduled cervical Pap smears and mammograms. The sales
representatives will concentrate on a geographic area based on the number of
physician clients and prospects, which will be identified using several national
physician databases that provide address information, patient demographic
information, and other data. The Company will also use the FDA
website containing contact information on the approximately 8,600 Mammography
Quality Standards Act (MQSA)-certified clinics to identify potential
clients.
Company
Laboratory
The
Company has entered into a lease for a laboratory facility and intends to
establish a clinical laboratory at this facility in the fourth quarter of 2010
for the cytology and molecular diagnostics testing and reading of results of
collected NAF samples. The Company believes that by maintaining its
own clinical laboratory, it will be able to generate substantial additional
service revenues through cytology and molecular diagnostic testing, in addition
to the sale of the MASCT System pumps and patient kits. The Company
has begun limited operations of the laboratory and anticipates that it will be
licensed under the Washington state Medical Tests Site (MTS) and federal CLIA
certification programs, as well as required state laboratory permits and
licenses.
The
Company intends to establish a comprehensive quality assurance program for its
laboratory, designed to drive accurate and timely test results and to ensure the
consistent high quality of its testing services. In addition to the
compulsory proficiency programs and external inspections required by CMS and
other regulatory agencies, the Company intends to develop a variety of internal
systems and procedures to emphasize, monitor, and continuously improve the
quality of its operations.
The
Company intends to participate in externally-administered quality surveillance
programs, and seek accreditation of its laboratory by the College of Anatomic
Pathology, or CAP. The CAP accreditation program involves both
unannounced on-site inspections of laboratories and participation in CAP’s
ongoing proficiency testing program. CAP is an independent, non-governmental
organization of board-certified pathologists that accredits laboratories
nationwide on a voluntary basis and that has been accredited by CMS to inspect
laboratories to determine adherence to the CLIA standards. A
laboratory’s receipt of accreditation by CAP satisfies the Medicare requirement
for participation in proficiency testing programs administered by an external
source, one of Medicare’s primary requirements for reimbursement
eligibility.
MASCT
System NAF Sample Collection and Testing Process
By
focusing on NAF samples and the cytology and molecular diagnostic technologies
utilizing NAF, the entire process from specimen collection to delivery of the
comprehensive patient diagnoses using the MASCT System will be tailored to the
specific needs of the Company’s referring physicians. When a nurse or
physician’s assistant uses the MASCT System to take a NAF specimen from a
patient for diagnostic testing, he or she will complete a requisition form
(either by hand or electronically, via electronic medical records, or EMR,
technology or via an EMR web interface), attach a bar-coded label to each NAF
specimen from the requisition, and package the specimen for shipment to the
Company.
The
Company will supply physicians with pre-addressed packaging for added
convenience. The Company intends to schedule daily specimen
collections from its referring physicians, which creates reliability and
convenience and relieves referring physicians of the administrative burden and
cost of handling logistical details. Once the specimen arrives in the
Company’s laboratory, the Company will scan the bar coded label on the
requisition and enter all pertinent information about the specimen, including
patient billing information, into a work-flow software system. A
cytotechnologist will then prepare the specimen for
interpretation. It is preferable to prepare NAF slides with
liquid-based cytology technique, using cellular concentration and monolayer
slide method. This approach aids interpretation, because it optimizes
cellularity. The prepared specimen will be delivered to one of the
Company’s pathologists for analysis. After diagnosis, the pathologist
will use a software system to prepare a comprehensive report, which might
include any relevant images from the NAF. The diagnostic report will
then be delivered to the physician via secure Internet software, remote printer,
fax or mail. Should the physician have questions, the Company’s
pathologists will be available for consultations.
The
practice of anatomic pathology requires a pathologist to make a specific
diagnosis, which referring physicians rely on to determine appropriate treatment
plans and monitor the effectiveness of treatment. In addition to Dr.
Quay, the Company intends to hire other board-certified pathologists and
cytotechnologists to assist in the interpretation of the NAF
samples.
International
Commercialization Strategy
Because
the Company holds foreign patents for the MASCT System and the laboratory
testing in Europe, Japan, Canada and Australia, it believes that it can find
local partners for marketing the MASCT System and for performing the clinical
laboratory testing in those countries. It also believes that it may
be able to license the MASCT System and laboratory technology to local
physicians, healthcare professionals and sales representatives in those
countries and will be able to enter into licensing agreements for sales- and
service-based royalties. The Company has pending patent applications in emerging
markets such as China and India and believes these will also represent a growth
opportunity.
Growth
Strategy
The
Company intends to launch the MASCT System in the first quarter of 2011 near its
headquarters in Seattle and initially to focus its sales and marketing efforts
in Washington, Oregon, and Idaho. This will allow the Company to test
different market approaches and to better understand the marketing and sales
process before committing the significant financial and human resources to a
national launch. These three states have approximately 290
mammography clinics registered with the FDA that perform approximately 1.2
million mammograms per year. The Company believes that this would
represent a total addressable market of over $100 million
annually.
The
Company plans to market the MASCT System nationally after its regional
marketing and selling effort, if successful, and after it has established
the operation of its clinical and diagnostic laboratory. This will
provide it with experience and knowledge of the issues and problems that may
arise as it markets the MASCT System and the facilities to provide the testing
and reading of the samples. Assuming a successful regional launch,
the Company intends to commence its national launch of the MASCT System during
the first quarter of 2012.
Research
and Development
Second
Generation Oxy-MASCT Product Development
Dr. Quay
also discovered that administration of a synthetic version of a natural hormone,
oxytocin, increases the production of NAF. The Company anticipates
that it will develop a second generation product, Oxy-MASCTÔ, based on this
research. The Oxy-MASCT technology is covered by three U.S. and nine
foreign patents owned by the Company. If the Company is successful in
developing and obtaining marketing approval for a product based on the Oxy-MASCT
technology, it may market the Oxy-MASCT product to the core of healthcare
professionals who use the MASCT System. The Company plans to initiate
clinical trials of the Oxy-MASCT System for the collection of NAF during the
fourth quarter of 2011, and, if the results of these trials are favorable, to
file with the FDA for market clearance of the Oxy-MASCT System as a Class III
medical device in 2013.
Second
Generation Biomarker Test Development
The
Company intends to engage in research activities relating to the study and
analysis of NAF samples to develop molecular diagnostic biomarkers for breast
health and disease. The Company believes that some of these tests may
be developed to serve the growing worldwide personalized medicine market, which
is estimated to reach $50 billion in 2012.
The
Company’s patents and patent applications provide the basis for its research
efforts. Specifically, its NAF biomarker patents are directed to the
general classes of biomarkers, that is, proteins, peptides, glycoproteins,
lipids, glycolipids, DNA polynucleotides, or RNA polynucleotides. The
patents are also directed to the following specific biomarkers in
NAF:
Alpha-Lactalbumin
|
|
EMS1
|
|
PAl-1
|
Actin
|
|
Epithelial
Membrane Antigen
|
|
PAl-2
|
bcl-2
|
|
Gal-GalNAC
|
|
PGE2
|
Beta-glucuronidase
|
|
GCDFP-15
|
|
Prolactin
|
blood
group antigens including ABH and MN
|
|
Heat
Shock Proteins
|
|
Proliferating
Cell Nuclear Antigen
|
BRCA1
|
|
HIVIFG
|
|
pS2
|
BRCA2
|
|
IL-10
|
|
PSA
|
CA
19-9
|
|
Insulin
Growth Factor Receptors
|
|
Ras
|
CA-125
|
|
Integrins
|
|
Rb
|
CA15-3
|
|
IR-14
|
|
S-100
protein
|
Cathepsin
D
|
|
KA
1
|
|
Tissue
Plasminogen Activator
|
CCND1
|
|
KA
14
|
|
Tn
Antigen
|
CD31
|
|
Ki67
Growth Factor
|
|
Transforming
Growth Factor alpha
|
CD44
splice variants
|
|
Laminin
Receptor
|
|
uPA
|
CEA
|
|
Laminins
|
|
uPA
Receptor
|
Cyclin
D1
|
|
LASA
|
|
uPA
related antigens and complexes
|
c-myb
|
|
Le(y)-Related
Carbohydrate Antigen
|
|
Vasopressin
|
c-myc
|
|
MCA
|
|
Vimentin
|
Collagenase
Type IV
|
|
Neuron-Specific
Enolase
|
|
p53
|
Cyclin
B1
|
|
nm23
|
|
blood
group antigens including Lewis
|
The
Company believes that each of the stages of breast cancer, from normal growth,
to hyperplasia, to ADH, to carcinoma in situ, and finally to invasive cancer is
associated with specific biomarker patterns. As a result, the Company
intends to develop second generation biomarker tests involving DNA methylation
patterns, mass spectrometry proteomics, and other microarray-based biomarker
panels using the following multi-phased clinical development platform, which it
intends to fund through additional equity and/or debt financings, as well as
revenue-based earnings from sales of the MASCT System:
Clinical Research
Phase. In this phase, the Company would establish a product
definition and research plan. The Company would initiate clinical
research with literature reviews of related biomarker expression patterns from
NAF studies, core and fine needle biopsy material, and cancer excisions, which
usually contain normal, hyperplastic, and carcinoma-in-situ changes in adjacent
anatomical locations. The Company would secure access to archival
tumor or pre-cancerous biopsy samples for feasibility studies as well as
archival tumor or pre-cancerous biopsy samples correlated with clinical data for
biomarker identification studies. The goal of these studies would be to identify
patterns of DNA sequences, DNA methylation changes, RNA microarrays, or protein
expression changes that occur in pre-cancerous hyperplasia compared to normal
tissue and that correlate with the later development of cancer.
Development Phase. The
Company would conduct additional clinical studies to refine the biomarker set in
the specific patient population of interest. The Company would select
the final biomarker panel through statistical modeling of the biomarker
correlation data to develop the best quantitative correlation to the target
clinical outcome. With a biomarker panel and quantitative methodology
established, the Company would then finalize all of the remaining assay
parameters. For example, the Company may test and verify protocols for DNA, RNA,
or protein extraction and amplification from archival tissue as well as NAF
samples, as appropriate, automated chemistry and reagent quality control and
handling to establish a reproducible, scalable process. Once the
biomarker panel, assay chemistry, automation and analysis specifications are
finalized, tested and verified, the Company would begin clinical
validation.
Validation Phase. In
this phase, the Company would conduct one or more validation studies with
prospectively designed endpoints to test its candidate biomarker panel and the
corresponding quantitative expression score. These studies would be conducted
with a different set of archival patient specimens to verify that the test
correlates with the predicted clinical outcome in an independent patient
population. Because the Company would control the quality and reproducibility of
its assays using formalin-fixed, paraffin embedded tissues, the Company would be
able to conduct large validation studies (approximately 700 patients) with
archived samples with years of clinical outcomes. This allows validation studies
to be performed more rapidly than would be the case with techniques that require
fresh tissue, which must be newly collected and need many years of follow up
before study results can be obtained.
Commercialization and Product
Expansion Phase. Once a test is commercialized, the Company may
perform additional studies designed to support the test’s clinical utility and
potentially to broaden its use in additional patient populations or for
additional indications. Such studies may include prospective studies to verify
that the Company’s test is changing physician behavior as well as testing a
commercial product in new populations. Multiple clinical studies are also useful
for driving adoption and reimbursement by physicians and payors.
Billing
and Reimbursement
Billing
for the MASCT System Medical Device and Patient Kits and the NAF Collection
Procedure
Currently
Medicare and certain insurance carriers do not cover the cost of collecting the
NAF sample. The Company intends to work with physicians and other
interest groups to obtain coverage for the procedures but this process can be
lengthy, costly, and might not be successful. Failure to receive
reimbursement could limit the adoption and utilization of the MASCT
System. Because the process can be done by a nurse or physician’s
assistant, takes less than five minutes, and the MASCT System supplies will
contain everything to obtain, label, and ship the NAF samples, the charge for
collecting NAF samples should be below the average cost of a
mammogram.
Billing
for Diagnostic Services
Billing
for diagnostic services is generally complex. As a result, the
Company intends to rely on a third-party billing company to perform most of its
billing and collection services. Laboratories must bill various payors, such as
private insurance companies, managed care companies, governmental payors such as
Medicare and Medicaid, physicians, hospitals, and employer groups, each of whom
may have different billing requirements. The Company expects to be obligated to
bill in the specific manner prescribed by the various payors. Additionally, the
audit requirements that must be met to ensure compliance with applicable laws
and regulations, as well as internal compliance policies and procedures, add
further complexity to the billing process. Other factors that complicate billing
include:
|
·
|
additional
billing procedures required by government payor
programs;
|
|
·
|
variability
in coverage and information requirements among various
payors;
|
|
·
|
missing,
incomplete or inaccurate billing information provided by referring
physicians;
|
|
·
|
billings
to payors with whom the Company does not have
contracts;
|
|
·
|
disputes
with payors as to who is responsible for
payment;
|
|
·
|
disputes
with payors as to the appropriate level of
reimbursement;
|
|
·
|
training
and education of employees and
clients;
|
|
·
|
compliance
and legal costs; and
|
|
·
|
cost
related to, among other factors, medical necessity denials and the absence
of advance beneficiaries’ notices.
|
In
general, the Company expects to perform the requested tests and report test
results even if the billing information is incorrect or missing. The Company
will subsequently attempt to obtain any missing information and correct
incomplete or erroneous billing information received from the healthcare
provider. Missing or incorrect information on requisitions adds complexity to
and slows the billing process, creates backlogs of unbilled requisitions, and
generally increases the aging of accounts receivable. When all issues relating
to the missing or incorrect information are not resolved in a timely manner, the
related receivables will be written off to the allowance for doubtful
accounts.
Reimbursement
Depending
on the billing arrangement and applicable law, the party that reimburses the
Company for its services will be (i) a third party who provides coverage to the
patient, such as an insurance company, managed care organization, or a
governmental payor program; (ii) the physician or other authorized party (such
as another laboratory) who ordered the test or otherwise referred the test to
us; or (iii) the patient. A large percentage of revenues are likely to be
derived from Medicare, so Medicare coverage and reimbursement rules will be
significant to the Company’s operations.
Reimbursement
for services under the Medicare program is based principally on two sets of fee
schedules. Generally, anatomic pathology services, including most of the
services the Company provides, are paid based on the Medicare physician fee
schedule. The physician fee schedule is designed to set compensation
rates for those medical services provided to Medicare beneficiaries that require
a degree of physician supervision. Clinical laboratory tests that are not
physician pathology services, such as most blood and urine tests, are paid by
Medicare based on the clinical laboratory fee schedule. Outpatient diagnostic
laboratory tests are typically paid according to the laboratory fee
schedule.
For the
anatomic pathology services that the Company will provide, it will be reimbursed
under the Medicare physician fee schedule, and beneficiaries are responsible for
applicable coinsurance and deductible amounts. The physician fee schedule is
based on assigned relative value units for each procedure or service, and an
annually determined conversion factor is applied to the relative value units to
calculate the reimbursement. The formula used to calculate the fee schedule
conversion factor has resulted in significant decreases in payment levels in
recent years, and for 2008, CMS generally provided for a 10.1% decrease in
physician fee schedule payments.
Future
decreases in the Medicare physician fee schedule are expected unless Congress
acts to change the fee schedule methodology or mandates freezes or increases
each year. Because the vast majority of the Company’s laboratory services will
be reimbursed based on the physician fee schedule, changes to the
physician fee schedule could result in a greater impact on the Company’s
revenues than changes to the Medicare laboratory fee schedule.
The
Company expects to bill the Medicare program directly. Generally, it
will be permitted to directly bill the Medicare beneficiary for clinical
laboratory tests only when the service is considered not medically necessary and
the patient has signed an Advanced Beneficiary Notice, or ABN, reflecting
acknowledgment that Medicare is likely to deny payment for the service. In most
situations, the Company is required to rely on physicians to obtain an ABN from
the patient. When the Company is not provided an ABN, it is generally
unable to recover payment for a service for which Medicare has denied payment
for lack of medical necessity.
In
billing Medicare, the Company is required to accept the lowest of: its actual
charge, the fee schedule amount for the state or local geographical area, or a
national limitation amount, as payment in full for covered tests performed on
behalf of Medicare beneficiaries. Payment under the laboratory fee
schedule has been limited by Congressional action such as freezes on the
otherwise applicable annual Consumer Price Index, or CPI, update to the fee
schedule amount. The CPI update of the laboratory fee schedule for
2004 through 2008 was frozen by the Medicare Prescription Drug, Improvement and
Modernization Act of 2003.
The
Medicare statute permits CMS to adjust statutorily prescribed fees for some
medical services, including clinical laboratory services, if the fees are
“grossly excessive.” Medicare regulations provide that if CMS or a
carrier determines that an overall payment adjustment of less than 15% is needed
to produce a realistic and equitable payment amount, then the payment amount is
not considered “grossly excessive or deficient.” However, if a determination is
made that a payment adjustment of 15% or more is justified, CMS could provide an
adjustment of 15% or less, but not more than 15%, in any given year. The Company
cannot provide any assurance that fees payable by Medicare for clinical
laboratory services could not be reduced as a result of the application of this
rule or that the government might not assert claims for recoupment of previously
paid amounts by retroactively applying these principles.
The
payment amounts under the Medicare fee schedules are important not only for
reimbursement under Medicare, but also because the schedule is often used as a
reference for the payment amounts set by other third-party
payors. For example, state Medicaid programs are prohibited from
paying more than the Medicare fee schedule limit for laboratory services
furnished to Medicaid recipients, and insurance companies and managed care
organizations typically reimburse at a percentage of the Medicare fee
schedule.
The
Company’s reimbursement rates will also vary depending on whether it is
considered an “in-network,” or participating, provider. If it enters
into a contract with an insurance company, the Company’s reimbursement will be
governed by its contractual relationship, and it will typically be reimbursed on
a fee-for-service basis at a discount from the patient fee
schedule. If the Company does not have a contract with an insurance
company, it will be classified as “out-of-network,” or as a non-participating
provider. In such instances, it would have no contractual right to
reimbursement for services. If it were to receive reimbursement, it would
generally be at a rate higher than reimbursement rates for participating
providers.
Reimbursement
Strategy
Significance
of CPT Codes
Reimbursement
for medical procedures and laboratory services is based on obtaining a Current
Procedural Terminology, or CPT, code from the AMA. CPT is a listing
of descriptive terms and identifying codes for reporting medical services and
procedures. The purpose of CPT is to provide a uniform and accurate
description of medical, surgical and diagnostic services, thereby serving as a
means for reliable nationwide communication among physicians and other
healthcare providers, patients and third parties.
CPT
descriptive terms and identifying codes currently serve a wide variety of
important functions. This system of terminology is the most widely
accepted medical nomenclature used to report medical procedures and services
under public and private health insurance programs. CPT is also used
for administrative management purposes such as claims processing and developing
guidelines for medical care review.
Category
I CPT Codes
Category
I CPT codes describe a procedure or service identified with a five-digit CPT
code and descriptor nomenclature. The inclusion of a descriptor and
its associated specific five-digit identifying code number in this category of
CPT codes is generally based upon the procedure being consistent with
contemporary medical practice and being performed by many physicians in clinical
practice in multiple locations.
In
developing new and revised regular CPT codes the Advisory Committees and the
Editorial Panel require:
|
·
|
that
the service/procedure has received approval from the FDA for the specific
use of devices or drugs;
|
|
·
|
that
the suggested procedure/service is a distinct service performed by many
physicians/practitioners across the United
States;
|
|
·
|
that
the clinical efficacy of the service/procedure is well established and
documented in U.S. peer review
literature;
|
|
·
|
that
the suggested service/procedure is neither a fragmentation of an existing
procedure/service nor currently reportable by one or more existing codes;
and
|
|
·
|
that
the suggested service/procedure is not requested as a means to report
extraordinary circumstances related to the performance of a
procedure/service already having a specific CPT
code.
|
Category
III CPT Codes – Emerging Technology
Category
III CPT codes are a temporary set of tracking codes for new and emerging
technologies. These codes are intended to facilitate data collection
on and assessment of new services and procedures. The Category III codes are
intended for data collection purposes in the FDA approval process or to
substantiate widespread usage. As such, the Category III codes may
not conform to the usual CPT code requirements for Category I. The
Panel has established the following criteria for evaluating Category III code
requests, any one of which is sufficient for consideration by the Editorial
Panel:
|
·
|
a
protocol for a study of procedures being
performed;
|
|
·
|
support
from the specialties who would use the
procedure;
|
|
·
|
availability
of U.S. peer-reviewed literature;
and
|
|
·
|
descriptions
of current United States trials outlining the efficacy of the
procedure.
|
In
general, these codes will be assigned a numeric-alpha identifier (eg,
1234T). These codes will be located in a separate section of CPT,
following the "Category II" section. Introductory language in this
code section explains the purpose of the Category III codes.
Since
Category III CPT codes are intended to be used for data collection purposes to
substantiate widespread usage or in the FDA approval process, they are not
intended for services/procedures that are not accepted by the Editorial Panel
because the proposal was incomplete, more information is needed, or the Advisory
Committee did not support the proposal.
Category
III CPT codes are not referred to the AMA / Specialty RVS Update Committee, or
RUC, for valuation because no relative value units, or RVUs, will be
assigned. Payment for these services/procedures is based on the
policies of payors and local Medicare carriers.
CPT
Code for MASCT System NAF Collection Procedure
The NAF
collection procedure of the MASCT System does not currently have a
procedure-specific Category I CPT code, which is important for reimbursement by
Medicare for eligible patients, and which is part of the basis by which
insurance companies make reimbursement decisions. A non-specific
Category I CPT code, 19499 (unlisted procedure, breast), can be used initially
by physicians and insurance carriers will often pay for such procedures with
proper documentation. Medicare does not currently reimburse for CPT
19499 procedures.
Beginning
in the first quarter of 2011, the Company expects to begin the process of
obtaining a Category III CPT code with which to collect clinical data to support
a Category I CPT code application for the use of NAF collection as an adjunct to
mammography. It is expected it may take 12 months to obtain the
Category III CPT code and up to two years to collect data to make an application
to the AMA for a Category I CPT code. The Company expects physicians
will be able to use either the non-specific Category I CPT code 19499 with
documentation or the MASCT System specific Category III code to obtain
reimbursement.
CPT
Code for Cytology and IHC Biomarker Testing
Category
I laboratory procedure codes for cytology, IHC biomarker tests, microarray-based
analysis of molecular probes, and in situ hybridization of DNA and RNA probes
currently exist and it is expected that reimbursement for these codes by
Medicare will be at the established rates shown in the following
table:
2010 CPT
Code
|
|
Description
|
|
2010 Medicare National
Reimbursement Rate (Per
Patient)
|
|
88161
|
|
Cytopathology,
smears; preparation, screening and interpretation
|
|
|
$106.20
|
|
88162
|
|
Cytopathology,
smears; extended study involving over 5 slides and/or multiple
stains
|
|
|
$151.18
|
|
88360
|
|
Morphometric
analysis, tumor immunohistochemistry (eg, Her-2/neu, estrogen
receptor/progesterone receptor), quantitative or semiquantitative, each
antibody; manual
|
|
|
$240.42
|
|
88360
(5)
|
|
Morphometric
analysis, tumor immunohistochemistry (eg, Her-2/neu, estrogen
receptor/progesterone receptor), quantitative or semiquantitative, five
antibody panel; manual
|
|
|
$1,202.10
|
|
88342
|
|
Immunohistochemistry
(including tissue immunoperoxidase), each antibody
|
|
|
$200.58
|
|
88342
(5)
|
|
Immunohistochemistry
(including tissue immunoperoxidase), five antibody panel
|
|
|
$1,002.50
|
|
88385
|
|
Array-based
evaluation of multiple molecular probes; 51 through 250
probes
|
|
|
$1,250.00
|
|
88367
|
|
Morphometric
analysis, in situ hybridization (quantitative or
semi-quantitative) each probe; using computer-assisted
technology
|
|
|
$479.34
|
|
Laboratories
typically set patient fee schedules at two to four times the Medicare
reimbursement rate for the same procedure.
Intellectual
Property
The
Company owns five issued U.S. patents and nine corresponding issued patents in
Australia, Canada, Europe, Hong Kong, and Japan as well as pending patent
applications in the U.S., Europe, and Japan. The patents encompass
the first and second generation product line for the company. The
first generation product and collection system encompasses the invention of a
proprietary, patented process for obtaining fluid and cells from within the
breast, in a reproducible and non-invasive method, through a device that
allows pressure to be applied to the nipple, thereby increasing the
amount of fluid that is extracted from the ducts and lobules of the
breast. A second generation
diagnostic product and testing service is derived from additional patented
technologies in which samples of breast fluid, containing cancer markers,
abnormal cells and malignant cells, are obtained from the breast nipple
following administration of oxytocin, a brain pituitary
hormone. Studies done by others in Europe have shown that oxytocin
administration increases NAF by as much as 10-fold. The Company has
also patented its test kit collection system, which will allow the company to
have the fluids processed exclusively by its own laboratory.
As of
June 30, 2010, the Company owned 13 issued patents (five U.S. and eight
foreign) and six pending applications (one U.S. and five foreign),
including one expired patent issued in the EU, now entering national
phase. The Company owns patents and patent applications covering the
development, manufacture, use and sale of the MASCT System and the Oxy-MASCT
System, as well as breast cancer biomarkers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MASCT
System
|
|
|
5
|
|
|
|
2016-2020
|
|
|
|
4
|
|
|
|
8
|
|
|
|
2016-2020
|
|
|
|
5
|
|
Oxy-MASCT
System
|
|
|
3
|
|
|
|
2016-2020
|
|
|
|
3
|
|
|
|
8
|
|
|
|
2016-2020
|
|
|
|
5
|
|
Breast
cancer biomarkers
|
|
|
3
|
|
|
|
2016-2020
|
|
|
|
2
|
|
|
|
8
|
|
|
|
2016-2020
|
|
|
|
5
|
|
Total
(1)
|
|
|
5
|
|
|
|
2016-2020
|
|
|
|
4
|
|
|
|
8
|
|
|
|
2016-2020
|
|
|
|
5
|
|
(1) Certain of the Company’s patents and pending patent applications
contain claims covering one or more of the MASCT System, the Oxy-MASCT System
and breast cancer biomarkers. Some pending applications, if issued,
would expire in 2029.
The
Company has applied with the United States Patent and Trademark Office for
registration of the use of the marks Atossa (and design), MASCT, and
Oxy-MASCT.
The
technologies and products covered by the Company’s patents can be summarized
as:
|
·
|
MASCT
System collection device for NAF;
|
|
·
|
The
method of making a diagnosis from NAF, using “whole cells, cell fragments,
cell membranes, a protein, a peptide, a glycoprotein, a lipid, a
glycolipid, a DNA polynucleotide, an RNA polynucleotide, or a combination
thereof;” and
|
|
·
|
The
use of the drug oxytocin or oxytocin analogues to increase the amount of
NAF produced.
|
The
Company believes that its patents also provide protection against other uses for
the MASCT System and technology. Specifically, the MASCT System
collection kits to be provided by the Company are protected under an issued U.S.
patent owned by the Company and will be sold under a limited “collection only”
patent license, which will permit physicians to collect NAF samples but will not
allow for other uses of the vial. In addition, an issued U.S. patent
owned by the Company protects the processes of transferring and processing
samples to detect or quantify breast disease markers and the detection of these
biomarkers. The foreign patent counterparts contain similar
claims.
Competition
The
Company believes that the MASCT System for NAF collection will compete in the
medical device product industry with Neomatrix and with academic scientists and
physicians who use “homemade” NAF fluid collection systems for research
purposes. The Neomatrix device is automated and provides warmth and
nipple aspiration simultaneously.
The
Company believes it will compete in the anatomic pathology laboratory industry
based on the patent portfolio for the MASCT System, the technical expertise
provided by the Company’s focus on diagnoses utilizing NAF, service-focused
relationships with referring physicians, and its advanced
technology. The Company does not believe that its competitors can
transport or process NAF samples collected with the MASCT System without
infringing the Company’s patent estate.
Laboratories
that could process NAF samples not collected with the MASCT System include
thousands of local and regional pathology groups, national laboratories,
hospital pathologists, and academic laboratories. The largest such competitors
include Laboratory Corporation of America and Quest Diagnostics
Incorporated.
Characteristics
of each source of competition include:
Local and
Regional Pathology Groups. Local and
regional pathology groups focus on servicing hospitals, often maintaining a
staff of pathologists on site that can provide support in the interpretation of
certain results. The business models of these laboratories tend to be focused on
the efficient delivery of individual tests for a multitude of diseases rather
than the comprehensive assessment of only NAF samples, and their target groups
tend to be hospital pathologists as opposed to community
physicians.
National
Laboratories. National
laboratories typically offer a full suite of tests for a variety of medical
professionals, including general practitioners, hospitals, and pathologists.
Their emphasis on providing a broad product portfolio of commoditized tests at
the lowest possible price often limits such laboratories’ ability to handle
difficult or complex specimens requiring special attention, such as NAF samples.
In addition, national laboratories typically do not provide ready access to a
specialized pathologist for interpretation of test results.
Hospital
Pathologists. Pathologists
working in a hospital traditionally provide most of the diagnostic services
required for hospital patients and sometimes also serve non-hospital
patients. Hospital pathologists typically have close interaction with
treating physicians, including face-to-face contact. However,
hospital pathologists often do not have the depth of experience, specialization,
and expertise necessary to perform the specialized services needed for NAF
samples.
Academic
Laboratories.
Academic laboratories generally offer advanced technology and
know-how. In fact, the vast majority of NAF sample processing over
the last years has been in academic laboratories primarily for research
purposes. These laboratories typically pursue multiple activities and
goals, such as research and education, or are generally committed to their own
hospitals. Turn-around time for specimen results reporting from
academic laboratories is often slow. This limits the attractiveness of academic
laboratories to outside physicians who tend to have focused specialized needs
and require results to be reported in a timely manner.
The
Company also anticipates that the MASCT System will face competition from other
diagnostic tools for breast cancer, including mammograms, ultrasound
examinations, magnetic resonance imaging, fine needle aspiration and core
biopsies, among others. These methods are currently more widely used
and accepted by physicians, and may offer a competitive advantage over the
Company’s proposed products and services because they are currently reimbursed
by third-party payors.
Information
Systems
The
Company will need to acquire, develop and implement laboratory information
management systems, or LIMS, that support the Company’s operations and physician
services. There are a number of commercial vendors of LIMS for
anatomic pathology laboratories, and the Company intends initially to use such
third-party supplied products for its laboratory operations. Its
information systems, to the extent such systems hold or transmit patient medical
information, must be capable of being operated in compliance with state and
federal laws and regulations relating to the privacy and security of patient
medical information, including a comprehensive federal law and regulations
referred to as HIPAA. While the Company intends to establish its
information systems to be compliant with such laws, including HIPAA, such laws
are complex and subject to interpretation.
Government
Regulation
United
States Medical Device Regulation
The
Federal Food, Drug, and Cosmetic Act, or FDCA, and the FDA’s implementing
regulations, govern registration and listing, manufacturing, labeling, storage,
advertising and promotion, sales and distribution, and post-market surveillance.
Medical devices and their manufacturers are also subject to inspection by the
FDA. The FDCA, supplemented by other federal and state laws, also provides civil
and criminal penalties for violations of its provisions. We intend to
manufacture and market a medical device that is regulated by the FDA, comparable
state agencies and regulatory bodies in other countries. We also
intend to operate a clinical and diagnostic laboratory which will use reagents
and test kits some of which are regulated medical devices.
The FDA
classifies medical devices into one of three classes (Class I, II or III) based
on the degree of risk the FDA determines to be associated with a device and the
extent of control deemed necessary to ensure the device’s safety and
effectiveness. Devices requiring fewer controls because they are deemed to pose
lower risk are placed in Class I or II. Class I devices are deemed to pose the
least risk and are subject only to general controls applicable to all devices,
such as requirements for device labeling, premarket notification, and adherence
to the FDA’s current good manufacturing practice requirements, as reflected in
its QSR. Most pathology staining kits, reagents, and routine
antibody-based Immunohistochemistry protocols which the Company intends to use
initially are Class I devices. Class II devices are intermediate risk
devices that are subject to general controls and may also be subject to special
controls such as performance standards, product-specific guidance documents,
special labeling requirements, patient registries or postmarket surveillance.
The MASCT System device and certain advanced laboratory testing, such as
microarray multiplexed assays, where an algorithm is used to calculate a score
related to, for example, tumor aggression or sensitivity to chemotherapy from
dozens on individual expression data points, are Class II
devices. Class III devices are those for which insufficient
information exists to assure safety and effectiveness solely through general or
special controls, and include life-sustaining, life-supporting, or implantable
devices, and devices not “substantially equivalent” to a device that is already
legally marketed.
Most
Class I devices, including the laboratory staining kits and reagents the Company
intends to use, and some Class II devices are exempted by regulation from the
510(k) clearance requirement and can be marketed without prior authorization
from FDA. Class I and Class II devices that have not been so exempted are
eligible for marketing through the 510(k) clearance pathway. By contrast,
devices placed in Class III generally require premarket approval, or PMA,
approval prior to commercial marketing. To obtain 510(k) clearance
for a medical device, an applicant must submit a premarket notification to the
FDA demonstrating that the device is “substantially equivalent” to a predicate
device legally marketed in the United States. A device is
substantially equivalent if, with respect to the predicate device, it has the
same intended use and (i) the same technological characteristics, or (ii) has
different technological characteristics and the information submitted
demonstrates that the device is as safe and effective as a legally marketed
device and does not raise different questions of safety or effectiveness. A
showing of substantial equivalence sometimes, but not always, requires clinical
data. In the case of the MASCT System, a clinical trial was
conducted. Generally, the 510(k) clearance process can exceed 90 days
and may extend to a year or more. After a device has received 510(k)
clearance for a specific intended use, any modification that could significantly
affect its safety or effectiveness, such as a significant change in the design,
materials, method of manufacture or intended use, will require a new 510(k)
clearance or (if the device as modified is not substantially equivalent to a
legally marketed predicate device) PMA approval. While the determination as to
whether new authorization is needed is initially left to the manufacturer, the
FDA may review this determination and evaluate the regulatory status of the
modified product at any time and may require the manufacturer to cease marketing
and recall the modified device until 510(k) clearance or PMA approval is
obtained. The manufacturer may also be subject to significant regulatory fines
or penalties.
All
clinical trials must be conducted in accordance with regulations and
requirements collectively known as Good Clinical Practice, or
GCP. GCPs include the FDA’s Investigational Device Exemption, or IDE,
regulations, which describe the conduct of clinical trials with medical devices,
including the recordkeeping, reporting and monitoring responsibilities of
sponsors and investigators, and labeling of investigation devices. They also
prohibit promotion, test marketing, or commercialization of an investigational
device, and any representation that such a device is safe or effective for the
purposes being investigated. GCPs also include FDA’s regulations for
institutional review board approval and for protection of human subjects
(informed consent), as well as disclosure of financial interests by clinical
investigators.
Required
records and reports are subject to inspection by the FDA. The results of
clinical testing may be unfavorable or, even if the intended safety and
effectiveness success criteria are achieved, may not be considered sufficient
for the FDA to grant approval or clearance of a product. The commencement or
completion of clinical trials, if any, that the Company may sponsor,
may be delayed or halted, or be inadequate to support approval of a PMA
application or clearance of a premarket notification for numerous reasons,
including, but not limited to, the following:
|
·
|
the
FDA or other regulatory authorities do not approve a clinical trial
protocol or a clinical trial (or a change to a previously approved
protocol or trial that requires approval), or place a clinical trial on
hold;
|
|
·
|
patients
do not enroll in clinical trials or follow up at the rate
expected;
|
|
·
|
institutional
review boards and third-party clinical investigators may delay or reject
the Company’s trial protocol or changes to its trial
protocol;
|
|
·
|
third-party
clinical investigators decline to participate in a trial or do not perform
a trial on the Company’s anticipated schedule or consistent
with the clinical trial protocol, investigator agreements, good clinical
practices or other FDA
requirements;
|
|
·
|
third-party
organizations do not perform data collection and analysis in a timely or
accurate manner;
|
|
·
|
regulatory
inspections of clinical trials or manufacturing facilities, which may,
among other things, require the Company to undertake corrective action or
suspend or terminate its clinical
trials;
|
|
·
|
changes
in governmental regulations or administrative
actions;
|
|
·
|
the
interim or final results of the clinical trial are inconclusive or
unfavorable as to safety or effectiveness;
and
|
|
·
|
the
FDA concludes that the Company’s trial design is inadequate to demonstrate
safety and effectiveness.
|
After a
device is approved and placed in commercial distribution, numerous regulatory
requirements apply. These include:
|
·
|
establishment
registration and device listing;
|
|
·
|
the
QSR, which requires manufacturers to follow design, testing, control,
documentation and other quality assurance
procedures;
|
|
·
|
labeling
regulations, which prohibit the promotion of products for unapproved or
“off-label” uses and impose other restrictions on
labeling;
|
|
·
|
medical
device reporting regulations, which require that manufacturers report to
the FDA if a device may have caused or contributed to a death or serious
injury or malfunctioned in a way that would likely cause or contribute to
a death or serious injury if malfunctions were to recur;
and
|
|
·
|
corrections
and removal reporting regulations, which require that manufacturers report
to the FDA field corrections and product recalls or removals if undertaken
to reduce a risk to health posed by the device or to remedy a violation of
the FDCA caused by the device that may present a risk to
health.
|
The FDA
enforces regulatory requirements by conducting periodic, announced and
unannounced inspections and market surveillance. Inspections may include the
manufacturing facilities of our subcontractors. Failure to comply
with applicable regulatory requirements, including those applicable to the
conduct of our clinical trials, can result in enforcement action by the FDA,
which may lead to any of the following sanctions:
|
·
|
warning
letters or untitled letters;
|
|
·
|
fines
and civil penalties;
|
|
·
|
unanticipated
expenditures;
|
|
·
|
delays
in clearing or approving or refusal to clear or approve
products;
|
|
·
|
withdrawal
or suspension of FDA clearance;
|
|
·
|
product
recall or seizure;
|
|
·
|
orders
for physician notification or device repair, replacement, or
refund;
|
|
·
|
production
interruptions;
|
|
·
|
operating
restrictions;
|
The
Company and its contract manufacturers, specification developers and suppliers
are also required to manufacture the MASCT System in compliance with current
Good Manufacturing Practice requirements set forth in the QSR. The
QSR requires a quality system for the design, manufacture, packaging, labeling,
storage, installation and servicing of marketed devices, and includes extensive
requirements with respect to quality management and organization, device design,
buildings, equipment, purchase and handling of components, production and
process controls, packaging and labeling controls, device evaluation,
distribution, installation, complaint handling, servicing and record keeping.
The FDA enforces the QSR through periodic announced and unannounced inspections
that may include the manufacturing facilities of our subcontractors. If the FDA
believes the Company or any of its contract manufacturers or regulated suppliers
is not in compliance with these requirements, it can shut down the Company’s
manufacturing operations, require recall of the MASCT System, refuse to clear or
approve new marketing applications, institute legal proceedings to detain or
seize products, enjoin future violations, or assess civil and criminal penalties
against the Company or its officers or other employees. Any such
action by the FDA would have a material adverse effect on the Company’s
business.
European
Medical Device Regulation
The
European Union has adopted directives and numerous standards that govern and
harmonize the national laws and standards regulating the design, manufacture,
clinical trials, labeling, adverse event reporting and post-market surveillance
activities for medical devices that are marketed in member states.
Compliance
with voluntary harmonized standards including ISO 13845 issued by the
International Organization for Standards establishes the presumption of
conformity with the essential requirements for a CE Mark. The International
Organization for Standardization, or ISO, is a worldwide federation of national
standards bodies from some 130 countries, established in 1947. The mission of
the ISO is to promote the development of standardization and related activities
in the world with a view to facilitating the international exchange of goods and
services. ISO certification is commonly a prerequisite to use of the CE Mark and
indicates that a quality system complies with standards applicable to activities
ranging from initial product design and development through production and
distribution.
Devices
that comply with the requirements of a relevant directive will be entitled to
bear the CE Mark and, accordingly, can be commercially distributed throughout
the member states of the European Union, and other countries that comply with or
have adopted these directives. The method of assessing conformity
varies depending on the type and class of the product, but typically involves a
combination of self-assessment by the manufacturer and a third-party assessment
by a “Notified Body,” an independent and neutral institution appointed to
conduct conformity assessment. This third-party assessment consists of an audit
of the manufacturer’s quality system and technical review of the manufacturer’s
product. An assessment by a Notified Body residing within the European Union is
required in order for a manufacturer to commercially distribute the product
throughout the European Union. The manufacturer’s assessment will
include a clinical evaluation of the conformity of the device with applicable
regulatory requirements, which for the MASCT System will include clinical study
results. The clinical data presented by us must provide evidence that
the products meet the performance specifications claimed by the Company, provide
sufficient evidence of adequate assessment of unwanted side effects and
demonstrate that the benefits to the patient outweigh the risks associated with
the device. The Company is subject to continued surveillance by the
Notified Body and is required to report any serious adverse incidents to the
appropriate authorities of the European Union member states.
The
Medical Devices Directive, or MDD, covers the regulatory requirements of the
European Union for medical devices. Compliance with the requirements of the MDD
is declared by placing the CE Mark on the product and supplying the device with
a declaration of conformity, in which the manufacturer certifies that its
product complies with the MDD. Products intended for sale must bear
the CE mark to show compliance with the MDD. If a Notified Body is involved in
the approval, the number of the Notified Body must also appear adjacent to the
CE Mark. The routes to compliance under the MDD depend on the classification of
the product:
Class I
devices are low risk, such as pathology staining kits, stethoscopes, hospital
beds and wheelchairs. The manufacturer must produce a technical file, including
product test results compared to relevant standards. In addition, manufacturers
of sterile products and devices with a measuring function must apply to a
Notified Body for certification of the aspects of manufacture relating to
sterility or measurement.
Class IIa
devices are low to medium risk, such as hearing aids, electrocardiographs and
ultrasonic diagnostic equipment. The MASCT System is a Class IIa
device. As with Class I devices, the manufacturer produces a
technical file, but a conformity assessment must be carried out by a Notified
Body, according to one of the following routes, at the manufacturer’s
option:
|
·
|
examination
and testing of each product or homogenous batch of
products;
|
|
·
|
audit
of the full quality assurance
system;
|
|
·
|
audit
of the production quality assurance system;
or
|
|
·
|
audit
of final inspection and testing.
|
Class IIb
devices are medium-high risk devices, such as surgical lasers, infusion pumps,
ventilators, intensive care monitoring equipment and many implantable devices.
Routes to compliance are the same as for Class IIa devices, with the addition of
required examination and testing of the product by the Notified Body; however,
the full quality assurance route does not require type examination and
testing.
Class III
devices are high risk, such as balloon catheters and prosthetic heart valves.
Routes to compliance are:
|
·
|
audit
of the full quality assurance system and examination of a design dossier
by the Notified Body. A design dossier is a submission similar
to a PMA application with the FDA;
or
|
|
·
|
examination
and testing of the product, together with audit of the production quality
assurance system.
|
The
Company intends to seek approval to apply the CE Mark to the MASCT System as a
Class IIa device in order to market in the European Union and other countries
that accept the CE Mark.
CLIA
and State Regulation
As a
future provider of cytology and molecular diagnostic services, the Company is
required to hold certain federal, state and local licenses, certifications, and
permits. Under CLIA, it is required to hold a certificate applicable
to the type of work it performs and to comply with certain CLIA-imposed
standards. CLIA regulates all laboratories by requiring they be
certified by the federal government and comply with various operational,
personnel, facilities administration, quality, and proficiency requirements
intended to ensure that laboratory testing services are accurate, reliable, and
timely. CLIA does not preempt state laws that are more stringent than federal
law.
To obtain
and renew its CLIA certificates, which it is required to renew every two years,
the Company will be regularly subject to survey and inspection to assess
compliance with program standards and may be subject to additional random
inspections. Standards for testing under CLIA are based on the level of
complexity of the tests performed by the laboratory. Laboratories performing
high complexity testing are required to meet more stringent requirements than
laboratories performing less complex tests where a CLIA certificate is required.
Both NAF cytology and molecular diagnostic testing are high complexity tests.
CLIA certification is a prerequisite to be eligible for reimbursement under
Medicare and Medicaid.
The
Clinical Laboratory Improvement Amendments of 1988, or CLIA ’88, was passed to
improve quality control at cytology laboratories performing gynecological
diagnoses (Pap smears for cervical cancer). Under CLIA ‘88, the
number of slides a cytotechnologist may screen each day is regulated (no more
than 100 slides in any 24 hour period, and must have at least 8 hours to
complete the examination of 100 slides, which results in an average of 12.5
slides per hour) and quality control procedures require rescreening of a minimum
of 10% randomly selected within-normal-limits, or WNL, slides per
day. In addition, specialized proficiency testing requirements apply
not just to the laboratory, but to the individuals performing the test,
specialized personnel standards, and quality control procedures. The
Company will not be seeking certification to perform cervical Pap smears and
therefore does not believe these provisions of CLIA ‘88 apply to
it.
In
addition to CLIA requirements, the Company will be subject to various state
laws. CLIA provides that a state may adopt laboratory regulations that are more
stringent than those under federal law, and a number of states, including
Washington, where the Company is located, have done so. The
Washington state Medical Test Site, or MTS, Licensure law (Chapter 70.42 RCW)
was passed in May 1989 to allow the state to regulate clinical laboratory
testing. In October 1993, Washington became the first state to have its clinical
laboratory licensure program judged by the Federal Health and Human Services
Centers for Medicare and Medicaid Services, or CMS, as equivalent to CLIA and
was granted an exemption. In addition, New York, Maryland,
Pennsylvania, Rhode Island, and California, have implemented their own
laboratory regulatory schemes. State laws may require that laboratory personnel
meet certain qualifications, specify certain quality controls, or prescribe
record maintenance requirements.
Privacy
and Security of Health Information and Personal Information; Standard
Transactions
The
Company will be subject to state and federal laws and implementing regulations
relating to the privacy and security of the medical information of the patients
it treats. The principal federal legislation is part of
HIPAA. Pursuant to HIPAA, the Secretary of the Department of Health
and Human Services, or HHS, has issued final regulations designed to improve the
efficiency and effectiveness of the healthcare system by facilitating the
electronic exchange of information in certain financial and administrative
transactions, while protecting the privacy and security of the patient
information exchanged. These regulations also confer certain rights
on patients regarding their access to and control of their medical records in
the hands of healthcare providers such as the Company.
Four
principal regulations have been issued in final form: privacy regulations,
security regulations, standards for electronic transactions, and the National
Provider Identifier regulations. The HIPAA privacy regulations, which
fully came into effect in April, 2003, establish comprehensive federal standards
with respect to the uses and disclosures of an individual’s personal health
information, referred to in the privacy regulations as “protected health
information,” by health plans, healthcare providers, and healthcare
clearinghouses. The Company is a healthcare provider within the
meaning of HIPAA. The regulations establish a complex regulatory
framework on a variety of subjects, including:
|
·
|
the
circumstances under which uses and disclosures of protected health
information are permitted or required without a specific authorization by
the patient, including but not limited to treatment purposes, activities
to obtain payment for services, and healthcare operations
activities;
|
|
·
|
a
patient’s rights to access, amend, and receive an accounting of certain
disclosures of protected health
information;
|
|
·
|
the
content of notices of privacy practices for protected health information;
and
|
|
·
|
administrative,
technical and physical safeguards required of entities that use or receive
protected health information.
|
The
federal privacy regulations, among other things, restrict the Company’s ability
to use or disclose protected health information in the form of
patient-identifiable laboratory data, without written patient authorization, for
purposes other than payment, treatment, or healthcare operations (as defined by
HIPAA) except for disclosures for various public policy purposes and other
permitted purposes outlined in the privacy regulations. The privacy
regulations provide for significant fines and other penalties for wrongful use
or disclosure of protected health information, including potential civil and
criminal fines and penalties. Although the HIPAA statute and
regulations do not expressly provide for a private right of damages, the Company
could incur damages under state laws to private parties for the wrongful use or
disclosure of confidential health information or other private personal
information.
The
Company will implement policies and practices that it believes brings it into
compliance with the privacy regulations. However, the documentation and process
requirements of the privacy regulations are complex and subject to
interpretation. Failure to comply with the privacy regulations could subject the
Company to sanctions or penalties, loss of business, and negative
publicity.
The HIPAA
privacy regulations establish a “floor” of minimum protection for patients as to
their medical information and do not supersede state laws that are more
stringent. Therefore, the Company is required to comply with both
HIPAA privacy regulations and various state privacy laws. The failure to do so
could subject it to regulatory actions, including significant fines or
penalties, and to private actions by patients, as well as to adverse publicity
and possible loss of business. In addition, federal and state laws
and judicial decisions provide individuals with various rights for violation of
the privacy of their medical information by healthcare providers such as the
Company.
The final
HIPAA security regulations, which establish detailed requirements for physical,
administrative, and technical measures for safeguarding protected health
information in electronic form, became effective on April 21,
2003. The Company intends to employ what it considers to be a
reasonable and appropriate level of physical, administrative and technical
safeguards for patient information. Failure to comply with the
security regulations could subject the Company to sanctions or penalties and
negative publicity.
The final
HIPAA regulations for electronic transactions, referred to as the transaction
standards, establish uniform standards for certain specific electronic
transactions and code sets and mandatory requirements as to data form and data
content to be used in connection with common electronic transactions, such as
billing claims, remittance advices, enrollment, and eligibility. The
Company intends to outsource to a third-party vendor the handling of its billing
and collection transactions, to which the transaction standards apply. Failure
of the vendor to properly conform to the requirements of the transaction
standards could, in addition to possible sanctions and penalties, result in
payors not processing transactions submitted on our behalf, including claims for
payment.
The HIPAA
regulations on adoption of national provider identifiers, or NPI, required
healthcare providers to adopt new, unique identifiers for reporting on claims
transactions submitted after May 23, 2007. The Company intends to obtain NPIs
for its laboratory facilities and pathologists so that it can report NPIs to
Medicare, Medicaid, and other health plans.
The
healthcare information of the Company’s future patients will includes social
security numbers and other personal information that are not of an exclusively
medical nature. The consumer protection laws of a majority of states now require
organizations that maintain such personal information to notify each individual
if their personal information is accessed by unauthorized persons or
organizations, so that the individuals can, among other things, take steps to
protect themselves from identity theft. The costs of notification and the
adverse publicity can both be significant. Failure to comply with
these state consumer protection laws can subject a company to penalties that
vary from state to state, but may include significant civil monetary penalties,
as well as to private litigation and adverse publicity. California
recently enacted legislation that expanded its version of a notification law to
cover improper access to medical information generally, and other states may
follow suit.
Federal
and State Fraud and Abuse Laws
The
federal healthcare Anti-Kickback Statute prohibits, among other things,
knowingly and willfully offering, paying, soliciting, or receiving remuneration
to induce referrals or in return for purchasing, leasing, ordering, or arranging
for the purchase, lease, or order of any healthcare item or service reimbursable
under a governmental payor program. The definition of “remuneration” has been
broadly interpreted to include anything of value, including gifts, discounts,
the furnishing of supplies or equipment, credit arrangements, payments of cash,
waivers of payments, ownership interests, opportunity to earn income, and
providing anything at less than its fair market value. The Anti-Kickback Statute
is broad, and it prohibits many arrangements and practices that are lawful in
businesses outside of the healthcare industry. Recognizing that the
Anti-Kickback Statute is broad and may technically prohibit many innocuous or
beneficial arrangements within the healthcare industry, HHS has issued a series
of regulatory “safe harbors.” These safe harbor regulations set forth certain
provisions that, if met, will assure healthcare providers and other parties that
they will not be prosecuted under the federal Anti-Kickback Statute. Although
full compliance with these provisions ensures against prosecution under the
federal Anti-Kickback Statute, the failure of a transaction or arrangement to
fit within a specific safe harbor does not necessarily mean that the transaction
or arrangement is illegal or that prosecution under the federal Anti-Kickback
Statute will be pursued.
From time
to time, the Office of Inspector General, or OIG, issues alerts and other
guidance on certain practices in the healthcare industry. In October 1994, the
OIG issued a Special Fraud Alert on arrangements for the provision of clinical
laboratory services. The Fraud Alert set forth a number of practices allegedly
engaged in by some clinical laboratories and healthcare providers that raise
issues under the “fraud and abuse” laws, including the Anti-Kickback Statute.
These practices include: (i) laboratories providing employees to furnish
valuable services for physicians (other than collecting patient specimens for
testing for the laboratory) that are typically the responsibility of the
physicians’ staff; (ii) providing free testing to a physician’s managed care
patients in situations where the referring physicians benefit from such reduced
laboratory utilization; (iii) providing free pick-up and disposal of
bio-hazardous waste for physicians for items unrelated to a laboratory’s testing
services; (iv) providing general-use facsimile machines or computers to
physicians that are not exclusively used in connection with the laboratory
services; and (v) providing free testing for healthcare providers, their
families, and their employees (professional courtesy testing).
The OIG
emphasized in the Special Fraud Alert that when one purpose of an arrangement is
to induce referrals of program-reimbursed laboratory testing, both the clinical
laboratory and the healthcare provider, or physician, may be liable under the
Anti-Kickback Statute, and may be subject to criminal prosecution and exclusion
from participation in the Medicare and Medicaid programs.
Another
issue about which the OIG has expressed concern involves the provision of
discounts on laboratory services billed to customers in return for the referral
of more lucrative federal healthcare program business. In a 1999 Advisory
Opinion, the OIG concluded that a proposed arrangement whereby a laboratory
would offer physicians significant discounts on non-federal healthcare program
laboratory tests might violate the Anti-Kickback Statute. The OIG reasoned that
the laboratory could be viewed as providing such discounts to the physician in
exchange for referrals by the physician of business to be billed by the
laboratory to Medicare at non-discounted rates. The OIG indicated that the
arrangement would not qualify for protection under the discount safe harbor
because Medicare and Medicaid would not get the benefit of the discount.
Subsequently, in a year 2000 correspondence, the OIG stated that the
Anti-Kickback Statute may be violated if there were linkage between the discount
offered to the physician and the physician’s referrals of tests covered under a
federal healthcare program that would be billed by the laboratory directly.
Where there was evidence of such linkage, the arrangement would be considered
“suspect” if the charge to the physician was below the laboratory’s “average
fully loaded costs” of the test.
Generally,
arrangements that would be considered suspect, and possible violations under the
Anti-Kickback Statute, include arrangements between a clinical laboratory and a
physician (or related organizations or individuals) in which the laboratory
would (1) provide items or services to the physician or other referral source
without charge, or for amounts that are less than their fair market value; (2)
pay the physician or other referral source amounts that are in excess of the
fair market value of items or services that were provided; or (3) enter into an
arrangement with a physician or other entity because it is a current or
potential referral source. HIPAA also applies to fraud and false
statements. HIPAA created two new federal crimes: healthcare fraud and false
statements relating to healthcare matters. The healthcare fraud statute
prohibits knowingly and willfully executing a scheme to defraud any healthcare
benefit program, including private payors. A violation of this statute is a
felony and may result in fines, imprisonment, or exclusion from governmental
payor programs such as the Medicare and Medicaid programs. The false statements
statute prohibits knowingly and willfully falsifying, concealing, or covering up
a material fact or making any materially false, fictitious, or fraudulent
statement in connection with the delivery of or payment for healthcare benefits,
items, or services. A violation of this statute is a felony and may result in
fines or imprisonment or exclusion from governmental payor
programs.
Physician
Referral Prohibitions
Under a
federal law directed at “self-referral,” commonly known as the Stark Law,
prohibitions exist, with certain exceptions, on Medicare and Medicaid payments
for laboratory tests referred by physicians who personally, or through a family
member, have an investment interest in, or a compensation arrangement with, the
laboratory performing the tests. A person who engages in a scheme to circumvent
the Stark Law’s referral prohibition may be fined up to $100,000 for each such
arrangement or scheme. In addition, any person who presents or causes to be
presented a claim to the Medicare or Medicaid programs in violation of the Stark
Law is subject to civil monetary penalties of up to $15,000 per bill submission,
an assessment of up to three times the amount claimed, and possible exclusion
from participation in federal governmental payor programs. Bills submitted in
violation of the Stark Law may not be paid by Medicare or Medicaid, and any
person collecting any amounts with respect to any such prohibited bill is
obligated to refund such amounts.
Any
arrangement between a laboratory and a physician or physicians’ practice that
involves remuneration will prohibit the laboratory from obtaining payment for
services resulting from the physicians’ referrals, unless the arrangement is
protected by an exception to the self-referral prohibition or a provision
stating that the particular arrangement would not result in remuneration. Among
other things, a laboratory’s provision of any item, device, or supply to a
physician would result in a Stark Law violation unless it was used only to
collect, transport, process, or store specimens for the laboratory, or was used
only to order tests or procedures or communicate related results. This may
preclude a laboratory’s provision of fax machines and computers that may be used
for unrelated purposes. Most arrangements involving physicians that would
violate the Anti-Kickback Statute would also violate the Stark Law. Many states
also have “self-referral” and other laws that are not limited to Medicare and
Medicaid referrals. These laws may prohibit arrangements which are not
prohibited by the Stark Law, such as a laboratory’s placement of a phlebotomist
in a physician’s office to collect specimens for the laboratory.
Discriminatory
Billing Prohibition
In
response to competitive pressures, the Company will be increasingly required to
offer discounted pricing arrangements to managed care payers and physicians and
other referral services. Discounts to referral sources raise issues
under the Anti-Kickback Statute. Any discounted charge below the
amount that Medicare or Medicaid would pay for a service also raises issues
under Medicare’s discriminatory billing prohibition. The Medicare statute
permits the government to exclude a laboratory from participation in federal
healthcare programs if it charges Medicare or Medicaid “substantially in excess”
of its usual charges in the absence of “good cause.” In 2000, the OIG stated in
informal correspondence that the prohibition was violated only if the
laboratory’s charge to Medicare was substantially more than the “median
non-Medicare/–Medicaid charge.” On September 15, 2003, the OIG issued a notice
of proposed rulemaking addressing the statutory prohibition. Under the proposed
rule, a provider’s charge to Medicare or Medicaid would be considered
“substantially in excess of [its] usual charges” if it was more than 120% of the
provider’s mean or median charge for the service. The proposed rule was
withdrawn in June 2007. At that time, the OIG stated that it would continue to
evaluate billing patterns of individuals and entities on a case-by-case
basis.
Competitive
Bidding
The
Medicare Modernization Act of 2003 required CMS to conduct a demonstration
program on using competitive bidding for clinical lab tests that are furnished
without a face-to-face encounter between the individual and the entity
performing the test, to determine whether competitive bidding could be used to
provide lab services at reduced cost to Medicare, while continuing to maintain
quality and access to care. The Medicare Improvements for Patients
and Providers Act of 2008 repealed the Medicare Competitive Bidding
Demonstration Project for Clinical Laboratory
Services. Reintroduction by statute and widespread use of competitive
bidding, if implemented for clinical lab services, could have a significant
effect on the clinical laboratory industry and on us. The Company
could be precluded from furnishing certain clinical laboratory services to
Medicare beneficiaries if it is not the successful bidder or, as part of the
competitive bidding process, it could be required to offer reduced payment
amounts in order to participate in the arrangement. In addition,
states could initiate efforts to establish competitive bidding processes for the
provision of clinical laboratory services under the state Medicaid
program.
Corporate
Practice of Medicine
The
Company’s contractual relationships with the licensed healthcare providers are
subject to regulatory oversight, mainly by state licensing authorities. In
certain states, for example, limitations may apply to the relationship with the
pathologists that the Company intends to employ or engage, particularly in terms
of the degree of control that the Company exercises or has the power to exercise
over the practice of medicine by those pathologists. A number of states,
including New York, Texas, and California, have enacted laws prohibiting
business corporations, such as the Company, from practicing medicine and
employing or engaging physicians to practice medicine. These requirements are
generally imposed by state law in the states in which the Company operates, vary
from state to state, and are not always consistent among states. In addition,
these requirements are subject to broad powers of interpretation and enforcement
by state regulators. Some of these requirements may apply to the Company even if
it does not have a physical presence in the state, based solely on the
employment of a healthcare provider licensed in the state or the provision of
services to a resident of the state. The Company believes that it operates in
material compliance with these requirements. However, failure to comply can lead
to action against the Company and the licensed healthcare professionals that it
employs, fines or penalties, receipt of cease and desist orders from state
regulators, loss of healthcare professionals’ licenses or permits, the need to
make changes to the terms of engagement of those professionals that interfere
with the Company’s business, and other material adverse
consequences.
State
Laboratory Licensure
The
Company intends that its laboratory will be certified by CLIA and be licensed in
the state of Washington. However, many state licensure laws require a laboratory
that solicits or tests specimens from individuals within that state to hold a
license from that state, even if the testing occurs in another state. The
Company intends to accept testing from California, New York, Pennsylvania,
Maryland, New Jersey, and Rhode Island, which require out-of-state laboratories
to hold state licenses. The Company intends to apply for licenses in
these states. Similarly, many of the states from which it will
solicit specimens require that a physician interpreting specimens from that
state be licensed by that particular state, irrespective of where the services
are to be provided. In the absence of such a state license, the physician may be
considered to be engaged in the unlicensed practice of medicine.
The
Company may become aware from time to time of other states that require out of
state laboratories or physicians to obtain licensure in order to accept
specimens from the state, and it is possible that other states do have such
requirements or will have such requirements in the future. The Company intends
to follow instructions from the state regulators as how to comply with such
requirements.
Referrals
after Becoming a Public Company
Once the
Company’s stock is publicly traded, it will not be able to accept referrals from
physicians who own, directly or indirectly, shares of its stock unless it
complies with the Stark Law exception for publicly traded securities. This
requires, among other things, $75 million in stockholders’ equity (total assets
minus total liabilities). The parallel safe harbor requires, among other things,
$50 million in undepreciated net tangible assets, in order for any distributions
to such stockholders to be protected under the Anti-Kickback
Statute.
Other
Regulatory Requirements
The
Company’s laboratory will be subject to federal, state, and local regulations
relating to the handling and disposal of regulated medical waste, hazardous
waste, and biohazardous waste, including chemical, biological agents and
compounds, and human tissue. The Company intends to use outside vendors who are
contractually obligated to comply with applicable laws and regulations to
dispose of such waste. These vendors will be licensed or otherwise qualified to
handle and dispose of such waste.
The
Occupational Safety and Health Administration, or OSHA, has established
extensive requirements relating to workplace safety for healthcare employers,
including requirements mandating work practice controls, protective clothing and
equipment, training, medical follow-up, vaccinations, and other measures
designed to minimize exposure to, and transmission of, blood-borne pathogens.
Pursuant to its authority under the FDCA, the FDA has regulatory responsibility
over instruments, test kits, reagents, and other devices used to perform
diagnostic testing by laboratories such as ours. Specifically, the manufacturers
and suppliers of analyte specific reagents, or ASRs, which we will obtain for
use in diagnostic tests, are subject to regulation by the FDA and are required
to register their establishments with the FDA, to conform manufacturing
operations to the FDA’s Quality System Regulation and to comply with certain
reporting and other record keeping requirements. The FDA also regulates the sale
or distribution, in interstate commerce, of products classified as medical
devices under the FDCA, including in vitro diagnostic test
kits. Such devices must undergo premarket review by the FDA prior to
commercialization unless the device is of a type exempted from such review by
statute or pursuant to the FDA’s exercise of enforcement
discretion.
The FDA
maintains that it has authority to regulate the development and use of LDTs or
“home brews” as medical devices, but to date has not exercised its authority
with respect to “home brew” tests as a matter of enforcement discretion. The FDA
regularly considers the application of additional regulatory controls over the
sale of ASRs and the development and use of “home brews” by laboratories such as
the Company’s.
The FDA
has announced public hearings to discuss oversight of LDTs. While the
outcome of those hearings is unknown, it is probable that some form of
pre-market notification or approval process will become a requirement for
certain LDTs. Pre-market notification or approval of the Company’s
future LDTs would be costly and delay the ability of the Company to
commercialize such tests.
Compliance
Program
Compliance
with government rules and regulations is a significant concern throughout the
industry, in part due to evolving interpretations of these rules and
regulations. The Company will seek to conduct its business in
compliance with all statutes and regulations applicable to its
operations. To this end, it has determined that it will establish an
informal compliance program that reviews for regulatory compliance procedures,
policies, and facilities throughout its business. To better focus
compliance efforts, the Company intends to hire an experienced compliance
officer when appropriate and develop a formal compliance program. The
Company will endeavor to make all suitable adjustments or modifications as
become known or necessary in order to comply with these complex set of laws and
regulations.
Legal
Proceedings
The
Company is not a party to any material legal proceedings.
Employees
As of
September 1, 2010, the Company had three executive officers, one of whom serves
in such capacity as a consultant to the Company, and one other employee. The
Company expects that it will hire more employees as it expands.
Property
The
Company’s corporate headquarters are located at 4105 East Madison Street, Suite
320, Seattle, Washington 98112 where the Company occupies approximately 330
square feet of office space. The original term of the lease shall
terminate on December 31, 2010, with annual rent of $13,200 plus applicable
sales tax. From April 30, 2009 (inception) through June 30, 2010, the
Company incurred $6,848 of rent expense for the lease. As of June 30,
2010, security deposit for the lease amounted to $1,100. On July 15,
2010, the Company and Ensisheim terminated the lease, effective July 1, 2010 and
the Company began receiving free rent from Ensisheim. The Company
leases approximately 1,300 square feet of office and laboratory space in the
Seattle Life Sciences Center in Seattle, Washington, under a six-month lease
which will convert into a month-to-month lease starting in March,
2011. The Company believes that its current facilities will be
adequate to meet its needs for the next 12 months. The Company
intends to lease additional or alternative office and laboratory space in the
Greater Seattle area in the second half of 2011, if needed.
Insurance
The
Company currently maintains commercial general and office premises liability
insurance. At the time the Company establishes its laboratory and
launches the MASCT System, it expects to obtain liability insurance for its
products and services. As a general matter, providers of diagnostic
services may be subject to lawsuits alleging medical malpractice or other
similar legal claims. Some of these suits involve claims for
substantial damages. The Company believes that it will be able to
obtain adequate insurance coverage in the future at acceptable costs, but cannot
assure that it will be able to do so.
MANAGEMENT
The
following table sets forth information regarding the members of the board of
directors of the Company and its executive officers as of September 15,
2010:
Executive
Officers, Directors and Prospective Directors
|
|
|
|
|
Steven
C. Quay, M.D., Ph.D.
|
|
59
|
|
Chairman
of the Board of Directors, Chief Executive Officer and
President
|
Christopher
Benjamin
|
|
36
|
|
Chief
Financial Officer
|
Shu-Chih
Chen, Ph.D.
|
|
48
|
|
Director,
Chief Scientific Officer
|
John
Barnhart
|
|
53
|
|
Director
|
Mary
Tagliaferri, M.D.
|
|
44
|
|
Director
Nominee
|
Stephen
Galli, M.D.
|
|
60
|
|
Director
Nominee
|
Alexander
Cross, Ph.D.
|
|
78
|
|
Director
Nominee
|
Mary
Tagliaferri, M.D., Stephen Galli, M.D., and Alexander Cross, Ph.D., have agreed
to serve on the board of directors of the Company concurrent with the closing of
this offering.
The
Company’s bylaws provide that the number of directors authorized to serve on the
board of directors of the Company may be established, from time to time, by
action of the board of directors of the Company. Vacancies in the
existing board of directors of the Company are filled by a majority vote of the
remaining directors on the board of directors of the
Company. Directors serve for a one-year term until each subsequent
annual meeting of stockholders and until their respective successors have been
elected and qualified or until death, resignation or removal. The
Company’s executive officers are appointed by and serve at the discretion of the
board of directors of the Company.
Dr. Quay
is the Chief Executive Officer and Chairman of the board of directors of the
Company. Dr. Shu-Chih Chen is the Chief Scientific Officer and a
director. Drs. Quay and Chen are husband and wife. They currently
beneficially own a majority of the outstanding voting securities of the
Company. Following the completion of this offering and exercise of
the Class A Warrants, they will remain substantial minority
stockholders.
Steven C. Quay,
M.D., Ph.D. Dr. Quay has served as Chief Executive Officer and
Chairman of the board of directors of the Company since the Company was
incorporated in April 2009. Prior to his work at the Company, Dr.
Quay served as Chairman of the Board, President and Chief Executive Officer of
MDRNA, Inc. from August 2000 to May 2008, and as its Chief Scientific Officer
until November 31, 2008. Dr. Quay is certified in Anatomic Pathology
with the American Board of Pathology, with training at Massachusetts General
Hospital and Harvard Medical School, is a former faculty member of the
Department of Pathology, Stanford University School of Medicine, and is a named
inventor on 14 U.S. and foreign patents covering the MASCT System. He
oversaw the clinical testing and regulatory filing of the MASCT device with the
FDA that led to its ultimate marketing clearance. Including the
patents for the MASCT System, Dr. Quay has a total of 69 U.S. patents, 92
pending patent applications and is a named inventor on patents covering five
pharmaceutical products that have been approved by the FDA. Dr. Quay
received an M.D. in 1977 and a Ph.D. in 1975 from the University of Michigan
Medical School. He also received his B.A. degree in biology,
chemistry and mathematics from Western Michigan University in
1971. Dr. Quay is a member of the American Society of Investigative
Pathology, the Association of Molecular Pathology and the Association of
Pathology Informatics. He was selected to serve on the Company’s
board of directors because of his role as the founder of the Company and the
inventor of the MASCT System, as well as his qualifications as a physician and
the principal researcher overseeing the clinical and regulatory development of
the MASCT System.
Christopher
Benjamin. Mr. Benjamin has served as Chief Financial Officer
of the Company since July 2010. His experience includes both public
and private company financial reporting expertise. Based in Seattle,
Mr. Benjamin has served as President of Rogue CFO Consulting since November
2007, as well as serving as the Chief Financial Officer for NexTec and Redfin
Corporations and acting as the Accounting Manager and Assistant Controller for
the Bsquare Corporation. His responsibilities at these companies
included monthly financial reporting and analysis, audit and cash management,
forecasting, oversight of the General Ledger, as well as ensuring compliance
with GAAP, FASB and SEC reporting standards. From February 2003 to
November 2005, Mr. Benjamin worked at Cascade Natural Gas Corporation, where his
responsibilities included serving as Manager of Financial Reporting and Fixed
Assets, along with Sarbanes Oxley process documentation, process flow creation
and SEC reporting support. He received his M.B.A. from the University
of Washington in Seattle in 2007 and a B.A. in accounting from the University of
Fraser Valley in Abbotsford, British Columbia, Canada in 1997.
Shu Chih Chen,
Ph.D. Dr.
Chen has served as Chief Scientific Officer and director of the Company since
the Company was incorporated in April 2009. Prior to joining the
Company, Dr. Chen served as President of Ensisheim beginning in 2008, was
founder and President of SC2Q Consulting Company from 2006 to 2008, and served
as Head, Cell Biology, Nastech Pharmaceuticals Company, Inc. from 2002 to
2006. During 1995 and 1996, she was an Associate Professor at
National Yang Ming University, Taipei, Taiwan, and served as the principal
investigator of an NIH RO1 grant studying tumor suppression by gap junction
protein connexin 43 at the Department of Molecular Medicine at Northwest
Hospital before working in the research department at Nastech Pharmaceutical
Company. She is named as an inventor on four patent
applications related to cancer therapeutics. Dr. Chen received her
Ph.D. degree in microbiology and public health from Michigan State University in
1992 and has published extensively on Molecular Oncology. She received her B.S.
degree in medical technology from National Yang Ming University, Taipei, Taiwan
in 1984. Dr. Chen was selected to serve on the Company’s board of
directors because of her qualifications as a professor and researcher in the
field of cancer therapeutics.
John
Barnhart. Mr. Barnhart has served
as a director of the Company since July 2009. He is the founder and
has been the Managing Director of the Visconti Group, a management consulting
group in Seattle, Washington, since November 2003. He held prior
executive positions at The Walt Disney Company, Sony Pictures Entertainment, and
Walt Disney Imagineering. He received a B.S. degree in engineering
from California State University, Long Beach in 1974. Mr. Barnhart
was selected to serve on the Company’s board of directors because of his
understanding and experience with development and marketing of consumer products
and services.
Mary Tagliaferri,
M.D. Dr. Tagliaferri will become a member of the Company’s
board of directors upon the completion of this offering. Dr.
Tagliaferri is a co-founder of Bionovo Pharmaceuticals and has served in various
capacities there since February 2002. Most recently, in May 2007, she
was appointed as its President. She was appointed as a director of
Bionovo in May 2005 and as its Chief Medical Officer, Secretary and Treasurer in
April 2005, and continues to serve in these capacities. Bionovo is a
drug discovery and development company focused on developing safe and effective
drugs for the treatment of unmet medical needs in women’s health and cancer,
including a clinical-stage novel formulation for breast cancer. Dr.
Tagliaferri conducted translational research at the University of California,
San Francisco from 1996 to 2002 and has participated in the development of
ductal lavage, a method of obtaining NAF through cannulating the ducts. Dr.
Tagliaferri received her M.D. degree from University of California, San
Francisco and her B.S. from Cornell University. She also hold an M.S.
degree in traditional Chinese medicine from the American College of Traditional
Chinese Medicine. Dr. Tagliaferri has been selected as a director
nominee because of her experience as a founder, officer and director of a
biopharmaceutical company developing treatments for breast cancer, as well as
her qualifications as a physician and researcher in the area of breast health,
including NAF collection.
Stephen Galli,
M.D. Dr. Galli will become a member of the Company’s board of
directors upon the completion of this offering. Dr. Galli is Chair of
the Department of Pathology, Professor of Pathology and of Microbiology &
Immunology and the Mary Hewitt Loveless, M.D., Professor, Stanford University
School of Medicine, Stanford, California, and has served in these capacities
since February 1999. Before joining Stanford, he was on the faculty
of Harvard Medical School. He holds 13 U.S. patents and has over 340
publications. He is past president of the American Society for Investigative
Pathology and current president of the Collegium Internationale
Allergologicum. In addition to receiving awards for his research, he
was recently recognized with the 2010 Stanford University President’s Award for
Excellence Through Diversity for his recruitment and support of women and
underrepresented minorities at Stanford University. He received his
B.A. degree in biology, magna cum laude, from Harvard College in 1968 and his
M.D. degree from Harvard Medical School in 1973 and completed a residency in
anatomic pathology at the Massachusetts General Hospital in 1977. Dr.
Galli has been selected as a director nominee because of his qualifications as a
professor and physician, and his specialized expertise as a
pathologist.
Alexander D.
Cross, Ph.D. Dr. Cross will become a member of the Company’s
board of directors upon completion of this offering. Dr. Cross has
served on the board and as a member of the Audit, Compensation, and Nominating
and Governance Committees of a number of public companies, including MDRNA, Inc.
and Ligand Pharmaceuticals Inc. Dr. Cross also served as Chairman of
the Board and CEO of Cytopharm, Inc. until August 2006. Dr. Cross has
been a consultant in the fields of pharmaceuticals and biotechnology since
January 1986 and has served as a principal of NDA Partners, LLC since
2003. Previously, Dr. Cross served as President and CEO of Zoecon
Corporation, a biotechnology company, from April 1983 to December 1985, and
Executive Vice President and Chief Operating Officer from 1979 to
1983. Dr. Cross also previously held several corporate management
positions at Syntex Corporation from 1961 through 1979. Dr. Cross holds 109
issued United States patents and is the author of 90 peer-reviewed publications.
Dr. Cross received his B.Sc., Ph.D. and D.Sc. degrees from the University of
Nottingham, England, and is a Fellow of the Royal Society of
Chemistry. Dr. Cross has been selected as a director nominee because
of his qualifications as a scientist, business executive and audit committee
financial expert, and his prior experience as a director and committee member of
public companies.
Scientific
Advisory Board
The
Company has established a Scientific Advisory Board to provide strategic
resources to the Company’s management and its board of directors. It is intended
that the Company’s scientific advisory board will have knowledge in breast
cancer, NAF, and breast cancer biomarkers. The Company expects to
expand the board members in the future. The initial Scientific Advisory Board
currently consists of:
Dr. Edward
Sauter, M.D., Ph.D. Dr. Sauter is
the Associate Dean for Research and Professor of Surgery at the University of
North Dakota School of Medicine & Health Sciences. He received his M.D. from
the Louisiana State School of Medicine and his Ph.D. from the University of
Pennsylvania. He completed his general surgery residency at the Ochsner Clinic,
in New Orleans, Louisiana. Dr. Sauter also completed a Surgical
Oncology Fellowship at Fox Chase Cancer Center in Philadelphia, Pennsylvania.
Dr. Sauter was Vice-Chair for Research in the Department of Surgery and
Professor at the University of Missouri-Columbia. He also completed his MHA
while at the University of Missouri. Dr. Sauter is widely recognized for his
research and clinical experience in breast cancer. Among his many
accomplishments, Dr. Sauter and a team of researchers pioneered noninvasive and
minimally invasive techniques to predict breast cancer risk using NAF. Dr.
Sauter is the co-author of over 100 peer-reviewed publications on breast cancer,
the majority of which pertain to cytology and molecular diagnostic biomarkers in
NAF.
Dr.
Sauter and the Company entered into a consulting agreement on February 18, 2010
which provides a $5,000 signing fee and $1,000 per month for up to four hours
per month of Dr. Sauter’s time. The agreement also provides
reasonable travel expenses in connection with his work for the Company. The
agreement terminates on December 31, 2010 but can be renewed by agreement of the
parties.
Director
Compensation
Upon
completion of this offering, Mr. Barnhart and Drs. Tagliaferri, Galli and Cross,
as non-employee directors of the Company, will receive the
following:
|
·
|
an
initial director compensation fee of $50,000, paid in shares of the
Company’s common stock and that vests ratably over one year from the date
of grant;
|
|
·
|
an
annual director retainer of $50,000, paid in shares of the Company’s
common stock and that vests ratably over one year from the date of grant;
and
|
|
·
|
an
in-person meeting fee of $1,500 and a telephone meeting fee of
$1,000.
|
Compensation
for service on the Audit Committee will be $12,000 for the Chair and $8,000 for
each member, paid in fully vested shares of the Company’s common stock or
options, payable quarterly in arrears.
Compensation
for service on the Compensation Committee and Nominating/Governance Committee
will be $10,000 for the Chair and $6,000 for each member, paid in fully
vested shares of
the Company’s common stock or options, payable quarterly in
arrears.
All
committee members will also receive a cash payment of $2,000 per in-person
meeting for the Chair and $1,500 per in-person meeting for each member and
$1,500 per telephonic meeting for the Chair and $1,000 per telephonic meeting
for each member.
The
employee directors will receive no compensation for their board
service. All directors will receive reimbursement for reasonable
travel expenses.
Director
Independence
The board
of directors of the Company has reviewed the materiality of any relationship
that each of our directors and prospective directors has with the Company,
either directly or indirectly. Based on this review, the board of directors of
the Company has determined that John Barnhart, a current director, and the
following director nominees will be “independent directors” as
defined by Section 803(A)(2)(b) of the NYSE Amex LLC Company Guide at the time
they become directors (upon the completion of this offering): Mary Tagliaferri,
M.D., Stephen Galli, M.D. and Alexander Cross, Ph.D.
Committees
of the Board of Directors of the Company
The board
of directors of the Company has provided for the establishment of an audit
committee, a compensation committee and a nominating/governance committee
effective upon the completion of this offering. The composition and function of
each of these committees is described below.
Upon
completion of this offering, the audit committee will be comprised of Dr. Cross
(chair), Mr. Barnhart and Dr. Galli. The board of directors of the Company has
determined that Dr. Cross is an audit committee financial expert, as defined by
the rules of the SEC. The audit committee will be authorized to:
|
·
|
approve
and retain the independent registered public accounting firm to conduct
the annual audit of the Company’s financial
statements;
|
|
·
|
review
the proposed scope and results of the
audit;
|
|
·
|
review
and pre-approve audit and non-audit fees and
services;
|
|
·
|
review
accounting and financial controls with the independent auditors and the
Company’s financial and accounting
staff;
|
|
·
|
review
and approve transactions between the Company and its directors, officers
and affiliates;
|
|
·
|
recognize
and prevent prohibited non-audit services;
and
|
|
·
|
establish
procedures for complaints received by the Company regarding accounting
matters; oversee internal audit functions, if
any.
|
The
Company believes that the composition of its audit committee will meet the
independence requirements of the applicable rules of the SEC and NYSE Amex upon
completion of this offering.
Compensation
Committee
Upon the
completion of this offering, the compensation committee will be comprised of Dr.
Tagliaferri (chair), Mr. Barnhart and Dr. Cross. All members of the compensation
committee will qualify as independent directors under the current definition
promulgated by NYSE Amex. The compensation committee will be
authorized to:
|
·
|
review
and recommend the compensation arrangements for
management;
|
|
·
|
establish
and review general compensation policies with the objective to attract and
retain superior talent, to reward individual performance and to achieve
our financial goals;
|
|
·
|
administer
stock incentive and purchase plans;
and
|
|
·
|
oversee
the evaluation of the board of directors of the Company and
management.
|
Nominating and Governance
Committee
Upon the
completion of this offering, the nominating and governance committee will be
comprised of Mr. Barnhart (chair), Dr. Galli and Dr. Tagliaferri. All
members of the nominating and governance committee will qualify as independent
directors under the current definition promulgated by NYSE Amex. The
nominating and governance committee will be authorized to:
|
·
|
identify
and nominate candidates for election to the board of directors of the
Company; and
|
|
·
|
develop
and recommend to the board of directors of the Company a set of corporate
governance principles applicable to our
company.
|
Compensation
Committee Interlocks and Insider Participation
No
prospective member of our compensation committee has at any time been an
employee of ours. None of our executive officers serves as a member
of the board of directors or compensation committee of any other entity that has
one or more executive officers serving as a member of our board of directors or
compensation committee.
Code
of Business Conduct and Ethics
The
Company intends to adopt a code of business conduct and ethics that applies to
all its employees, officers and directors, including those officers responsible
for financial reporting. The code of business conduct and ethics will be
available on the Company’s website. The Company expects that any
amendments to the code, or any waivers of its requirements, will be disclosed on
its website.
Limitation
of Directors’ and Officers’ Liability and Indemnification
The
Delaware General Corporation Law authorizes corporations to limit or eliminate,
subject to specified conditions, the personal liability of directors to
corporations and their stockholders for monetary damages for breach of their
fiduciary duties. The Company’s certificate of incorporation and
amended and restated bylaws limit the liability of its directors to the fullest
extent permitted by Delaware law.
The
Company has obtained director and officer liability insurance to cover
liabilities the Company’s directors and officers may incur in connection with
their services to the Company. The Company’s certificate of
incorporation and amended and restated bylaws also provide that it will
indemnify and advance expenses to any of its directors and officers who, by
reason of the fact that he or she is an officer or director, is involved in a
legal proceeding of any nature. The Company will repay certain
expenses incurred by a director or officer in connection with any civil,
criminal, administrative or investigative action or proceeding, including
actions by the Company or in its name. Such indemnifiable expenses include, to
the maximum extent permitted by law, attorney’s fees, judgments, fines,
settlement amounts and other expenses reasonably incurred in connection with
legal proceedings. A director or officer will not receive indemnification if he
or she is found not to have acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the Company’s best
interest.
Such
limitation of liability and indemnification does not affect the availability of
equitable remedies. In addition, the Company has been advised that in the
opinion of the SEC, indemnification for liabilities arising under the Securities
Act of 1933, as amended, is against public policy as expressed in the Securities
Act and is therefore unenforceable.
There is
no pending litigation or proceeding involving any of the Company’s directors,
officers, employees or agents in which indemnification will be required or
permitted. The Company is not aware of any threatened litigation or proceeding
that may result in a claim for such indemnification.
EXECUTIVE
COMPENSATION
Remuneration
of Officers
The
Company did not accrue or pay any remuneration or compensation to any officer,
director or employee in 2009. In 2010, the Company has accrued salary
payments to Dr. Steven C. Quay and Dr. Shu-Chih Chen as of June 30, 2010 in the
amounts and on the terms as defined below. The monthly accruals are
approximately $20,833, and $16,667, respectively.
Upon the
completion of this offering, the Company’s compensation committee will be
responsible for reviewing and evaluating key executive employee base salaries,
setting goals and objectives for executive bonuses and administering benefit
plans. The compensation committee will provide advice and recommendations to the
board of directors of the Company on such matters. See “Committees of
the Board of Directors—Compensation Committee” for further details on the role
of the compensation committee.
Employment
Agreements
Employment
Agreement with Steven Quay, M.D. Ph.D.
The
Company has entered into an employment agreement with Dr. Quay to act as the
Company’s chief executive officer. The agreement will provide for an
initial base salary of $250,000 per year and an annual target bonus of up to 40%
of Dr. Quay’s then-current base salary, payable upon the achievement of
performance goals to be established annually by the compensation
committee.
Under the
employment agreement, Dr. Quay received an option to purchase 250,000 shares of
common stock at an exercise price of $5.00 per share, the fair market value of
the common stock on the date of grant, as determined by the Board of
Directors. 25% of the shares of common stock underlying the option,
or 62,500 shares, will vest on December 31, 2010, and the remaining 75%, or
187,500 shares, will vest in equal quarterly installments over the next three
years, so long as Dr. Quay remains employed with the Company.
During
the employment term, the Company will make available to Dr. Quay employee
benefits provided to other key employees and officers of the
Company. To the extent these benefits are based on length of service
with the Company, Dr. Quay will receive full credit for prior service with the
Company. Participation in health, hospitalization, disability, dental
and other insurance plans that the Company may have in effect for other
executives, all of which shall be paid for by the Company with contribution by
Dr. Quay as set for the other executives, as and if appropriate.
Dr. Quay
will be entitled to six weeks of paid vacation per year for each full year of
employment, pro rated for each partial year. Vacation time not taken
during a calendar year will not be accrued to the next calendar
year.
Dr. Quay
has also agreed that, for the period commencing on the date of his employment
agreement with the Company and during the term of his employment and for a
period of 12 months following voluntary termination of his employment with the
Company that he will not compete with the Company in the United
States. The employment agreement also contains provisions relating to
confidential information and assignment of inventions, which require Dr. Quay to
refrain from disclosing any proprietary information and to assign to the Company
any inventions which directly concern the MASCT System, Oxy-MASCT System, or
future products, research, or development, or which result from work they
perform for the Company or using its facilities.
Consulting
Agreement with Christopher Benjamin
The
Company has entered into an agreement with Christopher Benjamin to act as the
Company’s interim chief financial officer. The agreement provides a
monthly retainer fee of $2,250 for up to 25 hours of work per month and $100 per
hour beyond that level. The agreement may be terminated by the
Company upon 30 days written notice.
Employment
Agreement with Shu-Chih Chen
The
Company has entered into an amended and restated employment agreement with Dr.
Chen to act as the Company’s chief scientific officer. The agreement
will provide for an initial base salary of $200,000 per year and an annual
target bonus of up to 30% of Dr. Chen’s then-current base salary, payable upon
the achievement of performance goals to be established annually by the
compensation committee.
Under the
employment agreement, Dr. Chen received an option to purchase 100,000 shares of
common stock at an exercise price of $5.00 per share, the fair market value of
the common stock on the date of grant, as determined by the Board of
Directors. 25% of the shares of common stock underlying the option,
or 25,000 shares, will vest on December 31, 2010, and the remaining 75%, or
75,000 shares, will vest in equal quarterly installments over the next three
years, so long as Dr. Chen remains employed with the Company.
During
the employment term, the Company will make available to Dr. Chen employee
benefits provided to other key employees and officers of the
Company. To the extent these benefits are based on length of service
with the Company, Dr. Chen will receive full credit for prior service with the
Company. Participation in health, hospitalization, disability, dental
and other insurance plans that the Company may have in effect for other
executives, all of which shall be paid for by the Company with contribution by
Dr. Chen as set for the other executives, as and if appropriate.
Dr. Chen
will be entitled to six weeks of paid vacation per year for each full year of
employment, pro rated for each partial year. Vacation time not taken
during a calendar year will not be accrued to the next calendar
year.
Dr. Chen
has also agreed that, for the period commencing on the date of her employment
agreement with the Company and during the term of her employment and for a
period of 12 months following voluntary termination of her employment with the
Company that she will not compete with the Company in the United
States. The employment agreement also contains provisions relating to
confidential information and assignment of inventions, which require Dr. Chen to
refrain from disclosing any proprietary information and to assign to the Company
any inventions which directly concern the MASCT System, Oxy-MASCT System, or
future products, research, or development, or which result from work she
performs for the Company or using its facilities.
Severance
Benefits and Change in Control Arrangements
The
Company has agreed to provide the severance benefits and change in control
arrangements described below to its named executive officers.
Dr.
Steven Quay
Pursuant
to his employment agreement, if (i) the Company terminates the employment of Dr.
Quay without cause, or (ii) Dr. Quay terminates his employment for good reason,
then Dr. Quay will be entitled to receive all accrued but unpaid compensation,
plus a severance payment equal to twelve months of base salary. In
addition, upon such event, the vesting of all shares of common stock underlying
options then held by Dr. Quay will accelerate, and the options will remain
exercisable for the remainder of their terms. The cash severance
payment is required to be paid in substantially equal installments over a period
of six months beginning on the Company’s first payroll date that occurs
following the 30th day
after the effective date of termination of Dr. Quay’s employment, subject to
certain conditions. The Company will not be required, however, to pay
any severance pay for any period following the termination date if Dr. Quay
materially violates certain provisions of his employment agreement and the
violation is not cured within 30 days following receipt of written notice from
the Company containing a description of the violation and a demand for immediate
cure.
In
addition, under the terms of his employment agreement, in the event of a “change
in control” of the Company (as defined in the employment agreement) during Dr.
Quay’s employment term, Dr. Quay will be entitled to receive a one-time payment
equal to 2.9 times his base salary, and the vesting of all outstanding equity
awards then held by Dr. Quay will accelerate such that they are fully vested as
of the date of the change in control.
Dr.
Shu-Chih Chen
Pursuant
to her employment agreement, if (i) the Company terminates the employment of Dr.
Chen without cause, or (ii) Dr. Chen terminates her employment for good reason,
then Dr. Chen will be entitled to receive all accrued but unpaid compensation,
plus a severance payment equal to twelve months of base salary. In
addition, upon such event, the vesting of all shares of common stock underlying
options then held by Dr. Chen will accelerate, and the options will remain
exercisable for the remainder of their terms. The cash severance
payment is required to be paid in substantially equal installments over a period
of six months beginning on the Company’s first payroll date that occurs
following the 30th day
after the effective date of termination of Dr. Chen’s employment, subject to
certain conditions. The Company will not be required, however, to pay
any severance pay for any period following the termination date if Dr. Chen
materially violates certain provisions of her employment agreement and the
violation is not cured within 30 days following receipt of written notice from
the Company containing a description of the violation and a demand for immediate
cure.
In
addition, under the terms of her employment agreement, in the event of a “change
in control” of the Company (as defined in the employment agreement) during Dr.
Chen’s employment term, Dr. Chen will be entitled to receive a one-time payment
equal to 2.9 times her base salary, and the vesting of all outstanding equity
awards then held by Dr. Chen will accelerate such that they are fully vested as
of the date of the change in control.
2010
Stock Option and Incentive Plan
The
Company’s 2010 Stock Option and Incentive Plan, or the 2010 Plan, provides for
the grant of equity-based awards to employees, officers, non-employee directors
and other key persons providing services to the Company. Awards of
incentive options may be granted under the 2010 Plan until September
2020. No other awards may be granted under the 2010 Plan after the
date that is 10 years from the date of stockholder approval.
Plan
Administration. The 2010 Plan may be administered by the full
board or the compensation committee. It is the current intention of
the Company that the 2010 Plan be administered by the compensation
committee. The compensation committee has full power to select, from
among the individuals eligible for awards, the individuals to whom awards will
be granted, to make any combination of awards to participants, and to determine
the specific terms and conditions of each award, subject to the provisions of
the 2010 Plan. The compensation committee may delegate to our chief
executive officer the authority to grant stock options to employees who are not
subject to the reporting and other provisions of Section 16 of the Exchange
Act and not subject to Section 162(m) of the Code, subject to certain
limitations and guidelines.
Eligibility. Persons
eligible to participate in the 2010 Plan will be those full or part-time
officers, employees, non-employee directors and other key persons (including
consultants and prospective officers) of the Company and its subsidiaries as
selected from time to time by the compensation committee in its
discretion.
Plan Limits. Initially,
the total number of shares of common stock available for issuance under the 2010
Plan is 1,000,000 shares. On January 1, 2012 and each January 1
thereafter, the number of shares of common stock reserved and available for
issuance under the 2010 Plan will be cumulatively increased by 4% of the number
of shares of common stock issued and outstanding on the immediately preceding
December 31. Subject to these overall limitations, the maximum
aggregate number of shares of Stock that may be issued in the form of incentive
stock options or stock appreciation rights to any one individual will not exceed
the initial 2010 Plan limit of 1,000,000, cumulatively increased on January 1,
2012 and each January 1 thereafter by the lesser of (i) the 4% annual increase
applicable to the 2010 Plan for such year or (ii) 500,000
shares.
Stock Options. The
2010 Plan permits the granting of (i) options to purchase common stock
intended to qualify as incentive stock options under Section 422 of the
Code and (ii) options that do not so qualify. Options granted
under the 2010 Plan will be non-qualified options if they fail to qualify as
incentive options or exceed the annual limit on incentive stock
options. Incentive stock options may only be granted to employees of
the Company and its subsidiaries. Non-qualified options may be
granted to any persons eligible to receive incentive options and to non-employee
directors and key persons. The option exercise price of each option
will be determined by the compensation committee but may not be less than 100%
of the fair market value of the common stock on the date of
grant. Fair market value for this purpose will be the last reported
sale price of the shares of common stock on the NYSE Amex on the date of grant;
provided, that if the date of grant is the first day on which trading prices for
our common stock are reported on the NYSE Amex, the fair market value will be
the price to the public of shares of our common stock in this
offering. The exercise price of an option may not be reduced after
the date of the option grant, other than to appropriately reflect changes in our
capital structure.
The term
of each option will be fixed by the compensation committee and may not exceed 10
years from the date of grant. The compensation committee will
determine at what time or times each option may be exercised. Options
may be made exercisable in installments and the exercisability of options may be
accelerated by the compensation committee. In general, unless
otherwise permitted by the compensation committee, no option granted under the
2010 Plan is transferable by the optionee other than by will or by the laws of
descent and distribution, and options may be exercised during the optionee’s
lifetime only by the optionee, or by the optionee’s legal representative or
guardian in the case of the optionee’s incapacity.
Upon
exercise of options, the option exercise price must be paid in full either in
cash, by certified or bank check or other instrument acceptable to the
compensation committee or by delivery (or attestation to the ownership) of
shares of common stock that are beneficially owned by the optionee for at least
six months or were purchased in the open market. Subject to
applicable law, the exercise price may also be delivered to the Company by a
broker pursuant to irrevocable instructions to the broker from the
optionee. In addition, the compensation committee may permit
non-qualified options to be exercised using a net exercise feature which reduces
the number of shares issued to the optionee by the number of shares with a fair
market value equal to the exercise price.
To
qualify as incentive options, options must meet additional federal tax
requirements, including a $100,000 limit on the value of shares subject to
incentive options that first become exercisable by a participant in any one
calendar year.
Stock Appreciation
Rights. The compensation committee may award stock
appreciation rights subject to such conditions and restrictions as the
compensation committee may determine. Stock appreciation rights
entitle the recipient to shares of common stock equal to the value of the
appreciation in the stock price over the exercise price. The exercise
price is the fair market value of the common stock on the date of
grant. The term of a stock appreciation right will be fixed by the
compensation committee and may not exceed 10 years.
Restricted
Stock. The compensation committee may award shares of common
stock to participants subject to such conditions and restrictions as the
compensation committee may determine. These conditions and
restrictions may include the achievement of certain performance goals and/or
continued employment with us through a specified restricted period.
Restricted Stock
Units. The compensation committee may award restricted stock
units to any participants. Restricted stock units are generally
payable in the form of shares of common stock, although restricted stock units
granted to the chief executive officer may be settled in cash. These
units may be subject to such conditions and restrictions as the compensation
committee may determine. These conditions and restrictions may
include the achievement of certain performance goals (as summarized above)
and/or continued employment with the Company through a specified vesting
period. In the compensation committee’s sole discretion, it may
permit a participant to make an advance election to receive a portion of his or
her future cash compensation otherwise due in the form of a restricted stock
unit award, subject to the participant’s compliance with the procedures
established by the compensation committee and requirements of Section 409A
of the Code. During the deferral period, the deferred stock awards
may be credited with dividend equivalent rights.
Adjustments for Stock Dividends,
Stock Splits, Etc. The 2010 Plan requires the compensation
committee to make appropriate adjustments to the number of shares of common
stock that are subject to the 2010 Plan, to certain limits in the 2010 Plan, and
to any outstanding awards to reflect stock dividends, stock splits,
extraordinary cash dividends and similar events.
Tax
Withholding. Participants in the 2010 Plan are responsible for
the payment of any federal, state or local taxes that the Company is required by
law to withhold upon the exercise of options or stock appreciation rights or
vesting of other awards. Subject to approval by the compensation
committee, participants may elect to have the minimum tax withholding
obligations satisfied by authorizing the Company to withhold shares of common
stock to be issued pursuant to the exercise or vesting.
Amendments and
Termination. The board of directors of the Company may at any
time amend or discontinue the 2010 Plan and the compensation committee may at
any time amend or cancel any outstanding award for the purpose of satisfying
changes in the law or for any other lawful purpose. However, no such
action may adversely affect any rights under any outstanding award without the
holder’s consent. To the extent required under the NYSE Amex rules,
any amendments that materially change the terms of the 2010 Plan will be subject
to approval by our stockholders. Without approval by our
stockholders, the compensation committee may not reduce the exercise price of
options or stock appreciation rights or effect repricing through cancellation or
re-grants, including any cancellation in exchange for
cash. Amendments shall also be subject to approval by our
stockholders if and to the extent determined by the compensation committee to be
required by the Code to preserve the qualified status of incentive options or to
ensure that compensation earned under the 2010 Plan qualifies as
performance-based compensation under Section 162(m) of the
Code.
Retirement
Plan and Other Benefits
The
Company offers health, dental, disability, and life insurance to its full-time
employees.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Dr. Quay
is the president, chief executive officer and chairman of the board of directors
of the Company. Dr. Chen is the chief scientific officer and a
director of the Company. Drs. Quay and Chen are husband and
wife. Prior to the completion of this offering, Drs. Quay and Chen
were the Company’s majority stockholders. After the completion of
this offering and exercise of the Class A Warrants, Drs. Quay and Chen will no
longer be majority stockholders but will remain substantial minority
stockholders. Ensisheim Partners, LLC, which holds 66.3% of the
outstanding common stock of the Company prior to this offering, is wholly owned
by Drs. Quay and Chen, and they are the beneficial owners of the shares of the
Company’s stock owned by that entity.
Ensisheim
was the original owner of the patents covering the MASCT System, which were
acquired by the Company in June 2010. Ensisheim has no further
interest or right to the U.S. patents and foreign counterparts that cover the
manufacture, use, and selling of the MASCT System, the pending patent
applications for improvements, or the FDA marketing authorization for the MASCT
System that was transferred to the Company. Ensisheim did not receive
any monetary compensation in connection with the transfer and assignment to the
Company of these patents and other assets.
On
December 24, 2009, the Company entered into a commercial lease agreement with
Ensisheim for office space located in Seattle, Washington, at an annual rent of
$13,200 plus applicable sales tax. The original term of the lease was
to expire on December 31, 2010. From April 30, 2009 (inception)
through June 30, 2010, the Company incurred $6,848 of rent expense for the
lease. As of June 30, 2010, security deposit for the lease amounted
to $1,100. On July 15, 2010, the Company and Ensisheim terminated the
lease, effective July 1, 2010 and the Company began occupying the facility on a
rent-free basis.
The
Company has borrowed an aggregate of $105,000 from Dr. Quay pursuant to
promissory notes that are due and payable in full on or before December 31,
2010. The notes bear an annual interest rate of 10% accruing from
June 30, 2010 and carry a pass-through loan origination fee of
$4,000.
In July
2010, in connection with the departure of Robert L. Kelly, a former officer, the
Company entered into a consulting agreement with a limited liability company
controlled by Mr. Kelly. Under the agreement, the Company was to
receive consulting services relating to capital raising and investor
relations. The agreement was terminated by the Company in September
2010, through which time a total of $30,000 had been
paid.
Indemnification
Agreements
Prior to
the completion of this offering, the Company intends to enter into
indemnification agreements with each of its directors and certain of its
executive officers. These agreements will require the Company to
indemnify these individuals to the fullest extent permitted under Delaware law
against liabilities that may arise by reason of their service to the Company,
and to advance expenses incurred as a result of any proceeding against them as
to which they could be indemnified.
Related
Party Transaction Policies
Related
party transactions to be entered into after the completion of this offering and
that the Company is required to disclose publicly under the federal securities
laws will require prior approval of the Company’s independent directors without
the participation of any director who may have a direct or indirect interest in
the transaction in question. Related parties include directors,
nominees for director, principal stockholders, executive officers and members of
their immediate families. For these purposes, a “transaction” will
include all financial transactions, arrangements or relationships, ranging from
extending credit to the provision of goods and services for value and will
include any transaction with a company in which a director, executive officer
immediate family member of a director or executive officer, or principal
stockholder (that is, any person who beneficially owns five percent or more of
any class of the Company’s voting securities) has an interest by virtue of a 10%
or greater equity interest. The Company’s policies and procedures
regarding related party transactions are not expected to be a part of a formal
written policy, but rather, will represent a course of practice determined to be
appropriate by the board of directors of the Company.
PRINCIPAL
STOCKHOLDERS
The
following table sets forth information as of September 30, 2010 regarding the
beneficial ownership of the Company’s common stock by each of its executive
officers and directors, individually and as a group and by each person who
beneficially owns in excess of five percent of the common stock after giving
effect to any exercise of warrants or options held by that person within 60 days
after September 30, 2010. Unless indicated otherwise, the address for
the beneficial holders is c/o Atossa Genetics Inc., 4105 E. Madison St., Suite
320, Seattle, Washington 98112.
|
|
|
|
|
Percentage of Common Stock
|
|
|
|
Shares
|
|
|
Beneficially Owned
|
|
Name of Beneficial Owner
|
|
Beneficially
|
|
|
Before
|
|
|
After
|
|
|
|
Owned
|
|
|
Offering (1)
|
|
|
Offering (2)
|
|
Directors
and Officers
|
|
|
|
|
|
|
|
|
|
Steven
C. Quay, M.D., Ph.D. (3)
|
|
|
4,293,252 |
|
|
|
71.6 |
% |
|
|
35.8 |
% |
Shu-Chih
Chen (4)
|
|
|
3,976,460 |
|
|
|
66.3 |
% |
|
|
33.1 |
% |
John
Barnhart
|
|
|
48,602 |
|
|
|
* |
|
|
|
* |
|
Christopher
Benjamin
|
|
|
0 |
|
|
|
— |
|
|
|
— |
|
All
Current Officers and Directors as a Group (4 persons)
|
|
|
4,341,854 |
|
|
|
72.4 |
% |
|
|
36.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
Nominees
|
|
|
|
|
|
|
|
|
|
|
|
|
Mary
Tagliaferri, M.D.
|
|
|
0 |
|
|
|
— |
|
|
|
— |
|
Stephen
Galli, M.D.
|
|
|
17,674 |
|
|
|
* |
|
|
|
* |
|
Alexander
D. Cross (5)
|
|
|
88,366 |
|
|
|
1.5 |
% |
|
|
* |
|
(1)
|
Based
on 6,000,063 shares of common stock issued and outstanding as of September
30, 2010 after giving effect to a one-for-2.26332 reverse split of our
common stock effected in September
2010.
|
(2)
|
Assumes
the sale of 9,000,000 shares of common stock, representing 3,000,000
shares underlying the Units and an additional 6,000,000 shares issuable
upon exercise of the Class A
Warrants.
|
(3)
|
Includes
(i) 316,792 shares of common stock directly owned by Dr. Quay and
(ii) 3,976,460 shares of common stock owned by
Ensisheim. Ensisheim is solely owned and controlled by Drs.
Quay and Chen, and, as a result, Drs. Quay and Chen are deemed to be
beneficial owners of the shares held by this
entity.
|
(4)
|
Consists
of 3,976,460 shares of common stock owned by
Ensisheim. Ensisheim is solely owned and controlled by Drs.
Quay and Chen, and, as a result, Drs. Quay and Chen are deemed to be
beneficial owners of the shares held by this
entity.
|
(5)
|
Represents
88,366 shares of common stock held by the Alexander D. Cross Family
Trust.
|
DESCRIPTION
OF SECURITIES
Capitalization
The
following description of the Company’s capital stock gives effect to an increase
in the authorized number of shares of common stock of the Company and a
one-for-2.26332 reverse stock split of the outstanding common stock of the
Company effected in September 2010.
The
Company is authorized to issue 75,000,000 shares of common stock, par value
$0.001 per share, of which 6,000,063 shares were outstanding as of the date of
this prospectus, and 10,000,000 shares of undesignated preferred stock, par
value $0.001 per share, none of which have been designated or
issued.
As of
September 30, 2010, there were 56 record holders of the Company’s common
stock.
Units
Unit
Composition. The Company is offering for sale 3,000,000 Units,
with each Unit consisting of (i) one share of common stock, (ii) two
Class A Warrants, and (iii) one Class B Warrant. A description
of the common stock, Class A Warrants and Class B Warrants is set forth
below. The securities underlying the Units will automatically
separate from the Units on the 90th day after the date of this prospectus,
unless Dawson James Securities, Inc., the representative of the underwriters,
determines that an earlier separation date is acceptable based on its assessment
of the relative strengths of the securities markets and small capitalization
companies in general, and the trading pattern of, and demand for, the Company’s
securities in particular. The Company will issue a press release
announcing when such separation will occur.
Rights as Stockholder. Unit
holders do not have any voting or other rights as a stockholder of the
Company. Upon the separation of the Units, a Unit holder will be
deemed to have become the holder of record of the underlying common stock as of
the date of separation. If the date of separation is a date upon
which the stock transfer books of the Company are closed, the Unit holder will
be deemed to have become the record holder of the underlying common stock the
next day on which the stock transfer books of the Company are open.
Listing of
Units. The Units are expected to be listed for trading on the
NYSE Amex under the symbol “ATOSU.” Once the securities comprising
the Units separate, the Units will cease trading and be cancelled and
terminated.
Common
Stock
Voting Rights. Holders of
shares of common stock are entitled to one vote for each share on all matters to
be voted on by the stockholders. Holders of common stock do not have cumulative
voting rights.
Dividend and Distribution
Rights. Holders of common stock are entitled to share ratably
in dividends, if any, as may be declared from time to time by the board of
directors of the Company in its discretion from funds legally available
therefore. In the event of a liquidation, dissolution or winding up, the holders
of common stock are entitled to share pro rata all assets remaining after
payment in full of all liabilities and all amounts due to holders of preferred
stock that may have a liquidation preference that is senior to the common
stock.
No Preemptive
Rights. Holders of common stock have no preemptive rights to
purchase additional shares of the Company’s common stock.
Other Rights. There are no
conversion or redemption rights or sinking fund provisions with respect to the
common stock.
Listing of Common
Stock. The common stock is expected to be listed for trading
on the NYSE Amex under the symbol “ATOS.” Trading of the common
stock will not commence until the Units are separated.
Class
A Warrants
Below is
a summary of the material terms of the Class A Warrants, including relevant
provisions of the Warrant Agent Agreement between the Company and Onyx Stock
Transfer, LLC, the Warrant Agent for the Class A Warrants and the Class B
Warrants, or Onyx Stock Transfer. This summary is qualified with
reference to the Warrant Agent Agreement and the Class A Warrant Certificate,
copies of which have been filed as exhibits to the Company’s registration
statement, of which this prospectus is a part. Investors are urged to
review the Warrant Agent Agreement and the form of Class A Warrant Certificate
for additional information regarding the Class A Warrants.
Purchase
Rights. Each Class A Warrant will entitle the holder to
acquire one share of common stock during the exercise period and subject to the
conditions set forth below.
Warrant Agent; Book Entry and
Certificated Warrants. Onyx Stock Transfer will serve as the
warrant agent for the Class A Warrants. Onyx Stock Transfer also
serves as the transfer agent and registrar for the Units, common stock, Class A
Warrants and Class B Warrants. Certificates representing Class A
Warrants are expected to be issued in “book entry” form, deposited with the
Depository Trust Company and registered in the name of Cede & Co., a nominee
of Depository Trust Company. If warrant certificates cannot be issued
in book entry form, or if a warrant holder requests in writing that a warrant
certificate be issued in physical form, then the warrant agent will issue a
Class A Warrant Certificate.
Listing of Class A
Warrants. The Class A Warrants will not be listed for trading
on any securities exchange.
Exercise
Period. The Class A Warrants will be exercisable at the option
of the holder for a period of 10 days, beginning the sixth trading day after
separation of the Units. The Company intends to issue a press release
announcing the separation of the securities and the commencement of the 10-day
exercise period. If any Class A Warrants are not exercised prior to
the expiration of this 10-day period, those warrants will expire.
Exercise
Price. Each Class A Warrant will have an exercise price of
$0.05 per share of common stock, which may only be paid on a cashless “net
exercise” basis. When exercising a Class A Warrant on a net exercise
basis, the holder will be entitled to receive a number of shares of common stock
for each Class A Warrant, rounded up to the nearest whole number, calculated
using the following formula:
X = (A -
$0.05)
A
Where:
|
X =
|
the
number of shares of common stock to be issued to the holder per Class A
Warrant
|
|
A
=
|
the
five trading-day average closing price of the Company’s common stock
immediately following separation of the
Units
|
Because
the number of shares of common stock to be issued upon exercise of the Class A
Warrant will be rounded up to the nearest whole share, each Class A Warrant will
represent the right to acquire one share of common stock irrespective of the
common stock value, unless the five-day average price of the common stock is
equal to or less than $0.05 per share, in which case the Class A Warrant would
have no value. The exercise price and the number of shares of common
stock purchasable upon the exercise of each warrant are subject to adjustment
upon the happening of certain events, such as stock dividends, distributions,
stock splits and recapitalizations, although the Company does not expect any
such events to occur prior to the expiration of the Class A
Warrants.
Rights as Stockholder.
Warrant holders do not have any voting or other rights as a stockholder
of the Company. Upon the exercise of the Class A Warrants, a holder
will be deemed to have become the holder of record of the underlying common
stock as of the date upon which the Class A Warrant Certificate (if issued) was
surrendered and the exercise notice was submitted. If the date of
such surrender (if applicable) and submission is a date upon which the stock
transfer books of the Company are closed, the holder will be deemed to have
become the record holder of the common stock the next day on which the stock
transfer books of the Company are open.
Limits on
Exercise. The Class A Warrants provide that no exercise will
be effected, and the holder of a warrant will not have the right to exercise a
warrant, if after giving effect to the exercise the holder, together with any
affiliates, would beneficially own in excess of 4.99% of the number of shares of
common stock of the Company outstanding immediately after giving effect to the
issuance of shares upon exercise. The holder may, upon 61 days prior
written notice, waive this 4.99% limit and thereby elect to increase the
exercise limit to 9.99% of the total shares outstanding. The holder
may not waive the 9.99% limit. To the extent that a warrant holder
cannot exercise a Class A Warrant due to this limitation, the unexercised
portion of the Class A Warrant will expire at the end of the 10-day exercise
period.
Amendment. With
the consent of holders of Class A Warrants representing a majority of the shares
issuable upon exercise of all outstanding Class A Warrants, the Company and Onyx
Stock Transfer, as the Warrant Agent, may modify the Warrant Agent Agreement or
modify the rights of the holders of the Class A Warrants; provided, however,
that no modifications made be made to the terms upon which the Class A Warrants
are exercisable without the consent of the holder of each outstanding Class A
Warrant that would be affected by the proposed amendment.
Fundamental
Transaction. The Class A Warrants will be exercisable for
securities, property or rights other than Company common stock if any of the
following transactions (each referred to below in this subsection as a
Fundamental Transaction) occur while Class A Warrants are issued and
outstanding:
|
·
|
the
Company, directly or indirectly, in one or more related transactions
effects any merger or consolidation of the Company with or into another
person;
|
|
·
|
the
Company, directly or indirectly, effects any sale, lease, license,
assignment, transfer, conveyance or other disposition of all or
substantially all of its assets in one or a series of related
transactions;
|
|
·
|
any,
direct or indirect, purchase offer, tender offer or exchange offer
(whether by the Company or another person) is completed pursuant to which
holders of Company common stock are permitted to sell, tender or exchange
their shares for other securities, cash or property and such offer has
been accepted by the holders of 50% or more of the outstanding Company
common stock;
|
|
·
|
the
Company, directly or indirectly, in one or more related transactions,
effects any reclassification, reorganization or recapitalization of the
common stock or any compulsory share exchange pursuant to which the common
stock is effectively converted into or exchanged for securities other than
the Company’s securities, cash or property;
or
|
|
·
|
the
Company, directly or indirectly, in one or more related transactions
consummates a stock or share purchase agreement or other business
combination (including, without limitation, a reorganization,
recapitalization, spin-off or scheme of arrangement) with another person
whereby such other person acquires more than 50% of the outstanding shares
of common stock (not including any shares of common stock held by the
other person or other persons making or party to, or associated or
affiliated with the other persons making or party to, such stock or share
purchase agreement or other business
combination).
|
Following
the occurrence of a Fundamental Transaction, upon any exercise of a Class A
Warrant, the holder will have the right to receive, for each share of common
stock that would have been issuable prior to the occurrence of the Fundamental
Transaction, securities of the successor or acquiring corporation or of the
Company, if it is the surviving corporation, and any additional consideration
(e.g., cash) payable in connection with the Fundamental Transaction on each
share of common stock that was outstanding immediately prior to the Fundamental
Transaction. For example, if the Company is acquired in a merger where each
share of Company common stock will receive upon closing one share of the
acquiring company, plus $1.00 per share, then the holders of Class A Warrants
would be entitled upon exercise to receive the same combination of cash and
stock. If holders of common stock are given any choice as to the type
of consideration they will receive in a Fundamental Transaction, then the
warrant holders will, upon exercise of the warrants, be given the same
choice.
Redemption
Rights. The Company will have no rights to call the Class A
Warrants for redemption.
Ranking. The Class
A Warrants are equal in seniority to the Class B warrants.
Class
B Warrants
Below is
a summary of the material terms of the Class B Warrants, including relevant
provisions of the Warrant Agent Agreement. This summary is qualified
with reference to the Warrant Agent Agreement and the Class B Warrant
Certificate, copies of which have been filed as exhibits to the Company’s
registration statement, of which this prospectus is a part. Investors
are urged to review the Warrant Agent Agreement and the form of Class B Warrant
Certificate for additional information regarding the Class B
Warrants.
Purchase
Rights. Each Class B Warrant will entitle the holder to
acquire one share of common stock during the exercise period and subject to the
conditions set forth below.
Warrant Agent; Book Entry and
Certificated Warrants. Onyx Stock Transfer will serve as the
warrant agent for the Class B Warrants. Onyx Stock Transfer also
serves as the transfer agent and registrar for the Units, common stock, Class A
Warrants and Class B Warrants. Certificates representing Class B
Warrants are expected to be issued in “book entry” form, deposited with the
Depository Trust Company and registered in the name of Cede & Co., a nominee
of Depository Trust Company. If warrant certificates cannot be issued
in book entry form, or if a warrant holder requests in writing that a warrant
certificate be issued in physical form, then the warrant agent will issue a
Class B Warrant Certificate.
Listing of Class B
Warrants. The Class B Warrants are expected to be listed for
trading on the NYSE Amex under the symbol “ATOSW.” Trading will
not commence until the Class B Warrants are separated from the
Units.
Exercise
Period. Subject to the redemption right described below, the
Class B Warrants will be exercisable at the option of the holder commencing
on the first anniversary of the date of this prospectus and continuing until the
fifth anniversary of the date of separation of the Units. The
Company intends to issue a press release announcing the separation of the
securities and the commencement of the exercise period. If any Class
B Warrants are not exercised prior to the expiration of this five-year exercise
period, those warrants will expire.
Exercise
Price. Each Class B Warrant will have an exercise price equal
to 55% of the Unit offering price. With an assumed Unit offering
price of $6.00 per Unit, which is the midpoint of the estimated price range on
the cover of this prospectus, the Class B Warrant exercise price would initially
be $3.30 per share. The Class B Warrants may be exercised only for
full shares of common stock.
The Class
B Warrants must be exercised for cash, unless the Company does not then have an
effective registration statement under the Securities Act of 1933 covering the
issuance of the shares underlying the Class B Warrants, in which case they may
only be exercised on a cashless, net exercise basis. When exercising
a Class B Warrant on a net exercise basis, the holder will be entitled to
receive a number of shares of common stock upon exercise calculated using the
following formula:
X = Y (A -
B)
A
Where:
|
X
=
|
the
number of shares of common stock to be issued to the holder under Class B
Warrants being exercised
|
Y
= the number of Class B
Warrants being exercised
|
A
=
|
the
ten trading-day average closing price of the Company’s common stock prior
to exercise
|
|
B
=
|
the
exercise price of the Class B Warrants (initially $3.30, based on an
assumed offering price of $6.00 per Unit), subject to any applicable
adjustments
|
The
exercise price and the number of shares of common stock purchasable upon the
exercise of each warrant are subject to adjustment upon the happening of certain
events, such as stock dividends, distributions, stock splits and
recapitalizations.
Rights as Stockholder.
Warrant holders do not have any voting or other rights as a stockholder
of the Company. Upon the exercise of the Class B Warrants, a holder
will be deemed to have become the holder of record of the underlying common
stock as of the date upon which the Class B Warrant Certificate (if issued) was
surrendered and the exercise notice was submitted. If the date of
such surrender (if applicable) and submission is a date upon which the stock
transfer books of the Company are closed, the holder will be deemed to have
become the record holder of the common stock the next day on which the stock
transfer books of the Company are open.
Limits on
Exercise. The Class B Warrants provide that no exercise will
be effected, and the holder of a warrant will not have the right to exercise a
warrant, if after giving effect to the exercise the holder, together with any
affiliates, would beneficially own in excess of 4.99% of the number of shares of
common stock of the Company outstanding immediately after giving effect to the
issuance of shares upon exercise. The holder may, upon 61 days prior
written notice, waive this 4.99% limit and thereby elect to increase the
exercise limit to 9.99% of the total shares outstanding. The holder
may not waive the 9.99% limit. To the extent that a warrant holder
cannot exercise a Class B Warrant due to this limitation, the unexercised
portion of the Class B Warrant will expire at the end of the exercise
period.
Amendment. With
the consent of holders of Class B Warrants representing a majority of the shares
issuable upon exercise of all outstanding Class B Warrants, the Company and Onyx
Stock Transfer, as the Warrant Agent, may modify the Warrant Agent Agreement or
modify the rights of the holders of the Class B Warrants; provided, however,
that no modifications made be made to the terms upon which the Class B Warrants
are exercisable without the consent of the holder of each outstanding Class B
Warrant that would be affected by the proposed amendment.
Fundamental
Transaction. The Class B Warrants will be exercisable for
securities, property or rights other than Company common stock if any of the
following transactions (each referred to below in this subsection as a
Fundamental Transaction) occur while Class B Warrants are issued and
outstanding:
|
·
|
the
Company, directly or indirectly, in one or more related transactions
effects any merger or consolidation of the Company with or into another
person;
|
|
·
|
the
Company, directly or indirectly, effects any sale, lease, license,
assignment, transfer, conveyance or other disposition of all or
substantially all of its assets in one or a series of related
transactions
|
|
·
|
any,
direct or indirect, purchase offer, tender offer or exchange offer
(whether by the Company or another person) is completed pursuant to which
holders of Company common stock are permitted to sell, tender or exchange
their shares for other securities, cash or property and such offer has
been accepted by the holders of 50% or more of the outstanding Company
common stock;
|
|
·
|
the
Company, directly or indirectly, in one or more related transactions,
effects any reclassification, reorganization or recapitalization of the
common stock or any compulsory share exchange pursuant to which the common
stock is effectively converted into or exchanged for securities other than
the Company’s securities, cash or property;
or
|
|
·
|
the
Company, directly or indirectly, in one or more related transactions
consummates a stock or share purchase agreement or other business
combination (including, without limitation, a reorganization,
recapitalization, spin-off or scheme of arrangement) with another person
whereby such other person acquires more than 50% of the outstanding shares
of common stock (not including any shares of common stock held by the
other person or other persons making or party to, or associated or
affiliated with the other persons making or party to, such stock or share
purchase agreement or other business
combination).
|
Following
the occurrence of a Fundamental Transaction, upon any exercise of a Class B
Warrant, the holder will have the right to receive, for each share of common
stock that would have been issuable prior to the occurrence of the Fundamental
Transaction, securities of the successor or acquiring corporation or of the
Company, if it is the surviving corporation, and any additional consideration
(e.g., cash) payable in connection with the Fundamental Transaction on each
share of common stock that was outstanding immediately prior to the Fundamental
Transaction. For example, if the Company is acquired in a merger where each
share of Company common stock will receive one share of the acquiring company’s
common stock, plus $1.00 per share, then the holders of Class B Warrants would
be entitled upon exercise to receive the same combination of stock and
cash. If holders of Company common stock are given any choice as to
the type of consideration they will receive in a Fundamental Transaction, then
the warrant holders will, upon exercise of the warrants, be given the same
choice.
Redemption
Rights. The Company will have the right to redeem the Class B
Warrants at $0.25 per share of common stock underlying the Class B Warrants in
the event (i) the average of the closing price of the common stock exceeds 200%
of the exercise price for 10 consecutive trading days while the warrants are
exercisable and (ii) there is then an effective registration statement with
a current prospectus on file with the SEC covering the exercise of the Class B
Warrants for cash. In the event that the Company wishes to call the
Class B Warrants for redemption, it will provide warrant holders with 30 days
prior notice of the redemption, during which time the holders of Class B
Warrants may continue to exercise the warrant. At the end of the
30-day period, and assuming the Company has complied with applicable redemption
requirements, the warrant holders will thereafter be entitled only to receive
the redemption value, subject to the surrender of warrant certificates, if
applicable.
Ranking. The Class
B Warrants are equal in seniority to the Class A warrants.
Preferred
Stock
The board
of directors of the Company is authorized to provide for the issuance of any or
all of the shares of preferred stock in series and, by filing a certificate
pursuant to the applicable law of the State of Delaware, to establish from time
to time the number of shares to be included in each such series, and to fix the
designation, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof.
The
authority of the board of directors of the Company with respect to each series
of preferred stock includes determination of the following
characteristics:
|
·
|
The
number of shares constituting that series and the distinctive designation
of that series;
|
|
·
|
The
dividend rate on the shares of that series, whether dividends shall be
cumulative, and, if so, from which date or dates, and the relative rights
of priority, if any, of payment of dividends on shares of that
series;
|
|
·
|
Whether
that series shall have voting rights, in addition to the voting rights
provided by law, and, if so, the terms of such voting
rights;
|
|
·
|
Whether
that series shall have conversion privileges, and, if so, the terms and
conditions of such conversion, including provision for adjustment of the
conversion rate in such events as the board of directors of the Company
shall determine;
|
|
·
|
Whether
or not the shares of that series shall be redeemable, and, if so, the
terms and conditions of such redemption, including the date or dates upon
or after which they shall be redeemable, and the amount per share payable
in case of redemption, which amount may vary under different conditions
and at different redemption dates;
|
|
·
|
Whether
that series shall have a sinking fund for the redemption or purchase of
shares of that series, and, if so, the terms and amount of such sinking
fund;
|
|
·
|
The
rights of the shares of that series in the event of voluntary or
involuntary liquidation, dissolution or winding up of the Company, and the
relative rights of priority, if any, of payment of shares of that series;
and
|
|
·
|
Any
other relative rights, preferences and limitations of that
series.
|
Anti-Takeover
Devices
The
Company’s certificate of incorporation authorizes “blank-check” preferred stock,
which means that the board of directors of the Company has the authority to
designate one or more series of preferred stock without stockholder
approval. These series of preferred stock may have superior rights,
preferences and privileges over our common stock, including dividend rights,
voting rights and liquidation preferences. The ability of the board
of directors of the Company to issue shares of the Company’s preferred stock
without stockholder approval could deter takeover offers and make it more
difficult or costly for a third party to acquire the Company without the consent
of the board of directors of the Company.
In
addition, the Company’s certificate of incorporation does not opt out of Section
203 of the Delaware General Corporation Law, which protects a corporation
against an unapproved takeover by basically prohibiting a company from engaging
in any business combination with any interested stockholder (defined as a
stockholder owning more than 15% of the outstanding shares) for a period of
three years from the time such stockholder became a 15% holder unless approved
by the board of directors of the Company. These antitakeover devices
will inhibit any attempt by stockholders to, for whatever reason, attempt a
takeover of the Company.
No
Trading Market
There is
currently no established public trading market for the Company’s
securities. A trading market in the securities may never
develop. The Company intends to apply for listing of the Units, its
common stock and the Class B Warrants on the NYSE Amex under the trading symbols
“ATOSU,” “ATOS” and “ATOSW,” respectively. If for any reason the
Units, the Company’s common stock or the Class B Warrants are not so listed or a
public trading market does not develop, purchasers of the Units may have
difficulty selling their securities. The Class A Warrants will not be
listed for trading on any exchange.
NYSE
Amex Listing Requirements
The NYSE
Amex has established quantitative standards for initial listing of companies as
well as continuation of listing standards. The NYSE Amex has four
differing listing standards applicable for initial listing. The
initial listing standard that most effectively applies to the Company consists
of a market capitalization of at least $50 million, a market value of the public
float of $15 million, a minimum per share price of $2.00, stockholders equity of
at least $4 million, and at least 400 public stockholders with at least 1.0
million shares. In addition, the NYSE Amex has qualitative standards
concerning corporate governance, director independence, and conflicts of
interest that must be met. The Company believes that following this
offering it will meet the requirements for initial listing.
Dividends
The
Company does not anticipate declaring dividends but anticipates that it will use
any funds for further development and growth of the Company.
Transfer
Agent
Onyx
Stock Transfer, LLC, 2672 Bayshore Parkway, Suite 1055, Mountain View,
California 94043 (telephone: (650) 215-4880; facsimile: (650) 215-4884) will
serve as transfer agent for the Units, Class A Warrants, Class B Warrants and
common stock of the Company.
SHARES
ELIGIBLE FOR FUTURE SALE
As of the
date of this prospectus, there are 6,000,063 shares of common stock
outstanding. Of such shares, approximately 4,340,000 are owned
directly and beneficially by affiliates of the Company, are not being registered
in this prospectus, are subject to the limitations of Rule 144 under the
Securities Act and may not be sold publicly unless they are registered under the
Securities Act or are sold pursuant to Rule 144. These shares are
subject to a lock-up agreement restricting the sale of such shares for one year
from the date of effectiveness of the registration statement of which this
prospectus forms a part. In the event shares not currently salable
become salable by means of registration or eligibility for sale under Rule 144
and the holders of such shares elect to sell such shares in the public market,
there is likely to be a negative effect on the market price of the Company’s
securities.
Lock-Up
Agreements
As of the
effective date of this prospectus, the holders of all the Company’s outstanding
shares of common stock have entered into lock-up agreements with the
underwriters restricting the sale of such shares, including all the shares owned
directly and beneficially by affiliates of the Company.
The
lock-up agreements restrict the sale of such shares from the effective date of
the registration statement of which this prospectus is a part for a period of 12
months, after which time the provisions of the lock-up agreement
expire. However, such shares cannot be sold publicly unless
registered under the Securities Act or sold pursuant to provisions of Rule 144
promulgated pursuant to the Securities Act.
CERTAIN
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The
following discussion sets forth certain material U.S. federal income tax
considerations in connection with the purchase of the Units and of the ownership
and disposition of the common stock, Class A Warrants and Class B Warrants
underlying the Units and the exercise or expiration of the warrants, in each
case to U.S. Holders and Non-U.S. Holders (each as defined
below). This discussion is based upon the Internal Revenue Code of
1986, as amended, or the Code, Treasury Regulations promulgated thereunder,
judicial decisions, and the U.S. Internal Revenue Service’s, or IRS’s, current
administrative rules, practices and interpretations of law, all as in effect on
the date of this document, and all of which are subject to change, possibly with
retroactive effect, and to differing interpretations, which could result in U.S.
federal income tax consequences different from those described below. This
discussion applies only to holders that hold common stock and warrants as
capital assets, and does not address all aspects of U.S. federal income taxation
that may be important to particular holders in light of their individual
circumstances or to holders who may be subject to special tax rules, including,
without limitation, partnerships (including any entity or arrangement treated as
a partnership for U.S. federal income tax purposes), dealers in securities or
foreign currency, traders in securities that use a mark-to-market method of
accounting for securities holdings, U.S. expatriates, U.S. persons whose
functional currency is not the U.S. dollar, “controlled foreign corporations”,
“passive foreign investment companies”, insurance companies, tax-exempt
organizations, banks, financial institutions, broker-dealers, holders who hold
common stock as part of a hedge, straddle, conversion, constructive sale or
other integrated security transaction, or who acquired common stock pursuant to
the exercise of compensatory stock options or otherwise as compensation, all of
whom may be subject to tax rules that differ significantly from those summarized
below.
In
addition, newly enacted legislation imposes withholding taxes on certain types
of payments made to “foreign financial institutions” and certain other non-U.S.
entities unless additional certification, information reporting and other
specified requirements are satisfied. Failure to comply with the new
reporting requirements could result in withholding tax being imposed on payments
of dividends and sales proceeds to foreign intermediaries and certain non-U.S.
Holders. Prospective investors should consult their own tax advisers
regarding this new legislation.
We have
not sought, and will not seek, a ruling from the IRS regarding the U.S. federal
income tax consequences of this offering. The following discussion
does not address the tax consequences of this offering under foreign, state, or
local tax laws, or the alternative minimum tax provisions of the
Code. Accordingly, you are urged to consult your tax advisor with
respect to the particular tax consequences of this offering.
For
purposes of this description, a “U.S. Holder” is a beneficial owner of common
stock or a warrant that is:
|
·
|
An
individual citizen or resident of the United
States;
|
|
·
|
a
corporation or other entity taxable as a corporation that is created or
organized in or under the laws of the U.S., any state thereof or the
District of Columbia;
|
|
·
|
an
estate, the income of which is subject to U.S. federal income taxation,
regardless of its source; or
|
|
·
|
a
trust, if a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust (or the trust
was in existence on August 20, 1996, and validly elected to continue to be
treated as a U.S. person).
|
For
purposes of this discussion, a Non-U.S. Holder is a beneficial owner of common
stock or a warrant that is not a U.S. Holder and is not a partnership for U.S.
federal income tax purposes. If an entity classified as a partnership
for U.S. federal income tax purposes holds common stock or a warrant, the tax
treatment of a partner will generally depend on the status of the partner and
the activities of the partnership. Any holder of common stock or a
warrant that is a partnership, or any partner in such a partnership, should
consult its tax advisors.
THIS
SUMMARY IS ONLY A GENERAL DISCUSSION AND IS NOT INTENDED TO BE, AND SHOULD NOT
BE CONSTRUED TO BE, LEGAL, OR TAX ADVICE. THE U.S. FEDERAL INCOME TAX
TREATMENT OF THE UNITS IS COMPLEX . EACH HOLDER WHO ACQUIRES UNITS IS
STRONGLY URGED TO CONSULT HIS, HER OR ITS OWN TAX ADVISER WITH RESPECT TO THE
U.S. FEDERAL, STATE, LOCAL AND FOREIGN INCOME, ESTATE AND OTHER TAX CONSEQUENCES
OF THE ACQUISITION OF THE UNITS, WITH SPECIFIC REFERENCE TO SUCH PERSON’S
PARTICULAR FACTS AND CIRCUMSTANCES.
U.S.
Holders
The
following is a summary of certain U.S. federal income tax considerations
applicable to a U.S. Holder:
Common
Stock
Distributions. Distributions
with respect to common stock, if any, will be includible in the gross income of
a U.S. Holder as ordinary dividend income to the extent paid out of current or
accumulated earnings and profits, as determined for U.S. federal income tax
purposes. Any portion of a distribution in excess of current or
accumulated earnings and profits would be treated as a return of the holder’s
tax basis in its common stock and then as gain from the sale or exchange of the
common stock. Under current law, if certain requirements are met, a maximum 15%
U.S. federal income tax rate will apply to any dividends paid to a holder of
common stock who is a U.S. individual and that is included in the U.S. Holder’s
income prior to January 1, 2011.
Distributions
to U.S. Holders that are corporate shareholders, constituting dividends for U.S.
federal income tax purposes, may qualify for the 70% dividends received
deduction, or DRD, which is generally available to corporate shareholders that
own less than 20% of the voting power or value of the outstanding stock of the
distributing corporation. A U.S. holder that is a corporate
shareholder holding 20% or more of the distributing corporation may be eligible
for an 80% DRD. No assurance can be given that we will have sufficient earnings
and profits (as determined for U.S. federal income tax purposes) to cause any
distributions to be eligible for a DRD. In addition, a DRD is
available only if certain holding periods and other taxable income requirements
are satisfied. The length of time that a U.S. Holder has held stock
is reduced by any period during which the U.S. Holder’s risk of loss with
respect to the stock is diminished by reason of the existence of certain
options, contracts to sell, short sales, or other similar transactions. Also, to
the extent that a corporation incurs indebtedness that is directly attributable
to an investment in the stock on which the dividend is paid, all or a portion of
the DRD may be disallowed. In addition, any dividend received by a corporation
may also be subject to the extraordinary distribution provisions of the Tax
Code.
Dispositions. If
you sell or otherwise dispose of any shares of common stock, you will generally
recognize capital gain or loss equal to the difference between your amount
realized and your adjusted tax basis of such shares of common
stock. The respective tax bases of the common stock, the Class A
Warrants and the Class B Warrants underlying the Units acquired in this offering
will be determined by first allocating the purchase price for each Unit among
the common stock, the Class A Warrants and the Class B Warrants in proportion to
their respective fair market values on the date the Unit is
purchased. (See “Warrants – Cashless Exercise” and “Warrants –
Exercise for Cash” below for a discussion of tax basis with respect to common
stock received upon exercise of a Class A Warrant or a Class B
Warrant). Such capital gain or loss will be long-term capital gain or
loss if your holding period for such shares of common stock is more than one
year. Long-term capital gain of a non-corporate U.S. Holder,
including an individual, that is recognized in taxable years beginning before
January 1, 2011 is generally taxed at a maximum rate of 15%. Your
holding period for the common stock underlying a Unit will begin on the date the
Unit is purchased. (See “Warrants – Cashless Exercise” and “Warrants
- Exercise for Cash” below for a discussion of holding period with respect to
common stock received upon exercise of a Class A Warrant or a Class B
Warrant). The deductibility of capital losses is subject to
limitations.
Warrants
Dispositions. If
you sell or otherwise dispose of a warrant, you will generally recognize capital
gain or loss equal to the difference between the amount realized and your
adjusted tax basis of such warrant. The respective tax bases of the
common stock, the Class A Warrants and the Class B Warrants underlying the Units
acquired in this offering will be determined by first allocating the purchase
price for each Unit among the common stock, the Class A Warrants and the Class B
Warrants in proportion to their respective fair market values on the date of the
Unit is purchased. Such capital gain or loss will be long-term
capital gain or loss if your holding period for a warrant is more than one
year. Your holding period for the warrants underlying a Unit will
begin on the date the Unit is purchased. Long-term capital gain of a
non-corporate U.S. holder, including individuals, that is recognized in taxable
years beginning before January 1, 2011 is generally taxed at a maximum rate of
15%. In the event a warrant lapses unexercised, you will recognize a
capital loss in an amount equal to the adjusted tax basis of the
warrant. Such capital loss will be long-term if your holding period
of such warrant was more than one year at the time of lapse. The
deductibility of capital losses is subject to limitations.
Cashless
Exercise. The Class A Warrants maybe exercised only by way of
cashless exercise, while the Class B Warrants can be exercised in a cashless
manner only in certain limited circumstances. The tax consequences of
a cashless exercise of a warrant are not clear under current tax
law. It is possible that a cashless exercise may be treated as a
recapitalization for U.S. federal income tax purposes, in which case no gain or
loss would be recognized in connection with such exercise, other than with
respect to cash received in lieu of a fractional share. In this case,
a U.S. Holder’s tax basis in the common stock received would equal the holder’s
basis in the warrant (plus any gain recognized from the receipt of cash in lieu
of a fractional share minus the amount of cash received). If a
cashless exercise is treated as a recapitalization, the holding period of the
common stock will include the holding period of the warrant. The
Company intends to treat the Class A Warrants as equity for U.S. federal income
tax purposes and the cashless exercise of the Class A Warrants and the cashless
exercise of the Class B Warrants, if applicable, as a
recapitalization.
However,
it is also possible that a cashless exercise could be treated as a taxable
exchange in which gain or loss would be recognized. In such event, a
U.S. Holder could be deemed to have surrendered warrants equal to the number of
common shares having a value equal to the exercise price for the total number of
warrants to be exercised. The U.S. Holder would recognize capital
gain or loss in an amount equal to the difference between the fair market value
of the warrants deemed surrendered to pay the exercise price and the holder’s
tax basis in such warrants deemed surrendered. In this case, a U.S.
Holder’s tax basis in the common stock received would equal the sum of the fair
market value of the warrants deemed surrendered to pay the exercise price and
the holder’s tax basis in the warrants exercised. A U.S. Holder’s
holding period for the common stock would commence on the date following the
date of exercise of the warrant.
In
addition, upon a cashless exercise of a warrant, cash received in lieu of a
fractional share of common stock will be treated as a payment in a taxable
exchange for such fractional share of common stock, and gain or loss will be
recognized on the receipt of cash in an amount equal to the difference between
the amount of cash received and the amount of adjusted tax basis allocable to
the fractional share of common stock.
DUE TO
THE ABSENCE OF AUTHORITY ON THE U.S. FEDERAL INCOME TAX TREATMENT OF A CASHLESS
EXERCISE, THERE CAN BE NO ASSURANCE WHICH, IF ANY, OF THE ALTERNATIVE TAX
CONSEQUENCES AND HOLDING PERIODS DESCRIBED ABOVE WOULD BE ADOPTED BY THE IRS OR
A COURT OF LAW. ACCORDINGLY, HOLDERS SHOULD CONSULT THEIR TAX
ADVISORS REGARDING THE TAX CONSEQUENCES OF A CASHLESS EXERCISE.
Exercise for
Cash. Your tax basis in shares of common stock received upon
exercise of a Class B Warrant for cash generally will equal the tax basis of the
Class B Warrant, increased by the amount paid upon exercise of the
warrant. Your holding period of shares of common stock received upon
exercise of a warrant will begin on the day following the date on which the
warrant is exercised.
Constructive
Distributions. Upon the
occurrence of certain events, you may be deemed to receive a constructive
distribution pursuant to Section 305 of the Code. Such a constructive
distribution could occur upon the occurrence of certain adjustments, or failure
to make certain adjustments, to the number of shares of common stock to be
issued upon exercise of a warrant or to the warrant’s exercise
price. Any deemed distributions will be taxable as a dividend,
return of capital, or capital gain in accordance with the earnings and profits
rules under the Code. In addition, in certain situations, we may be
obligated to adjust the conversion rate of the warrants or, in lieu of such
adjustment, to provide for the conversion of warrants into warrants or shares of
an acquirer. Depending on the circumstances, such modification could result in a
deemed exchange of your warrant for a new warrant, potentially resulting in the
recognition of taxable gain or loss.
Information
Reporting and Backup Withholding
Information
reporting requirements generally will apply to payments of dividends on shares
of common stock or deemed dividends on a warrant and to the proceeds of a sale
of a warrant or shares of common stock paid to you unless you are an exempt
recipient such as a corporation or, in some circumstance, a tax-exempt
organization.
Backup
withholding will apply to those payments if you fail to provide your correct
taxpayer identification number, certify your exempt status, or report in full
interest and dividend income. Certain U.S. Holders, including, among
others, corporations, financial institutions and certain tax exempt
organizations, generally are not subject to backup withholding. Backup
withholding tax is not an additional tax, and you may use amounts withheld as
credit against your U.S. federal income tax liability or may claim a refund as
long as you timely provide certain information to the IRS. U.S. Holders
should consult their own tax advisors regarding the applicability of backup
withholding.
Non-U.S.
Holders
The
following is a summary of certain U.S. federal tax considerations
applicable to a Non-U.S. Holder:
Common
Stock
Distributions.
Dividends paid to a Non-U.S. Holder, if any, with respect to shares of
common stock will be subject to withholding tax at a 30% rate (or lower
applicable income tax treaty rate) unless the dividends are effectively
connected with the Non-U.S. Holder’s conduct of a trade or business in the
United States. If a Non-U.S. Holder is engaged in a trade or business in
the United States and dividends with respect to the common stock are effectively
connected with the conduct of that trade or business and, if required by an
applicable income tax treaty, are attributable to a U.S. permanent
establishment, then the Non-U.S. Holder will be subject to U.S. federal income
tax on those dividends on a net income basis (although the dividends will be
exempt from the 30% U.S. federal withholding tax, provided the certification
requirements are satisfied) in the same manner as if received by a U.S. person
as defined under the Code. Any such effectively connected income received by a
foreign corporation may, under certain circumstances, be subject to an
additional branch profits tax at a 30% rate (or lower applicable income tax
treaty rate).
Subject
to the discussion below under “— New Legislation Relating to Foreign Accounts,”
in order to obtain a reduced rate of withholding, you will be required to timely
provide a properly executed IRS Form W-8BEN (or other applicable IRS form)
certifying your entitlement to benefits under a treaty. If a Non-U.S. Holder is
eligible for a reduced rate of U.S. withholding tax pursuant to an income tax
treaty, it may obtain a refund of any excess amounts withheld by filing an
appropriate claim for refund with the Internal Revenue
Service.
Dispositions. A
Non-U.S. Holder may recognize gain upon the sale, exchange, redemption or other
taxable disposition of common stock. Subject to the discussion
below concerning backup withholding and the newly-enacted legislation relating
to foreign accounts, such gain generally will not be subject to U.S.
federal income tax unless: (i) that gain is effectively connected with conduct
of a trade or business in the United States (and, if required by an applicable
income tax treaty, is attributable to a U.S. permanent establishment) by a
Non-U.S. Holder; (ii) the Non-U.S. Holder is an individual who is present in the
United States for 183 days or more in the taxable year of that disposition, and
certain other conditions are met; or (iii) the Company is or has been a “U.S.
real property holding corporation” for U.S. federal income tax
purposes.
If a
Non-U.S. Holder is an individual described in clause (i) of the last sentence of
the preceding paragraph, the Non-U.S. Holder will generally be subject to tax on
the net gain at regular graduated U.S. federal income tax rates. If the
Non-U.S. holder is an individual described in clause (ii) of the preceding
paragraph, the Non-U.S. holder will generally be subject to a flat 30% tax on
the gain, which may be offset by U.S. source capital losses even though the
non-U.S. holder is not considered a resident of the United States. If a
Non-U.S. Holder is a foreign corporation that is described in clause (i) of the
last sentence of the preceding paragraph, it will be subject to tax on its net
gain in the same manner as if it were a U.S. person as defined under the Code
and, in addition, the Non-U.S. Holder may be subject to the branch profits tax
at a rate equal to 30% of its effectively connected earnings and profits or at
such lower rate as may be specified by an applicable income tax
treaty.
The Company believes that
it is not and does not anticipate becoming a “U.S. real property holding
corporation” for U.S. federal income tax purposes. However, because
the determination depends on the fair market value of our U.S. real property
interests and the fair market value of our other assets, no assurance can be
provided that we currently are not, or in the future will not become, a U.S.
real property holding corporation. The tax relating to stock in a “U.S. real
property holding corporation” generally will not apply to a Non-U.S. Holder
whose holdings (taking into account actual ownership and certain constructive
ownership rules) at all times during the applicable period, constituted 5% or
less of our common stock, provided that our common stock is regularly traded on
an established securities market. If we are a U.S. real property holding
corporation and our common stock is treated as a U.S. real property interest,
you will be subject to U.S. federal income tax on a net income basis on any gain
realized on a sale or other disposition of the common stock and a purchaser may
be required to withhold a portion of the proceeds payable to you from the
disposition.
Warrants
Dispositions.
A Non-U.S. Holder may recognize gain upon the sale, exchange, redemption,
exercise or other taxable disposition of a warrant. Subject to the discussion
below concerning backup withholding and the newly-enacted legislation relating
to foreign accounts, such gain generally will not be subject to U.S.
federal income tax unless: (i) that gain is effectively connected with conduct
of a trade or business in the United States (and, if required by an applicable
income tax treaty, is attributable to a U.S. permanent establishment) by a
Non-U.S. Holder; (ii) the Non-U.S. Holder is an individual who is present in the
United States for 183 days or more in the taxable year of that disposition, and
certain other conditions are met; or (iii) the Company is or has been a “U.S.
real property holding corporation” for U.S. federal income tax
purposes.
If a
Non-U.S. Holder is an individual described in clause (i) of the last sentence of
the preceding paragraph, the Non-U.S. Holder will generally be subject to tax on
the net gain at regular graduated U.S. federal income tax rates. If the
Non-U.S. holder is an individual described in clause (ii) of the preceding
paragraph, the Non-U.S. holder will generally be subject to a flat 30% tax on
the gain, which may be offset by U.S. source capital losses even though the
non-U.S. holder is not considered a resident of the United States. If a
Non-U.S. Holder is a foreign corporation that is described in clause (i) of the
last sentence of the preceding paragraph, it will be subject to tax on its net
gain in the same manner as if it were a U.S. person as defined under the Code
and, in addition, the Non-U.S. Holder may be subject to the branch profits tax
at a rate equal to 30% of its effectively connected earnings and profits or at
such lower rate as may be specified by an applicable income tax
treaty.
The Company believes that
it is not and does not anticipate becoming a “U.S. real property holding
corporation” for U.S. federal income tax purposes. However, because
the determination depends on the fair market value of our U.S. real property
interests and the fair market value of our other assets, no assurance can be
provided that we currently are not, or in the future will not become, a U.S.
real property holding corporation. If we are a U.S. real property holding
corporation and our warrants are treated as a U.S. real property interest, you
will be subject to U.S. federal income tax on a net income basis on any gain
realized on a sale or other disposition of the common stock and a purchaser may
be required to withhold a portion of the proceeds payable to you from the
disposition.
Constructive
Distributions. Upon the occurrence of
certain events, you may be deemed to receive a constructive distribution
pursuant to Section 305 of the Code. Such a constructive distribution
could occur upon the occurrence of certain adjustments, or failure to make
certain adjustments, to the number of shares of common stock to be issued upon
exercise of a warrant or to the warrant’s exercise price. Any
deemed dividends that are not effectively connected with the conduct of a trade
or business in the United States generally will be subject to withholding tax at
a 30% rate (or lower applicable income tax treaty rate). Subject to the
discussion below under “— New Legislation Relating to Foreign Accounts,” in
order to obtain a reduced rate of withholding, you will be required to timely
provide a properly executed IRS Form W-8BEN (or other applicable IRS form)
certifying your entitlement to benefits under a treaty. Because any
constructive dividend would not give rise to any cash from which any applicable
withholding tax could be satisfied, it is possible that this tax would be
withheld from any amount owed to you, including, but not limited to, cash or
shares of common stock otherwise due on exercise, dividends or sales proceeds
subsequently paid or credited to you.
Constructive
dividends that are effectively connected with the conduct of a trade or business
within the United States and, where a tax treaty applies, are attributable to a
U.S. permanent establishment, are not subject to withholding tax, but instead
are subject to U.S. federal income tax on a net income basis at applicable
graduated U.S. federal income tax rates in the same manner as if you were a
resident of the United States. In such cases, we generally will not be required
to withhold U.S. federal income tax if you comply with applicable certification
and disclosure requirements, generally on a properly executed IRS Form W-8ECI
(or other applicable IRS Form). Any such effectively connected income received
by a Non-U.S. Holder that is classified as corporation for U.S. tax purposes may
also be subject to an additional branch profits tax at a 30% rate (or lower
applicable income tax treaty rate).
A
Non-U.S. Holder of shares that wishes to claim the benefit of an applicable
treaty rate is required to satisfy applicable certification and other
requirements. If you are eligible for a reduced rate of U.S. withholding tax
pursuant to an income tax treaty, you may obtain a refund of any excess amounts
withheld by filing an appropriate claim for refund with the
IRS.
In
certain situations, we may be obligated to adjust the conversion rate of the
warrants or, in lieu of such adjustment, to provide for the conversion of
warrants into warrants or shares of an acquirer. Depending on the
circumstances, such modification could result in a deemed exchange of your
warrant for a new warrant, potentially resulting in the recognition of taxable
gain (See “Warrants – Dispositions” above).
New
Legislation Relating to Foreign Accounts
Newly
enacted legislation may impose withholding taxes on certain types of payments
made to “foreign financial institutions” and certain other non-U.S. entities.
The legislation imposes a 30% withholding tax on dividends on, and gross
proceeds from the sale or other disposition of, common stock or paid to a
foreign financial institution or to a foreign non-financial entity, unless (i)
the foreign financial institution undertakes certain diligence and reporting
obligations or (ii) the foreign non-financial entity either certifies it does
not have any substantial U.S. owners or furnishes identifying information
regarding each substantial U.S. owner. If the payee is a foreign financial
institution, it must enter into an agreement with the U.S. Treasury requiring,
among other things, that it undertake to identify accounts held by certain U.S.
persons or U.S.-owned foreign entities, annually report certain information
about such accounts, and withhold 30% on payments to account holders whose
actions prevent it from complying with these reporting and other requirements.
The legislation would apply to payments made after December 31, 2012.
Prospective investors should consult their tax advisors regarding this
legislation.
Information
Reporting and Backup Withholding
Generally,
we must report to the IRS and to you the amount of dividends paid (or deem paid)
to you and the amount of tax, if any, withheld with respect to those payments.
Copies of the information returns reporting such interest payments and any
withholding may also be made available to the tax authorities in the country in
which you reside under the provisions of an applicable income tax
treaty.
In
general, you will not be subject to backup withholding with respect to payments
of dividends (or deemed dividends) that we make to you provided that we do not
have actual knowledge or reason to know that you are a U.S. person, as defined
under the Code, and we have a properly executed IRS Form W-8BEN (or other
applicable IRS form) and certify, under penalties of perjury, that you are not a
U.S. person or (b) you hold your common stock or warrants through certain
foreign intermediaries and satisfy the certification requirements of applicable
U.S. Treasury regulations. Special rules apply to non-U.S. holders that
are pass-through entities rather than corporations or individuals.
In
addition, no information reporting or backup withholding will be required
regarding the proceeds of the sale of common stock or a warrant made within the
U.S. or conducted through certain U.S.-related financial intermediaries, if the
payor receives the statement described above and does not have actual knowledge
or reason to know that you are a U.S. person, as defined under the Code, or you
otherwise establish an exemption.
Any
amounts withheld under the backup withholding rules will be allowed as a refund
or a credit against your U.S. federal income tax liability provided the required
information is timely furnished to the IRS.
UNDERWRITING
Subject
to the terms and conditions of the underwriting agreement, the underwriters
named below, through their representative, Dawson James Securities, Inc., who is
acting as the sole book-running manager and sole representative of the
underwriters of this offering, each underwriter named below has severally agreed
to purchase from us on a firm commitment basis the following respective number
of Units at a public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus:
|
|
|
Dawson
James Securities, Inc.
|
|
|
|
|
|
|
|
|
Total
|
|
|
The
underwriting agreement provides that the obligation of the underwriters to
purchase all of the 3,000,000 Units being offered to the public (assuming a
$6.00 per Unit public offering price) is subject to specific conditions,
including the absence of any material adverse change in our business or in the
financial markets and the receipt of certain legal opinions, certificates and
letters from us, our counsel and the independent auditors. Subject to the terms
of the underwriting agreement, the underwriters will purchase all of the
3,000,000 Units being offered to the public, other than those covered by the
over-allotment option described below, if any of these Units are
purchased.
Over-Allotment
Option
We have
granted to the underwriters an option, exercisable not later than 45 days after
the effective date of the registration statement, to purchase up to 450,000
additional Units at the public offering price less the underwriting discounts
and commissions set forth on the cover of this prospectus. The underwriters may
exercise this option only to cover over-allotments made in connection with the
sale of the Units offered by this prospectus. The over-allotment option will
only be used to cover the net syndicate short position resulting from the
initial distribution. To the extent that the underwriters exercise this option,
each of the underwriters will become obligated, subject to conditions, to
purchase approximately the same percentage of these additional Units as the
number of Units to be purchased by it in the above table bears to the total
number of Units offered by this prospectus. We will be obligated, pursuant to
the option, to sell these additional Units to the underwriters to the extent the
option is exercised. If any additional Units are purchased, the underwriters
will offer the additional Units on the same terms as those on which the other
Units are being offered hereunder.
Commissions
and Discounts
The
underwriting discounts and commissions are 7% of the initial public offering
price. We have agreed to pay the underwriters the discounts and commissions set
forth below, assuming either no exercise or full exercise by the underwriters of
the underwriters’ over-allotment option. In addition, we have agreed to pay to
the underwriters a non-accountable expense allowance of up to 3% of the gross
proceeds of this offering.
Additionally,
the underwriters will receive a warrant exercisable for the purchase of up to
15% of the aggregate number of Units sold in the public offering, exercisable
commencing one year from the effective date of the registration statement of
which this prospectus forms a part and expiring four years from such effective
date, at an exercise price of 110% of the public Unit offering price. The
underwriter warrant will contain a cashless, net exercise feature. The
Class A Warrants issuable upon exercise of the underwriter warrant will be
exercisable only on a cashless basis and will be exercisable for a period of 10
days from the date the underwriter Unit warrant is exercised; the Class B
Warrants issuable upon exercise of the underwriter warrant will be exercisable
for a period of five years following the exercise of the underwriter Unit
warrant. In compliance with the lock-up restrictions set forth in FINRA
Rule 5110(g)(1), neither the underwriter’s warrants nor the underlying
securities may be sold, transferred, assigned, pledged or hypothecated, or be
the subject of any hedging, short sale, derivative, put, or call transaction
that would result in the effective economic disposition of the securities by any
person for a period of at least 180 days immediately following the date of
effectiveness or commencement of sales of the offering, except to any member
participating in the offering and the officers or partners thereof, and only if
all securities so transferred remain subject to the one-year lock-up restriction
for the remainder of the lock-up period.
The
representative has advised us that the underwriters propose to offer the Units
directly to the public at the public offering price set forth on the cover of
this prospectus. In addition, the representative may offer some of the Units to
other securities dealers at such price less a concession of $___ per Unit.
The underwriters may also allow, and such dealers may reallow, a concession not
in excess of $___ per Unit to other dealers. After the common stock is
released for sale to the public, the representative may change the offering
price and other selling terms at various times.
The
following table summarizes the underwriting discounts and commissions we will
pay to the underwriters. The underwriting discounts and commissions are equal to
the public offering price per share less the amount per share the underwriters
pay us for the shares.
|
|
|
|
Total
without
Over-Allotment
|
|
Total
with
Over-Allotment
|
Public
offering price
|
|
|
|
|
|
|
Underwriting
discount (1)
|
|
|
|
|
|
|
Proceeds,
before expenses, to us
|
|
|
|
|
|
|
(1)
|
Does
not include the non-accountable expense reimbursement fee in the amount of
up to 3% of the gross proceeds of this
offering.
|
We
estimate that the total expenses of the offering, including registration, filing
and listing fees, printing fees and legal and accounting expenses, but excluding
underwriting discounts and commissions, will be approximately $_________, all of
which are payable by us.
Lock-Up
Agreements
We and
each of our officers, directors, and existing stockholders are bound by
agreements providing that, subject to certain exceptions, these stockholders may
not offer, issue, sell, contract to sell, encumber, grant any option for the
sale of or otherwise dispose of any shares of our common stock or other
securities convertible into or exercisable or exchangeable for shares of our
common stock for a period of 12 months from the effective date of the
registration statement of which this prospectus is a part without the prior
written consent of Dawson James.
Dawson
James may in its sole discretion and at any time without notice release some or
all of the shares subject to lock-up agreements prior to the expiration of the
lock-up period. When determining whether or not to release shares from the
lock-up agreements, the representative will consider, among other factors, the
securityholder’s reasons for requesting the release, the number of shares for
which the release is being requested and market conditions at the
time.
Pricing
of this Offering
Prior to
this offering there has been no public market for any of our securities. The
public offering price of the Units and the terms of the warrants, including the
exercise prices of the warrants, were negotiated between us and Dawson
James. Factors considered in determining the prices and terms of the
Units, including the common stock and warrants underlying the Units,
include:
|
·
|
the
history and prospects of companies in our
industry;
|
|
·
|
prior
offerings of those companies;
|
|
·
|
our
prospects for developing and commercializing our products; our capital
structure;
|
|
·
|
an
assessment of our management and their experience; general conditions of
the securities markets at the time of the offering;
and
|
|
·
|
other
factors as were deemed
relevant.
|
However,
although these factors were considered, the determination of our offering price
is more arbitrary than the pricing of securities for an operating company in a
particular industry since the underwriters are unable to compare our financial
results and prospects with those of public companies operating in the same
industry.
Price
Stabilization, Short Positions and Penalty Bids
The
underwriters may engage in over-allotment, stabilizing transactions, syndicate
covering transactions, and penalty bids or purchasers for the purpose of
pegging, fixing or maintaining the price of the common stock, in accordance with
Regulation M under the Exchange Act:
|
·
|
Over-allotment
involves sales by the underwriters of shares in excess of the number of
shares the underwriters are obligated to purchase, which creates a
syndicate short position. The short position may be either a covered short
position or a naked short position. In a covered short position, the
number of shares over-allotted by the underwriters is not greater than the
number of shares that they may purchase in the over-allotment option. In a
naked short position, the number of shares involved is greater than the
number of shares in the over-allotment option. The underwriters may close
out any short position by either exercising their over-allotment option
and/or purchasing shares in the open
market.
|
|
·
|
Stabilizing
transactions permit bids to purchase the underlying security so long as
the stabilizing bids do not exceed a specified
maximum.
|
|
·
|
Syndicate
covering transactions involve purchases of the common stock in the open
market after the distribution has been completed in order to cover
syndicate short positions. In determining the source of shares to close
out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option, a naked short position, the position
can only be closed out by buying shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned
that there could be downward pressure on the price of the shares in the
open market after pricing that could adversely affect investors who
purchase in the offering.
|
|
·
|
Penalty
bids permit the underwriters to reclaim a selling concession from a
syndicate member when the common stock originally sold by the syndicate
member is purchased in a stabilizing or syndicate covering transaction to
cover syndicate short positions.
|
These
stabilizing transactions, syndicate covering transactions and penalty bids may
have the effect of raising or maintaining the market price of our common stock
or preventing or retarding a decline in the market price of the common stock. As
a result, the price of the common stock may be higher than the price that might
otherwise exist in the open market. These transactions may be effected in the
over-the-counter market or otherwise and, if commenced, may be discontinued at
any time.
Neither
we nor any of the underwriters make any representation or prediction as to the
direction or magnitude of any effect that the transactions described above may
have on the price of the common stock. In addition, neither we nor any of the
underwriters make representation that the underwriters will engage in these
stabilizing transactions or that any transaction, once commenced, will not be
discontinued without notice.
Other
Terms
For a
period of 24 months from the consummation of this offering, we have granted
Dawson James, on any transaction where we elect to employ a banker, the right of
first refusal to act as a co-lead manager and book runner, for any and all
future public and private equity offerings by us or any of our successors or
subsidiaries. We have engaged Dawson James, on a non-exclusive basis, as
our agent for the solicitation of the exercise of the Class B Warrants. To
the extent not inconsistent with the guidelines of the Financial Industry
Regulatory Authority, or FINRA, and the rules and regulations of the SEC, we
have agreed to pay the underwriter for bona fide services rendered a commission
equal to 5% of the exercise price for each warrant exercised more than one year
after the date of this prospectus if the exercise was solicited by Dawson James.
No compensation will be paid to the underwriter upon the exercise of the
warrants if:
|
·
|
the
market price of the underlying shares of common stock is lower than the
exercise price;
|
|
·
|
the
holder of the warrants has not confirmed in writing that the underwriter
solicited his, her or its exercise;
|
|
·
|
the
warrants are held in a discretionary account, unless prior specific
written approval for the exercise is received from the
holder;
|
|
·
|
the
warrants are exercised in an unsolicited transaction;
or
|
|
·
|
the
arrangement to pay the commission is not disclosed in the prospectus
provided to warrant holders at the time of
exercise.
|
In
addition, we have agreed to reimburse the underwriters for up to $150,000 of the
legal fees incurred by the underwriters in connection with the offering, plus up
to an additional $25,000 in legal fees for blue sky matters and up to $15,000
for legal fees related to filings with FINRA.
Indemnification
We have
agreed to indemnify the underwriters against liabilities relating to the
offering arising under the Securities Act, liabilities arising from breaches of
some or all of the representations and warranties contained in the underwriting
agreement, and to contribute to payments that the underwriters may be required
to make for these liabilities.
Electronic
Distribution
A
prospectus in electronic format may be made available on a website maintained by
the representatives of the underwriters and may also be made available on a
website maintained by other underwriters. The underwriters may agree to allocate
a number of shares to underwriters for sale to their online brokerage account
holders. Internet distributions will be allocated by the representatives of the
underwriters to underwriters that may make Internet distributions on the same
basis as other allocations. In connection with the offering, the underwriters or
syndicate members may distribute prospectuses electronically. No forms of
electronic prospectus other than prospectuses that are printable as Adobe® PDF
will be used in connection with this offering.
The
underwriters have informed us that they do not expect to confirm sales of Units
offered by this prospectus to accounts over which they exercise discretionary
authority.
Other
than the prospectus in electronic format, the information on any underwriter’s
website and any information contained in any other website maintained by an
underwriter is not part of the prospectus or the registration statement of which
this prospectus forms a part, has not been approved and/or endorsed by us or any
underwriter in its capacity as underwriter and should not be relied upon by
investors.
Relationships
Certain
of the underwriters or their affiliates have provided from time to time and may
in the future provide investment banking, lending, financial advisory and other
related services to us and our affiliates for which they have received and may
continue to receive customary fees and commissions.
Foreign
Regulatory Restrictions on Purchase of Units
We have
not taken any action to permit a public offering of the Units outside the United
States or to permit the possession or distribution of this prospectus outside
the United States. Persons outside the United States who come into possession of
this prospectus must inform themselves about and observe any restrictions
relating to this offering of Units and the distribution of the prospectus
outside the United States.
LEGAL
MATTERS
The
validity of the securities offered by this prospectus will be passed upon for us
by Goodwin Procter LLP, San Francisco, California. Certain legal matters
relating to this offering will be passed upon for the underwriter by McDermott
Will & Emery LLP, Menlo Park, California.
EXPERTS
KCCW
Accountancy Corp., an independent PCAOB registered public accounting firm, has
audited the Company’s balance sheets as of December 31, 2009 and the related
statements of operations, stockholders’ equity, and cash flows, which are
included in this prospectus. The financial statements are included in
reliance on the report of KCCW Accountancy Corp., given their authority as
experts in accounting and auditing.
ADDITIONAL
INFORMATION
We have
filed with the SEC a registration statement on Form S-1 under the Securities Act
of 1933 with respect to the Units offered by this prospectus. This
prospectus does not contain all of the information included in the registration
statement, portions of which are omitted as permitted by the rules and
regulations of the SEC. For further information pertaining to us and the Units
to be sold in this offering, you should refer to the registration statement and
its exhibits.
In this
prospectus, whenever reference is made to contracts, agreements or other
documents, the references are not necessarily complete, and you should refer to
the exhibits attached to the registration statement for copies of the actual
contract, agreement or other document filed as an exhibit to the registration
statement or such other document, each such statement being qualified in all
respects by such reference.
Upon the
completion of this offering, we will be subject to the informational
requirements of the Securities Exchange Act of 1934 and will be required to file
annual, quarterly and current reports, proxy statements and other information
with the SEC. We anticipate making these documents publicly available, free of
charge, on its website as soon as reasonably practicable after filing such
documents with the SEC. The information contained in, or that can be accessed
through, our website is not part of this prospectus.
You can
read the registration statement and future filings, as they are filed with the
SEC, over the Internet at the SEC’s website at www.sec.gov. Copies of
filings may be requested, at no cost, from us. You may also read and copy
any document filed with the SEC at its public reference facility at 100 F
Street, N.E., Washington, D.C. 20549 and copies may be requested at prescribed
rates at such address or at 1-800-SEC-0330.
ATOSSA
GENETICS, INC.
(A
Development Stage Company)
INDEX
TO FINANCIAL STATEMENTS
|
|
Page
|
|
|
|
Unaudited
Financial Statements |
|
|
|
|
|
Balance
Sheet as of June 30, 2010 (unaudited)
|
|
F-1
|
|
|
|
Statements
of Operations through the Period Ended June 30, 2010
(unaudited)
|
|
F-2
|
|
|
|
Statements
of Cash Flows through the Period Ended June 30, 2010
(unaudited)
|
|
F-3
|
|
|
|
Notes
to Financial Statements as of June 30, 2010 (unaudited)
|
|
F-4
|
|
|
|
Audited Financial
Statements |
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-11
|
|
|
|
Balance
Sheet as of December 31, 2009
|
|
F-12
|
|
|
|
Statements
of Operations through the Period Ended December 31, 2009
|
|
F-13
|
|
|
|
Statements
of Changes in Stockholders’ Deficit through the Period Ended December 31,
2009
|
|
F-14
|
|
|
|
Statements
of Cash Flows through the Period Ended December 31, 2009
|
|
F-15
|
|
|
|
Notes
to Financial Statements as of December 31, 2009
|
|
F-16
|
|
|
|
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
BALANCE
SHEETS
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Assets
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
32,098 |
|
|
$ |
84,364 |
|
Prepaid
expenses
|
|
|
8,000 |
|
|
|
- |
|
Total
Current Assets
|
|
|
40,098 |
|
|
|
84,364 |
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
Security
deposit - related parties
|
|
|
1,100 |
|
|
|
1,100 |
|
Total
Other Assets
|
|
|
1,100 |
|
|
|
1,100 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
41,198 |
|
|
$ |
85,464 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' (Deficit) Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accrued
payroll
|
|
$ |
53,571 |
|
|
$ |
- |
|
Accrued
expenses
|
|
|
39,864 |
|
|
|
36,281 |
|
Note
payable - related party
|
|
|
5,000 |
|
|
|
5,000 |
|
Accrued
royalty payable - related party
|
|
|
- |
|
|
|
12,500 |
|
Total
Current Liabilities
|
|
|
98,436 |
|
|
|
53,781 |
|
|
|
|
|
|
|
|
|
|
Stockholders'
(Deficit) Equity
|
|
|
|
|
|
|
|
|
Preferred
stock - $.001 par value; 10,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
0
shares issued and outstanding
|
|
|
- |
|
|
|
- |
|
Common
stock - $.001 par value; 50,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
6,000,063
and 4,899,882 shares issued and
|
|
|
|
|
|
|
|
|
outstanding,
respectively
|
|
|
6,000 |
|
|
|
4,900 |
|
Additional
paid-in capital
|
|
|
321,540 |
|
|
|
149,640 |
|
Accumulated
deficit
|
|
|
(384,778 |
) |
|
|
(122,857 |
) |
Total
Stockholders' (Deficit) Equity
|
|
|
(57,238 |
) |
|
|
31,683 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' (Deficit) Equity
|
|
$ |
41,198 |
|
|
$ |
85,464 |
|
The
accompanying notes are an integral part of these financial
statements.
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
STATEMENTS
OF OPERATIONS
(UNAUDITED)
|
|
|
|
|
From April 30,
|
|
|
|
|
|
From April 30,
|
|
|
|
For The Three
|
|
|
2009 (Inception)
|
|
|
For The Six
|
|
|
2009 (Inception)
|
|
|
|
Months Ended
|
|
|
Through June 30,
|
|
|
Months Ended
|
|
|
Through June 30,
|
|
|
|
June 30, 2010
|
|
|
2009
|
|
|
June 30, 2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenue
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
compensation
|
|
|
53,571 |
|
|
|
- |
|
|
|
53,571 |
|
|
|
53,571 |
|
Website
and internet expenses
|
|
|
52,508 |
|
|
|
- |
|
|
|
52,538 |
|
|
|
55,538 |
|
Consulting
expenses
|
|
|
39,165 |
|
|
|
- |
|
|
|
44,165 |
|
|
|
44,165 |
|
Legal
and professional expenses
|
|
|
26,125 |
|
|
|
- |
|
|
|
90,709 |
|
|
|
179,231 |
|
Advertising
and promotion expenses
|
|
|
- |
|
|
|
- |
|
|
|
12,204 |
|
|
|
12,204 |
|
Research
and development expenses
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
21,250 |
|
Other
operating expenses
|
|
|
25,859 |
|
|
|
524 |
|
|
|
21,561 |
|
|
|
31,646 |
|
Total
operating expenses
|
|
|
197,228 |
|
|
|
524 |
|
|
|
274,747 |
|
|
|
397,605 |
|
Other
Operating Income
|
|
|
- |
|
|
|
- |
|
|
|
12,500 |
|
|
|
12,500 |
|
Operating
Loss
|
|
|
(197,228 |
) |
|
|
(524 |
) |
|
|
(262,247 |
) |
|
|
(385,105 |
) |
Interest
Income
|
|
|
128 |
|
|
|
- |
|
|
|
453 |
|
|
|
453 |
|
Net
Loss before Income Taxes
|
|
|
(197,101 |
) |
|
|
(524 |
) |
|
|
(261,795 |
) |
|
|
(384,653 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes
|
|
|
- |
|
|
|
- |
|
|
|
125 |
|
|
|
125 |
|
Net
Loss
|
|
$ |
(197,101 |
) |
|
$ |
(524 |
) |
|
$ |
(261,920 |
) |
|
$ |
(384,778 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share - basic and diluted
|
|
$ |
(0.03 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.08 |
) |
Weighted
average shares outstanding, basic and diluted
|
|
|
5,996,206 |
|
|
|
3,976,459 |
|
|
|
5,870,334 |
|
|
|
4,814,161 |
|
The
accompanying notes are an integral part of these financial
statements.
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
STATEMENTS
OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
From April 30,
|
|
|
From
April 30,
|
|
|
|
For The Six
|
|
|
2009 (Inception)
|
|
|
2009 (Inception)
|
|
|
|
Months Ended
|
|
|
Through June 30,
|
|
|
Through June 30,
|
|
|
|
June 30, 2010
|
|
|
2009
|
|
|
2010
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(261,920 |
) |
|
$ |
(524 |
) |
|
$ |
(384,778 |
) |
Common
shares issued for services
|
|
|
71,000 |
|
|
|
- |
|
|
|
71,000 |
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in prepaid expenses
|
|
|
(8,000 |
) |
|
|
- |
|
|
|
(8,000 |
) |
Increase
in security deposits
|
|
|
- |
|
|
|
- |
|
|
|
(1,100 |
) |
Increase
in accrued payroll
|
|
|
53,571 |
|
|
|
- |
|
|
|
53,571 |
|
(Decrease)
Increase in accrued expenses
|
|
|
(8,917 |
) |
|
|
- |
|
|
|
39,864 |
|
Net
cash used in operating activities
|
|
|
(154,266 |
) |
|
|
(524 |
) |
|
|
(229,442 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stocks
|
|
|
102,000 |
|
|
|
- |
|
|
|
256,540 |
|
Proceeds
from loans from related parties
|
|
|
- |
|
|
|
5,000 |
|
|
|
5,000 |
|
Net
cash provided by financing activities
|
|
|
102,000 |
|
|
|
5,000 |
|
|
|
261,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN CASH & CASH EQUIVALENTS
|
|
|
(52,266 |
) |
|
|
4,476 |
|
|
|
32,098 |
|
CASH
& CASH EQUIVALENTS, BEGINNING BALANCE
|
|
|
84,364 |
|
|
|
- |
|
|
|
- |
|
CASH
& CASH EQUIVALENTS, ENDING BALANCE
|
|
$ |
32,098 |
|
|
$ |
4,476 |
|
|
$ |
32,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Income
taxes paid
|
|
$ |
125 |
|
|
$ |
- |
|
|
$ |
125 |
|
The
accompanying notes are an integral part of these financial
statements.
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
NOTE
1: NATURE OF OPERATIONS
Atossa
Genetics, Inc., (the “Company”) was incorporated on April 30, 2009 in the State
of Delaware. The Company was formed to develop and market the Mammary
Aspirate Specimen Cytology Test, or the MASCT System, a cellular and molecular
diagnostic risk assessment product for the detection of pre-cancerous changes
that could lead to breast cancer. The Company’s fiscal year ends on
December 31st.
Development Stage
Risk
To date,
the Company has not earned any revenues from operations. Accordingly,
the Company’s activities have been accounted for as those of a “Development
Stage Enterprise” as set forth in Accounting Standards Codification (“ASC”) 915
“Development Stage Entities”, which was previously Statement of Financial
Accounting Standards No. 7 (“SFAS 7”). Among the disclosures required
by ASC 915 are that the Company’s financial statements be identified as those of
a development stage company, and that the statements of operations,
stockholders’ equity and cash flows disclose activity since the date of the
Company’s inception.
Since its
inception, the Company has been dependent upon the receipt of capital investment
to fund its continuing activities. In addition to the normal risks
associated with a new business venture, there can be no assurance that the
Company’s business plan will be successfully executed. The Company’s
ability to execute its business plan will depend on its ability to obtain
additional financing and achieve a profitable level of
operations. There can be no assurance that sufficient financing will
be obtained. Further, the Company cannot give any assurance that it
will generate substantial revenues or that its business operations will prove to
be profitable.
NOTE
2: GOING CONCERN
The
Company’s financial statements are prepared using generally accepted accounting
principles in the United States of America applicable to a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company has not yet established an
ongoing source of revenues sufficient to cover its operating costs and allow it
to continue as a going concern. The ability of the Company to
continue as a going concern is dependent on the Company obtaining adequate
capital to fund operating losses until it becomes profitable. If the
Company is unable to obtain adequate capital, it could be forced to cease
operations. The accompanying financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
Management’s Plan to
Continue as a Going Concern
In order
to continue as a going concern, the Company will need, among other things,
additional capital resources. Management’s plans to obtain such resources for
the Company include (1) obtaining capital from the sale of its securities, (2)
sales of the MASCT System and (3) short-term borrowings from stockholders or
other related party(ies) when needed. However, management cannot provide any
assurance that the Company will be successful in accomplishing any of its
plans.
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
The
ability of the Company to continue as a going concern is dependent upon its
ability to successfully accomplish the plans described in the preceding
paragraph and eventually to secure other sources of financing and attain
profitable operations.
NOTE
3: SUMMARY OF ACCOUNTING POLICIES
Revenue
Recognition:
Although
the Company has yet to generate any revenues, it expects that it will recognize
product and service revenue when the following fundamental criteria are met: (i)
persuasive evidence of an arrangement exists, (ii) delivery has occurred or the
service has been performed, (iii) the Company’s price to the customer is fixed
or determinable and (iv) collection of the resulting accounts receivable is
reasonably assured. The Company will recognize revenue for product
sales upon transfer of title to the customer. The Company will
recognize revenue for services upon performance of the
service. Customer purchase orders and/or contracts will generally be
used to determine the existence of an arrangement. Shipping documents
and the completion of any customer acceptance requirements, when applicable,
will be used to verify product delivery or that services have been
rendered. The Company will assess whether a price is fixed or
determinable based upon the payment terms associated with the transaction and
whether the sales price is subject to refund or adjustment. The Company will
record reductions to revenue for estimated product returns and pricing
adjustments in the same period that the related revenue is
recorded. These estimates will be based on industry-based historical
data, historical sales returns, if any, analysis of credit memo data, and other
factors known at the time.
Interim
Financial Statements:
The
unaudited financial statements of the Company have been prepared in accordance
with U.S. generally accepted accounting principles for interim financial
information. Accordingly, they do not include all the information
and footnotes
required by accounting principles generally accepted in the United States of
America for annual audited financial statements. However, the
information included in these interim financial statements reflects all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for the fair presentation of the financial
position and the results of operations of the Company. Results shown
for interim periods are not necessarily indicative of the results to be obtained
for a full year. These interim financial statements should be read in
conjunction with the Company’s audited financial statements as of December 31,
2009 and related notes included therein.
Cash
and Cash Equivalents:
Cash and
cash equivalents include cash and all highly liquid instruments with original
maturities of three months or less.
Use
of Estimates:
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Accordingly, actual results could differ
from those estimates.
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
Research
and Development Expenses:
Research
and development costs are generally expensed as incurred. The
Company’s research and development expenses consist of costs incurred for
internal and external research and development.
Share
Based Payments:
In
December 2004, the Financial Accounting Standard Board, or the FASB, issued the
Statement of Financial Accounting Standards, or SFAS, No. 123(R), “Share-Based
Payment”, which replaces SFAS No. 123 and supersedes APB Opinion No.
25. SFAS No. 123(R) is now included in the FASB’s ASC Topic 718,
“Compensation – Stock Compensation.” Under SFAS No. 123(R), companies
are required to measure the compensation costs of share-based compensation
arrangements based on the grant-date fair value and recognize the costs in the
financial statements over the period during which employees or independent
contractors are required to provide services. Share-based
compensation arrangements include stock options and warrants, restricted share
plans, performance-based awards, share appreciation rights and employee share
purchase plans. In March 2005, the SEC issued Staff Accounting
Bulletin No. 107, or SAB 107, which expresses views of the staff regarding the
interaction between SFAS No. 123(R) and certain SEC rules and regulations and
provides the staff’s views regarding the valuation of share-based payment
arrangements for public companies. SFAS No. 123(R) permits public
companies to adopt its requirements using one of two methods. On
April 14, 2005, the SEC adopted a new rule amending the compliance dates for
SFAS No. 123(R). Companies may elect to apply this statement either
prospectively, or on a modified version of retrospective application under which
financial statements for prior periods are adjusted on a basis consistent with
the pro forma disclosures required for those periods under SFAS No.
123.
The
Company has fully adopted the provisions of FASB ASC 718 and related
interpretations as provided by SAB 107. As such, compensation cost is
measured on the date of grant as the fair value of the share-based
payments. Such compensation amounts, if any, are amortized over the
respective vesting periods of the option grant.
Recently
Issued Accounting Pronouncements:
The
Company has adopted all recently issued accounting pronouncements that
management believes to be applicable to the Company. The adoption of
these accounting pronouncements, including those not yet effective, is not
anticipated to have a material effect on the financial position or results of
operations of the Company.
NOTE
4: STOCKHOLDERS’ EQUITY
The
Company is authorized to issue a total of 85,000,000 shares of stock consisting
of 75,000,000 shares of Common Stock, par value $.001 per share, and 10,000,000
shares of Preferred Stock, par value $.001 per share.
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
Prior Issuances of Common
Stock
On April
30, 2009 (inception), the Company issued 1,767,315 shares (or 4,000,000 shares
before giving effect to the September 2010 reverse stock split) to Ensisheim
Partners LLC, a party related to the Company through common ownership by two of
the Company’s officers, for cash in the amount of $24,000, or $.014 per share
(or $.006 per share before giving effect to the September 2010 reverse stock
split); 1,325,487 shares (3,000,000 shares before giving effect to the September
2010 reverse stock split) to Manistee Ventures LLC, a party related to the
Company through common ownership by two of the Company’s officers, for cash in
the amount of $18,000, or $.014 per share (or $.006 per share before giving
effect to the September 2010 reverse stock split); and 883,658 shares (or
2,000,000 shares before giving effect to the September 2010 reverse stock split)
to the Chairman, Chief Executive Officer and President of the Company at that
time for cash in the amount of $12,000, or $.014 per share (or $.006 per share
before giving effect to the September 2010 reverse stock split).
On July
28, 2009, the Company issued 39,765 shares (or 90,000 shares before giving
effect to the September 2010 reverse stock split) to a director of the Company
for cash in the amount of $540, or $.014 per share (or $.006 per share before
giving effect to the September 2010 reverse stock split).
On
December 28, 2009, the Company issued 883,658 shares (or 2,000,000 shares before
giving effect to the September 2010 reverse stock split) to Ensisheim Partners
LLC for cash in the amount of $100,000, or $0.11 per share (or $.05 per share
before giving effect to the September 2010 reverse stock split).
On
January 21, 2010, the Company issued 865,984 shares (or 1,960,000 shares before
giving effect to the September 2010 reverse stock split) to forty-four (44)
investors for cash in the amount of $98,000, or $0.11 per share (or
$.05 per share before giving effect to the September 2010 reverse stock
split).
On
January 21, 2010, the Company issued 132,549 shares (or 300,000 shares before
giving effect to the September 2010 reverse stock split) to a service provider
for effecting transactions intended to cause the Company to become a public
company and to have its securities traded on a national exchange in the United
States. The shares were issued at a value of $15,000, or $0.11 per
share (or $.05 per share before giving effect to the September 2010 reverse
stock split), the same price as the 865,984 shares (or 1,960,000 shares before
giving effect to the September 2010 reverse stock split) issued for cash on the
same date.
On
January 21, 2010, the Company issued an additional 53,019 shares (or 120,000
shares before giving effect to the September 2010 reverse stock split) to a
shareholder who acquired 13,255 shares (or 30,000 shares before giving effect to
the September 2010 reverse stock split) for cash on the same date as one of the
forty-four (44) investors. Those shares were issued to the
shareholder for services to be performed, including investor relations, media
relations, and corporate communications. Those shares were issued at
a value of $6,000, or $0.11 per share (or $.05 per share before giving effect to
the September 2010 reverse stock split), the same price as the issuance of the
865,984 shares (or 1,960,000 shares before giving effect to the September 2010
reverse stock split) for cash on the same date.
On
January 23, 2010, the Company issued 35,346 shares (or 80,000 shares before
giving effect to the September 2010 reverse stock split) to an investor for cash
in the amount of $4,000, or $0.11 per share (or $.05 per share before giving
effect to the September 2010 reverse stock split).
On April
27, 2010, the Company issued 13,255 shares (or 30,000 shares before giving
effect to the September 2010 reverse stock split) to a service provider for
website development services pursuant to an original agreement between the
Company and the website developer executed on December 14, 2009, where it was
agreed at that time the shares of common stock would be issued to the developer
in exchange for his services invoiced for $50,000, which would have valued the
shares on December 14, 2009 at $3.77 per share (or $1.67 per share before giving
effect to the September 2010 reverse stock split).
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
Letter of Intent for
Proposed Initial Public Offering
On May
25, 2010, the Company executed a Letter of Intent with Dawson James Securities,
Inc. relating to a proposed public initial public offering of the Company’s
securities (the “Letter Agreement”). Pursuant to the Letter
Agreement, the Company paid a $25,000 deposit upon signing for out-of-pocket
expenses and will reimburse Dawson James for up to $150,000 in expenses incurred
in connection with the offering. If the offering is successful,
Dawson James will receive compensation in an amount equal to 7% of the gross
proceeds received by the Company in the offering, plus an expense allowance of
3% of the gross proceeds. Dawson James will also receive a warrant to
purchase Units equal to 15% of the total Units sold in the offering, exercisable
at 110% of the public offering price of the Units.
NOTE
5: INCOME TAXES
The
Company accounts for income taxes as outlined in ASC 740, “Income Taxes”, which
was previously Statement of Financial Accounting Standards No. 109, “Accounting
for Income Taxes” (“SFAS 109”). Under the asset and liability method
of SFAS 109, deferred income tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. A valuation
allowance is provided for the amount of deferred tax assets that, based on
available evidence, are not expected to be realized.
The
provision for income taxes differs from the amounts which would be provided by
applying the statutory federal income tax rate of 34% to the net loss before
provision for income taxes for the following reasons:
|
|
Six
Month
Period
Ended
June
30, 2010
|
|
|
From
April 30,
2009
(Inception)
Through
June
30,
2009
|
|
|
From
April 30,
2009
(Inception)
Through
June 30,
2010
|
|
Income
tax benefit at statutory rate (34%)
|
|
$ |
(89,002 |
) |
|
$ |
(178 |
) |
|
$ |
(130,662 |
) |
Valuation
allowance
|
|
|
89,002 |
|
|
|
178 |
|
|
|
130,662 |
|
Delaware
state tax
|
|
|
125 |
|
|
|
- |
|
|
|
125 |
|
Income
taxes
|
|
$ |
125 |
|
|
$ |
- |
|
|
$ |
125 |
|
The tax
effect of temporary difference that gave rise to the Company’s deferred tax
asset as of June 30, 2010 and December 31, 2009 is as follows:
|
|
|
|
|
|
|
NOL
carryover
|
|
$ |
130,662 |
|
|
$ |
46,871 |
|
Valuation
allowance
|
|
|
(130,662 |
) |
|
|
(46,871 |
) |
Net
deferred tax asset
|
|
$ |
- |
|
|
$ |
- |
|
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
NOTE
6: CONCENTRATION OF CREDIT RISK
Financial
instruments that potentially subject the Company to concentration of credit risk
consist principally of cash deposits. Accounts at each institution
are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to
$250,000. At June 30, 2010 and December 31, 2009, the Company had no
amounts in excess of the FDIC insured limit.
NOTE
7: RELATED PARTY TRANSACTIONS
Loans from
Officer
The
Company had borrowed $5,000 as of June 30, 2010 and December 31, 2009 from its
Chairman of the Board and Chief Executive Officer. This amount was
borrowed on May 26, 2009 as a short-term, unsecured loan via verbal agreement
and did not bear any interest. Commencing June 30, 2010, the loan was
converted into a written Promissory Note bearing an annual interest rate of 10%,
with a maturity date of December 31, 2010.
On June
30, 2010, the Company borrowed an additional $100,000 from its Chairman of the
Board and Chief Executive Officer pursuant to a promissory note. The
note bears a 10% interest rate per annum and carries a $4,000 loan origination
fee. The note is payable in full on or before December 31,
2010. The loan under the note was funded to the Company on July 12,
2010.
Exclusive License
Agreement
On July
27, 2009, the Company entered into an exclusive license agreement with Ensisheim
Partners LLC (“Ensisheim”), an entity solely owned by the Chairman and Chief
Executive Officer of the Company and the Chief Scientific Officer of the
Company, who is also the Company’s Chairman and CEO’s wife. Pursuant
to that agreement, Ensisheim granted the Company an exclusive, worldwide,
perpetual, irrevocable, royalty-bearing, license to the MASCT System, with the
right to grant and authorize sublicenses. The license agreement
provided that the Company would pay Ensisheim a royalty equal to 2% of net sales
revenues, with a minimum royalty of $12,500 per fiscal quarter during the term
of the agreement, which would have increased to a minimum royalty of $25,000 per
fiscal quarter beginning in the quarter in which the first commercial sale of a
licensed product would have taken place. As of December 31, 2009, a
total of $12,500 was payable to Ensisheim under the minimum royalty
provisions. From inception through June 30, 2010, the Company had
incurred $16,250 in patent-related expenses under the license agreement with
Ensisheim, which was recorded as accrued expense, whereas $4,000 was paid during
the period from inception through December 31, 2009.
On June
17, 2010, the Company and Ensisheim entered into an Assignment Agreement,
whereby Ensisheim assigned to the Company all rights to the patents and patent
applications underlying the MASCT System. Pursuant to the assignment,
the Company will have all responsibility for prosecution, maintenance, and
enforcement and will indemnify Ensisheim from any and all claims against the
patent estate. Ensisheim retained no residual rights with respect to
the patents and patent applications. In conjunction with the
assignment, the Company terminated the exclusive license agreement between the
Company and Ensisheim dated July 27, 2009. As a result of the
termination, the Company has no further obligations with respect to royalty
payments to Ensisheim due under the old licensing agreement. As a
result, the $12,500 of patent royalty payable to Ensisheim recorded as accrued
royalty payable at December 31, 2009 has been removed and recorded as other
operating income during the second quarter of 2010.
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
Commercial Lease
Agreement
On
December 24, 2009, the Company entered into a commercial lease agreement with
Ensisheim for office space located in Seattle, Washington. The lease
provided for annual rent of $13,200, plus applicable sales tax. From
inception through December 31, 2009, the Company incurred $248 of rent expense
for the lease. As of December 31, 2009, security deposit for the
lease amounted to $1,100. For the period of January 1, 2010 through
June 30, 2010, the Company incurred $6,600 of rent expense for the
lease. On July 15, 2010 the Company and Ensisheim terminated the
lease, effective July 1, 2010 and the Company commenced use of the facility rent
free.
Executive
Compensation
On May
19, 2010, the Company entered into employment agreements with three executives,
including its Chief Executive Officer, its former President, and its Chief
Scientific Officer. The annual base salaries under each agreement
were calculated based on combined consideration of the success of capital raise
and the operating results of the Company, and capped at $360,000, $350,000, and
$250,000, respectively for the three executives.
In July
2010, the employment agreement with the former President was terminated with no
salary paid or payable.
NOTE
8: SUBSEQUENT EVENTS
On July
22, 2010, the Company restated and amended the employment agreements with its
Chief Executive Officer and Chief Scientific Officer. The agreements
modified the base annual salary amounts to $250,000 and $200,000, respectively,
effective retroactively to May 19, 2010. These salaries were accrued
and amounted to $53,571 as of June 30, 2010. No stock options or
warrants were issued or effective as of June 30, 2010 under the revised
agreements.
On July
22, 2010, in connection with the resignation and departure of Robert L. Kelly,
the President and a director, the Company entered into a consulting agreement
with a limited liability company controlled by Mr. Kelly. Under the
agreement, the Company was to receive consulting services relating to capital
raising and investor relations. The agreement was terminated by the
Company in September 2010, through which time a total of $30,000 had been
paid.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Atossa
Genetics, Inc.:
We have
audited the accompanying balance sheet of Atossa Genetics, Inc. (a development
stage company) (the “Company”) as of December 31, 2009, and the related
statement of operations, changes in stockholders' equity, and cash flows for the
period from April 30, 2009 (inception) through December 31,
2009. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Atossa Genetics, Inc. (a
development stage company) as of December 31, 2009 and the results of their
operations and their cash flows for the period from April 30, 2009 (inception)
through December 31, 2009 in conformity with accounting principles generally
accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As described in Note 2 of the
financial statements, the Company has been in the development stage since its
inception (April 30, 2009) and continues to incur expenses. The
Company’s viability is dependent upon its ability to obtain future financing and
the success of its future operations. These matters raise substantial
doubt about the Company’s ability to continue as a going
concern. Management’s plan in regard to these matters is also
described in Note 2 to the financial statements. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ KCCW
Accountancy Corp.
Diamond
Bar, California
February
20, 2010
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
BALANCE
SHEET
December
31, 2009
Assets
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
Cash
and cash equivalents
|
|
$ |
84,364 |
|
Total
Current Assets
|
|
|
84,364 |
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
Security
deposit - related parties
|
|
|
1,100 |
|
Total
Other Assets
|
|
|
1,100 |
|
|
|
|
|
|
Total
Assets
|
|
$ |
85,464 |
|
|
|
|
|
|
Liabilities and Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
Accrued
expenses
|
|
$ |
36,281 |
|
Accrued
expenses - related parties
|
|
|
12,500 |
|
Loan
from officer
|
|
|
5,000 |
|
Total
Current Liabilities
|
|
|
53,781 |
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
Preferred
stock - $.001 par value; 10,000,000 shares authorized, 0
shares
|
|
|
|
|
issued
and outstanding
|
|
|
- |
|
Common
stock - $.001 par value; 50,000,000 shares authorized,
|
|
|
|
|
4,899,882
shares issued and outstanding
|
|
|
4,900 |
|
Additional
paid-in capital
|
|
|
149,640 |
|
Accumulated
deficit
|
|
|
(122,857 |
) |
Total
Stockholders' Equity
|
|
|
31,683 |
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$ |
85,464 |
|
The
accompanying notes are an integral part of financial
statements.
(A
DEVELOPMENT STAGE COMPANY)
STATEMENT
OF OPERATIONS
From
April 30, 2009 (Inception) through December 31, 2009
Net
Revenue
|
|
$ |
- |
|
|
|
|
|
|
General
and Administrative Expenses
|
|
|
|
|
Legal
and professional expenses
|
|
|
88,522 |
|
Other
general and administrative expenses
|
|
|
13,085 |
|
Total
general, selling and administrative expenses
|
|
|
101,607 |
|
|
|
|
|
|
Research
and Development Expenses
|
|
|
21,250 |
|
|
|
|
|
|
Net
Loss before Income Taxes
|
|
|
(122,857 |
) |
|
|
|
|
|
Income
Tax Expense
|
|
|
- |
|
|
|
|
|
|
Net
Loss
|
|
$ |
(122,857 |
) |
|
|
|
|
|
Loss
per common share - basic and diluted
|
|
$ |
(0.03 |
) |
Weighted
average shares outstanding, basic and diluted
|
|
|
4,037,847 |
|
The
accompanying notes are an integral part of financial
statements.
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
STATEMENT
OF STOCKHOLDERS' EQUITY
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at April 30, 2009, Founders' shares
|
|
|
3,976,459 |
|
|
$ |
3,976 |
|
|
$ |
50,024 |
|
|
$ |
- |
|
|
$ |
54,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of shares for cash, July 28, 2009
|
|
|
39,765 |
|
|
|
40 |
|
|
|
500 |
|
|
|
- |
|
|
|
540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of shares for cash, December 28, 2009
|
|
|
883,658 |
|
|
|
884 |
|
|
|
99,116 |
|
|
|
- |
|
|
|
100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period ended December 31, 2009
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(122,857 |
) |
|
|
(122,857 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
|
4,899,882 |
|
|
$ |
4,900 |
|
|
$ |
149,640 |
|
|
$ |
(122,857 |
) |
|
$ |
31,683 |
|
The
accompanying notes are an integral part of financial
statements.
ATOSSA
GENETICS, INC.
(A
DEVELOPMENT STAGE COMPANY)
STATEMENT
OF CASH FLOWS
From
April 30, 2009 (Inception) through December 31, 2009
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
Net
loss
|
|
$ |
(122,857 |
) |
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
Increase
in security deposits
|
|
|
(1,100 |
) |
Increase
in accrued expenses
|
|
|
48,781 |
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(75,176 |
) |
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
Proceeds
from issuance of common stocks
|
|
|
154,540 |
|
Proceeds
from loans from related parties
|
|
|
5,000 |
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
159,540 |
|
|
|
|
|
|
NET
DECREASE IN CASH & CASH EQUIVALENTS
|
|
|
84,364 |
|
|
|
|
|
|
CASH
& CASH EQUIVALENTS, BEGINNING BALANCE
|
|
|
- |
|
|
|
|
|
|
CASH
& CASH EQUIVALENTS, ENDING BALANCE
|
|
$ |
84,364 |
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES:
|
|
|
|
|
Interest
paid
|
|
$ |
- |
|
Income
taxes paid
|
|
$ |
- |
|
The
accompanying notes are an integral part of financial
statements.
NOTE
1: NATURE OF OPERATIONS
Atossa
Genetics, Inc., (the “Company”) was incorporated on April 30, 2009 in the State
of Delaware. The Company specializes in the molecular diagnostic
industry to develop and market a patented, FDA-approved cellular and molecular
diagnostic risk assessment product for breast cancer, the Mammary Aspirate
Cytology Specimen Test (MASCT) system. The Company’s fiscal
year ends on December 31st.
Development Stage
Risk
The
Company has not earned revenues from operations. Accordingly, the
Company’s activities have been accounted for as those of a “Development Stage
Enterprise” as set forth in Accounting Standards Codification (“ASC”) 915
“Development Stage Entities”, which was previously Statement of Financial
Accounting Standards No. 7 (“SFAS 7”). Among the disclosures required
by ASC 915 are that the Company’s financial statements be identified as those of
a development stage company, and that the statements of operations,
stockholders’ equity and cash flows disclose activity since the date of the
Company’s inception.
Since its
inception, the Company has been dependent upon the receipt of capital investment
to fund its continuing activities. In addition to the normal risks
associated with a new business venture, there can be no assurance that the
Company’s business plan will be successfully executed. Our ability to
execute our business plan will depend on our ability to obtain additional
financing and achieve a profitable level of operations. There can be
no assurance that sufficient financing will be obtained. Further, we
cannot give any assurance that we will generate substantial revenues or that our
business operations will prove to be profitable.
NOTE
2: GOING CONCERN
The
Company’s financial statements are prepared using generally accepted accounting
principles in the United States of America applicable to a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company has not yet established an
ongoing source of revenues sufficient to cover its operating costs and allow it
to continue as a going concern. The ability of the Company to
continue as a going concern is dependent on the Company obtaining adequate
capital to fund operating losses until it becomes profitable. If the
Company is unable to obtain adequate capital, it could be forced to cease
operations. The accompanying financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
Management’s Plan to
Continue as a Going Concern
In order
to continue as a going concern, the Company will need, among other things,
additional capital resources. Management’s plans to obtain such
resources for the Company include (1) obtaining capital from the sale of its
securities, (2) the sale of the MASCT Systems, and (3) short-term borrowings
from shareholders or related party when needed. However, management
cannot provide any assurance that the Company will be successful in
accomplishing any of its plans.
The
ability of the Company to continue as a going concern is dependent upon its
ability to successfully accomplish the plans described in the preceding
paragraph and eventually secure other sources of financing and attain profitable
operations.
NOTE
3: SUMMARY OF ACCOUNTING POLICIES
Basis
of Presentation:
The
accompanying financial statements have been prepared by the
Company. The Company’s financial statements are prepared in
accordance with generally accepted accounting principles in the United States of
America (“US GAAP”).
Cash
and Cash Equivalents:
Cash and
cash equivalents include cash and all highly liquid instruments with original
maturities of three months or less.
Use
of Estimates:
The
preparation of financial statements in conformity with generally accepted
accounting principles in the Unites States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Accordingly, actual results could differ from
those estimates.
Research
and Development Expenses:
Research
and Development costs are generally expensed as incurred. The
Company’s Research and Development expenses consist of costs incurred for
internal and external research and development.
Share
Based Payments:
In
December, 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”, which
replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No.
123(R) is now included in ASC 718 “Compensation – Stock
Compensation”. Under SFAS No. 123(R), companies are required to
measure the compensation costs of share-based compensation arrangements based on
the grant-date fair value and recognize the costs in the financial statements
over the period during which employees or independent contractors are required
to provide services. Share-based compensation arrangements include
stock options and warrants, restricted share plans, performance-based awards,
share appreciation rights and employee share purchase plans. In
March, 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) which
expresses views of the staff regarding the interaction between SFAS No. 123(R)
and certain SEC rules and regulations and provides the staff’s views regarding
the valuation of share-based payment arrangements for public
companies. SFAS No. 123(R) permits public companies to adopt its
requirements using one of two methods. On April 14, 2005, the SEC
adopted a new rule amending the compliance dates for SFAS No.
123(R). Companies may elect to apply this statement either
prospectively, or on a modified version of retrospective application under which
financial statements for prior periods are adjusted on a basis consistent with
the pro forma disclosures required for those periods under SFAS No.
123.
The
Company has fully adopted the provisions of SFAS No. 123(R) and related
interpretations as provided by SAB 107. As such, compensation cost is
measured on the date of grant as the fair value of the share-based
payments. Such compensation amounts, if any, are amortized over the
respective vesting periods of the option grant.
Recently
Issued Accounting Pronouncements:
The
Company has adopted all recently issued accounting
pronouncements. The adoption of the accounting pronouncements,
including those not yet effective, is not anticipated to have a material effect
on the financial position or results of operations of the
Company.
NOTE
4: STOCKHOLDERS’ EQUITY
As of
June 30, 2010, the Company was authorized to issue a total of 60,000,000 shares
of stock consisting of 50,000,000 shares of Common Stock with par value of $.001
per share and 10,000,000 shares of Preferred Stock, par value of
$.001.
On April
30, 2009 (inception), the Company issued 1,767,315 shares (or 4,000,000 before
giving effect to the September 2010 reverse stock split) to Ensisheim Partners
LLC, a related party to the Company through common ownership, for cash in the
amount of $24,000, or $.014 per share (or $.006 per share before giving effect
to the September 2010 reverse stock split); 1,325,487 shares (or 3,000,000
shares before giving effect to the September 2010 reverse stock split) to
Manistee Ventures LLC, a related party to the Company through common ownership,
for cash in the amount of $18,000, or $.014 per share (or $.006 per share before
giving effect to the September 2010 reverse stock split); and 883,658 shares (or
2,000,000 shares before giving effect to the September 2010 reverse stock split)
to the Chairman, CEO and President of the Company at that time for cash in the
amount of $12,000, or $.014 per share (or $.006 per share before giving effect
to the September 2010 reverse stock split).
On July
28, 2009, the Company issued 39,765 shares (or 90,000 shares before giving
effect to the September 2010 reverse stock split) to a director of the Company
for cash in the amount of $540, or $.014 per share (or $.006 per share before
giving effect to the September 2010 reverse stock split).
On
December 28, 2009, the Company issued 883,658 shares (or 2,000,000 shares before
giving effect to the September 2010 reverse stock split) to Ensisheim Partners
LLC for cash in the amount of $100,000, or $.11 per share (or $.05 per share
before giving effect to the September 2010 reverse stock
split).
NOTE
5: INCOME TAXES
The
Company accounts for income taxes as outlined in ASC 740, “Income Taxes”, which
was previously Statement of Financial Accounting Standards No. 109, “Accounting
for Income Taxes” (“SFAS 109”). Under the asset and liability method
of SFAS 109, deferred income tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. A valuation
allowance is provided for the amount of deferred tax assets that, based on
available evidence, are not expected to be realized.
The
provision for income taxes differs from the amounts which would be provided by
applying the statutory federal income tax rate of 34% to the net loss before
provision for income taxes for the following reasons:
|
|
December 31,
2009
|
|
Income
tax benefit at statutory rate (34%)
|
|
$ |
(46,871 |
) |
Valuation
allowance
|
|
|
46,871 |
|
Net
income tax benefit
|
|
$ |
- |
|
The tax
effect of temporary difference that gave rise to the Company’s deferred tax
asset as of December 31, 2009 is as follows:
|
|
December 31,
2009
|
|
NOL
carryover
|
|
$ |
46,871 |
|
Valuation
allowance
|
|
|
(46,871 |
) |
Net
deferred tax asset
|
|
$ |
- |
|
NOTE
6: CONCENTRATION OF CREDIT RISK
Financial
instruments that potentially subject the Company to concentration of credit risk
consist principally of cash deposits. Accounts at each institution
are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to
$250,000. At December 31, 2009, the Company had no amounts in excess
of FDIC insured limit.
NOTE
7: RELATED PARTY TRANSACTIONS
The
parties primarily refer to the shareholders and officers of the Company and
corporate entities related to the Company through common
ownership.
Loan from
Officer
Loan from
officer amounted to $5,000 as of December 31, 2009. The loan was
borrowed from the CEO and President of the Company on May 26, 2009 for
short-term with verbal agreement, unsecured, and bearing no
interest.
Exclusive License
Agreement
On July
27, 2009, the Company entered into an exclusive license agreement with Ensisheim
Partners LLC (“Ensisheim”), solely owned by the CEO and President of the Company
and the COO of the Company, the Company’s CEO’s
wife. Pursuant to the agreement, Ensisheim grants to the Company an
exclusive, worldwide, perpetual, irrevocable, royalty-bearing, license, with the
right to grant and authorize sublicenses. The Company will pay
Ensisheim a royalty equal to two percent (2%) of net sales revenues derived from
such licensing, with a minimum royalty of $12,500 per fiscal quarter during the
term of this agreement, which will increase to a minimum royalty of $25,000 per
fiscal quarter beginning in the quarter in which the first commercial sale of a
licensed product takes place. This agreement will continue in effect,
on a country-by-country basis, until the date on which no further licensing
royalty would be due in such country, unless terminated earlier in accordance
with the terms of this agreement. From inception through December 31,
2009, the Company incurred $16,250 of patent royalty with Ensisheim which was
recorded as research and development expense. As of December 31,
2009, $12,500 of patent royalty payable to Ensisheim was recorded as accrued
expense whereas $4,000 was paid during the period from inception through
December 31, 2009.
Commercial Lease
Agreement
On
December 24, 2009, the Company entered into a commercial lease agreement with
Ensisheim for an office space located in Seattle, Washington. The
term of the lease shall terminate on December 31, 2010, with annual rent of
$13,200 plus applicable sales tax. From inception through December
31, 2009, the Company incurred $248 of rent expense for the lease. As
of December 31, 2009, security deposit for the lease amounted to
$1,100.
NOTE
8: SUBSEQUENT EVENTS
On
January 21, 2010, the Company issued 865,984 shares (or 1,960,000 shares before
giving effect to the September 2010 reverse stock split) to forty-four (44)
investors for cash in the amount of $98,000, or $0.11 per share (or
$.05 per share before giving effect to the September 2010 reverse stock
split).
On
January 21, 2010, the Company issued 132,549 shares (or 300,000 shares before
giving effect to the September 2010 reverse stock split) to a service provider
for effecting transactions intended to cause the Company to become a public
company and to have its securities traded on a national exchange in the United
States. The shares were issued at a value of $15,000, or $0.11 per
share (or $.05 per share before giving effect to the September 2010 reverse
stock split), the same price as the 865,984 shares (or 1,960,000 shares before
giving effect to the September 2010 reverse stock split) issued for cash on the
same date.
On
January 21, 2010, the Company issued an additional 53,019 shares (or 120,000
shares before giving effect to the September 2010 reverse stock split) to a
shareholder who acquired 13,255 shares (or 30,000 shares before giving effect to
the September 2010 reverse stock split) for cash on the same date as one of the
forty-four (44) investors. Those shares were issued to the
shareholder for services to be performed, including investor relations, media
relations, and corporate communications. Those shares were issued at
a value of $6,000, or $0.11 per share (or $.05 per share before giving effect to
the September 2010 reverse stock split), the same price as the issuance of the
865,984 shares (or 1,960,000 shares before giving effect to the September 2010
reverse stock split) for cash on the same date.
On
January 23, 2010, the Company issued 35,346 shares (or 80,000 shares before
giving effect to the September 2010 reverse stock split) to an investor for cash
in the amount of $4,000, or $0.11 per share (or $.05 per share before giving
effect to the September 2010 reverse stock split).

3,000,000
Units
PROSPECTUS
DAWSON
JAMES SECURITIES, INC.
______________________,
2010
Until
_______________, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers’ obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PART
II
Item
13. Other Expenses of Issuance and Distribution
The
expenses (other than underwriting discounts and commissions) payable by us in
connection with this offering are as follows:
|
|
|
|
SEC
registration fee
|
|
$ |
1,255 |
|
Financial
Industry Regulatory Authority, Inc. fee
|
|
|
3,000 |
|
NYSE
Amex listing fee
|
|
|
* |
|
Accountants’
fees and expenses
|
|
|
* |
|
Legal
fees and expenses
|
|
|
* |
|
Transfer
Agent’s fees and expenses
|
|
|
* |
|
Printing
and engraving expenses
|
|
|
* |
|
Miscellaneous
|
|
|
* |
|
Total
Expenses
|
|
$ |
* |
|
|
*
|
to
be completed by amendment
|
All
expenses are estimated except for the SEC registration fee and the Financial
Industry Regulatory Authority, Inc. fee.
Item
14. Indemnification of Directors and Officers
Section
145 of the Delaware General Corporation Law, or the DGCL, authorizes a
corporation to indemnify its directors and officers against liabilities arising
out of actions, suits and proceedings to which they are made or threatened to be
made a party by reason of the fact that they have served or are currently
serving as a director or officer to a corporation. The indemnity may cover
expenses (including attorneys’ fees) judgments, fines and amounts paid in
settlement actually and reasonably incurred by the director or officer in
connection with any such action, suit or proceeding. Section 145 permits
corporations to pay expenses (including attorneys’ fees) incurred by directors
and officers in advance of the final disposition of such action, suit or
proceeding. In addition, Section 145 provides that a corporation has the power
to purchase and maintain insurance on behalf of its directors and officers
against any liability asserted against them and incurred by them in their
capacity as a director or officer, or arising out of their status as such,
whether or not the corporation would have the power to indemnify the director or
officer against such liability under Section 145.
We have
adopted provisions in our certificate of incorporation and bylaws to be in
effect at the completion of this offering that limit or eliminate the personal
liability of our directors to the fullest extent permitted by the DGCL, as it
now exists or may in the future be amended. Consequently, a director will not be
personally liable to us or our stockholders for monetary damages or breach of
fiduciary duty as a director, except for liability for:
|
·
|
any
breach of the director’s duty of loyalty to us or our
stockholders;
|
|
·
|
any
act or omission not in good faith or that involves intentional misconduct
or a knowing violation of law;
|
|
·
|
any
unlawful payments related to dividends or unlawful stock purchases,
redemptions or other distributions;
or
|
|
·
|
any
transaction from which the director derived an improper personal
benefit.
|
These
limitations of liability do not alter director liability under the federal
securities laws and do not affect the availability of equitable remedies such as
an injunction or rescission.
In
addition, our bylaws to be in effect at the completion of this offering will
provide that:
|
·
|
we
will indemnify our directors, officers and, in the discretion of our board
of directors, certain employees to the fullest extent permitted by the
DGCL, as it now exists or may in the future be amended;
and
|
|
·
|
we
will advance reasonable expenses, including attorneys’ fees, to our
directors and, in the discretion of our board of directors, to our
officers and certain employees, in connection with legal proceedings
relating to their service for or on behalf of us, subject to limited
exceptions.
|
We will
enter into indemnification agreements with each of our directors and certain of
our executive officers. These agreements provide that we will indemnify each of
these directors and executive officers to the fullest extent permitted by
Delaware law. We will advance expenses, including attorneys’ fees, judgments,
fines and settlement amounts, to each indemnified director, executive officer or
affiliate in connection with any proceeding in which indemnification is
available and we will indemnify our directors and officers for any action or
proceeding arising out of that person’s services as an officer or director
brought on behalf of the Company or in furtherance of our rights.
We also
expect to maintain general liability insurance that covers certain liabilities
of our directors and officers arising out of claims based on acts or omissions
in their capacities as directors or officers, including liabilities under the
Securities Act.
The
underwriting agreement filed as Exhibit 1.1 to this registration statement
provides for indemnification of us and our directors and officers by the
underwriters against certain liabilities under the Securities Act and the
Exchange Act.
Item
15. Recent Sales of Unregistered Securities
The
Company has sold the following securities within the past three years which were
not registered under the Securities Act of 1933:
Pursuant
to an exemption from registration under Section 4(2) of the Securities Act of
1933, as amended, as a transaction by an issuer not involving any public
offering as founder shares in connection with the formation of the Company, the
Company issued 4,899,884 shares of its common stock as follows:
|
|
|
|
|
|
|
|
Steven
Quay
|
|
|
883,658 |
|
April
30, 2009
|
|
$ |
12,000 |
|
Ensisheim
Partners LLC
|
|
|
1,767,316 |
|
April
30, 2009
|
|
$ |
24,000 |
|
Ensisheim
Partners LLC
|
|
|
883,658 |
|
December
28, 2009
|
|
$ |
100,000 |
|
Manistee
Ventures, Inc.
|
|
|
1,325,487 |
|
April
30, 2009
|
|
$ |
18,000 |
|
John
Barnhart
|
|
|
39,765 |
|
July
28, 2009
|
|
$ |
540 |
|
In
January 2010, pursuant to an exemption from registration under Rule 504 pursuant
to the Securities Act of 1933 (the “Securities Act”), the Company issued an
aggregate of 901,354 shares of its common stock to 45 investors for aggregate
cash proceeds of $102,000. Of these 45 investors, 13 are accredited
investors and 4 are citizens and residents of Taiwan, Republic of
China.
In
January 2010, the Company issued 185,569 shares in consideration for services
performed by two consultants, with an aggregate value of $21,000. This
offering was exempt from registration under Rule 504 under the Securities
Act.
On April
23, 2010, the Company issued 13,256 shares of common stock for services
performed by a consultant with an aggregate value of $50,000. This
offering was exempt from registration under Section 4(2) of the Securities Act,
as a transaction by an issuer not involving any public
offering.
Item
16. Exhibits and Financial Statement Schedules.
EXHIBITS
1.1*
|
|
Form
of Underwriting Agreement
|
3.1
|
|
Certificate
of Incorporation, as currently in effect
|
3.2*
|
|
Certificate
of Incorporation (to be effective immediately prior to
completion of this offering)
|
3.3
|
|
By-laws,
as currently in effect
|
3.4*
|
|
By-laws
(to be effective immediately prior to completion of this
offering)
|
4.1*
|
|
Specimen
common stock certificate
|
4.2*
|
|
Form
of Warrant Agent Agreement
|
4.3*
|
|
Form
of Class A Warrant Certificate
|
4.4*
|
|
Form
of Class B Warrant Certificate
|
4.5*
|
|
Form
of Unit Certificate
|
5.1*
|
|
Opinion
of Goodwin Procter LLP
|
10.1
|
|
License
Agreement with Ensisheim Partners, LLC
|
10.2
|
|
Termination
of Exclusive Patent License Agreement, dated June 17,
2010
|
10.3#
|
|
Amended
and Restated Employment Agreement with Steven Quay
|
10.4#
|
|
Amended
and Restated Employment Agreement with Shu-Chih Chen
|
10.5*
|
|
Form
of Indemnification Agreement
|
10.6#
|
|
2010
Stock Option and Incentive Plan
|
10.7*#
|
|
Form
of Stock Option Agreement
|
10.8*#
|
|
Form
of Stock Award Agreement
|
10.9*
|
|
Form
of Lock-Up Agreement
|
10.10
|
|
Form
of Subscription Agreement
|
10.11
|
|
Promissory
Note issued by the Company to Steven Quay on January 2,
2010.
|
10.12
|
|
Promissory
Note issued by the Company to Steven Quay on June 30,
2010.
|
10.13 |
|
Sublease
Agreement with CompleGen, Inc, dated September 29,
2010 |
10.14* |
|
Patent
Assignment Agreement by and between Atossa Genetics, Inc. and Ensisheim
Partners, LLC |
23.1
|
|
Consent
of KCCW Accountancy Corp.
|
23.2*
|
|
Consent
of Goodwin Procter LLP (filed as part of Exhibit 5.1)
|
24.1
|
|
Power
of Attorney (contained on signature page)
|
99.1
|
|
Consent
of Prospective Director Mary Tagliaferri, M.D.
|
99.2
|
|
Consent
of Prospective Director Stephen Galli, M.D.
|
99.3
|
|
Consent
of Prospective Director Alexander Cross,
Ph.D.
|
*
|
To
be filed by amendment.
|
#
|
Indicates
management contract or compensatory plan, contract or
agreement.
|
Item
17. Undertakings
Undertaking Pursuant to Rule
415 Under the Securities Act of 1933
The
undersigned registrant hereby undertakes:
(1).
|
To
file, during any period in which it offers or sales securities, a
post-effective amendment to this registration
statement:
|
(i) To
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933;
(ii) To
reflect in the prospectus any facts or events which, individually or in the
aggregate, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the “Calculation of Registration Fee”
table in the effective registration statement; and
(iii) To
include any additional material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2).
|
That,
for the purpose of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of the securities at that time to be the initial bona fide
offering thereof.
|
(3).
|
To
remove from registration by means of a post-effective amendment any of the
securities that remain unsold at the termination of the
offering.
|
(4).
|
That,
for the purpose of determining liability under the Securities Act of 1933
to any purchaser in the initial distribution of
securities:
|
Each
prospectus filed pursuant to Rule 424(b) as part of a registration statement
relating to this offering, other than registration statements relying on Rule
403B or other than prospectuses filed in reliance on Rule 430A, shall be deemed
to be part of and included in the registration statement as of the date it is
first used after effectiveness. Provided, however, that no statement made
in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
(5).
|
That,
for the purpose of determining liability under the Securities Act of 1933
to any purchaser in the initial distribution of
securities:
|
The
undersigned registrant undertakes that in a primary offering of securities of
the undersigned registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser.:
|
i
|
Any
preliminary prospectus or prospectus of the undersigned registrant
relating to this offering required to be filed pursuant to Rule
424;
|
|
ii.
|
Any
free writing prospectus relating to this offering prepared by or on behalf
of the undersigned registrant or used or referred to by the undersigned
registrant;
|
|
iii.
|
The
portion of any other free writing prospectus relating to the offering
containing material information about the undersigned registrant or its
securities provided by or on behalf of the undersigned registrant;
and
|
|
iv.
|
Any
other communication that is an offer in the offering made by the
undersigned registrant to the
purchaser.
|
Undertaking Request for
acceleration of effective date or filing of registration statement becoming
effective upon filing.
The
undersigned registrant hereby undertakes:
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this Registration Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Seattle, State of
Washington, on September 30, 2010.
|
ATOSSA
GENETICS INC.
|
|
|
|
By:
|
/s/
Steven C. Quay |
|
Name:
Steven C. Quay, M.D., Ph.D.
|
|
Title:
President and Chief Executive
Officer
|
SIGNATURES
AND POWER OF ATTORNEY
We, the
undersigned officers and directors of Atossa Genetics Inc., hereby severally
constitute and appoint Steven C. Quay, M.D., Ph.D. our true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution
for him and in his name, place and stead, and in any and all capacities, to sign
for us and in our names in the capacities indicated below any and all amendments
(including post-effective amendments) to this registration statement (or any
other registration statement for the same offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended),
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as full to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration
Statement on Form S-1 has been signed by the following persons in the capacities
and on the dates indicated.
|
|
|
|
|
|
|
|
|
|
/s/ Steven
C. Quay
|
|
President,
Chief Executive Officer and
Chairman
of the Board of Directors
|
|
September
30, 2010
|
Steven
C. Quay, M.D., Ph.D.
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/ Christopher
Benjamin
|
|
Chief
Financial Officer
|
|
September
30, 2010
|
Christopher
Benjamin
|
|
(Principal
Financial Officer and
Principal
Accounting Officer)
|
|
|
|
|
|
|
|
/s/
Shu-Chih Chen
|
|
Director
|
|
September
30, 2010
|
Shu-Chih
Chen
|
|
|
|
|
|
|
|
|
|
/s/
John
Barnhart
|
|
Director
|
|
September
30, 2010
|
John
Barnhart
|
|
|
|
|